UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________________________________________________________________
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2018 | ||
Or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission File Number 001-16625
BUNGE LIMITED
(Exact name of registrant as specified in its charter)
Bermuda (State or other jurisdiction of incorporation or organization) | 98-0231912 (IRS Employer Identification No.) | |
50 Main Street White Plains, New York USA (Address of principal executive offices) | 10606 (Zip Code) | |
(914) 684-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Shares, par value $.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of registrant's common shares held by non-affiliates, based upon the closing price of our common shares on the last business day of the registrant's most recently completed second fiscal quarter, June 29, 2018, as reported by the New York Stock Exchange, was approximately $9,792 million. Common shares held by executive officers and directors and persons who own 10% or more of the issued and outstanding common shares have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose.
As of February 15, 2019, 141,118,189 Common Shares, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2019 Annual General Meeting of Shareholders to be held on May 23, 2019 are incorporated by reference into Part III.
Table of Contents
Page | ||
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Cautionary Statement Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements to encourage companies to provide prospective information to investors. This Annual Report on Form 10-K includes forward looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. Forward looking statements include all statements that are not historical in nature. We have tried to identify these forward looking statements by using words including "may," "will," "should," "could," "expect," "anticipate," "believe," "plan," "intend," "estimate," "continue" and similar expressions. These forward looking statements are subject to a number of risks, uncertainties, assumptions 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. These factors include the risks, uncertainties, trends and other factors discussed under the headings "Item 1A. Risk Factors," as well as "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K, including:
• | changes in governmental policies and laws affecting our business, including agricultural and trade policies and environmental, tax and biofuels regulation; |
• | our capital allocation plans, funding needs and financing sources; |
• | changes in foreign exchange policy or rates; |
• | the outcome of pending regulatory and legal proceedings; |
• | our ability to complete, integrate and benefit from acquisitions, divestitures, joint ventures and strategic alliances; |
• | our ability to achieve the efficiencies, savings and other benefits anticipated from our cost reduction, margin improvement, operational excellence and other business optimization initiatives; |
• | industry conditions, including fluctuations in supply, demand and prices for agricultural commodities and other raw materials and products that we sell and use in our business, fluctuations in energy and freight costs and competitive developments in our industries; |
• | weather conditions and the impact of crop and animal disease on our business; |
• | global and regional economic, agricultural, financial and commodities market, political, social and health conditions; |
• | the outcome of our strategic review process; |
• | the effectiveness of our risk management strategies; |
• | operational risks, including industrial accidents, natural disasters and cybersecurity incidents: and |
• | other factors affecting our business generally. |
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward looking statements contained in this Annual Report on Form 10-K. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward looking events discussed in this Annual Report on Form 10-K not to occur. Except as otherwise required by federal securities law, we undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Annual Report on Form 10-K.
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PART I
Item 1. Business
References in this Annual Report on Form 10-K to "Bunge Limited," "Bunge," "the Company," "we," "us" and "our" refer to Bunge Limited and its consolidated subsidiaries, unless the context otherwise indicates.
Business Overview
We are a leading global agribusiness and food company with integrated operations that stretch from the farm to consumer foods. We believe we are a leading:
• | global oilseed processor and producer of vegetable oils and protein meals, based on processing capacity; |
• | global grain processor, based on volume; |
• | seller of packaged vegetable oils worldwide, based on sales; |
• | producer and seller of wheat flours and bakery mixes and dry milled corn products in North and South America, based on volume; and |
• | producer of sugar and ethanol in Brazil, based on volume. |
We conduct our operations in five segments: Agribusiness, Edible Oil Products, Milling Products, Sugar and Bioenergy, and Fertilizer. We refer to the Edible Oil Products and Milling Products segments collectively as our Food and Ingredients businesses. Key elements of our corporate strategy include enhancing our global expertise and footprint in grains and oilseeds in a capital-efficient way through targeted investments and strategic partnerships, partnering with customers to develop products, services and solutions that meet today’s and future needs in food and feed applications, and maximizing returns and profitability through a strong focus on cost efficiency and continuous improvement. Our strategy is aligned with long-term global macroeconomic and consumer growth trends, including a commitment to sustainability.
Our Agribusiness segment is an integrated, global business principally involved in the purchase, storage, transportation, processing and sale of agricultural commodities and commodity products. Our Agribusiness operations and assets are located in North and South America, Europe and Asia-Pacific, and we have merchandising and distribution offices throughout the world.
Our Food and Ingredients businesses consist of two reportable business segments: Edible Oil Products and Milling Products. The Edible Oil Products segment includes businesses that sell vegetable oils and fats, including cooking oils, shortenings, margarines, mayonnaise and specialty ingredients. The Milling Products segment includes businesses that sell wheat flours, bakery mixes, corn-based products and rice. The operations and assets of our Edible Oil Products segment are primarily located in North and South America, Europe and Asia-Pacific and the operations and assets of our Milling Products segment are located in North and South America.
Our Sugar and Bioenergy segment produces and sells sugar and ethanol derived from sugarcane, as well as energy derived from the sugar and ethanol production process, through our operations in Brazil.
Our Fertilizer segment is involved in producing, blending and distributing fertilizer products for the agricultural industry in South America, with operations and retail distribution activities in Argentina, Uruguay and Paraguay, and port facilities in Argentina and Brazil.
2018 Summary Operating Highlights - In our Agribusiness segment in 2018, we continued our focus on improving the efficiency and operations of our global network of integrated assets with a combination of productivity and maintenance investments, including substantially completing the upgrade of an existing oilseed processing plant in Italy. In our Food and Ingredients businesses, we completed the acquisition of a 70% ownership interest in IOI Loders Croklaan, creating a leading solutions provider in business to business (“B2B”) oils and accelerating the growth of our value-added oils business, and the acquisition of two corn mills in the United States, which enabled Bunge to expand its value-added product offering in North America. In the Sugar and Bioenergy segment, we exited from our renewable oils joint venture in Brazil and exited our international sugar trading operations. Additionally, we made continued progress on our Global Competitiveness Program that was launched in 2017 to improve our cost position and deliver increased value to shareholders.
History and Corporate Information
Bunge Limited is a limited liability company formed under the laws of Bermuda. We are registered with the Registrar of Companies in Bermuda under registration number EC20791. We trace our history back to 1818 when we were founded as a trading company in Amsterdam, The Netherlands. We are a holding company and substantially all of our operations are conducted through our subsidiaries. Our principal executive offices and corporate headquarters are located at 50 Main Street,
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White Plains, New York, 10606, United States of America and our telephone number is (914) 684-2800. Our registered office is located at 2 Church Street, Hamilton, HM 11, Bermuda.
Agribusiness
Overview—Our Agribusiness segment is an integrated, global business involved in the purchase, storage, transport, processing and sale of agricultural commodities and commodity products while managing risk across various product lines. The principal agricultural commodities that we handle in this segment are oilseeds, primarily soybeans, rapeseed, canola and sunflower seed, and grains, primarily wheat and corn. We process oilseeds into vegetable oils and protein meals, principally for the food, animal feed and biodiesel industries, through a global network of facilities. Our footprint is well balanced, with approximately 33% of our processing capacity located in South America, 27% in North America, 26% in Europe and 14% in Asia-Pacific.
Customers—We sell agricultural commodities and processed commodity products to customers throughout the world. The principal purchasers of our oilseeds, grains and oilseed meal are animal feed manufacturers, livestock producers, wheat and corn millers and other oilseed processors. As a result, our agribusiness operations generally benefit from global demand for protein, primarily poultry and pork products. The principal purchasers of the unrefined vegetable oils produced in this segment are our own Food and Ingredients businesses and third-party edible oil processing companies, which use these oils as raw materials in the production of edible oil products for the food service, food processor and retail markets. In addition, we sell oil products for various non-food uses, including industrial applications and the production of biodiesel.
Distribution and Logistics—We have developed an extensive global logistics network to transport our products, including trucks, railcars, river barges and ocean freight vessels. Typically, we either lease the transportation assets or contract with third parties for these services. To better serve our customer base and develop our global distribution and logistics capabilities, we own or operate either directly or through joint venture arrangements, various port terminal facilities globally, including in Brazil, Argentina, the United States, Canada, Russia, Ukraine, Poland, Vietnam and Australia.
Financial Services and Activities—We also offer various financial services, principally trade structured finance and financial risk management services for customers and other third parties. Our trade structured finance operations leverage our international trade flows to generate trade finance derived liquidity in emerging markets for third parties. Our financial risk management services include structuring and marketing risk management products to enable agricultural producers and end users of commodities to manage their commodity price risk exposures. We also engage in trading of foreign exchange and other financial instruments in our financial services business. Additionally, in Brazil, we provide financing services to farmers from whom we purchase soybeans and other agricultural commodities. Our farmer financing activities are an integral part of our grain and oilseed origination activities as they help assure the annual supply of raw materials for our Brazilian agribusiness operations.
Biodiesel—We own and operate biodiesel facilities in Europe and Brazil and have equity method investments in biodiesel producers in Europe and Argentina. This business is complementary to our core Agribusiness operations as in each case we supply some of the raw materials (refined or partially refined vegetable oil) used in their production processes.
Raw Materials—We purchase oilseeds and grains either directly from farmers or indirectly through intermediaries. Although the availability and price of agricultural commodities may, in any given year, be affected by unpredictable factors such as weather, government programs and policies and farmer planting and selling decisions, our operations in major crop growing regions globally have enabled us to source adequate raw materials for our operational needs.
Competition—Due to their commodity nature, markets for our products are highly competitive and subject to product substitution. Competition is principally based on price, quality, product and service offerings and geographic location. Major competitors include but are not limited to: The Archer Daniels Midland Co. ("ADM"), Cargill Incorporated ("Cargill"), Louis Dreyfus Group ("Louis Dreyfus"), Glencore International PLC, Wilmar International Limited ("Wilmar") and COFCO International ("COFCO").
Food and Ingredients
Overview—Our Food and Ingredients businesses include two reportable business segments: Edible Oil Products and Milling Products. We primarily sell our products to three customer types or market channels: food processors, food service companies and retail outlets. The principal raw materials used in our Food and Ingredients businesses are various crude and further processed vegetable oils and fats in our Edible Oil Products segment, and wheat, corn and rice in our Milling Products segment. These raw materials are mostly agricultural commodities that we either produce or purchase from third parties. We believe that our global integrated business model enables us to realize synergies between our Agribusiness and Food and Ingredients operations through raw material procurement, logistics, risk management and co-location of industrial facilities, enabling us to supply customers with reliable, high quality products on a global basis. As many of the products we sell in our
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Food & Ingredients businesses are staple foods or ingredients, these businesses benefit from macro population and income growth rates generally. Additionally, our Food and Ingredients businesses are focused on capitalizing on growing global consumer food trends, including a desire for less processed, healthier foods, interest in new flavors and increases in snacking and eating outside the home.
Edible Oil Products
Products—Our edible oil products include packaged and bulk oils and fats, including cooking oils, shortenings, margarines, mayonnaise and other products derived from the vegetable oil refining process. We primarily use soybean, sunflower, rapeseed and canola oil that we produce in our Agribusiness segment oilseed processing operations as raw materials in this business. We also refine and fractionate palm oil, palm kernel oil, coconut oil, and shea butter, and blend and refine olive oil. Additionally, we produce specialty ingredients such as lecithin derived from vegetable oils, which is used as an emulsifier in a broad range of food products. We are a leading seller of packaged vegetable oils worldwide, based on sales. We have edible oil refining and packaging facilities in North America, South America, Europe and Asia-Pacific. Our edible oil products business is largely B2B focused in North America, while in South America, Europe and Asia-Pacific it comprises a mix of B2B and business to consumer ("B2C") offerings.
On March 1, 2018, we completed the acquisition of a 70% ownership interest in IOI Loders Croklaan ("Loders"). The resulting Bunge Loders Croklaan business has enabled us to expand our customer value proposition with a full range of tropical and seed oils, leading innovation and application capabilities, a larger global footprint, and an integrated value chain focused on sustainability. Bunge Loders Croklaan products are used in a variety of applications, from confectionary and bakery to culinary uses and infant nutrition products.
In Brazil, our retail edible oil brands include Soya, the leading consumer packaged vegetable oil brand, as well as Primor and Salada. We are also a leading producer in the Brazilian margarine market with our brands Delicia and Primor, as well as in mayonnaise with our Soya, Primor and Salada brands. We are also a leading supplier of shortenings to the food processor market. We also produce processed tomato and other staple food products, including sauces, condiments and seasonings in Brazil under several brand names.
In the United States and Canada, we offer food manufacturers, bakeries and foodservice operators high quality solutions to fit their goals, such as delivering desired tastes and textures, or reducing trans-fats or saturated fats in their products. Our products include trans-fat free high oleic canola oil that is low in saturated fats and high oleic soybean oil that is highly stable and trans-fat free. We have also developed proprietary fiber addition processes that allow bakery and food processor customers to achieve significant reductions in saturated fats in shortenings. We also offer expeller pressed and physically refined oils to food service customers under the brand Whole Harvest and produce margarines and buttery spreads, including our leading brand Country Premium, for food service, food processor and retail private label customers. The Bunge Loders Croklaan product line also includes a variety of products for bakery and confectionary customers.
In Europe, we are a leader in consumer packaged vegetable oils, which are sold in various geographies under brand names including Venusz, Floriol, Kujawski, Olek, Unisol, Ideal, Oleina, Maslenitsa, Oliwier, Salat Rozumnitsa and Komili, and a leader in margarines, including our brand names Smakowita, Maslo Rosline, Masmix, Optima, Deli Reform, Keiju, Evesol, Linco, Gottgott, Suvela and Finuu. We are also a significant B2B oils supplier in the Western European foodservice channel. In addition, the Bunge Loders Croklaan product line also includes a variety of products for the confectionary and bakery industries.
In Asia, we offer a range of consumer and B2B products. In India, our consumer brands include Dalda, Ginni and Chambal in edible oils; Dalda and Gagan in vanaspati; and Masterline in professional bakery fats. In China, we offer consumer edible oil products under the Dou Wei Jia brand. The Bunge Loders Croklaan product line also includes bakery, culinary, confectionary and infant nutrition product offerings.
Customers—Our customers include baked goods companies, snack food producers, confectioners, restaurant chains, foodservice operators, infant nutrition companies and other food manufacturers who use vegetable oils and shortenings as ingredients in their operations, as well as grocery chains, wholesalers, distributors and other retailers who sell to consumers under our brand names or under private labels. These customers include global and national food processors and manufacturers, many of which are leading brand owners in their product categories.
Competition—Competition is based on a number of factors, including price, raw material procurement, distribution capabilities and cost structure, brand recognition, product quality, innovation, technical support, new product introductions, composition and nutritional value and advertising and promotion. Our products may compete with widely advertised, well-
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known, branded products, as well as private label and customized products. Our principal competitors in the Edible Oil Products segment include, but are not limited to: ADM, AAK AB, Cargill, Fuji Oil Co. Ltd. and Wilmar, as well as local competitors in each region.
Milling Products
Products—Our Milling Products segment activities include the production and sale of a variety of wheat flours and bakery mixes in Brazil and Mexico, corn-based products in the United States and Mexico derived from both the dry and wet corn milling processes and milled rice products in the United States and Brazil.
Our brands in Brazil include Suprema, Soberana, Primor and Predileta wheat flours and Gradina, and Pre-Mescla bakery premixes. Our wheat flour and bakery mix brands in Mexico include Espiga, Esponja, Francesera, Chulita, Galletera and Pastelera. Our corn milling products consist primarily of dry-milled corn meals and flours, wet-milled masa and flours, flaking and brewer's grits, as well as soy-fortified corn meal, corn-soy blend and other similar products. As part of our corn portfolio, we also sell whole grain and fiber ingredients. In the United States, we offer in our portfolio ancient grains, such as quinoa and millet. We also produce a range of extruded products that include die cut pellets for the snack food industry. Additionally, we offer non-GMO products in the United States, including corn varieties. We mill and sell bulk and packaged rice in the United States and sell branded rice in Brazil under the Primor brand.
In January 2018, we acquired two corn mills in the United States ("Minsa USA"), from Grupo Minsa, S.A.B. de C.V. The acquisition of Minsa USA enabled Bunge to expand its value-added product offering in grain based functional flours (masa) and continue to build on our milling B2B businesses in North America.
Customers—The primary customers for our wheat milling products are food processing, bakery and food service companies. The primary customers for our corn milling products are companies in the food-processing sector, such as cereal, snack, bakery and brewing companies, as well as the U.S. Government for humanitarian assistance programs. Our rice milling business sells to customers in the food service and food processing channels, as well as to export markets.
Competition—Competition is based on a variety of factors, including price, raw material procurement, brand recognition, product quality, nutritional profile, dietary trends and distribution capabilities. In Brazil, our major competitors are M. Dias Branco, J. Macedo and Moinho Anaconda, as well as many small regional producers. Our major competitors in North American corn milling include Cargill, Didion Inc., SEMO Milling, LLC, Life Line Foods, LLC and Gruma S.A.B. de C.V. Our major competitors in our U.S. rice milling business include ADM and Farmers' Rice Cooperative. Our major competitors in Mexico include Elizondo Agroalimentos, S.A. de C.V., Molinera de México S.A. de C.V. and Grupo Trimex S.A.
Sugar and Bioenergy
Overview—We are a leading, integrated producer of sugar and ethanol in Brazil. We own and operate eight sugarcane mills in Brazil, the world's largest producer and exporter of sugar. As of December 31, 2018, our mills had a total crushing capacity of approximately 22 million metric tons per year. Sugarcane, which is the raw material that we use to produce sugar and ethanol, is supplied by a combination of our own plantations and third-party farmers. Additionally, through cogeneration facilities at our sugarcane mills, we produce electricity from the burning of sugarcane bagasse (the fibrous portion of the sugarcane that remains after the extraction of sugarcane juice) in boilers, which enables our mills to meet their energy requirements. Any surplus electricity is sold to the local grid or other large third-party users of electricity.
In 2018, we exited our international sugar trading operations and renewable oils joint venture in Brazil and continue to explore alternatives to reduce our exposure to the Brazilian sugarcane milling business, such as an initial public offering, sale, joint venture or other alternatives. The nature and timing of any potential outcome or transaction is uncertain and cannot be predicted. Over the past several years we have also focused on improving the efficiency and lowering the operating costs of this business.
Raw Materials—Sugarcane is our principal raw material in this segment and we both produce it and procure it through third-party supply contracts. The annual harvesting cycle in Brazil typically begins in late March/early April and ends in late November/early December. Once planted, sugarcane is harvested for five to seven years on average, but the yield decreases with each harvest over the life cycle of the cane. As a result, after this period, old sugarcane plants are typically removed, and the area is replanted. The quality and yield of the harvested cane are also affected by factors such as soil quality, moisture topography, weather and agricultural practices.
Our mills are supplied with sugarcane grown on approximately 325,000 hectares of land. This land represents approximately 9,000 hectares of land that we own, 234,000 hectares of land that we manage under agricultural partnership arrangements and 82,000 hectares of land farmed by third-party farmers. In 2018, approximately 71% of our total milled sugarcane came from our owned or managed plantations and 29% was purchased from third-party suppliers. Payments under
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the agricultural partnership agreements and third-party supply contracts are based on a formula, which factors in the volume of sugarcane per hectare, sucrose content of the sugarcane and market prices for sugarcane, which are set by Consecana, the state of São Paulo sugarcane, sugar and ethanol council.
Our sugarcane planting and harvesting processes are substantially mechanized. Mechanized harvesting does not require burning of the cane prior to harvesting, significantly reducing the environmental impact when compared to manual harvesting, and resulting in improved soil conditions.
Logistics—Harvested sugarcane is loaded onto trucks and trailers and transported to our mills. Since the sucrose content of the sugarcane begins to degrade rapidly after harvesting, we seek to minimize the time and distance between the cutting of the cane and its delivery to our mills for processing.
Products—Our mills allow us to produce ethanol, sugar and electricity, as further described below. At mills that produce both sugar and ethanol, we can adjust our production mix within certain capacity limits between ethanol and sugar, as well as, for certain mills, between different types of sugar (raw and crystal) and ethanol (hydrous and anhydrous). The ability to adjust our production mix allows us to respond to changes in customer demand and market prices.
Sugar—Our current maximum sugar production capacity is 6,050 metric tons per day, which in a season of 5,000 hours of milling, results in an annual maximum production capacity of approximately 1.3 million metric tons of sugar. We produce two types of sugar: very high polarity ("VHP") raw sugar and crystal sugar. VHP sugar is similar to the raw sugar traded on major commodities exchanges, including the standard NY11 contract, and is sold almost exclusively for export. Crystal sugar is a non-refined white sugar and is principally sold domestically in Brazil.
Ethanol—Our current maximum ethanol production capacity is 6,240 cubic meters per day, which in a season of 5,000 hours of milling, results in an annual maximum production capacity of 1.3 million cubic meters of ethanol. We produce and sell two types of ethanol: hydrous and anhydrous. Hydrous ethanol is consumed directly as a transport fuel, while anhydrous ethanol is blended with gasoline in transport fuels.
Electricity—We generate electricity from burning sugarcane bagasse in our mills. As of December 31, 2018, our total installed cogeneration capacity was approximately 322 megawatts, with approximately 126 megawatts available for resale to third parties after supplying our mills' energy requirements, representing up to approximately 600,000 megawatt hours of electricity available for resale depending upon sugar mill production and cogeneration unit performance and availability.
Customers—The sugar we produce at our mills is sold in both the Brazilian domestic and export markets. Our domestic customers are primarily in the confectionary and food processing industries. The ethanol we produce is primarily sold to customers for use in the Brazilian domestic market to meet the demand for fuel. We also export sugar and ethanol in the international market.
Other—We have a minority investment in a U.S. corn based ethanol production facility and a 50% interest in a joint venture that produces corn based ethanol in Argentina. In June 2018, we sold our interest in a joint venture for the development and production of renewable oils and feed ingredients in Brazil.
Competition—We compete with other sugar and ethanol producers in Brazil and internationally, and in the global market with beet sugar processors, producers of other sweeteners, and other biofuels producers. The industry is highly competitive, with raw material procurement, cost structure, selling price and distribution capabilities being important competitive factors. Our major competitors in Brazil include Cosan Limited/ Raizen, São Martinho S.A. and Biosev (Louis Dreyfus). Our major international competitors include British Sugar PLC, Südzucker AG, Cargill, Tereos S.A., Sucden S.A., ED&F Man Limited and COFCO.
Fertilizer
Overview—Through our operations in Argentina, Uruguay and Paraguay, we produce, blend and distribute a range of liquid and dry NPK fertilizers, including nitrogen-based liquid and solid phosphate fertilizers. NPK refers to nitrogen (N), phosphate (P) and potassium (K), the main components of chemical fertilizers, used for crop production primarily of soybeans, corn and wheat. Our operations in Argentina, Uruguay and Paraguay are closely linked to our grain origination activities as we supply fertilizer to producers who supply us with grain. In Brazil, we operate a port terminal in the Port of Santos that discharges and handles imported fertilizers for third parties through our subsidiary Termag and provides logistics and support services. Our Brazilian grain operations also supply third-party produced fertilizer to farmers through barter agreements with the farmers.
Products and Services—We offer a complete fertilizer portfolio, including SSP, ammonia and ammonium thiosulfate that we produce, as well as monoammonium phosphate ("MAP"), diammonium phosphate, triple supersphosphate, urea, urea-ammonium nitrate, ammonium sulfate and potassium chloride that we purchase from third parties and resell. We market our
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products under the Bunge brand, as well as the Solmix brand for liquid fertilizers.
Raw Materials—Our main raw materials in this segment are concentrated phosphate rock, sulfuric acid, natural gas and sulphur. The prices of fertilizer raw materials are typically based on international prices that reflect global supply and demand factors and global transportation and other logistics costs. Each of these fertilizer raw materials is readily available in the international market from multiple sources.
Competition—Competition is based on a number of factors, including delivered price, product offering and quality, location, access to raw materials, production efficiency and customer service, including, in some cases, customer financing terms. Our main competitors in our fertilizer operations in Argentina are Nutrien Ltd. (Agrium/ASP), YPF S.A., Profertil S.A., COFCO (Nidera B.V.), Yara International ASA and Louis Dreyfus.
Global Competitiveness Program
In July 2017, we announced a global competitiveness program (“GCP”) to improve our cost position and deliver increased value to shareholders. When fully implemented, the GCP is expected to reduce overhead costs by approximately $250 million annually. The key elements of the GCP strategy outlined to meet this goal include improving efficiency and scalability by simplifying organizational structures, streamlining processes and consolidating back office functions globally, and adopting a zero-based budgeting process that will target excess costs in specific budget categories. The GCP supplements other cost reduction and strategic initiatives designed to enhance the efficiency and performance our business. The implementation of these activities is expected to generate the $250 million of reduced overhead costs by the end of 2019 and to further benefit us in 2020. Additionally, we intend to apply the strategies and insights gained from the GCP to develop additional opportunities to reduce costs and increase efficiency in other areas of our business. For more information see Note 2 - Global Competitiveness Program to our consolidated financial statements included as part of this Annual Report on Form 10-K.
Risk Management
Risk management is a fundamental aspect of our business. Engaging in the hedging of risk exposures and anticipating market developments are critical to protect and enhance our return on assets. As such, we are active in derivative markets for agricultural commodities, energy, ocean freight, foreign currency and interest rates. We seek to leverage the market insights that we gain through our global operations across our businesses by actively managing our physical and financial positions on a daily basis. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk"
Insurance
In each country where we conduct business, our operations and assets are subject to varying degrees of risk and uncertainty. We insure our businesses and assets in each country in a manner that we deem appropriate for a company of our size and activities, based on an analysis of the relative risks and costs. We believe that our geographic dispersion of assets helps mitigate risk to our business from an adverse event affecting a specific facility; however, if we were to incur a significant loss or liability for which we were not insured in full or in part, it could have a materially adverse effect on our business, financial condition and results of operations.
Operating Segments and Geographic Areas
We have included financial information about our reportable segments and our operations by geographic area in Note 27 - Segment Information to our consolidated financial statement included as part of this Annual Report on Form 10-K.
Research and Development, Innovation, Patents and Licenses
Our research and development activities are focused on developing products and improving processes that will drive growth or otherwise add value to our core business operations. In our Food and Ingredients business, we have 17 research and development centers globally to support product development and enhancement. Additionally, Bunge Ventures, our corporate venture capital unit, invests in start-ups and other early stage companies that are developing new technologies relevant to our industries.
We own trademarks, patents and licenses covering certain of our products and manufacturing processes. However, neither our business as a whole nor any segment is dependent on any specific trademark, patent or license.
Seasonality
In our Agribusiness segment, while there is a degree of seasonality in the growing season and procurement of our principal raw materials, such as oilseeds and grains, we typically do not experience material fluctuations in volume between the first and second half of the year since we are geographically diversified between the northern and southern hemispheres, and
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we sell and distribute products throughout the year. However, the first quarter of the year has generally been our weakest in terms of financial results due to the timing of the North and South American oilseed harvests as the North American harvest peaks in the third and fourth quarters and the South American harvest peaks in the second quarter, and thus our North and South American grain merchandising and oilseed processing activities are generally at lower levels during the first quarter.
In our Food and Ingredients businesses, demand for certain of our food items may be influenced by holidays and other annual events.
We experience seasonality in our Sugar and Bioenergy segment as a result of the Brazilian sugarcane growing cycle. In the Center-South of Brazil, where most of our mills are located, the sugarcane harvesting period typically begins in late March/early April and ends in late November/early December. This creates fluctuations in our sugar and ethanol inventories, which usually peak in December to cover sales between crop harvests. These factors result in earnings being weighted towards the second half of the year. This segment is also impacted by the yield development of the sugarcane crops over the course of the crop year with sugar content reaching its highest level in the middle of the crop. As a result of the above factors, there may be significant variations in our results of operations from one quarter to another.
In our Fertilizer segment, we are subject to seasonal trends based on the South American agricultural growing cycle as farmers typically purchase the bulk of their fertilizer needs in the second half of the year.
Government Regulation
We are subject to a variety of laws and regulations in each of the countries in which we operate which govern various aspects of our business, including general business regulations as well as those governing the manufacturing, handling, storage, transport, marketing and sale of our products. These include laws and regulations relating to facility licensing and permitting, food and feed safety, handling and production of regulated substances, nutritional and labeling requirements, global trade compliance and other matters. Our operations and those of our suppliers are also subject to restrictions on land use in certain protected areas, forestry reserve requirements, limitations on the burning of sugarcane and water use. Additionally, from time-to-time, agricultural production shortfalls in certain regions and growing demand for agricultural commodities for feed, food and fuel use have caused prices for relevant agricultural commodities to rise. High commodity prices and regional crop shortfalls have led, and in the future may lead, governments to impose price controls, tariffs, export restrictions and other measures designed to assure adequate domestic supplies and/or mitigate price increases in their domestic markets, as well as increase the scrutiny of competitive conditions in their markets.
Many countries globally are using and producing biofuels as alternatives to traditional fossil fuels. Biofuels convert crops, such as sugarcane, corn, soybeans, palm, rapeseed or canola and other oilseeds, into ethanol or biodiesel to extend, enhance or substitute for fossil fuels. Production of biofuels has increased significantly in the last decade in response to both periods of high fossil fuel prices and to government incentives to produce biofuels offered in many countries, including the United States, Brazil, Argentina and several South East Asian and European countries. Furthermore, in several countries, governmental authorities are mandating biofuels use in transport fuel at specified levels. As such, the markets for agricultural commodities used in the production of biofuels have become increasingly affected by the growth of the biofuels industry and related legislation.
Environmental Matters and Sustainability
We incorporate a commitment to sustainability into many of the areas of our business; from how we plan and develop our strategic goals and operate our facilities, to how we do business with our suppliers and customers and engage with our communities. Our philosophy is to "Act, Conserve and Engage" and our efforts include policies and initiatives to reduce deforestation, conserve resources in our operations and engage across our sector to address the sustainability challenges in the agribusiness and food value chain, such as the impacts of agricultural production on environmental resources.
We are subject to various environmental protection and occupational health and safety laws and regulations in the countries in which we operate, and we incur costs to comply with these requirements. Compliance with applicable laws and regulations relating to environmental matters has not had a material financial or competitive effect on our business. However, due to our extensive operations across multiple industries and jurisdictions globally, we are exposed to the risk of claims and liabilities under these laws and regulations. Violation can result in substantial fines, administrative sanctions, criminal penalties, revocations of operating permits and/or shutdowns of our facilities.
Additionally, our business could be affected in the future by regulation or taxation of greenhouse gas emissions or policies related to national emission reduction plans. It is difficult to assess the potential impact of any resulting regulation of greenhouse gas emissions. Potential consequences could include increased energy, transportation and raw material costs, and we may be required to make additional investments to modify our facilities, equipment and processes. As a result, the effects of additional climate change regulatory initiatives could have adverse impacts on our business and results of operations. Physical
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effects of climate change, including shifts in agricultural production areas and climatic volatility, could in the long-term result in incidents of stranded physical assets. We believe the breadth and diversification of our global asset network, as well as our participation in global trade of agricultural commodities, help to mitigate these risks.
Employees
As of December 31, 2018, we had approximately 31,000 employees. Many of our employees are represented by labor unions, and their employment is governed by collective bargaining agreements. In general, we consider our employee relations to be good.
Available Information
Our website address is www.bunge.com. Through the "Investors: SEC Filings" section of our website, it is possible to access our periodic report filings with the Securities and Exchange Commission ("SEC") pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports. Also, filings made pursuant to Section 16 of the Exchange Act with the SEC by our executive officers, directors and other reporting persons with respect to our common shares are made available through our website. Our periodic reports and amendments and the Section 16 filings are available through our website free of charge as soon as reasonably practicable after such report, amendment or filing is electronically filed with or furnished to the SEC.
Through the "Investors: Governance" section of our website (www.bunge.com), it is also possible to access copies of the charters for our Audit Committee, Compensation Committee, Finance and Risk Policy Committee, Corporate Governance and Nominations Committee, Sustainability and Corporate Responsibility Committee and Strategic Review Committee. Our Corporate Governance Guidelines and our Code of Conduct are also available on our website. Each of these documents is also made available free of charge through our website.
The foregoing information regarding our website and its content is for your convenience only. The information contained in or connected to our website is not deemed to be incorporated by reference in this report or filed with the SEC.
In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers where you may obtain a copy of all of the materials we file publicly with SEC. The SEC website address is www.sec.gov.
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Executive Officers and Key Employees of the Company
Set forth below is certain information concerning the executive officers and key employees of the company.
Name | Position | |
Gregory A. Heckman | Acting Chief Executive Officer | |
Todd Bastean | President, North America | |
Thomas M. Boehlert | Executive Vice President—Chief Financial Officer | |
Deborah Borg | Executive Vice President—Chief Human Resources and Communications Officer | |
Robert Coviello | Executive Vice President—Chief Growth and Strategy Officer | |
Christos Dimopoulous | President, Agribusiness | |
Gordon Hardie | President, Food & Ingredients | |
David G. Kabbes | Executive Vice President—Corporate Affairs and Chief Legal Officer | |
Pierre Mauger | President, Europe and Asia | |
Raul Padilla | President, South America and Sugar & Bioenergy | |
Brian Zachman | President, Global Risk Management | |
Gregory A. Heckman, 56— Mr. Heckman was appointed Acting Chief Executive Officer in January 2019. He joined our Board of Directors in October 2018 and continues to serve as a Board member. Mr. Heckman is the founding partner of Flatwater Partners, a private investment firm, and has over 30 years of experience in the agriculture, energy and food processing industries. He served as Chief Executive Officer of The Gavilon Group from 2008 to 2015. Prior to Gavilon, he served as Chief Operating Officer of ConAgra Foods Commercial Products and President and Chief Operating Officer of ConAgra Trade Group. Mr. Heckman serves on the Board of Directors of OCI N.V. and on the Advisory Board of JBS USA. He holds a B.S. in agricultural economics and marketing from the University of Illinois at Urbana-Champaign.
Todd Bastean, 52—Mr. Bastean has served as President, North America since January 2018. Prior to that, he served as Chief Executive Officer, Bunge North America since June 2013. He started his career at Bunge in 1994 and became Chief Financial Officer of Bunge North America in 2010. Before assuming that role, he served as Vice President and General Manager of Bunge North America's Milling and Biofuels business units, and as Vice President and Chief Administrative Officer of its Grain and Milling business units. He also held positions in strategic planning and auditing. Prior to joining Bunge, he worked for KPMG Peat Marwick. Mr. Bastean holds a B.S. in Accounting from Western Illinois University.
Thomas M. Boehlert, 59—Mr. Boehlert joined Bunge in January 2017. Previously, he was Chief Executive Officer, President and a Director of First Nickel Inc. from 2011 to 2015. First Nickel entered Canadian receivership in August 2015. Prior to that, he was Chief Financial Officer for Kinross Gold Corporation from 2006 to 2011 and served as Chief Financial Officer for several energy companies, including Texas Genco, Direct Energy and Sithe Energies, Inc. Previously, Mr. Boehlert spent 14 years in banking with Credit Suisse, where his focus was on the electric power, natural resources and infrastructure sectors, and where he built and headed the firm's London-based project finance business covering Europe, Africa and the Middle East. He started his career as an auditor at a KPMG predecessor firm in 1983. Mr. Boehlert is a Certified Public Accountant and holds a B.A. in Accounting from Indiana University and an M.B.A. in Finance from New York University.
Deborah Borg, 42—Ms. Borg joined Bunge in January 2016. She joined Bunge from Dow Chemical, where she served as President Dow USA, a role in which she was responsible for regional business strategy and external relationships with customers, government organizations and joint venture partners. She started her career at Dow in 2000 as Human Resources Manager for Australia / New Zealand and went on to hold regional and business HR roles in Asia, Europe and North America. She also served as Global HR Director, Marketing and Sales, and led the Human Capital Planning and Development function for Dow focusing on talent acquisition, retention, diversity and development. Previously, Ms. Borg served in HR and talent development roles with General Motors Australia. She holds a Bachelor of Business Management in Human Resources and a Master in Training and Change Management from Victoria University, Australia.
Robert Coviello, 50—Mr. Coviello has served as Executive Vice President and Chief Growth and Strategy Officer since January 2019. Prior to that he served as Managing Director, Southeast Asia and China from 2016 to 2018. Prior to that he held a variety of commercial leadership positions for Bunge in Asia, Europe and the United States. Prior to joining Bunge in 2003, he served in commercial and trading roles at Cargill. He holds a bachelor’s degree from Dartmouth College and an M.B.A. from Harvard Business School.
Christos Dimopoulos, 45—Mr. Dimopoulos has served as President, Agribusiness since October 2018. Prior to that he served most recently as Senior Vice President, Global Grains and Oilseeds since December 2017. He joined the company in
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2004 as a grain trader and subsequently held a variety of roles of increasing responsibility in the Agribusiness segment. Prior to Bunge, Mr. Dimopoulos held roles in Europe and the United States with Tradigrain and Intrade Risk Management. He holds a bachelor’s degree in Business Management and Marketing from HEC Lausanne in Switzerland.
Gordon Hardie, 55—Mr. Hardie has served as President, Food & Ingredients since January 2018. Prior to that, he served as Managing Director, Food & Ingredients since July 2011. Prior to joining Bunge, Mr. Hardie founded Morningside Partners, a corporate strategy and M&A advisory firm focused on the food and beverage industries in 2009. Prior to that, from 2003 to 2009, he led the Fresh Baking Division of Goodman Fielder Ltd, the leading producer of bakery brands in Australia and New Zealand, and held leadership roles at companies in a variety of international markets, including as Group General Manager, Marketing at Southcorp Wines; Vice President, Asia-Pacific, Middle East and Africa at Fosters Group International; and Regional Director, Americas & Asia-Pacific at Pernod Ricard. He holds a Bachelor's degree in European Language and Psychology from the National University of Ireland, University College Cork and an M.B.A. from the University College Dublin, Michael Smurfit Graduate School of Business.
David G. Kabbes, 56—Mr. Kabbes has served as Executive Vice President— Corporate Affairs and Chief Legal Officer since January 2018. He became General Counsel and Managing Director, Corporate Affairs in February 2015 after serving as Senior Vice President, Corporate and Legal Affairs for Bunge North America since 2000, where he oversaw the legal, government and industry affairs, communications, foreign trade support and environmental functions. Prior to joining Bunge in 2000, he was Executive Vice President, Secretary and General Counsel at Purina Mills, a corporate attorney at Koch Industries, Inc., a partner at Schiff Hardin & Waite and an associate at Thompson Coburn. He received a bachelor's degree in business from Quincy University and a law degree from the University of Illinois.
Pierre Mauger, 46—Mr. Mauger has served as President, Europe and Asia since January 2018. Prior to that he served as Chief Development Officer since September 2013, when he joined Bunge. Prior to joining Bunge, Mr. Mauger was a partner at McKinsey & Company, where he led the firm's agriculture service line in Europe, the Middle East and Africa from 2009 to 2013, overseeing client relationships with leading global companies in the commodity processing and trading, agrochemicals and fertilizer sectors, as well as with governments. Prior to that, he served as a partner in the firm's consumer goods practice. He joined McKinsey as an associate in 2000. Mr. Mauger previously worked as an auditor at Nestlé and KPMG. He holds a B.Sc. in Economics and Business Finance from Brunel University in the United Kingdom and an M.B.A. from INSEAD.
Raul Padilla, 63—Mr. Padilla has served as President, South America and President, Sugar and Bioenergy since January 2018. Prior to that he served as Chief Executive Officer of Bunge Brazil and Managing Director, Sugar and Bioenergy since 2014. Prior to that, he served as Managing Director, Bunge Global Agribusiness and Chief Executive Officer, Bunge Product Lines since July 2010. Prior to that, he was Chief Executive Officer of Bunge Argentina since 1999, having joined the company in 1997 as Commercial Director. Mr. Padilla has over 30 years of experience in the oilseed processing and grain handling industries in Argentina, beginning his career with La Plata Cereal in 1977. He has served as President of the Argentine National Oilseed Crushers Association, Vice President of the International Association of Seed Crushers and Director of the Buenos Aires Cereal Exchange and the Rosario Futures Exchange. Mr. Padilla is a graduate of the University of Buenos Aires.
Brian Zachman, 47—Mr. Zachman joined the Company in January 2019 as President of Global Risk Management. Prior to that, he held portfolio management positions focused on agricultural commodity derivatives since 2012, most recently with Millennium Limited Partners since 2014 and prior to that with SAC Capital from 2012 to 2014. Mr. Zachman previously worked at Bunge from 1999 to 2012, serving in a number of commercial and trading roles within Agribusiness. Prior to that, he held various commercial and merchant roles with Cargill and ConAgra. Mr. Zachman holds a Bachelor of Arts in Economics from the University of Minnesota-Duluth.
Item 1A. Risk Factors
Risk Factors
Our business, financial condition or results of operations could be materially adversely affected by any of the risks and uncertainties described below. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our financial condition and business operations. See "Cautionary Statement Regarding Forward Looking Statements."
Risks Relating to Our Business and Industries
Adverse weather conditions, including as a result of climate change, may adversely affect the availability, quality and price of agricultural commodities and agricultural commodity products, as well as our operations and operating results.
Adverse weather conditions have historically caused volatility in the agricultural commodity industry and consequently in our operating results by causing crop failures or significantly reduced harvests, which may affect the supply and pricing of
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the agricultural commodities that we sell and use in our business, reduce demand for our fertilizer products and negatively affect the creditworthiness of agricultural producers who do business with us.
Additionally, our sugar production depends on the volume and sucrose content of the sugarcane that we cultivate or that is supplied to us by third-party growers. Both sugarcane crop yields and sucrose content depend significantly on weather conditions, such as rainfall and prevailing temperatures, which can vary substantially. Adverse weather conditions can also impair our ability to harvest and transport sugarcane to our mills, leading to decreased productivity and higher production costs. As a result, unfavorable weather conditions have had and could in the future have a material adverse effect on our sugar operations.
Severe adverse weather conditions, such as hurricanes or severe storms, may also result in extensive property damage, extended business interruption, personal injuries and other loss and damage to us. Our operations also rely on dependable and efficient transportation services. A disruption in transportation services, as a result of weather conditions or otherwise, may also significantly adversely impact our operations.
Additionally, the potential physical impacts of climate change are uncertain and may vary by region. These potential effects could include changes in rainfall patterns, water shortages, changing sea levels, changing storm patterns and intensities, and changing temperature levels that could adversely impact our costs and business operations, the location, costs and competitiveness of global agricultural commodity production and related storage and processing facilities and the supply and demand for agricultural commodities. These effects could be material to our results of operations, liquidity or capital resources.
We are subject to fluctuations in agricultural commodity and other raw material prices, energy prices and other factors outside of our control that could adversely affect our operating results.
Prices for agricultural commodities and their by-products, including, among others, soybeans, corn, wheat, sugar and ethanol, like those of other commodities, are often volatile and sensitive to local and international changes in supply and demand caused by factors outside of our control, including farmer planting and selling decisions, currency fluctuations, government agriculture programs and policies, global inventory levels, demand for biofuels, weather and crop conditions and demand for and supply of, competing commodities and substitutes. These factors may cause volatility in our operating results.
Our fertilizer business may also be adversely affected by fluctuations in the prices of agricultural commodities and fertilizer raw materials that are caused by market factors beyond our control. Increases in fertilizer prices due to higher raw material costs have in the past and could in the future adversely affect demand for our fertilizer products. Additionally, as a result of competitive conditions in our Food and Ingredients and Fertilizer segments, we may not be able to recoup increases in raw material costs through increases in sales prices for our products, which may adversely affect our profitability.
Additionally, our operating costs and the selling prices of certain of our products are sensitive to changes in energy prices. Our industrial operations utilize significant amounts of electricity, natural gas and coal, and our transportation operations are dependent upon diesel fuel and other petroleum- based products. Significant increases in the cost of these items and currency fluctuations could adversely affect our operating costs and results. We also sell certain biofuel products, such as ethanol and biodiesel, which are closely related to, or may be substituted for, petroleum products. As a result, the selling prices of ethanol and biodiesel can be impacted by the selling prices of oil, gasoline and diesel fuel. In turn, the selling prices of the agricultural commodities and commodity products that we sell, such as corn and vegetable oils that are used as feedstocks for biofuels, are also sensitive to changes in the market price for biofuels, and consequently world petroleum prices as well. Prices for petroleum products and biofuels are affected by market factors and government fuel policies, over which we have no control. Lower prices for oil, gasoline or diesel fuel could result in decreased selling prices for ethanol, biodiesel and their raw materials, which could adversely affect our revenues and operating results. Additionally, the prices of sugar and sugarcane-based ethanol are also correlated, and, therefore, a decline in world sugar prices may also adversely affect the selling price of the ethanol we produce in Brazil.
We may be adversely affected by a shortage of sugarcane or by high sugarcane costs.
Sugarcane is our principal raw material used in the production of ethanol and sugar. Our ability to secure an adequate supply of sugarcane depends on our ability to negotiate and maintain satisfactory land rights and supply contracts with third parties. Currently, approximately 94% of the land we use for sugarcane supply is not owned by us, with such land typically managed through agricultural partnership agreements having an average remaining term of five years. We cannot guarantee that these agreements will be renewed after their respective terms or that any such renewals will be on terms and conditions satisfactory to us. A significant shortage of sugarcane supply or increase in the cost of available sugarcane, including as a result of the termination of our partnership or supply contracts or the inability to enter into alternative arrangements on
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economic terms, would likely have an adverse effect on our business and financial performance, and such effect could be material.
We face intense competition in each of our businesses.
We face significant competition in each of our businesses and we have numerous competitors, some of which are larger, more diversified and have greater financial resources than we have. Additionally, in recent years we have experienced regional Agribusiness competitors entering new geographies where previously they did not compete with us and certain customers seeking to procure certain commodities directly rather than through historical suppliers such as us. As many of the products we sell are global commodities, the markets for our products are highly price competitive, and in many cases also sensitive to product substitution. Additionally, the geographic location of assets can competitively advantage or disadvantage us with respect to our competitors in certain regions. We also face competition from changing technologies and shifting industry practices, such as increased on farm storage of crops in several regions which allow producers to retain commodities for extended periods and increase price pressure on purchasers such as us. To compete effectively, we must continuously focus on improving efficiency in our production and distribution operations, developing and offering products that meet customer needs, optimizing our geographic presence in key markets, and developing and maintaining appropriate market share and customer relationships. We also compete for talent in our industries, particularly commercial personnel. Competition could cause us to lose market share and talented employees, exit certain lines of business, increase marketing or other expenditures, increase our raw material costs or reduce pricing, each of which could have an adverse effect on our business and profitability.
We are vulnerable to the effects of supply and demand imbalances in our industries.
Historically, the market for some agricultural commodities and fertilizer products has been cyclical, with periods of high demand and capacity utilization stimulating new plant investment and the addition of incremental processing or production capacity by industry participants to meet the demand. The timing and extent of this expansion may then produce excess supply conditions in the market, which, until the supply/demand balance is again restored, negatively impacts product prices and operating results. During times of reduced market demand, we may suspend or reduce production at some of our facilities. The extent to which we efficiently manage available capacity at our facilities will affect our profitability.
We are subject to global and regional economic downturns and related risks.
The level of demand for our products is affected by global and regional demographic and macroeconomic conditions, including population growth rates and changes in standards of living. A significant downturn in global economic growth, or recessionary conditions in major geographic regions, may lead to reduced demand for agricultural commodities and food products, which could adversely affect our business and results of operations.
Additionally, weak global economic conditions and adverse conditions in global financial and capital markets, including constraints on the availability of credit, have in the past adversely affected, and may in the future adversely affect, the financial condition and creditworthiness of some of our customers, suppliers and other counterparties, which in turn may negatively impact our financial condition and results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for more information.
For example, Brazil has experienced significant political uncertainty in recent years due to high profile political corruption scandals, the impeachment of a former president and general uncertainty regarding the recent election of a new president. Additionally, Brazil’s economy has been slowly recovering from a severe downturn in 2015 and 2016. The depressed and uncertain economic and political environment in Brazil has adversely affected consumer confidence levels and spending, which has led to reduced demand for products in our Food and Ingredients businesses in the country. The pace of economic improvement is uncertain, and there can be no assurance that economic and political conditions will not continue to affect market and consumer confidence or deteriorate further in the near term. Additionally, a slowdown in China's economy over a prolonged period could lead to reduced global demand for agricultural commodities. To the extent that such economic and political conditions negatively impact consumer and business confidence and consumption patterns or volumes, our business and results of operations could be significantly and adversely affected.
We are subject to economic, political and other risks of doing business globally and in emerging markets.
We are a global business with a substantial majority of our assets and operations located outside the United States. In addition, our business strategies may involve expanding or developing our business in emerging market regions, including Eastern Europe, Asia-Pacific, the Middle East and Africa. Due to the international nature of our business, we are exposed to various risks of international operations, including:
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• | adverse trade policies or trade barriers on agricultural commodities and commodity products; |
• | inflation and hyperinflation and adverse economic effects resulting from governmental attempts to control inflation, such as imposition of wage and price controls and higher interest rates; |
• | changes in laws and regulations or their interpretation or enforcement in the countries where we operate, such as tax laws, including the risk of future adverse tax regulations relating to our status as a Bermuda company; |
• | difficulties in enforcing agreements or judgments and collecting receivables in foreign jurisdictions; |
• | exchange controls or other currency restrictions and limitations on the movement of funds, such as on the remittance of dividends by subsidiaries; |
• | inadequate infrastructure and logistics challenges; |
• | sovereign risk and risk of government intervention, including through expropriation, or regulation of the economy or natural resources, including restrictions on foreign ownership of land or other assets; |
• | the requirement to comply with a wide variety of laws and regulations that apply to international operations, including, without limitation, economic sanctions regulations, labor laws, import and export regulations, anti-corruption and anti-bribery laws, as well as other laws or regulations discussed in this "Item 1A. Risk Factors" section; |
• | challenges in maintaining an effective internal control environment with operations in multiple international locations, including language differences, varying levels of U.S. Generally Accepted Accounting Principles ("U.S. GAAP") expertise in international locations and multiple financial information systems; and |
• | labor disruptions, civil unrest, significant political instability, wars or other armed conflict or acts of terrorism. |
These risks could adversely affect our operations, business strategies and operating results.
As a result of our international operations, we are also exposed to currency exchange rate fluctuations. Changes in exchange rates between the U.S. dollar and other currencies, particularly the Brazilian real, the euro and other foreign currencies affect our revenues and expenses that are denominated in local currencies, affect farm economics in those regions and may also have a negative impact on the value of our assets located outside of the United States.
Additionally, there continues to be a great deal of uncertainty regarding U.S. and global trade policies for companies with multinational operations like ours. In recent years there has been an increase in populism and nationalism in various countries around the world and consequently historical free trade principles are being challenged. For example, the U.S. government has indicated its intent to adopt a new approach to trade policy and in some cases to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. As we continue to operate our business globally, our success will depend, in part, on the nature and extent of any such changes and our how well we are able to anticipate, respond to and effectively manage any such changes.
Government policies and regulations affecting the agricultural sector and related industries could adversely affect our operations and profitability.
Agricultural commodity production and trade flows are significantly affected by government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, import and export restrictions, price controls on agricultural commodities and energy policies (including biofuels mandates), can influence industry profitability, the planting of certain crops versus other uses of agricultural resources, the location and size of crop production, whether unprocessed or processed commodity products are traded and the volume and types of imports and exports. Additionally, regulation of financial markets and instruments in the United States and internationally may create uncertainty as these laws are adopted and implemented and may impose significant additional risks and costs that could impact our risk management practices. Further, increases in food and fertilizer prices have in the past resulted in increased scrutiny of our industries under antitrust and competition laws in various jurisdictions and increase the risk that these laws could be interpreted, administered or enforced in a manner that could affect our operations or impose liability on us in a manner that could have a material adverse effect on our operating results and financial condition. Future governmental policies, regulations or actions affecting our industries may adversely affect the supply of, demand for and prices of our products restrict our ability to do business in existing and target markets, engage in risk management activities and otherwise cause our financial results to suffer.
Finally, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. For example, a trade dispute between the U.S. and China that began in 2018 has led to both countries implementing tariffs on imported goods from the other, including on imports of U.S. soybeans into China. This has led to significant volatility in commodity prices, disruptions in historical trade flows and shifts in planting patterns in the U.S. and South America, which have presented challenges and uncertainties for our business. We cannot predict the
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effects that future trade policy or the terms of any negotiated trade agreements and their impact on our business could have. Additionally, failure to resolve the trade dispute between the countries may also lead to unexpected operating difficulties in China, enhanced regulatory scrutiny in China, greater difficulty transferring funds, or negative currency impacts.
We may not realize the anticipated benefits of acquisitions, divestitures or joint ventures.
We have been an active acquirer of other companies, and we have joint ventures with several partners. Part of our strategy involves acquisitions, alliances and joint ventures designed to expand or optimize our portfolio of businesses. Our ability to benefit from acquisitions, joint ventures and alliances depends on many factors, including our ability to identify suitable prospects, access funding sources on acceptable terms, negotiate favorable transaction terms and successfully consummate and integrate any businesses we acquire. In addition, we are currently undertaking a strategic review of our businesses in order to identify opportunities to enhance shareholder value and may decide as a result of that process or otherwise, from time to time, to divest certain of our assets or businesses by selling them or entering into joint ventures. Our ability to successfully complete a divestiture will depend on, among other things, our ability to identify buyers that are prepared to acquire such assets or businesses on acceptable terms and to adjust and optimize our retained businesses following the divestiture.
Our acquisition, joint venture or divestiture activities may involve unanticipated delays, costs and other problems. If we encounter unexpected problems with acquisitions, joint ventures or divestitures, our senior management may be required to divert attention away from other aspects of our businesses to address these problems. Additionally, we may fail to consummate proposed acquisitions, joint ventures or divestitures, after incurring expenses and devoting substantial resources, including management time, to such transactions.
Acquisitions also pose the risk that we may be exposed to successor liability relating to actions by an acquired company and its management before the acquisition. The due diligence we conduct in connection with an acquisition, the controls and policies we implement at acquired companies and any contractual guarantees or indemnities that we receive from the sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual liabilities. A material liability associated with an acquisition could adversely affect our reputation and results of operations and reduce the benefits of the acquisition. Additionally, acquisitions involve other risks, such as differing levels of management and internal control effectiveness at the acquired entities, systems integration risks, the risk of impairment charges relating to goodwill and intangible assets recorded in connection with acquisitions, the risk of significant accounting charges and expenses resulting from the completion and integration of a sizable acquisition, the need to fund increased capital expenditures and working capital requirements, our ability to retain and motivate employees of acquired entities, compliance and reputational risks and other unanticipated problems and liabilities.
Divestitures may also expose us to potential liabilities or claims for indemnification, as we may be required to retain certain liabilities or indemnify buyers for certain matters, including environmental or litigation matters, associated with the assets or businesses that we sell. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction, and its cost to us could ultimately exceed the proceeds we receive for the divested assets or businesses. Divestitures also have other inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses and unexpected costs or other difficulties associated with the separation of the businesses to be sold from our information technology and other systems and management processes, including the loss of key personnel. Additionally, expected cost savings or other anticipated efficiencies or benefits from divestitures may also be difficult to achieve or maximize.
Additionally, we have several joint ventures and investments where we may have limited control over governance, financial reporting and operations. As a result, we face certain operating, financial and other risks relating to these investments, including risks related to the financial strength of our joint venture partners or their willingness to provide adequate funding for the joint venture, having differing objectives from our partners, the inability to implement some actions with respect to the joint venture's activities that we may believe are favorable if the joint venture partner does not agree, compliance risks relating to actions of the joint venture or our partners and the risk that we will be unable to resolve disputes with the joint venture partner. As a result, these investments may contribute significantly less than anticipated to our earnings and cash flows.
We are subject to industry and other risks that could adversely affect our reputation and financial results.
We are subject to food and feed industry risks which include, but are not limited to, spoilage, contamination, tampering or other adulteration of products, product liability claims and recalls. We are also subject to shifts in customer and consumer
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preferences and concerns regarding the outbreak of disease associated with livestock and poultry, including avian or swine influenza. These risks could not only adversely affect our business and operating results but also our corporate reputation.
As a company whose products comprise staple food and feed products sold globally as well as ingredients included in trusted food brands of our customers, maintaining a good corporate reputation is critical to our continued success. Reputational value is based in large part on perceptions, which can shift rapidly in response to negative incidents. The failure or alleged failure to maintain high standards for quality, safety, integrity, environmental sustainability and social responsibility, including with respect to raw materials and services obtained from suppliers, even if untrue, may result in tangible effects, such as reduced demand for our products, disruptions to our operations, increased costs and loss of market share to competitors. Our reputation and results of operations could also be adversely impacted by changing consumer preferences and perceptions relating to some of the products we sell, such as with regard to the quantity and type of fats, sugars and grains consumed as well as concerns regarding genetically modified crops. Failure to anticipate, adapt or respond effectively to these trends or issues may result in material adverse effects on our business, financial condition, and results of operations.
We are subject to laws and regulations globally, including environmental, health and safety regulations. We may be subject to substantial costs, liabilities and other adverse effects on our business relating to these matters.
Due to our global business operations, we are required to comply with numerous laws and regulations in the countries where we operate. These include general business regulations, such as with respect to taxes, accounting, anti-corruption and fair competition, as well as those relating to the manufacturing, transport and sale of our products, including environmental regulations. In addition to liabilities arising out of our current and future operations for which we have ongoing processes to manage compliance with regulatory obligations, we may be subject to environmental liabilities for past operations at current facilities and in some cases to liabilities for past operations at facilities that we no longer own or operate. We may also be subject to liabilities for operations of acquired companies. Our industrial activities can also result in serious accidents that could result in personal injuries, facility shutdowns, reputational harm to our business and/or the expenditure of significant amounts to remediate safety issues or repair damaged facilities. We may incur material costs or liabilities to comply with environmental, health and safety requirements. Any failure to comply with applicable laws and regulations may subject us to fines, penalties and other liabilities, as well as damage to our reputation.
In addition, continued government and public emphasis in countries where we operate on environmental issues, including climate change, conservation and natural resource management, have resulted in and could result in new or more stringent forms of regulatory oversight or other limitations on the agricultural industry, including increased environmental controls, land-use restrictions affecting us or our suppliers and other conditions that could have a material adverse effect on our business, reputation, financial condition and results of operations. For example, certain aspects of our business and the larger food production chain generate carbon emissions. The imposition of regulatory restrictions on greenhouse gas emissions, which may include limitations on greenhouse gas emissions, other restrictions on industrial operations, taxes or fees on greenhouse gas emissions and other measures, could affect land-use decisions, the cost of agricultural production and the cost and means of processing and transporting of our products, which could adversely affect our business, cash flows and results of operations.
We are exposed to credit and counterparty risk relating to our customers in the ordinary course of business. In particular, we advance capital and provide other financing arrangements to farmers in Brazil and, as a result, our business and financial results may be adversely affected if these farmers are unable to repay the capital advanced to them.
We have various credit terms with customers, and our customers have varying degrees of creditworthiness, which exposes us to the risk of non-payment or other default under our contracts and other arrangements with them. In the event that we experience significant defaults on their payment obligations to us, our financial condition, results of operations or cash flows could be materially and adversely affected.
In Brazil, where there have been limited third-party financing sources available to farmers, we provide financing to farmers from whom we purchase soybeans and other agricultural commodities through prepaid commodity purchase contracts and advances, which are generally intended to be short-term in nature and are typically secured by the farmer's crop and a mortgage on the farmer's land and other assets to provide a means of repayment in the potential event of crop failure or shortfall. At December 31, 2018 and 2017, respectively, we had approximately $609 million and $817 million in outstanding prepaid commodity purchase contracts and advances to farmers. We are exposed to the risk that the underlying crop will be insufficient to satisfy a farmer's obligation under the financing arrangements as a result of weather and crop growing conditions, and other factors that influence the price, supply and demand for agricultural commodities. In addition, any collateral held by us as part of these financing transactions may not be sufficient to fully protect us from loss.
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We are a capital intensive business and depend on cash provided by our operations as well as access to external financing to operate and grow our business.
We require significant amounts of capital to operate our business and fund capital expenditures. Our working capital needs are directly affected by the prices of agricultural commodities, with increases in commodity prices generally causing increases in our borrowing levels. We are also required to make substantial capital expenditures to maintain, upgrade and expand our extensive network of storage facilities, processing plants, refineries, mills, logistics assets and other facilities to keep pace with competitive developments, technological advances and safety and environmental standards. Furthermore, the expansion of our business and pursuit of acquisitions or other business opportunities may require us to have access to significant amounts of capital. If we are unable to generate sufficient cash flows or raise sufficient external financing on attractive terms to fund these activities, including as a result of a tightening in the global credit markets, we may be forced to limit our operations and growth plans, which may adversely impact our competitiveness and, therefore, our results of operations.
As of December 31, 2018, we had $4,515 million of unused and available borrowing capacity under various committed long-term credit facilities and $5,372 million in total debt. Our debt levels could limit our ability to obtain additional financing, limit our flexibility in planning for, or reacting to, changes in the markets in which we compete, place us at a competitive disadvantage compared to our competitors that are less leveraged than we are and require us to dedicate more cash on a relative basis to servicing our debt and less to developing our business. This may limit our ability to run our business and use our resources in the manner in which we would like. Furthermore, difficult conditions in global credit or financial markets generally could adversely impact our ability to refinance maturing debt or the cost or other terms of such refinancing, as well as adversely affect the financial position of the lenders with whom we do business, which may reduce our ability to obtain financing for our operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources"
Access to credit markets and pricing of company debt is also dependent on maintaining appropriate credit ratings, and one of our financial objectives has been to maintain an investment grade credit rating. In connection with the IOI Loders Croklaan acquisition, we incurred additional debt to fund the acquisition. The combination of this increase in our indebtedness, coupled with challenging financial results over the past two years in part due to adverse and volatile industry conditions, as well as a chief executive officer leadership transition announced at the end of 2018, have led Moody’s and Fitch Ratings to downgrade our credit rating to Baa3 and BBB- with a stable outlook in December 2018 and January 2019, respectively. Additionally, S&P has lowered the outlook on our BBB credit rating from stable to negative. While our debt agreements do not have any credit rating downgrade triggers that would accelerate the maturity of our debt, further reductions in our credit ratings would increase our borrowing costs and, depending on their severity, impede our ability to obtain credit facilities or access the capital markets in the future on favorable terms, as well as impair our ability to compete effectively relative to competitors with higher credit ratings.
In addition, some of our credit facilities, interest rate derivatives and commercial agreements use LIBOR (London Inter-Bank Offered Rate) as the benchmark rate. LIBOR has recently been the subject of international reform proposals and it is expected that LIBOR will be discontinued or modified by the end of 2021. At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR, or the establishment of alternative reference rates may have on LIBOR, other benchmark rates or floating rate debt instruments. While certain of our credit facilities contain LIBOR alternative provisions, the use of alternative reference rates or other reforms could cause the interest rate on our borrowings to be materially different than expected. These developments may cause us to renegotiate some of these agreements. We will continue to monitor market developments related to LIBOR's modification or discontinuance.
Our risk management strategies may not be effective.
Our business is affected by fluctuations in agricultural commodity prices, transportation costs, energy prices, interest rates and foreign currency exchange rates. We engage in hedging transactions to manage these risks. However, our exposures may not always be fully hedged, and our hedging strategies may not be successful in minimizing our exposure to these fluctuations. In addition, our risk management strategies may seek to position our overall portfolio relative to expected market movements. While we have implemented a broad range of risk monitoring and control procedures and policies to mitigate potential losses, they may not in all cases be successful in anticipating a significant risk exposure and protecting us from losses that have the potential to impair our financial position. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk"
We may not be able to achieve the efficiencies, savings and other benefits anticipated from our cost reduction, margin
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improvement and other business optimization initiatives.
We are continually implementing programs throughout the company to reduce costs, increase efficiencies and enhance our business. Initiatives currently in process or implemented in the past several years include the rationalization of manufacturing operations globally, including the closing of facilities, the implementation of an operational improvement program in our Food and Ingredients businesses, and the launch of the Global Competitiveness Program (“GCP”) announced in July 2017. The goal of the GCP is to improve our cost position and deliver increased value to shareholders by achieving $250 million of cost savings over the course of the program. It is anticipated that aggregate total pre-tax cash charges attributable to the GCP will be in the range of approximately $200 million to $300 million, which primarily relate to severance and other employee benefit costs and costs related to professional services. The successful implementation of the GCP presents significant organizational design and other challenges. We may not achieve or sustain the targeted benefits under the GCP or we may not achieve them within our expected timetable. Unexpected delays, increased costs, adverse effects on our internal control environment, inability to retain and motivate employees, or other challenges arising from these initiatives could adversely affect our ability to realize the anticipated savings or other intended benefits of these activities. Additionally, the scope of the GCP requires a substantial amount of management and operational resources to implement it effectively. These and related demands on our resources may divert the company’s attention from our ongoing business operations, which could also impact our competitive position.
The loss of or a disruption in our manufacturing and distribution operations or other operations and systems could adversely affect our business.
We are engaged in manufacturing and distribution activities on a global scale, and our business depends on our ability to execute and monitor, on a daily basis, a significant number of transactions across numerous markets or geographies. As a result, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, fires, explosions, strikes and other labor or industrial disputes, and disruptions in logistics or information systems, as well as natural disasters, pandemics, acts of terrorism and other external factors over which we have no control. While we insure ourselves against many of these types of risks in accordance with industry standards, our level of insurance may not cover all losses. The potential effects of these conditions could have a material adverse effect on our business, results of operations and financial condition.
Our information technology systems, processes and sites may suffer interruptions, security breaches or failures that may adversely affect our ability to conduct our business.
We rely on certain key information technology systems, some of which are dependent on services provided by third parties, to provide critical data and services for internal and external users, including procurement and inventory management, transaction processing, financial, commercial and operational data, human resources management, legal and tax compliance and other information and processes necessary to operate and manage our business. Increased social engineering threats and more sophisticated computer crime, including advanced persistent threats, pose a potential risk to the security of our information technology systems, networks and services. Our information technology and infrastructure may experience attacks by hackers, breaches or other failures or disruptions that could compromise our systems and the information stored there. While we have implemented security measures and disaster recovery plans designed to protect the security and continuity of our networks and critical systems, these measures may not adequately prevent adverse events such as breaches or failures from occurring or mitigate their severity if they do occur. If our information technology systems are breached, damaged or fail to function properly due to any number of causes, such as security breaches or cyber based attacks, systems implementation difficulties, catastrophic events or power outages, and our security, contingency disaster recovery or other risk mitigation plans do not effectively mitigate these occurrences on a timely basis, we may experience a material disruption in our ability to manage our business operations and produce financial reports, as well as significant costs and lost business opportunities until they are remediated. We may also be subject to legal claims or proceedings, liability under laws that protect the privacy of personal information, potential regulatory penalties and damage to our reputation. These impacts may adversely impact our business, results of operations and financial condition, as well as our competitive position.
Changes in tax laws or exposure to additional tax liabilities could have a material impact on our financial condition and results of operations
We are subject to income taxes as well as non-income taxes in various jurisdictions throughout the world. Tax authorities may disagree with certain positions we have taken and assess additional taxes, along with interest and penalties. We regularly assess the likely outcomes of these audits and assessments in order to assess the appropriateness of our tax
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assets and liabilities. However, the calculation of such liabilities involves significant judgment in the interpretation of complex tax regulations in many jurisdictions. Therefore, any dispute with a taxing authority may result in a payment or outcome that is significantly different from current estimates. There can be no assurance that we will accurately predict the outcomes of these audits and the actual outcomes of these audits could have a material impact on our consolidated earnings and financial condition in the periods in which they are recognized.
Additionally, changes in tax laws could materially impact our tax rate and the monetization of recoverable tax assets (indirect tax credits). Furthermore, the recent efforts in corporate tax transparency by the Organization of Economic Cooperation and Development ("OECD") resulting in additional mandated disclosures will likely cause additional scrutiny on the Company's tax positions and potentially increased tax liabilities.
Risks Relating to Our Common Shares
We are a Bermuda company, and it may be difficult to enforce judgments against us and our directors and executive officers.
We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies or corporations incorporated in other jurisdictions, including the United States. Several of our directors and some of our officers are non-residents of the United States, and a substantial portion of our assets and the assets of those directors and officers are located outside the United States. As a result, it may be difficult to effect service of process on those persons in the United States or to enforce in the U.S. judgments obtained in U.S. courts against us or those persons based on civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act, or failure to act, involves fraud or dishonesty.
We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions provide for:
• | directors to be removed without cause at any special general meeting only upon the affirmative vote of at least 66% of all votes attaching to all shares then in issue entitling the holder to attend and vote on the resolution; |
• | restrictions on the time period in which directors may be nominated; |
• | our Board of Directors to determine the powers, preferences and rights of our preference shares and to issue the preference shares without shareholder approval; and |
• | an affirmative vote of at least 66% of all votes attaching to all shares then in issue entitling the holder to attend and vote on the resolution for some business combination transactions, which have not been approved by our Board of Directors. |
These provisions, as well as any additional anti-takeover measures our Board of Directors could adopt in the future, could make it more difficult for a third party to acquire us, even if the third party's offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2. Properties
The following tables provide information on our principal operating facilities as of December 31, 2018.
Facilities by Business Area
(metric tons) | Aggregate Daily Production Capacity | Aggregate Storage Capacity | ||||
Business Area | ||||||
Agribusiness | 155,412 | 16,289,648 | ||||
Food and Ingredients | 94,054 | 2,214,860 | ||||
Sugar and Bioenergy | 11,474 | 636,248 | ||||
Fertilizer | 2,235 | 1,100,100 | ||||
Facilities by Geographic Region
(metric tons) | Aggregate Daily Production Capacity | Aggregate Storage Capacity | ||||
Region | ||||||
North America | 82,386 | 6,176,026 | ||||
South America | 86,831 | 10,345,069 | ||||
Europe | 62,367 | 2,587,112 | ||||
Asia-Pacific | 31,591 | 1,132,649 | ||||
Agribusiness
In our Agribusiness segment, we have 167 commodity storage facilities globally that are located close to agricultural production areas or export locations. We also have 51 oilseed processing plants globally. We have 37 merchandising, distribution, and administrative offices throughout the world.
Food and Ingredients
In our Food and Ingredients businesses, we have 119 refining, packaging and milling facilities throughout the world. We also have 118 commodity storage facilities globally that are located close to food and ingredient locations. In addition, to facilitate distribution in Brazil, we operate eight distribution centers.
Sugar and Bioenergy
In our Sugar and Bioenergy segment, we have eight sugarcane mills, all of which are located in Brazil within close proximity to sugarcane production areas. We also manage land through agricultural partnership agreements for the cultivation of sugarcane as described under "Item 1. Business—Sugar and Bioenergy."
Fertilizer
In our Fertilizer segment, we operate three fertilizer processing and blending plants in Argentina and fertilizer ports in Brazil and Argentina.
Other
Our corporate headquarters in White Plains, New York, occupies approximately 66,300 square feet of space under a lease that expires in June 2025. We also own or lease other office space for our operations worldwide.
We believe that our facilities are adequate to address our operational requirements.
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Item 3. Legal Proceedings
We are subject to various legal proceedings and risks globally in the course of our business, including claims, suits, and government investigations or proceedings involving competition, tax, labor and employment, environmental, commercial disputes and other matters. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, we make provisions for potential liabilities when we deem them probable and reasonably estimable. These provisions are based on current information and legal advice and are adjusted from time to time according to developments. We do not expect the outcome of these proceedings, net of established reserves, to have a material adverse effect on our financial condition or results of operations. Due to their inherent uncertainty, however, there can be no assurance as to the ultimate outcome of current or future litigation, proceedings, investigations or claims and it is possible that a resolution of one or more such proceedings could result in judgments, awards, fines and penalties that could adversely affect our business, consolidated financial position, results of operations, or cash flows in a particular period.
For a discussion of certain legal and tax matters relating to Argentina and Brazil, see Notes 14 - Income Taxes and 21- Commitments and Contingencies to our consolidated financial statement included as part of this Annual Report on Form 10-K. Additionally, we are a party to a large number of labor and civil claims relating to our Brazilian operations. We have reserved an aggregate of $70 million and $66 million for labor and civil claims, respectively, as of December 31, 2018. The labor claims primarily relate to dismissals, severance, health and safety, salary adjustments and supplementary retirement benefits. The civil claims relate to various legal proceedings and disputes, including disputes with suppliers and customers and include approximately 126 million Brazilian reais (approximately $33 million as of December 31, 2018) related to a legacy environmental claim in Brazil.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) | Market Information |
Our common shares trade on the New York Stock Exchange under the ticker symbol "BG".
(b) | Approximate Number of Holders of Common Stock |
To our knowledge, based on information provided by Computershare Investor Services LLC, our transfer agent, as of December 31, 2018, we had 141,111,081 common shares outstanding, which were held by approximately 74 registered holders.
(c) | Dividends |
We have historically paid and expect to continue to pay cash dividends to holders of our common shares on a quarterly basis. In addition, holders of our 4.875% cumulative convertible perpetual preference shares are entitled to annual dividends per share in the amount of $4.875 per year payable quarterly, when, as and if declared by the Board of Directors in accordance with the terms of these shares. Any future determination to pay dividends will, subject to the provisions of Bermuda law, be at the discretion of our Board of Directors and will depend upon then existing conditions, including our financial condition, results of operations, contractual and other relevant legal or regulatory restrictions, capital requirements, business prospects and other factors our Board of Directors deems relevant.
Under Bermuda law, a company's board of directors may not declare or pay dividends from time to time if there are reasonable grounds for believing that the company is, or would after the payment be, unable to pay its liabilities as they become due or that the realizable value of its assets would thereby be less than of its liabilities. Under our bye-laws, each common share is entitled to dividends if, as and when dividends are declared by our Board of Directors, subject to any preferred dividend right of the holders of any preference shares. There are no restrictions on our ability to transfer funds (other than funds denominated in Bermuda dollars) in or out of Bermuda or to pay dividends to U.S. residents who are holders of our common shares.
We paid quarterly dividends on our common shares of $0.46 per share in the first two quarters of 2018 and $0.50 per share in the last two quarters of 2018. We paid quarterly dividends on our common shares of $0.42 per share in the first two quarters of 2017 and $0.46 per share in the last two quarters of 2017. On December 6, 2018, we declared a regular quarterly cash dividend of $0.50 per share payable on March 4, 2019 to shareholders of record on February 19, 2019.
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(d) | Securities Authorized for Issuance Under Equity Compensation Plans |
The following table sets forth certain information, as of December 31, 2018, with respect to our equity compensation plans.
(a) | (b) | (c) | |||||||||||
Plan category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price Per Share of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||||||||||
Equity compensation plans approved by shareholders(1) | 6,039,761 | (2) | $ | 70.93 | (3) | 2,782,828 | (4) | ||||||
(1) | Includes our 2016 Equity Incentive Plan, 2009 Equity Incentive Plan, Equity Incentive Plan, 2007 Non-Employee Directors' Equity Incentive Plan and 2017 Non-Employee Directors' Equity Incentive Plan. |
(2) | Includes non-statutory stock options outstanding of 81,800, 4,139,402 and 1,818,559 common shares under our Equity Incentive Plan, 2009 Equity Incentive Plan and 2016 Equity Incentive Plan, respectively. |
(3) | Calculated based on non-statutory stock options outstanding under our 2016 Equity Incentive Plan, 2009 Equity Incentive Plan and Equity Incentive Plan. This number excludes outstanding time-based restricted stock unit and performance-based restricted stock unit awards under the 2016 Equity Incentive Plan, 2009 Equity Incentive Plan and restricted and deferred restricted stock unit awards under the 2007 Non-Employee Directors' Equity Incentive Plan and 2017 Non-Employee Directors' Equity Incentive Plan. |
(4) | Includes dividend equivalents payable in common shares. Shares available under our 2016 Equity Incentive Plan may be used for any type of award authorized under the plan. Awards under the plan may be in the form of statutory or non-statutory stock options, restricted stock units (including performance-based) or other awards that are based on the value of our common shares. Our 2016 Equity Incentive Plan provides that the maximum number of common shares issuable under the plan is 5,800,000, subject to adjustment in accordance with the terms of the plan. This number also includes shares available for future issuance under our 2017 Non-Employee Directors' Equity Incentive Plan. Our 2017 Non-Employee Directors' Equity Incentive Plan provides that the maximum number of common shares issuable under the plan may not exceed 120,000, subject to adjustment in accordance with the terms of the plan. No additional awards may be granted under the Equity Incentive Plan and the Non-Employee Directors' Equity Incentive Plan. |
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(e) Performance Graph
The performance graph shown below compares the quarterly change in cumulative total shareholder return on our common shares with the Standard & Poor's (S&P) 500 Stock Index and the S&P Food Products Index from December 31, 2013 through the quarter ended December 31, 2018. The graph sets the beginning value of our common shares and the Indices at $100 and assumes that all dividends are reinvested. All Index values are weighted by the capitalization of the companies included in the Index.
(f) | Purchases of Equity Securities by Registrant and Affiliated Purchasers |
In May 2015, we established a new program for the repurchase of up to $500 million of our issued and outstanding common shares. The program has no expiration date. Bunge did not repurchase any common shares during the year ended December 31, 2018. Total repurchases under the program from its inception in May 2015 through December 31, 2018 were 4,707,440 shares for $300 million. Bunge completed the previous program of $975 million during the first quarter of 2015 with the repurchase of 2,460,600 common shares for $200 million.
Any repurchases may be made from time to time through a variety of means, including in the open market, in privately negotiated transactions or through other means as determined by us, and in compliance with applicable legal requirements. The timing and number of any shares repurchased will depend on a variety of factors, including share price and market conditions, and the program may be suspended or discontinued at any time at our discretion.
Item 6. Selected Financial Data
The following table sets forth our selected historical consolidated financial information for each of the five periods indicated. You should read this information together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements and notes to the consolidated financial statements included as part of this Annual Report on Form 10-K.
Our consolidated financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP. The selected historical financial information as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 are derived from our audited consolidated financial statements and related notes.
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Year Ended December 31, | ||||||||||||||||||||
(US$ in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||
Net sales | $ | 45,743 | $ | 45,794 | $ | 42,679 | $ | 43,455 | $ | 57,161 | ||||||||||
Cost of goods sold | (43,477 | ) | (44,029 | ) | (40,269 | ) | (40,761 | ) | (54,540 | ) | ||||||||||
Gross profit | 2,266 | 1,765 | 2,410 | 2,694 | 2,621 | |||||||||||||||
Selling, general and administrative expenses | (1,423 | ) | (1,437 | ) | (1,284 | ) | (1,430 | ) | (1,689 | ) | ||||||||||
Interest income | 31 | 38 | 51 | 43 | 87 | |||||||||||||||
Interest expense | (339 | ) | (263 | ) | (234 | ) | (258 | ) | (347 | ) | ||||||||||
Foreign exchange gains (losses) | (101 | ) | 95 | (8 | ) | (8 | ) | 47 | ||||||||||||
Other income (expense)—net | 48 | 40 | 10 | (24 | ) | 15 | ||||||||||||||
Gain (loss) on disposition of equity interests and sale of assets | (26 | ) | 9 | 122 | 47 | — | ||||||||||||||
Equity investment impairments | — | (17 | ) | (59 | ) | — | — | |||||||||||||
Goodwill and intangible impairments | — | — | (12 | ) | (13 | ) | — | |||||||||||||
Income from continuing operations before income tax | 456 | 230 | 996 | 1,051 | 734 | |||||||||||||||
Income tax (expense) benefit | (179 | ) | (56 | ) | (220 | ) | (296 | ) | (249 | ) | ||||||||||
Income from continuing operations | 277 | 174 | 776 | 755 | 485 | |||||||||||||||
Income (loss) from discontinued operations, net of tax | 10 | — | (9 | ) | 35 | 32 | ||||||||||||||
Net income | 287 | 174 | 767 | 790 | 517 | |||||||||||||||
Net loss (income) attributable to noncontrolling interests | (20 | ) | (14 | ) | (22 | ) | 1 | (2 | ) | |||||||||||
Net income attributable to Bunge | 267 | 160 | 745 | 791 | 515 | |||||||||||||||
Convertible preference share dividends and other obligations | (34 | ) | (34 | ) | (36 | ) | (53 | ) | (48 | ) | ||||||||||
Net income available to Bunge common shareholders | $ | 233 | $ | 126 | $ | 709 | $ | 738 | $ | 467 | ||||||||||
Year ended December 31, | ||||||||||||||||||||
(US$, except outstanding share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Per Share Data: | ||||||||||||||||||||
Earnings per common share—basic | ||||||||||||||||||||
Net income (loss) from continuing operations | $ | 1.58 | $ | 0.90 | $ | 5.13 | $ | 4.90 | $ | 2.98 | ||||||||||
Net income (loss) from discontinued operations | 0.07 | — | (0.06 | ) | 0.24 | 0.22 | ||||||||||||||
Net income (loss) to Bunge common shareholders | $ | 1.65 | $ | 0.90 | $ | 5.07 | $ | 5.14 | $ | 3.20 | ||||||||||
Earnings per common share—diluted | ||||||||||||||||||||
Net income (loss) from continuing operations | $ | 1.57 | $ | 0.89 | $ | 5.07 | $ | 4.84 | $ | 2.96 | ||||||||||
Net income (loss) from discontinued operations | 0.07 | — | (0.06 | ) | 0.23 | 0.21 | ||||||||||||||
Net income (loss) to Bunge common shareholders | $ | 1.64 | $ | 0.89 | $ | 5.01 | $ | 5.07 | $ | 3.17 | ||||||||||
Cash dividends declared per common share | $ | 1.96 | $ | 1.80 | $ | 1.64 | $ | 1.48 | $ | 1.32 | ||||||||||
Weighted-average common shares outstanding—basic | 140,968,980 | 140,365,549 | 139,845,124 | 143,671,546 | 146,209,508 | |||||||||||||||
Weighted-average common shares outstanding—diluted | 141,703,783 | 141,265,077 | 148,226,475 | 152,238,967 | 147,230,778 | |||||||||||||||
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December 31, | ||||||||||||||||||||
(US$ in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 389 | $ | 601 | $ | 934 | $ | 411 | $ | 362 | ||||||||||
Inventories(1) | 5,871 | 5,074 | 4,773 | 4,466 | 5,554 | |||||||||||||||
Working capital(2) | 3,896 | 4,188 | 3,408 | 3,576 | 4,377 | |||||||||||||||
Total assets | 19,425 | 18,871 | 19,188 | 17,914 | 21,425 | |||||||||||||||
Short-term debt, including current portion of long-term debt | 1,169 | 319 | 1,195 | 1,517 | 1,002 | |||||||||||||||
Long-term debt | 4,203 | 4,160 | 3,069 | 2,926 | 2,848 | |||||||||||||||
Convertible perpetual preference shares(3) | 690 | 690 | 690 | 690 | 690 | |||||||||||||||
Common shares and additional paid-in-capital | 5,279 | 5,227 | 5,144 | 5,106 | 5,054 | |||||||||||||||
Total equity | 6,378 | 7,357 | 7,343 | 6,652 | 8,690 | |||||||||||||||
Year ended December 31, | |||||||||||||||
(in millions of metric tons) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||
Other Data: | |||||||||||||||
Volumes: | |||||||||||||||
Agribusiness | 146.3 | 142.9 | 134.6 | 134.1 | 138.7 | ||||||||||
Edible Oil Products | 9.0 | 7.7 | 7.0 | 6.8 | 6.9 | ||||||||||
Milling Products | 4.6 | 4.5 | 4.5 | 4.2 | 4.5 | ||||||||||
Total Food and Ingredients | 13.6 | 12.2 | 11.5 | 11.0 | 11.4 | ||||||||||
Sugar and Bioenergy | 6.5 | 9.4 | 8.8 | 10.4 | 9.7 | ||||||||||
Fertilizer | 1.3 | 1.3 | 1.3 | 1.0 | 1.1 | ||||||||||
_______________________________________________________________________________
(1) | Included in inventories were readily marketable inventories of $4,532 million, $4,056 million, $3,855 million, $3,666 million and $4,409 million at December 31, 2018, 2017, 2016, 2015 and 2014, respectively. Readily marketable inventories are agricultural commodity inventories, such as soybeans, soybean meal, soybean oil, corn and wheat that are readily convertible to cash because of their commodity characteristics, widely available markets and international pricing mechanisms. |
(2) | Working capital is calculated as current assets less current liabilities. |
(3) | Bunge has 6,899,683 4.875% cumulative convertible perpetual preference shares outstanding. Each cumulative convertible preference share has an initial liquidation preference of $100 per share plus accumulated and unpaid dividends up to a maximum of an additional $25 per share. As a result of adjustments made to the initial conversion price because cash dividends paid on Bunge Limited's common shares exceeded certain specified thresholds, each cumulative convertible preference share is convertible, at the holder's option, at any time, into approximately 1.1918 Bunge Limited common shares (8,223,042 Bunge Limited common shares), subject to certain additional anti-dilution adjustments. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with "Cautionary Statement Regarding Forward Looking Statements" and our combined consolidated financial statements and notes thereto included in Item 15 of this Annual Report on Form 10-K.
Non-U.S. GAAP Financial Measures
Total segment earnings before interest and taxes ("EBIT") is an operating performance measure used by Bunge's management to evaluate segment operating activities. Bunge's management believes total segment EBIT is a useful measure of operating profitability, since the measure allows for an evaluation of the performance of its segments without regard to its financing methods or capital structure. In addition, EBIT is a financial measure that is widely used by analysts and investors in Bunge's industries. Total Segment EBIT is a non-U.S. GAAP financial measure and is not intended to replace net income attributable to Bunge, the most directly comparable U.S. GAAP financial measure.
Operating Results
Factors Affecting Operating Results
Bunge Limited, a Bermuda company, together with its subsidiaries, is a leading global agribusiness and food company with integrated operations that stretch from the farm to consumer foods. The commodity nature of the Company's principal products, as well as regional and global supply and demand variations that occur as an inherent part of the business, make volumes an important operating measure. Accordingly, information is included in "Segment Results" that summarizes certain items in our consolidated statements of income and volumes by reportable segment. The common unit of measure for all reported volumes is metric tons. A description of reported volumes for each reportable segment has also been included in the discussion of key factors affecting results of operations in each of our business segments as discussed below.
Agribusiness
In the Agribusiness segment, we purchase, store, transport, process and sell agricultural commodities and commodity products. Profitability in this segment is affected by the availability and market prices of agricultural commodities and processed commodity products and the availability and costs of energy, transportation and logistics services. Profitability in our oilseed processing operations is also impacted by volumes procured, processed and sold and by capacity utilization rates. Availability of agricultural commodities is affected by many factors, including weather, farmer planting and selling decisions, plant diseases, governmental policies, and agricultural sector economic conditions. Reported volumes in this segment primarily reflect (i) grains and oilseeds originated from farmers, cooperatives or other aggregators and from which "origination margins" are earned; (ii) oilseeds processed in our oilseed processing facilities and from which "crushing margins" are earned, representing the margin from the industrial separation of the oilseed into its protein meal and vegetable oil components, both of which are separate commodity products; and (iii) third party sales of grains, oilseeds and related commodity products merchandised through our distribution businesses and from which "distribution margins" are earned. The foregoing subsegment volumes may overlap as they produce separate margin capture opportunities. For example, oilseeds procured in our
South American grain origination activities may be processed in our oilseed processing facilities in Asia-Pacific and will be reflected at both points within the segment. As such, these reported volumes do not represent solely volumes of net sales to third-parties, but rather where margin is earned, appropriately reflecting their contribution to our global network's capacity utilization and profitability.
Demand for our purchased and processed agribusiness products is affected by many factors, including global and regional economic conditions, changes in per capita income, the financial condition of customers and customer access to credit, worldwide consumption of food products, particularly pork and poultry, population growth rates, relative prices of substitute agricultural products, outbreaks of disease associated with livestock and poultry, and demand for renewable fuels produced from agricultural commodities and commodity products.
We expect that the factors described above will continue to affect global supply and demand for our Agribusiness products for the foreseeable future. We also expect that, from time to time, imbalances will likely exist between oilseed processing capacity and demand for oilseed products in certain regions, which impacts our decisions regarding whether, when and where to purchase, store, transport, process or sell these commodities, including whether to change the location of or adjust our own oilseed processing capacity.
Additionally, price fluctuations and availability of commodities may cause fluctuations in our working capital, such as inventories, accounts receivable and borrowings over the course of a given year. For example, increased availability of commodities at harvest times often causes fluctuations in our inventories and borrowings. Increases in agricultural commodity prices will also generally cause our cash flow requirements to increase as our operations require increased use of cash to
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acquire inventories and fund daily settlement requirements on exchange traded futures that we use to hedge our physical inventories.
Food and Ingredients
In the Food and Ingredients businesses, which consist of our Edible Oil Products and Milling Products segments, our operating results are affected by changes in the prices of raw materials, such as crude vegetable oils and grains, the mix of products that we sell, changes in consumer eating habits, changes in per capita income, consumer purchasing power levels, availability of credit to customers, governmental dietary guidelines and policies, changes in regional economic conditions and the general competitive environment in our markets. Raw material inputs to our production processes in the Edible Oil Products and Milling Products segments are largely sourced at market prices from our Agribusiness segment. Reported volumes in these segments reflect third-party sales of our finished products and, as such, include the sales of products derived from raw materials sourced from the Agribusiness segment as well as from third-parties. The unit of measure for these volumes is metric tons as these businesses are linked to the commodity raw materials, which are their primary inputs.
Sugar and Bioenergy
The Sugar and Bioenergy segment is an integrated business which primarily includes the procurement and growing of sugarcane and the production of sugar, ethanol and electricity in our eight mills in Brazil.
Profitability in this segment is affected by the availability and quality of sugarcane, which impacts our capacity utilization rates and the amount of sugar that can be extracted from the sugarcane, and by market prices of sugar and ethanol. Availability and quality of sugarcane is affected by many factors, including weather, geographical factors such as soil quality and topography, and agricultural practices. Once planted, sugarcane may be harvested for several continuous years, but the yield decreases with each subsequent harvest. As a result, the current optimum economic cycle is generally five to seven consecutive harvests, depending on location. We own and/or have partnership agreements to manage farmland on which we grow and harvest sugarcane. We also purchase sugarcane from third parties. Prices of sugarcane in Brazil are established by Consecana, the state of São Paulo sugarcane, sugar and ethanol council, and are based on the sucrose content of the cane and the market prices of sugar and ethanol. Demand for our products is affected by such factors as changes in global or regional economic conditions, the financial condition of customers and customer access to credit, worldwide consumption of food products, population growth rates, changes in per capita income and demand for and governmental support of renewable fuels produced from agricultural commodities, including sugarcane. We expect that these factors will continue to affect supply and demand for our sugar and bioenergy products in the foreseeable future. Reported volumes in this segment reflect third-party sales of sugar and ethanol.
Fertilizer
In the Fertilizer segment, demand for our products is affected by the profitability of the agricultural sectors we serve, the availability of credit to farmers, agricultural commodity prices, the types of crops planted, the number of acres planted, the quality of the land under cultivation and weather-related issues affecting the success of the harvests. Our profitability is impacted by international selling prices for fertilizers and fertilizer raw materials, such as phosphate, sulfur, ammonia and urea, ocean freight rates and other import costs, as well as import volumes at the port facilities we manage. As our operations are in
South America, primarily Argentina, our results in this segment are typically seasonal, with fertilizer sales normally concentrated in the third and fourth quarters of the year due to the timing of the South American agricultural cycle. Reported volumes in this segment reflect third-party sales of our finished products.
In addition to these industry related factors which impact our business areas, our results of operations in all business areas and segments are affected by the following factors:
Foreign Currency Exchange Rates
Due to the global nature of our operations, our operating results can be materially impacted by foreign currency exchange rates. Both translation of our foreign subsidiaries' financial statements and foreign currency transactions can affect our results. On a monthly basis, for subsidiaries whose functional currency is a currency other than the U.S. dollar, subsidiary statements of income and cash flows must be translated into U.S. dollars for consolidation purposes based on weighted-average exchange rates in each monthly period. As a result, fluctuations of local currencies compared to the U.S. dollar during each monthly period impact our consolidated statements of income and cash flows for each reported period (per quarter and year-to-date) and also affect comparisons between those reported periods. Subsidiary balance sheets are translated using exchange rates as of the balance sheet date with the resulting translation adjustments reported in our consolidated balance sheets as a component of accumulated other comprehensive income (loss). Included in other comprehensive income for the years ended
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December 31, 2018, 2017, and 2016 were foreign currency net translation gains (losses) of $(1,125) million, $203 million and $713 million, respectively, resulting from the translation of our foreign subsidiaries' assets and liabilities.
Additionally, we record transaction gains or losses on monetary assets and liabilities that are not denominated in the functional currency of the entity. These amounts are remeasured into their respective functional currencies at exchange rates as of the balance sheet date, with the resulting gains or losses included in the entity's statement of income and, therefore, in our consolidated statements of income as foreign exchange gains (losses).
We primarily use a combination of equity and intercompany loans to finance our subsidiaries. Intercompany loans that are of a long-term investment nature with no intention of repayment in the foreseeable future are considered permanently invested and as such are treated as analogous to equity for accounting purposes. As a result, any foreign currency translation gains or losses on such permanently invested intercompany loans are reported in accumulated other comprehensive income (loss) in our consolidated balance sheets. In contrast, foreign currency translation gains or losses on intercompany loans that are not of a permanent nature are recorded in our consolidated statements of income as foreign exchange gains (losses).
Income Taxes
As a Bermuda exempted company, we are not subject to income taxes on income in our jurisdiction of incorporation. However, our subsidiaries, which operate in multiple tax jurisdictions, are subject to income taxes at various statutory rates ranging from 0% to 35%. The jurisdictions that significantly impact our effective tax rate are Brazil, the United States, Argentina and Bermuda. Determination of taxable income requires the interpretation of related and often complex tax laws and regulations in each jurisdiction where we operate and the use of estimates and assumptions regarding future events.
Results of Operations
2018 Overview
For the year ended December 31, 2018, net income attributable to Bunge increased by $107 million to $267 million from $160 million in 2017. This increase resulted primarily from higher total segment EBIT of $301 million, particularly in Agribusiness, as described below, and was partially offset by higher interest and income tax expenses.
Income tax expense was $179 million in 2018, compared to income tax expense of $56 million in 2017. The effective tax rate for 2018 was 39% compared to 24% in 2017. The higher effective tax rate for 2018 was primarily due to unfavorable earnings mix, coupled with an income tax charge of $48 million for valuation allowances established in Brazil and China.
Total segment EBIT of $737 million in 2018 increased from $436 million in 2017. EBIT for 2018 included $51 million of severance, employee benefit and other program costs related to our Global Competitiveness Program (“GCP”), $9 million of severance and other employee benefit costs related to other industrial initiatives, $10 million of restructuring charges in our industrial sugar operations in Brazil, and $10 million of indirect tax credits in Brazil. In addition, EBIT included $10 million of asset impairment charges in Europe relating to port assets. EBIT also included $29 million of losses on the disposition of equity interests in Brazil and Asia, $19 million of acquisition fees, and a $24 million loss on the extinguishment of debt. EBIT for 2017 included $55 million of severance, employee benefit and other program costs related to our GCP, $35 million of severance and other employee benefit costs related to other industrial initiatives, $22 million of restructuring charges in our industrial sugar operations in Brazil, and $16 million of indirect tax credits in our industrial sugar operations in Brazil. In addition, EBIT included $20 million of asset impairment charges in Asia and Europe relating to feedmill and port assets, $17 million of impairment charges related to our palm oil affiliate in Indonesia and our renewable oils affiliate in Brazil, and impairment charges of $7 million of intangible assets. EBIT also included $9 million of gains on the disposition of equity interests in Brazil and $9 million of acquisition fees.
Agribusiness Segment EBIT increased in 2018 by $389 million to $645 million, primarily due to higher soy crush margins in all regions driven by favorable market dynamics and reduced soybean production in Argentina due to a drought. Additionally, better results in our ocean freight activities contributed to the improved results.
Edible Oil Products Segment EBIT decreased $4 million to $122 million in 2018 from $126 million in 2017. Increases to gross profit from the acquisition of Loders and higher gross profit in Europe from higher volumes and improved margins for margarine were more than offset by weaker margins in Brazil from our packaged oil business as continued high availability of oils from the strong crushing environment pressured retail sales as well as higher SG&A resulting from recent acquisitions.
Milling Products Segment EBIT increased by $27 million to $90 million in 2018 driven primarily by higher volumes and margins in Mexico, the acquisition of Minsa USA, and lower costs in Brazil.
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Sugar and Bioenergy Segment EBIT decreased by $123 million. The lower results were primarily in our sugarcane milling operations, driven by lower international sugar prices from higher global supply and weaker demand, as well as lower volumes and higher costs due to the impact of severe weather in Brazil. Results in our trading and merchandising business were also lower as we exited this business during the year.
Fertilizer Segment EBIT increased $36 million, primarily due to stronger margins in Argentina resulting from the recovery of international fertilizer prices.
Segment Results
Bunge has five reportable segments-Agribusiness, Edible Oil Products, Milling Products, Sugar and Bioenergy, and Fertilizer-which are organized based upon similar economic characteristics and are similar in nature of products and services offered, the nature of production processes, the type and class of customer, and distribution methods. The Agribusiness segment is characterized by both inputs and outputs being agricultural commodities and thus high volume and low margin. The Edible Oil Products segment involves the manufacturing and marketing of products derived from vegetable oils. The Milling Products segment involves the manufacturing and marketing of products derived primarily from wheat and corn. The Sugar and Bioenergy segment primarily involves sugarcane growing and milling in Brazil and the sale of sugar, ethanol and electricity produced in our mills, as well as corn-based ethanol investments and related activities. The Fertilizer segment includes the activities of our port operations in Brazil and Argentina and blending and distribution operations in Argentina.
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A summary of certain items in our consolidated statements of income and volumes by reportable segment for the periods indicated is set forth below.
Year Ended December 31, | ||||||||||||
(US$ in millions) | 2018 | 2017 | 2016 | |||||||||
Volume (in thousands of metric tons): | ||||||||||||
Agribusiness | 146,309 | 142,855 | 134,605 | |||||||||
Edible Oil Products | 9,024 | 7,731 | 6,989 | |||||||||
Milling Products | 4,604 | 4,460 | 4,498 | |||||||||
Sugar and Bioenergy | 6,509 | 9,389 | 8,847 | |||||||||
Fertilizer | 1,328 | 1,329 | 1,272 | |||||||||
Net sales: | ||||||||||||
Agribusiness | $ | 32,206 | $ | 31,741 | $ | 30,061 | ||||||
Edible Oil Products | 9,129 | 8,018 | 6,859 | |||||||||
Milling Products | 1,691 | 1,575 | 1,647 | |||||||||
Sugar and Bioenergy | 2,257 | 4,054 | 3,709 | |||||||||
Fertilizer | 460 | 406 | 403 | |||||||||
Total | $ | 45,743 | $ | 45,794 | $ | 42,679 | ||||||
Cost of goods sold: | ||||||||||||
Agribusiness | $ | (30,772 | ) | $ | (30,808 | ) | $ | (28,571 | ) | |||
Edible Oil Products | (8,575 | ) | (7,519 | ) | (6,420 | ) | ||||||
Milling Products | (1,464 | ) | (1,366 | ) | (1,378 | ) | ||||||
Sugar and Bioenergy | (2,276 | ) | (3,955 | ) | (3,550 | ) | ||||||
Fertilizer | (390 | ) | (381 | ) | (350 | ) | ||||||
Total | $ | (43,477 | ) | $ | (44,029 | ) | $ | (40,269 | ) | |||
Gross profit (loss): | ||||||||||||
Agribusiness | $ | 1,434 | $ | 933 | $ | 1,490 | ||||||
Edible Oil Products | 554 | 499 | 439 | |||||||||
Milling Products | 227 | 209 | 269 | |||||||||
Sugar and Bioenergy | (19 | ) | 99 | 159 | ||||||||
Fertilizer | 70 | 25 | 53 | |||||||||
Total | $ | 2,266 | $ | 1,765 | $ | 2,410 | ||||||
Selling, general & administrative expenses: | ||||||||||||
Agribusiness | $ | (740 | ) | $ | (805 | ) | $ | (704 | ) | |||
Edible Oil Products | (412 | ) | (361 | ) | (320 | ) | ||||||
Milling Products | (136 | ) | (138 | ) | (127 | ) | ||||||
Sugar and Bioenergy | (112 | ) | (114 | ) | (112 | ) | ||||||
Fertilizer | (23 | ) | (19 | ) | (21 | ) | ||||||
Total | $ | (1,423 | ) | $ | (1,437 | ) | $ | (1,284 | ) | |||
Foreign exchange gain (loss): | ||||||||||||
Agribusiness | $ | (104 | ) | $ | 85 | $ | (7 | ) | ||||
Edible Oil Products | — | 3 | (1 | ) | ||||||||
Milling Products | 2 | (3 | ) | (7 | ) | |||||||
Sugar and Bioenergy | 7 | 11 | 9 | |||||||||
Fertilizer | (6 | ) | (1 | ) | (2 | ) | ||||||
Total | $ | (101 | ) | $ | 95 | $ | (8 | ) | ||||
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Year Ended December 31, | ||||||||||||
(US$ in millions) | 2018 | 2017 | 2016 | |||||||||
EBIT attributable to noncontrolling interests:(1) | ||||||||||||
Agribusiness | $ | (14 | ) | $ | (9 | ) | $ | (21 | ) | |||
Edible Oil Products | (12 | ) | (8 | ) | (13 | ) | ||||||
Milling Products | — | — | — | |||||||||
Sugar and Bioenergy | 1 | — | — | |||||||||
Fertilizer | (2 | ) | (2 | ) | (2 | ) | ||||||
Total | $ | (27 | ) | $ | (19 | ) | $ | (36 | ) | |||
Other income (expense): | ||||||||||||
Agribusiness | $ | 79 | $ | 56 | $ | 22 | ||||||
Edible Oil Products | (8 | ) | (7 | ) | 7 | |||||||
Milling Products | (3 | ) | (5 | ) | (4 | ) | ||||||
Sugar and Bioenergy | 4 | (4 | ) | (16 | ) | |||||||
Fertilizer | — | — | 1 | |||||||||
Unallocated | (24 | ) | — | — | ||||||||
Total | $ | 48 | $ | 40 | $ | 10 | ||||||
Gain (loss), net on disposition of equity interests—Agribusiness | $ | (10 | ) | $ | 9 | $ | 122 | |||||
Equity investment impairment—Agribusiness | $ | — | $ | (13 | ) | $ | (15 | ) | ||||
Intangible asset impairment—Agribusiness | $ | — | $ | — | $ | (12 | ) | |||||
Loss on disposition of equity interest—Sugar and Bioenergy | $ | (16 | ) | $ | — | $ | — | |||||
Equity investment impairment—Sugar and Bioenergy | $ | — | $ | (4 | ) | $ | (44 | ) | ||||
Segment EBIT:(1) | ||||||||||||
Agribusiness | $ | 645 | $ | 256 | $ | 875 | ||||||
Edible Oil Products | 122 | 126 | 112 | |||||||||
Milling Products | 90 | 63 | 131 | |||||||||
Sugar and Bioenergy | (135 | ) | (12 | ) | (4 | ) | ||||||
Fertilizer | 39 | 3 | 29 | |||||||||
Unallocated | (24 | ) | — | — | ||||||||
Total | $ | 737 | $ | 436 | $ | 1,143 | ||||||
Depreciation, depletion and amortization: | ||||||||||||
Agribusiness | $ | (257 | ) | $ | (267 | ) | $ | (236 | ) | |||
Edible Oil Products | (153 | ) | (105 | ) | (94 | ) | ||||||
Milling Products | (58 | ) | (61 | ) | (62 | ) | ||||||
Sugar and Bioenergy | (146 | ) | (164 | ) | (143 | ) | ||||||
Fertilizer | (8 | ) | (12 | ) | (12 | ) | ||||||
Total | $ | (622 | ) | $ | (609 | ) | $ | (547 | ) | |||
Net income attributable to Bunge | $ | 267 | $ | 160 | $ | 745 | ||||||
(1) | We refer to our earnings before interest and taxes in each of our segments as "Segment EBIT". Total Segment EBIT is an operating performance measure used by Bunge's management to evaluate its segments' operating activities. Total segment EBIT is a non-U.S. GAAP financial measure and is not intended to replace net income attributable to Bunge, the most directly comparable U.S. GAAP financial measure. Bunge's management believes segment EBIT is a useful measure of its segments' operating profitability, since the measure allows for an evaluation of the performance of its segments without regard to its financing methods or capital structure. In addition, EBIT is a financial measure that is widely used by analysts and investors in Bunge's industries. Total segment EBIT excludes EBIT attributable to noncontrolling interests and is not a measure of consolidated operating results under U.S. GAAP and should not be |
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considered as an alternative to net income attributable to Bunge or any other measure of consolidated operating results under U.S. GAAP.
A reconciliation of net income attributable to Bunge to Total Segment EBIT follows:
Year Ended December 31, | ||||||||||||
(US$ in millions) | 2018 | 2017 | 2016 | |||||||||
Net income attributable to Bunge | $ | 267 | $ | 160 | $ | 745 | ||||||
Interest income | (31 | ) | (38 | ) | (51 | ) | ||||||
Interest expense | 339 | 263 | 234 | |||||||||
Income tax expense | 179 | 56 | 220 | |||||||||
(Income) loss from discontinued operations | (10 | ) | — | 9 | ||||||||
Noncontrolling interests' share of interest and tax | (7 | ) | (5 | ) | (14 | ) | ||||||
Total segment EBIT | $ | 737 | $ | 436 | $ | 1,143 | ||||||
2018 Compared to 2017
Net Income Attributable to Bunge— For the year ended December 31, 2018, net income attributable to Bunge increased by $107 million to $267 million from $160 million in 2017. This increase resulted primarily from higher total segment EBIT of $301 million, particularly in Agribusiness, partially offset by higher interest and income tax expenses.
Income Tax Expense— In the year ended December 31, 2018, income tax expense was $179 million compared to income tax expense of $56 million in 2017. The effective tax rate for 2018 was 39% compared to 24% for 2017. The higher effective tax rate for 2018 was primarily due to unfavorable earnings mix, coupled with an income tax charge of $48 million for valuation allowances established in Brazil and China.
Agribusiness Segment— Agribusiness segment net sales increased by 1% to $32.2 billion in 2018, compared to $31.7 billion in 2017, mostly aligned with the overall volume increase of 2% year over year. Higher volumes and prices in our oilseed and grain trading and distribution businesses, mainly in Europe and Asia, and in our oilseed processing activities in Europe, Asia, and the U.S. were partially offset by lower prices in our grain origination businesses in the U.S. resulting from an international trade dispute between the U.S. and China, and lower volumes in our oilseed processing activities in Argentina, due to reduced soybean production resulting from adverse weather conditions.
Cost of goods sold in 2018 was relatively flat compared to 2017, with decreases, primarily in our South American and U.S. grain origination businesses, mainly due to lower average prices, and oilseed processing businesses in Argentina, mainly due to lower volumes, being offset by higher costs in our grain and oilseed trading and distribution business, mainly due to higher volumes.
Gross profit increased to $1,434 million in 2018, from $933 million in 2017. The increase was mainly due to higher soy crush margins in all regions primarily driven by strong global soymeal demand, combined with reduced supply due to the drought in Argentina.
SG&A expenses decreased $65 million to $740 million in 2018, which represented an 8% decrease from $805 million last year. The decrease was primarily attributable to savings from the GCP and lower expenses due to the depreciation of the Argentine peso and Brazilian real against the U.S. dollar. SG&A expenses in 2017 also included $17 million of credit reserves in Brazil, $7 million of impairment charges, primarily of intangible assets related to patents, and $7 million of transaction related costs associated with the acquisition of two oilseed processing facilities in Europe.
Foreign exchange results in 2018 were losses of $104 million, compared to gains of $85 million in 2017. Results for 2018 were primarily driven by the impact of the devaluation of the Argentine peso on U.S. dollar denominated debt in Argentina to fund operations.
Other income (expenses) - net was income of $79 million in 2018, compared to income of $56 million in 2017. The increase was primarily due to improved results from equity method investments in Asia and income earned from financial services.
Segment EBIT increased by $389 million in 2018 to $645 million, from $256 million in 2017. The increase was mainly due to higher soy crush margins, partially offset by foreign exchange losses.
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Edible Oil Products Segment— Edible oil products segment net sales increased by 14% in 2018 to $9.1 billion, compared to $8.0 billion in 2017, resulting primarily from a 17% increase in volumes, driven by our acquisition of Loders in March 2018 and the full year impact of production facilities in Europe acquired in 2017. This was partially offset by lower prices in Brazil due to high stocks of soybean oil in the domestic market resulting from the strong soy crushing environment.
Cost of goods sold in 2018 increased 14% compared to 2017, which is in line with the increase in net sales noted above, and primarily driven by the impact of the recent acquisitions.
Gross profit in 2018 increased to $554 million compared to $499 million in 2017. The increase was primarily due to the contribution to results by Loders and higher volumes and improved margins for margarine in Europe, which was partially offset by lower margins in our Brazilian packaged oil business.
SG&A expenses increased by 14% to $412 million in 2018 compared with $361 million in the same period a year ago. The increase was primarily related to the acquisition of Loders, including $19 million of integration costs. These increases were partially offset by lower costs in all other regions from GCP and the depreciation of the Brazilian real against the U.S. dollar.
Segment EBIT decreased to $122 million in 2018, from $126 million in 2017. Increased gross profit primarily from the acquisition of Loders was more than offset by weaker margins in Brazil and higher SG&A and other expenses.
Milling Products Segment— Milling products segment net sales increased 7% to $1,691 million in 2018 compared to $1,575 million in 2017. The increase was due to higher volumes in Brazil and Mexico driven by increased demand in various market segments, and higher prices in Mexico, as well as the acquisition of Minsa USA in the first quarter of 2018.
Cost of goods sold in 2018 increased 7% to $1,464 million compared to $1,366 million in 2017, which is in line with the increase in net sales noted above and primarily driven by the acquisition of Minsa USA, partially offset by lower costs and favorable foreign currency translation impact in Brazil.
Gross profit increased by 9% to $227 million in 2018, up from $209 million in 2017. The increase was primarily due to the acquisition of Minsa USA and lower industrial costs in Brazil.
SG&A expenses were essentially flat with $136 million in 2018 compared to $138 million in 2017, as added costs associated with the Minsa USA acquisition were offset by lower costs in Brazil due to the deprecation of the Brazilian real against the U.S. dollar and savings from GCP.
Segment EBIT increased to $90 million in 2018 from $63 million in 2017 primarily due to better results in the U.S. and lower industrial costs and SG&A in Brazil.
Sugar and Bioenergy Segment— Sugar and Bioenergy segment net sales decreased to $2,257 million in 2018 compared to $4,054 million in 2017. The 44% decrease in sales was driven by lower sales volumes primarily in trading and merchandising resulting from exiting our international trading and merchandising business and lower global prices of sugar. Our sugarcane milling volumes and yields were negatively impacted by drought conditions during the first half of the year, followed by excessive rain in the fourth quarter of 2018.
Cost of goods sold decreased by 42% to $2,276 million in 2018 compared to $3,955 million in 2017, which is substantially in line with the decrease in net sales. 2018 results also included $10 million of restructuring charges compared to $22 million of restructuring charges in 2017 related to our industrial operations, as well as $3 million in indirect tax credits in 2018, compared to $16 million in 2017.
Gross profit was a loss of $19 million in 2018, compared to income of $99 million in 2017, primarily in our sugarcane milling operations, due to lower sugar sales volumes and a decrease in sugar prices and margins globally, and lower results in our international trading and merchandising business as we exited this business during 2018.
SG&A expenses decreased by $2 million to $112 million in 2018 from $114 million in 2017, primarily due to the favorable impact of the depreciation of the Brazilian real against the U.S. dollar, partially offset by higher employee separation and professional services costs related to our GCP.
Foreign currency results in 2018 were gains of $7 million compared to $11 million in 2017. These results relate primarily to gains on foreign currency hedges on forward sales positions.
Other income (expenses) - net was income of $4 million in 2018, compared to expense of $4 million in 2017, which is primarily associated with results in our equity method investments.
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Segment EBIT decreased to a loss of $135 million in 2018 from a loss of $12 million in 2017, primarily due to lower volumes, global sugar prices and margins, the exiting of our international sugar trading activities and a $16 million loss on the sale of an equity investment in Brazil.
Fertilizer Segment— Fertilizer segment net sales increased to $460 million in 2018, compared to $406 million in 2017, primarily due to higher international fertilizer prices, partially offset by lower volumes in our port activities in Brazil.
Cost of goods sold in 2018 were $390 million compared to $381 million in 2017. The increase was primarily due to the higher costs of imported fertilizer inventories, partially offset by the impact of industrial cost reduction initiatives. Cost of goods sold in 2018 included $1 million of severance and other employee benefit costs, compared to $13 million in 2017.
Gross profit increased by $45 million to $70 million in 2018, from $25 million in 2017. The increase was primarily due to higher margins in Argentina, benefits from our restructuring activities and lower severance and other employee benefit costs.
SG&A expenses increased by $4 million to $23 million in 2018 from $19 million in 2017. SG&A expenses in 2017 benefited from an insurance recovery and gains on sales of assets.
Foreign exchange results for 2018 were a loss of $6 million compared to a loss of $1 million in 2017. Results for 2018 relate primarily to foreign currency hedges in the first six months of the year for the import of inventories.
Segment EBIT increased by $36 million to $39 million in 2018 from $3 million in 2017. The increase was primarily due to stronger margins in Argentina.
Unallocated— Unallocated segment EBIT of $24 million in 2018 relates to the loss on extinguishment of debt, which was recorded in other income (expense). See Note 17 - Long-Term Debt and Credit Facilities, to our consolidated financial statements included in this Annual Report on Form 10-K for more information.
Interest—A summary of consolidated interest income and expense follows:
Year Ended December 31, | ||||||||
(US$ in millions) | 2018 | 2017 | ||||||
Interest income | $ | 31 | $ | 38 | ||||
Interest expense | (339 | ) | (263 | ) | ||||
Interest income decreased by $7 million to $31 million in 2018 compared to $38 million in 2017, primarily related to lower outstanding balances and lower interest rates, primarily in Brazil. Interest expense increased $76 million to $339 million in 2018 from $263 million in 2017, primarily due to higher average debt balances associated with funding the Loders acquisition and higher working capital needs, as well as higher interest rates. These increases were partially offset by the reversal of interest related to ICMS tax credits in Brazil.
Discontinued Operations— Income from discontinued operations (retail fertilizer business in Brazil) in 2018 was $10 million, compared to nil in 2017. The income for 2018 was mainly comprised of a gain on the final settlement from the liquidation of an entity in 2004, foreign exchange gains due to the depreciation of the Brazilian real, and the recovery of bad debt provisions, partially offset by an $11 million charge related to the final settlement on the sale of the Brazilian retail fertilizer business in 2013.
2017 Compared to 2016
Net Income Attributable to Bunge— For the year ended December 31, 2017, net income attributable to Bunge decreased by $585 million to $160 million from $745 million in 2016. This decrease resulted primarily from a decrease in total segment EBIT of $707 million, particularly in Agribusiness, partially offset by decreases in losses from discontinued operations and income tax expense.
Income Tax Expense— In the year ended December 31, 2017, income tax expense was $56 million compared to income tax expense of $220 million in 2016. The effective tax rate for 2017 was 24% compared to 22% for 2016. The higher tax rate in 2017 was primarily due to an income tax charge recognized in the U.S. from newly enacted tax reform of $60 million, an income tax charge due to a tax rate change in Argentina for $6 million and a valuation allowance recognized in Europe for $26 million. This was partly offset by an income tax benefit of $32 million for a favorable resolution of income tax matters in Asia-Pacific, an income tax benefit of $17 million related to a prior year tax election in South America, and the release of a valuation allowance in Asia-Pacific for $6 million. The 2016 effective tax rate of 22% was driven primarily by certain discrete items including an income tax benefit of $60 million recorded for a change in estimate resulting from a tax election for North
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America, a release of valuation allowance for Sugar entities of $19 million, and an income tax benefit of $11 million recorded for income tax refund claims in Europe, partially offset by an income tax charge of $56 million recorded for an uncertain tax position related to Asia-Pacific. Excluding the effect of these discrete items noted above, our effective tax rate for 2017, and 2016 was 8% and 26%, respectively. The reduction in the effective tax rate from 2016 to 2017, after taking into account the discrete tax items noted above, is primarily attributable to favorable earnings mix on a lower base of pretax income and due to other net favorable discrete items, recognized primarily in the fourth quarter of 2017.
Agribusiness Segment— Agribusiness segment net sales increased by 6% to $31.7 billion in 2017, compared to $30.1 billion in 2016, aligned with the overall volumes increase of 6% compared to 2016. Higher volumes in Brazil due to larger soybean and corn crops, increased crush volumes in Europe due to our new crush plant in Ukraine which started operations in the second quarter of 2016, and the acquisition of two oilseed crushing facilities in Western Europe in the first quarter of 2017 led to the increase in net sales compared to 2016.
Cost of goods sold increased by 8%, aligned with the increases in volumes noted above. In addition, cost of goods sold for 2017, was impacted by $16 million of impairment charges of long-lived assets in Asia-Pacific and Europe, $12 million of severance and other employee benefit costs related to our industrial productivity initiatives, higher industrial costs and depreciation from the recent acquisitions in Europe and a 9% appreciation of the Brazilian real against the U.S. dollar in 2017 compared to 2016.
Gross profit decreased to $933 million in 2017, from $1.5 billion in 2016, primarily driven by lower margins in our grain origination, oilseed processing and trading and distribution businesses from slow farmer selling, reduced demand for soybean meal, strong competition, fewer risk management opportunities and severance and employee benefit costs related to industrial productivity initiatives.
SG&A expenses increased $101 million to $805 million in 2017, which represented a 14% increase from $704 million in the same period last year. This increase included $37 million of GCP costs, related primarily to severance and other employee benefit costs, added general and administrative expenses in Europe related to new acquisitions and a 9% appreciation of the Brazilian real against the U.S. dollar in 2016. Additionally, there was a $17 million credit adjustment in Brazil, $7 million of impairment charges, primarily of intangible assets related to patents, and $7 million of transaction related costs associated with the acquisition of two oilseed processing facilities in Europe.
Foreign currency results in 2017 were gains of $85 million, compared to losses of $7 million in 2016. These results were primarily driven by gains on U.S. dollar-denominated loans to fund operations and foreign currency gains realized due to the appreciation of the Chinese renminbi in our oilseed processing business in Asia.
Other income (expenses) - net was income of $56 million in 2017, compared to income of $22 million in 2016. Results for the year ended 2017 included income earned in our Financial Services Group, offset by a $13 million impairment of our palm oil affiliate in Indonesia. Results for the year ended 2016 included impairment and restructuring charges of $27 million on our palm oil affiliate in Indonesia and intangible assets related to aquaculture and other patents.
Segment EBIT decreased by $619 million primarily driven by our grain origination business, which was impacted by weaker margins, primarily due to slow farmer selling, strong competition and logistics commitments in South America and weaker results in our soybean processing facilities in most regions. Also, contributing to lower EBIT were severance, employee benefit and other program costs related to our Global Competitiveness Program (“GCP”), impairment charges, transaction costs related to the acquisition of two oilseed crushing facilities in Western Europe and the increase of general and administrative expenses for recent acquisitions.
Edible Oil Products Segment— Edible oil products segment net sales increased by 17% in 2017 to $8.0 billion, compared to $6.9 billion in 2016, resulting primarily from an 11% increase in volumes, driven by our acquisitions of two edible oil production facilities in Europe, the recent acquisition of an edible oil production facility in Argentina and increased volumes in Asia-Pacific and Brazil.
Cost of goods sold in 2017 increased 17% compared to 2016, which is in line with the increase in net sales noted above, and primarily driven by the impact of the recent acquisitions in Europe and Argentina and increased volumes in Asia-Pacific and Brazil compared to 2016. Additionally, 2017 included $6 million of severance and employee benefit costs related to industrial productivity initiatives.
Gross profit in 2017 increased to $499 million compared to $439 million in 2016. The increase was primarily driven by stronger margins in Brazil and increases in volumes in Europe from our recent acquisitions, offset in part by severance and other employee benefit costs and lower refining and packaging margins in the U.S.
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SG&A expenses increased by 13% to $361 million in 2017 compared with $320 million in the same period a year ago. The increase includes severance and other employee benefit costs of $10 million related to our GCP and acquisition related costs of $9 million. Additionally, there were increased general and administrative expenses associated with our recent acquisitions.
Foreign currency results in 2017 were income of $3 million, compared to loss of $1 million in 2016 related to foreign currency gains on debt and derivative instruments and hedges.
Other income (expenses) - net was expense of $7 million in 2017, compared to income of $7 million in 2016. Included in Other income (expenses) - net in 2016 is an $11 million gain recorded on the disposition of assets in Europe.
Segment EBIT increased to $126 million in 2017, up from $112 million in 2016, primarily from higher margins and volumes in our Brazil business and increased volumes due to acquisitions in Argentina and Europe, partially offset by severance and other employee benefit costs related to our GCP and industrial productivity initiatives and acquisition related costs of $9 million.
Milling Products Segment— Milling products segment net sales decreased 4% to $1.6 billion in 2017. Higher volumes in the U.S. were primarily offset by weak macro-economic conditions and pressure from the record wheat crop in Brazil compared to 2016.
Cost of goods sold were $1.4 billion in 2017, aligned with 2016. Cost of goods sold in 2017 was impacted by $4 million of severance and other employee benefit costs related to industrial productivity initiatives and 2016 included a recovery of $14 million in Brazilian import taxes paid in prior years.
Gross profit decreased by 22% to $209 million in 2017, down from $269 million in 2016, primarily due to increased competition and competitive pricing in Brazil that reduced margins as well as an unfavorable product mix in Mexico.
SG&A expenses increased to $138 million in 2017 from $127 million, primarily due to the 9% appreciation of the Brazilian real against the U.S. dollar compared to 2016 and employee severance and other employee benefit costs related to our GCP.
Segment EBIT decreased to $63 million in 2017 from $131 million in 2016 as a result of lower gross profit driven by continued weak economic conditions and lower demand for higher value wheat products in Brazil and Mexico and severance and other employee benefit costs related to our GCP and other industrial productivity initiatives. In addition, 2016 included a recovery of $14 million in Brazilian import taxes paid in prior years.
Sugar and Bioenergy Segment— Sugar and Bioenergy segment net sales increased to $4.1 billion in 2017 compared to $3.7 billion in the same period last year. The 9% increase in sales was primarily driven by higher sugar sales volumes in our trading and distribution business and a 9% appreciation of the Brazilian real against the U.S. dollar which positively impacted domestic sales of sugar and ethanol in Brazil when converted into U.S. dollar.
Cost of goods sold increased 11% in 2017 compared to the same period 2016, primarily due to higher sales volumes and the appreciation of the Brazilian real compared to the U.S. dollar. Results for 2017 also included $21 million of severance and restructuring charges related to our industrial operations and $16 million of indirect tax credits.
Gross profit decreased to $99 million in 2017 from the $159 million reported in 2016. Higher sales volumes and $16 million related to indirect tax credits were more than offset by lower sugar and ethanol sales prices and $21 million in severance and restructuring charges.
SG&A expenses increased by 3% to $114 million in 2017 from $112 million in the comparable period 2016, primarily due to $4 million of severance and other employee benefit costs related to our GCP and the appreciation of the Brazilian real compared to the U.S. dollar
Foreign currency results in 2017 were $11 million compared to $9 million in the same period 2016. These results relate primarily to gains on foreign currency hedges.
Other income (expenses) - net was expense of $4 million in 2017, compared to expense of $16 million in 2016 related to results in our joint venture for the production of renewable oils in Brazil.
Segment EBIT decreased to a loss $12 million in 2017 from a loss of $4 million in 2016, as higher sugar sales volumes along with foreign currency gains and indirect tax credits were more than offset by lower sugar and ethanol sales prices, $22 million in severance and restructuring charges related to our industrial operations, and $4 million of severance and other employee benefit costs related to our GCP.
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Fertilizer Segment— Fertilizer segment net sales increased to $406 million in 2017, compared to $403 million in 2016, primarily due to higher volumes in our Brazil port operations compared to 2016.
Cost of goods sold in 2017 were $381 million compared to $350 million in 2016. Cost of goods sold in 2017 included $13 million of severance and other employee benefit costs related to a production facility in Argentina. In addition, 2016 included a reversal of a natural gas tariff reserve of $11 million due to an Argentine Supreme court decision.
Gross profit decreased by $28 million to $25 million in 2017, from $53 million in the comparable period 2016. The decrease was primarily driven by lower margins in Argentina from higher raw material costs and severance and other employee benefit costs.
Segment EBIT decreased by $26 million to $3 million in 2017 from $29 million in the same period a year ago, higher volumes in our Brazil port operations were more than offset by lower margins in 2017 and $13 million of severance and other employee benefit costs related to a production facility in Argentina. In addition, 2016 included a reversal of a natural gas tariff reserve of $11 million due to an Argentine Supreme court decision.
Interest—A summary of consolidated interest income and expense for the periods indicated follows:
Year Ended December 31, | ||||||||
(US$ in millions) | 2017 | 2016 | ||||||
Interest income | $ | 38 | $ | 51 | ||||
Interest expense | (263 | ) | (234 | ) | ||||
Interest income decreased by $13 million to $38 million in 2017 compared to $51 million in 2016, primarily related to lower average cash and cash equivalents balances. Interest expense increased $29 million to $263 million in 2017 from $234 million in 2016, primarily due to higher average debt balances, higher variable interest rates, and an increase in the duration of our debt portfolio.
Discontinued Operations— Income (loss) from discontinued operations (retail fertilizer business in Brazil) in 2017 was nil compared to a loss of $9 million in 2016. Recovery of bad debt provisions and interest received from customers in litigation offset ongoing administrative expenses and foreign currency losses.
Liquidity and Capital Resources
Liquidity
Our main financial objectives are to prudently manage financial risks, ensure consistent access to liquidity and minimize cost of capital in order to efficiently finance our business and maintain balance sheet strength. We generally finance our ongoing operations with cash flows generated from operations, issuance of commercial paper, borrowings under various bilateral and syndicated revolving credit facilities, term loans and proceeds from the issuance of senior notes. Acquisitions and long-lived assets are generally financed with a combination of equity and long-term debt.
Our current ratio, which is a widely used measure of liquidity and is defined as current assets divided by current liabilities, was 1.54 and 1.67 at December 31, 2018 and 2017, respectively.
Cash and Cash Equivalents—Cash and cash equivalents were $389 million at December 31, 2018 and $601 million at December 31, 2017. Cash balances are managed in accordance with our investment policy, the objectives of which are to preserve the principal value of our cash assets, maintain a high degree of liquidity and deliver competitive returns subject to prevailing market conditions. Cash balances are invested in short-term deposits with highly rated financial institutions and in U.S. government securities.
Readily Marketable Inventories ("RMI")—RMI are agricultural commodity inventories, such as soybeans, soybean meal, soybean oil, corn, wheat, and sugar that are readily convertible to cash because of their commodity characteristics, widely available markets and international pricing mechanisms. Total RMI reported at fair value were $4,532 million and $4,056 million at December 31, 2018 and December 31, 2017, respectively (see Note 5 - Inventories, to our consolidated financial statements included as part of this Annual Report on Form 10-K).
Financing Arrangements and Outstanding Indebtedness—We conduct most of our financing activities through a centralized financing structure that provides the company efficient access to debt and capital markets. This structure includes a master trust, the primary assets of which consist of intercompany loans made to Bunge Limited and its subsidiaries. Certain of
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Bunge Limited's 100% owned finance subsidiaries, Bunge Limited Finance Corp., Bunge Finance Europe B.V. and Bunge Asset Funding Corp., fund the master trust with short and long-term debt obtained from third parties, including through our commercial paper program and certain credit facilities, as well as the issuance of senior notes. Borrowings by these finance subsidiaries carry full, unconditional guarantees by Bunge Limited.
Revolving Credit Facilities—At December 31, 2018, we had $5,015 million of aggregate committed borrowing capacity under our commercial paper program and various revolving bilateral and syndicated credit facilities, of which $4,515 million was unused and available. The following table summarizes these facilities as of the periods presented:
Total Committed Capacity | Borrowings Outstanding | |||||||||||||
Commercial Paper Program and Revolving Credit Facilities | Maturities | December 31, 2018 | December 31, 2018 | December 31, 2017 | ||||||||||
Commercial Paper | 2023 | $ | 600 | $ | — | $ | — | |||||||
Long-Term Revolving Credit Facilities (1) | 2020 - 2023 | 4,415 | 500 | — | ||||||||||
Total | $ | 5,015 | $ | 500 | $ | — | ||||||||
(1) | Borrowings under the revolving credit facilities that have maturities greater than one year from the date of the consolidated balance sheets are classified as long-term debt, consistent with the long-term maturity of the underlying facilities. However, individual borrowings under the revolving credit facilities are generally short-term in nature, bear interest at variable rates and can be repaid or renewed as each such individual borrowing matures. |
On December 14, 2018, we entered into an unsecured $1,100 million five-year syndicated revolving credit agreement (the "Credit Agreement") with certain lenders party thereto maturing December 14, 2023. We have the option to request an extension of the maturity date of the Credit Agreement for two additional one-year periods, subject to the consent of the lenders. The Credit Agreement replaced the then existing $1,100 million five-year revolving credit agreement, dated as of November 20, 2014, which was terminated by us in accordance with its terms. Borrowings under the Credit Agreement will bear interest at LIBOR plus a margin, which will vary from 1.00% to 1.625%, based on the credit ratings of our senior long-term unsecured debt ("Rating Level"). Amounts under the Credit Agreement that remain undrawn are subject to a commitment fee at rates ranging from 0.09% to 0.225%, varying based on the Rating Level. We may, from time-to-time, request one or more of the existing lenders or new lenders to increase the total commitments under the Credit Agreement by up to $200 million pursuant to an accordion provision. At December 31, 2018, we had no borrowings outstanding under the Credit Agreement.
On May 1, 2018, in connection with our previously announced strategy to reduce our exposure to the sugar milling business in Brazil, we entered into an unsecured $700 million, five-year revolving credit facility, which upon fulfillment of certain conditions is convertible into a non-recourse secured term loan facility with our sugar milling business as the borrower. This facility provides financial flexibility to fund our sugar milling business on a stand-alone basis. Additionally, subject to lender approval, we may request an increase, in an amount not to exceed $100 million, to the revolving credit facility commitments pursuant to an accordion provision set forth in the revolving credit facility. There were no borrowings outstanding under the facility at December 31, 2018.
We had $500 million of borrowings outstanding at December 31, 2018 under our $1,750 million unsecured syndicated revolving credit facility with certain lenders party thereto maturing December 12, 2020 (the ‘‘2020 Facility’’). Borrowings under the 2020 Facility bear interest at LIBOR plus a margin, which will vary from 0.30% to 1.30% per annum, based on the credit ratings of our senior long-term unsecured debt. We also pay a fee that varies from 0.10% to 0.40% per annum, based on the utilization of the 2020 Facility. Amounts under the 2020 Facility that remain undrawn are subject to a commitment fee payable quarterly in arrears at a rate of 35% of the margin specified above, which varies based on the rating level at each quarterly payment date. We may, from time to time, with the consent of the facility agent, request one or more of the existing lenders or new lenders to increase the total commitments under the 2020 Facility by up to $250 million pursuant to an accordion provision. We have the option to request an extension of the maturity date of the 2020 Facility for two additional one-year periods, subject to the consent of the lenders.
We had no borrowings outstanding at December 31, 2018 under our unsecured $865 million revolving credit facility, maturing September 6, 2022 (the "2022 Facility"). Borrowings under the 2022 Facility bear interest at LIBOR plus a margin, which will vary from 1.00% to 1.75% per annum, based on the credit ratings of our senior long-term unsecured debt. Amounts under the 2022 Facility that remain undrawn are subject to a commitment fee payable quarterly based on the average undrawn
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portion of the 2022 Facility at rates ranging from 0.125% to 0.275%, based on the credit ratings of our senior long-term unsecured debt.
Our commercial paper program is supported by committed back-up bank credit lines (the ‘‘Liquidity Facility’’) equal to the amount of the commercial paper program provided by lending institutions that are required to be rated at least A-1 by Standard & Poor’s and P-1 by Moody’s Investor Services. The cost of borrowing under the Liquidity Facility would typically be higher than the cost of issuance under our commercial paper program. On December 14, 2018 we amended our unsecured $600 million five-year Liquidity Facility with certain lenders party thereto and extended its term to December 14, 2023. We have the option to request an extension of the expiration date of the Liquidity Agreement for two additional one-year periods, subject to the consent of the lenders. At December 31, 2018, no borrowings were outstanding under the commercial paper program and no borrowings were outstanding under the Liquidity Facility. The Liquidity Facility is our only revolving credit facility that requires lenders to maintain minimum credit ratings.
In addition to committed credit facilities, from time to time, through our financing subsidiaries, we enter into bilateral short-term credit lines as necessary based on our financing requirements. At December 31, 2018 there were no borrowings outstanding under these bilateral short-term credit lines.
Short and long-term debt—Our short and long-term debt increased by $893 million at December 31, 2018 from December 31, 2017, primarily due to funding the acquisition of Loders. For the year ended December 31, 2018, our average short and long-term debt outstanding was approximately $6,929 million compared to approximately $5,455 million for the year ended December 31, 2017, primarily due to funding the acquisition of Loders and higher average working capital financing requirements, driven by higher average global commodity prices. Our long-term debt outstanding balance was $4,622 million at December 31, 2018 compared to $4,175 million at December 31, 2017. The following table summarizes our short-term debt activity at December 31, 2018.
(US$ in millions) | Outstanding Balance at December 31, 2018 | Weighted Average Interest Rate at December 31, 2018 (1) | Highest Balance Outstanding During 2018 (1) | Average Balance During 2018 (1) | Weighted Average Interest Rate During 2018 (1) | |||||||||||||
Bank Borrowings | $ | 750 | 6.98 | % | $ | 2,327 | $ | 1,332 | 4.82 | % | ||||||||
Commercial Paper | — | — | 598 | 449 | 2.41 | % | ||||||||||||
Total | $ | 750 | 6.98 | % | $ | 2,925 | $ | 1,781 | 4.21 | % | ||||||||
(1) | Includes $136 million of local currency borrowings in certain Central and Eastern European, and South American countries at a weighted average interest rate of 23.61% as of December 31, 2018. |
On September 10, 2018, we completed the sale and issuance of $600 million aggregate principal amount of 4.35% unsecured senior notes due March 15, 2024. The senior notes are fully and unconditionally guaranteed by Bunge Limited. The offering was made pursuant to a registration statement filed with the U.S. Securities and Exchange Commission. Interest on the senior notes is payable semi-annually in arrears in March and September of each year, commencing on March 15, 2019. The net proceeds of the offering were approximately $594 million after deducting underwriting commissions and estimated offering expenses. We used the net proceeds from this offering, together with available cash, to fund a tender offer and redemption of our $600 million aggregate principal amount of 8.50% senior notes due 2019, which resulted in a loss on extinguishment of debt of approximately $24 million related to make-whole payments.
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The following table summarizes our short and long-term debt:
December 31, | ||||||||
(US$ in millions) | 2018 | 2017 | ||||||
Short-term debt: (1) | ||||||||
Short-term debt (2) | $ | 750 | $ | 304 | ||||
Current portion of long-term debt | 419 | 15 | ||||||
Total short-term debt | 1,169 | 319 | ||||||
Long-term debt: | ||||||||
Revolving credit facility expiring 2020 | 500 | — | ||||||
Term loan due 2019—three-month Yen LIBOR plus 0.75% (Tranche A) | 258 | 253 | ||||||
Term loan due 2019—fixed Yen interest rate of 0.96% (Tranche B) | 54 | 53 | ||||||
Term loan due 2019—three-month LIBOR plus 1.30% (Tranche C) | 85 | 85 | ||||||
8.50% Senior Notes due 2019 | — | 599 | ||||||
3.50% Senior Notes due 2020 | 498 | 497 | ||||||
3.00% Senior Notes due 2022 | 397 | 396 | ||||||
1.85% Senior Notes due 2023—Euro | 916 | 960 | ||||||
4.35% Senior Notes due 2024 | 595 | — | ||||||
3.25% Senior Notes due 2026 | 695 | 694 | ||||||
3.75% Senior Notes due 2027 | 594 | 593 | ||||||
Other | 30 | 45 | ||||||
Subtotal | 4,622 | 4,175 | ||||||
Less: Current portion of long-term debt | (419 | ) | (15 | ) | ||||
Total long-term debt (3) | 4,203 | 4,160 | ||||||
Total debt | $ | 5,372 | $ | 4,479 | ||||
(1) | Includes secured debt of $9 million and $5 million at December 31, 2018 and December 31, 2017, respectively. |
(2) | Includes $136 million and $179 million of local currency borrowings in certain Central and Eastern European, South American, African and Asia-Pacific countries at a weighted average interest rate of 23.61% and 15.03% as of December 31, 2018 and December 31, 2017, respectively. |
(3) | Includes secured debt of $17 million and $24 million at December 31, 2018 and December 31, 2017, respectively. |
Credit Ratings—Bunge's debt ratings and outlook by major credit rating agencies at December 31, 2018 were as follows:
Short-term Debt(1) | Long-term Debt | Outlook | |||
Standard & Poor's (2) | A-1 | BBB | Stable | ||
Moody's | P-1 | Baa3 | Stable | ||
Fitch (2) | F1 | BBB | Negative | ||
(1) | Short-term rating applies only to Bunge Asset Funding Corp., the issuer under our commercial paper program. |
(2) | In January 2019, Standard & Poor's lowered the outlook on our long-term debt BBB credit rating to negative, and Fitch downgraded our long-term debt credit rating to BBB- with a stable outlook. |
Our debt agreements do not have any credit rating downgrade triggers that would accelerate maturity of our debt. However, credit rating downgrades would increase our borrowing costs under our credit facilities and, depending on their severity, could impede our ability to obtain credit facilities or access the capital markets in the future on competitive terms. A significant increase in our borrowing costs could impair our ability to compete effectively in our business relative to competitors with higher credit ratings.
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Our credit facilities and certain senior notes require us to comply with specified financial covenants, including minimum net worth, minimum current ratio, a maximum debt to capitalization ratio, and limitations on secured indebtedness. We were in compliance with these covenants as of December 31, 2018.
Trade Receivable Securitization Program—We initially entered into our trade receivable securitization program (the "Program") in June 2011, which provides us with an additional source of liquidity. On May 26, 2016, Bunge and certain of its subsidiaries renewed and amended the $700 million trade receivables securitization program, which terminates on May 26, 2021. However, each committed purchaser's commitment to fund trade receivables sold under the Program will terminate on May 26, 2019 unless extended in accordance with the terms of the receivables transfer agreement. On February 19, 2019, we exercised a portion of the $300 million accordion feature under this Program to increase the aggregate size of the facility by $100 million to an aggregate of $800 million and extended the committed purchasers' commitment to fund trade receivables under the Program until May 26, 2020.
December 31, | |||||||
(US$ in millions) | 2018 | 2017 | |||||
Receivables sold which were derecognized from Bunge's balance sheet | $ | 826 | $ | 810 | |||
Deferred purchase price included in other current assets | $ | 128 | $ | 107 | |||
The table below summarizes the cash flows and discounts of our trade receivables associated with the Program. Servicing fees under the Program were not significant in any period.
Years Ended December 31, | |||||||||||
(US$ in millions) | 2018 | 2017 | 2016 | ||||||||
Gross receivables sold | $ | 9,803 | $ | 10,022 | $ | 9,405 | |||||
Proceeds received in cash related to transfer of receivables | $ | 9,484 | $ | 9,734 | $ | 9,197 | |||||
Cash collections from customers on receivables previously sold | $ | 9,173 | $ | 9,659 | $ | 9,176 | |||||
Discounts related to gross receivables sold included in SG&A | $ | 14 | $ | 9 | $ | 6 | |||||
Non-cash activity for the program in the reporting period is represented by the difference between gross receivables sold and cash collections from customers on receivables previously sold.
Our risk of loss following the sale of the trade receivables is limited to the deferred purchase price receivable (the "DPP"), which at December 31, 2018 and 2017 had a fair value of $128 million and $107 million, respectively, and is included in other current assets in our consolidated balance sheets (see Note 18 - Trade Receivables Securitization Program, to our consolidated financial statements included as part of this Annual Report on Form 10-K). The DPP will be repaid in cash as receivables are collected, generally within 30 days. Delinquencies and credit losses on trade receivables sold under the Program during the years ended December 31, 2018, 2017 and 2016 were insignificant.
Interest Rate Swap Agreements—We may use interest rate swaps as hedging instruments and record the swaps at fair value in the consolidated balance sheets with changes in fair value recorded contemporaneously in earnings. Additionally, the carrying amount of the associated debt is adjusted through earnings for changes in the fair value due to changes in benchmark interest rates.
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Equity—Total equity is set forth in the following table:
December 31, | ||||||||
(US$ in millions) | 2018 | 2017 | ||||||
Convertible perpetual preference shares | $ | 690 | $ | 690 | ||||
Common shares | 1 | 1 | ||||||
Additional paid-in capital | 5,278 | 5,226 | ||||||
Retained earnings | 8,059 | 8,081 | ||||||
Accumulated other comprehensive income | (6,935 | ) | (5,930 | ) | ||||
Treasury shares, at cost (2018 and 2017—12,882,313) | (920 | ) | (920 | ) | ||||
Total Bunge shareholders' equity | 6,173 | 7,148 | ||||||
Noncontrolling interests | 205 | 209 | ||||||
Total equity | $ | 6,378 | $ | 7,357 | ||||
Total Bunge shareholders' equity was $6,173 million at December 31, 2018 compared to $7,148 million at December 31, 2017. The decrease in Bunge shareholders' equity during the year ended December 31, 2018 was primarily due to $1,090 million of cumulative translation losses and $276 million and $34 million of declared dividends to common and preferred shareholders, respectively, partially offset by $267 million net income attributable to Bunge and $99 million of unrealized gains associated with hedging activities.
Noncontrolling interest decreased to $205 million at December 31, 2018 from $209 million at December 31, 2017 primarily due to the effects of currency translation, as well as dividends paid and returns of capital to non-controlling interest holders, partially offset by income attributable to our noncontrolling interest entities.
At December 31, 2018, we had 6,899,683 4.875% cumulative convertible perpetual preference shares outstanding with an aggregate liquidation preference of $690 million. Each convertible perpetual preference share has an initial liquidation preference of $100, which will be adjusted for any accumulated and unpaid dividends. The convertible perpetual preference shares carry an annual dividend of $4.875 per share payable quarterly. As a result of adjustments made to the initial conversion price because cash dividends paid on Bunge Limited's common shares exceeded certain specified thresholds, each convertible perpetual preference share is convertible, at the holder's option, at any time into 1.1918 Bunge Limited common shares, based on the conversion price of $83.9096 per share, subject to certain additional anti-dilution adjustments (which represents 8,223,042 Bunge Limited common shares at December 31, 2018). At any time, if the closing price of our common shares equals or exceeds 130% of the conversion price for 20 trading days during any consecutive 30 trading days (including the last trading day of such period), we may elect to cause the convertible perpetual preference shares to be automatically converted into Bunge Limited common shares at the then-prevailing conversion price. The convertible perpetual preference shares are not redeemable by us at any time.
Cash Flows
Our cash flows from operations vary depending on, among other items, the market prices and timing of the purchase and sale of our inventories. Generally, during periods when commodity prices are rising, our Agribusiness operations require increased use of cash to support working capital to acquire inventories and fund daily settlement requirements on exchange traded futures that we use to minimize price risk related to the purchase and sale of our inventories.
2018 Compared to 2017—In 2018, our cash and cash equivalents, and restricted cash decreased by $212 million, compared to a decrease of $333 million in 2017.
Cash used for operating activities was $1,264 million for the year ended December 31, 2018 compared to cash used for operating activities of $1,975 million for the year ended December 31, 2017. Net cash outflows from operating activities was lower for the year ended December 31, 2018, primarily due to the lower use of cash associated with beneficial interests in securitized trade receivables and higher net income during 2018, partially offset by the increased working capital requirements compared to the year ended December 31, 2017. Cash provided by (used for) operating activities for all periods presented reflects the adoption of ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which changed the presentation of cash flows in relation to our trade receivables securitization program. Particularly impacted are the cash receipts from payments on the deferred purchase price, which are now classified as cash inflows from investing activities, whereas previously they were classified as inflows from operating activities.
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Certain of our non-U.S. operating subsidiaries are primarily funded with U.S. dollar-denominated debt, while currency risk is hedged with U.S. dollar-denominated assets. The functional currency of our operating subsidiaries is generally the local currency. The financial statements of our subsidiaries are calculated in the functional currency, and when the local currency is the functional currency, translated into U.S. dollar. U.S. dollar-denominated loans are remeasured into their respective functional currencies at exchange rates at the applicable balance sheet date. Also, certain of our U.S. dollar functional operating subsidiaries outside the U.S. are partially funded with local currency borrowings, while the currency risk is hedged with local currency denominated assets. Local currency loans in U.S. dollar functional currency subsidiaries outside the U.S. are remeasured into U.S. dollars at the exchange rate on the applicable balance sheet date. The resulting gain or loss is included in our consolidated statements of income as foreign exchange gains or losses. For the years ended December 31, 2018 and December 31, 2017, we recorded foreign currency losses of $139 million and $21 million, respectively, which were included as adjustments to reconcile net income to cash used for operating activities in the line item “Foreign exchange (gain) loss on net debt” in our consolidated statements of cash flows. This adjustment is required as these gains or losses are non-cash items that arise from financing activities and therefore will have no impact on cash flows from operations.
Cash provided by investing activities was $410 million for the year ended December 31, 2018 compared to cash provided by investing activities of $1,819 million for the year ended December 31, 2017. During 2018, payments were made for capital expenditures of $493 million, primarily related to replanting of sugarcane for our industrial sugar business in Brazil and the upgrade of our crush facility in Italy, as well as other capital projects at various facilities. In addition, we acquired Loders for $908 million, net of cash acquired, and Minsa USA for $73 million, net of cash acquired. Further, payments were made for investments of $1,184 million, primarily related to deposits, treasuries and bonds in South America related to financial services, which were substantially offset by proceeds from such investments of $1,098 million. Cash provided by investing activities was primarily associated with proceeds of $1,888 million from beneficial interests in securitized trade receivables (due to the change in accounting described above), as well as cash inflows related to settlements of net investment hedges of $66 million in the year ended December 31, 2018, primarily driven by the depreciation of the Brazilian real relative to the U.S. dollar in 2018. During 2017, payments were made for capital expenditures of $662 million, primarily related to the upgrade and expansion of an export terminal in the U.S., replanting of sugarcane for our industrial sugar business, the expansion of a crushing facility in Brazil and the upgrade of our crush facility in Italy. In addition, we acquired two oilseed processing plants in the Netherlands and France for $318 million, an edible oils business in Argentina for $26 million and an olive oil and seed oil producer in Turkey for $23 million, net of cash acquired. Additionally, we had cash outflows related to settlements of net investment hedges of $20 million, primarily driven by the appreciation of the Brazilian real relative to the US dollar in 2017, and payments for investments in affiliates relating to our G3, SB Oils and Tapajos joint ventures, as well as the acquisition of a non-controlling stake in Agricola Alvorada, a Brazilian agribusiness company during 2017. Proceeds from and payments for investments included primarily purchases and sales of short-term investments. Cash provided by investing activities was primarily associated with proceeds of $2,981 million from beneficial interests in securitized trade receivables.
Cash provided by financing activities was $631 million in the year ended December 31, 2018, compared to cash used for financing activities of $180 million for the year ended December 31, 2017. The net increase of $956 million in borrowings in 2018 was primarily related to the funding of acquisitions, financing capital expenditures and funding working capital needs. In addition, we paid dividends of $305 million to our common shareholders and holders of our convertible preference shares. In 2017, dividends paid to our common shareholders and holders of our convertible preference shares were $281 million.
2017 Compared to 2016—In 2017, our cash and cash equivalents, and restricted cash decreased by $333 million, compared to an increase of $525 million in 2016.
Cash used for our operating activities was $1,975 million for the year ended December 31, 2017, compared to cash provided by operating activities was $446 million for the year ended December 31, 2016. Net cash inflows from operating activities was lower for the year ended December 31, 2017, primarily due to lower net income, including adjustments for non-cash items, and increased working capital needs compared to the year ended December 31, 2016. Cash provided by (used for) operating activities for all periods presented reflects the adoption of ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which changed the presentation of cash flows in relation to our trade receivables securitization program. Particularly impacted are the cash receipts from payments on the deferred purchase price, which are now classified as cash inflows from investing activities, whereas previously they were classified as inflows from operating activities.
Certain of our non-U.S. operating subsidiaries are primarily funded with U.S. dollar-denominated debt, while currency risk is hedged with U.S. dollar-denominated assets. The functional currency of our operating subsidiaries is generally the local currency. The financial statements of our subsidiaries are calculated in the functional currency, and when the local currency is the functional currency, translated into U.S. dollar. U.S. dollar-denominated loans are remeasured into their respective functional currencies at exchange rates at the applicable balance sheet date. Also, certain of our U.S. dollar functional operating subsidiaries outside the U.S. are partially funded with local currency borrowings, while the currency risk is hedged
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with local currency denominated assets. Local currency loans in U.S. dollar functional currency subsidiaries outside the U.S. are remeasured into U.S. dollars at the exchange rate at the applicable balance sheet date. The resulting gain or loss is included in our consolidated statements of income as foreign exchange gains or losses. For the years ended December 31, 2017 and December 31, 2016, we recorded foreign currency losses of $21 million and losses of $80 million, respectively, which were included as adjustments to reconcile net income to cash used for operating activities in the line item “Foreign exchange (gain) loss on net debt” in our consolidated statements of cash flows. This adjustment is required because the cash flow impacts of these gains or losses are non-cash items and will represent financing activities when the subsidiary repays the underlying debt and therefore will have no impact on cash flows from operations.
Cash provided by investing activities was $1,819 million for the year ended December 31, 2017 compared to $534 million for the year ended December 31, 2016. During 2017, payments were made for capital expenditures of $662 million, primarily related to the upgrade and expansion of an export terminal in the U.S., replanting of sugarcane for our industrial sugar business, the expansion of a crushing facility in Brazil and the upgrade of our crush facility in Italy. In addition, we acquired two oilseed processing plants in the Netherlands and France for $318 million, an edible oils business in Argentina for $26 million and an olive oil and seed oil producer in Turkey for $23 million, net of cash acquired. We had cash outflows related to settlements of net investment hedges of $20 million in the year ended December 31, 2017, primarily driven by the appreciation of the Brazilian real relative to the US dollar in 2017. Proceeds from and payments for investments included primarily purchases and sales of short-term investments. These payments were offset by proceeds of $2,981 million from beneficial interests in securitized trade receivables. Investments in affiliates included additional investments primarily in our G3, SB Oils and Tapajos joint ventures, as well as the acquisition of a non-controlling stake in Agricola Alvorada, a Brazilian agribusiness company. During 2016, payments were made for capital expenditures of $784 million, primarily related to replanting of sugarcane and maintenance and improvements for our industrial sugar business in Brazil, upgrade and expansion of an export terminal in the United States, construction of a wheat milling facility in Brazil, the expansion of a port facility in Ukraine and the construction of oilseed processing plants in Ukraine and Asia-Pacific. In addition, we acquired, for $34 million, Walter Rau Neusser, a vegetable oil blends producer for large-scale commercial customers, based in Germany. We had cash outflows related to settlements of net investment hedges of $375 million, primarily driven by the appreciation of the Brazilian real relative to the US dollar in 2016. Proceeds from and payments for investments included primarily purchases and sales of certain marketable securities and other short term investments. These payments were offset by proceeds of $1,458 million from beneficial interests in securitized trade receivables. Investments in affiliates in 2016 included additional investments in SB Oils and G3.
Cash used for financing activities was $180 million in the year ended December 31, 2017, compared to $488 million for the year ended December 31, 2016. Dividends paid to our common shareholders and holders of our convertible preference shares were $281 million and $257 million for the years ended December 31, 2017 and 2016, respectively. In connection with our common share repurchase program, in 2017, we did not repurchase common shares and in 2016, we purchased 3,296,230 of our common shares at a cost of $200 million.
Brazilian Farmer Credit
Background—We advance collateralized funds to counterparties (farmers and crop resellers), primarily in Brazil, to secure mostly soybean origination for our soybean processing facilities. These activities are generally intended to be short-term in nature. The ability of our counterparties to repay these amounts is affected by agricultural economic conditions in the relevant geography, which are, in turn, affected by commodity prices, currency exchange rates, crop input costs and crop quality and yields. As a result, these arrangements are typically secured, including by a farmer's crop and, in many cases, land and other assets. In the event of counterparty default, we generally initiate legal proceedings to recover the defaulted amounts. However, the legal recovery process through the judicial system is a long-term process, generally spanning a number of years. Additionally, we may seek to renegotiate certain terms of our contract with the defaulting supplier in order to accelerate recovery of amounts owed.
Because Brazilian farmer credit exposures are denominated in local currency, reported values are impacted by movements in the value of the Brazilian real when translated into U.S. dollars. From December 31, 2017 to December 31, 2018, the Brazilian real depreciated by approximately 17%, decreasing the reported farmer credit exposure balances when translated into U.S. dollars.
We periodically evaluate the collectability of our farmer receivables and record allowances if we determine that collection is doubtful. We base our determination of the allowance on analyses of credit quality of individual accounts, considering also the economic and financial condition of the farming industry and other market conditions as well as the value of any collateral related to amounts owed. We continuously review defaulted farmer receivables for impairment on an individual account basis. We consider all accounts in legal collections processes to be defaulted and past due. For such accounts, we determine the allowance for uncollectible amounts based on the fair value of the associated collateral, net of estimated costs to sell. For all renegotiated accounts (current and past due), we consider changes in farm economic conditions
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and other market conditions, our historical experience related to renegotiated accounts and the fair value of collateral in determining the allowance for doubtful accounts.
Secured Advances to Suppliers and Prepaid Commodity Contracts—We purchase soybeans through prepaid commodity purchase contracts (advance cash payments to suppliers against contractual obligations to deliver specified quantities of soybeans in the future) and secured advances to suppliers (advances to suppliers against commitments to deliver soybeans in the future), primarily in Brazil. These financing arrangements are typically secured by the farmer's future crop and mortgages