Exhibit 99.2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Management's Report on Internal Control Over Financial Reporting................................................ F-2
Reports of Independent Registered Public Accounting Firm........................................................ F-3
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003.......................... F-5
Consolidated Balance Sheets at December 31, 2005 and 2004....................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003...................... F-7
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2005, 2004 and 2003............ F-8
Notes to the Consolidated Financial Statements.................................................................. F-10
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Bunge Limited's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f). Bunge Limited's internal control system
was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to further periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may deteriorate.
Under the supervision and with the participation of management,
including its principal executive officer and principal financial officer, Bunge
Limited's management assessed the design and operating effectiveness of internal
control over financial reporting as of December 31, 2005 based on the framework
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on Bunge Limited's assessment under the framework in Internal
Control--Integrated Framework issued by COSO, management concluded that Bunge
Limited's internal control over financial reporting was effective as of December
31, 2005. Management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2005 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
/s/ ALBERTO WEISSER
- ----------------------------------
Alberto Weisser
Chief Executive Officer
/s/ WILLIAM M. WELLS
- ----------------------------------
William M. Wells
Chief Financial Officer
March 3, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Bunge Limited
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting," that Bunge
Limited and its Subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005 is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of December 31, 2005 and for the year then ended of the Company
and our report dated March 3, 2006 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP
New York, NY
March 3, 2006
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Bunge Limited
We have audited the accompanying consolidated balance sheets of Bunge
Limited and Subsidiaries (the "Company") as of December 31, 2005 and 2004, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Bunge Limited and
Subsidiaries at December 31, 2005 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 3, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, NY
March 3, 2006
(November 10, 2006 as to Note 4 and Note 26)
F-4
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in millions, except per share data)
Year Ended December 31,
----------------------------------------
2005 2004 2003
------------ ------------ ------------
Net sales................................................................ $ 24,275 $ 25,168 $ 22,165
Cost of goods sold (Note 9).............................................. (22,704) (23,282) (20,860)
------------ ------------ ------------
Gross profit............................................................. 1,571 1,886 1,305
Selling, general and administrative expenses............................. (956) (871) (691)
Gain on sale of soy ingredients business................................. -- -- 111
Interest income.......................................................... 104 103 102
Interest expense......................................................... (231) (214) (215)
Foreign exchange (loss) gain............................................. (22) (31) 92
Other income (expense)--net............................................... 53 31 19
------------ ------------ ------------
Income from continuing operations before income tax and minority interest 519 904 723
Income tax benefit (expense)............................................. 82 (289) (201)
------------ ------------ ------------
Income from continuing operations before minority interest............... 601 615 522
Minority interest........................................................ (71) (146) (104)
------------ ------------ ------------
Income from continuing operations........................................ 530 469 418
Discontinued operations, net of tax benefit of $5 (2003) (Note 3)........ -- -- (7)
------------ ------------ ------------
Net income............................................................... $530 $469 $411
============ ============ ============
Earnings per common share (Note 22):
Basic
Income from continuing operations........................................ $ 4.73 $ 4.42 $ 4.19
Discontinued operations.................................................. -- -- (.07)
------------ ------------ ------------
Net income per share..................................................... $ 4.73 $ 4.42 $ 4.12
============ ============ ============
Diluted
Income from continuing operations........................................ $ 4.43 $ 4.10 $ 3.89
Discontinued operations.................................................. -- -- (.06)
------------ ------------ ------------
Net income per share..................................................... $ 4.43 $ 4.10 $ 3.83
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in millions, except share data)
December 31,
----------------------------------------
2005 2004
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 354 $ 432
Trade accounts receivable (less allowance of $180 and $133) (Note 17)........ 1,702 1,928
Inventories (Note 4)......................................................... 2,769 2,636
Deferred income taxes........................................................ 102 95
Other current assets (Note 5)................................................ 1,637 1,577
------------------ ------------------
Total current assets.............................................................. 6,564 6,668
Property, plant and equipment, net (Note 6)....................................... 2,900 2,536
Goodwill (Note 7)................................................................. 176 167
Other intangible assets, net (Note 8)............................................. 132 156
Investments in affiliates (Note 10)............................................... 585 564
Deferred income taxes............................................................. 462 273
Other non-current assets.......................................................... 627 543
------------------ ------------------
Total assets...................................................................... $ 11,446 $ 10,907
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (Note 15).................................................... $ 411 $ 541
Current portion of long-term debt (Note 16).................................. 178 140
Trade accounts payable....................................................... 1,803 1,898
Deferred income taxes........................................................ 38 38
Other current liabilities (Note 11).......................................... 1,187 1,285
------------------ ------------------
Total current liabilities......................................................... 3,617 3,902
Long-term debt (Note 16).......................................................... 2,557 2,600
Deferred income taxes............................................................. 145 232
Other non-current liabilities..................................................... 576 518
Commitments and contingencies (Note 20)
Minority interest in subsidiaries................................................. 325 280
Shareholders' equity:
Common shares, par value $.01; authorized--240,000,000 shares; issued and 1 1
outstanding: 2005--119,184,696 shares, 2004--110,671,450 shares............
Additional paid-in capital.................................................... 2,630 2,361
Retained earnings............................................................. 1,907 1,440
Accumulated other comprehensive loss.......................................... (312) (427)
------------------ ------------------
Total shareholders' equity......................................................... 4,226 3,375
------------------ ------------------
Total liabilities and shareholders' equity......................................... $ 11,446 $ 10,907
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
Year Ended December 31,
-----------------------------------
2005 2004 2003
----------- ---------- ----------
OPERATING ACTIVITIES
Net income....................................................................... $ 530 $ 469 $ 411
Adjustment to reconcile net income to cash provided by (used for) operating
activities:
Gain on sale of soy ingredients business......................................... -- -- (111)
Foreign exchange (gain) loss on debt............................................. (112) (85) (120)
Impairment of assets............................................................. 35 17 56
Bad debt expense................................................................. 40 58 3
(Decrease) increase in allowance for recoverable taxes........................... (27) 2 (38)
Depreciation, depletion and amortization......................................... 278 212 184
Deferred income taxes............................................................ (238) (56) (17)
Minority interest................................................................ 71 146 104
Changes in operating assets and liabilities, excluding
the effects of acquisitions:
Trade accounts receivable................................................... 270 (398) (129)
Inventories................................................................. (11) 328 (249)
Prepaid commodity purchase contracts........................................ (41) 211 (76)
Advances to suppliers....................................................... 135 (341) (30)
Trade accounts payable...................................................... (337) 164 174
Arbitration settlement (Note 20)............................................ -- -- (57)
Other--net (211) 75 (146)
----------- ---------- ----------
Cash provided by (used for) operating activities........................ 382 802 (41)
INVESTING ACTIVITIES
Payments made for capital expenditures........................................... (522) (437) (304)
Business acquisitions (net of cash acquired) and intangible assets............... (50) (355) (196)
Investments in affiliates........................................................ (18) (24) --
Proceeds from disposal of long-lived assets...................................... 59 14 28
Return of capital from affiliates................................................ 38 17 --
Related party repayments (loans)................................................. 13 (13) 41
Investment in notes receivable................................................... -- (26) --
Proceeds from sale of assets held for sale....................................... -- -- 450
Proceeds from sale of discontinued operations.................................... -- -- 82
----------- ---------- ----------
Cash (used for) provided by investing activities........................ (480) (824) 101
FINANCING ACTIVITIES
Net change in short-term debt.................................................... (130) (348) (381)
Proceeds from long-term debt..................................................... 1,210 860 851
Repayment of long-term debt...................................................... (952) (678) (529)
Proceeds from sale of common shares.............................................. 13 348 7
Dividends paid to shareholders................................................... (63) (51) (42)
Dividends paid to minority interest.............................................. (57) (52) (63)
Redemption of redeemable preferred stock......................................... -- (170) --
Proceeds from receivable from former shareholder................................. -- -- 55
----------- ---------- ----------
Cash provided by (used for) financing activities........................ 21 (91) (102)
Effect of exchange rate changes on cash and cash equivalents..................... (1) 56 61
----------- ---------- ----------
Net (decrease) increase in cash and cash equivalents............................. (78) (57) 19
Cash and cash equivalents, beginning of period................................... 432 489 470
----------- ---------- ----------
Cash and cash equivalents, end of period......................................... $ 354 $ 432 $ 489
=========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. dollars in millions, except share data)
Accumulated
Other
Comprehensive
Common Shares Additional Receivable Income Total Comprehensive
-------------------- Paid-in from Former Retained (Loss) Shareholders' Income
Shares Amount Capital Shareholder Earnings (Note 21) Equity (Loss)
------------ ------ --------- ----------- -------- --------- ---------- ------------
Balance, January 1, 2003.............. 99,332,233 $ 1 $ 1,999 $ (55) $ 653 $ (1,126) $1,472
Comprehensive income--2003:
Net income............................ -- -- -- -- 411 -- 411 $411
Other comprehensive income (loss):
Foreign exchange translation
adjustment, net of tax
expense of $8....................... -- -- -- -- -- 489 -- 489
Unrealized loss on commodity
futures, net of tax
benefit of $6....................... -- -- -- -- -- (9) -- (9)
Unrealized gain on investments,
net of tax of $0.................... -- -- -- -- -- 1 -- 1
Reclassification of realized net
(gains) to net income,
net of tax expense of $2............ -- -- -- -- -- (1) -- (1)
Minimum pension liability, net of
tax benefit of $7................... -- -- -- -- -- (10) -- (10)
--------- ------------
Total comprehensive income........ -- -- -- -- -- 470 470 $881
--------- ============
Collection of former shareholder
receivable.......................... -- -- -- 55 -- -- 55
Dividends paid........................ -- -- -- -- (42) -- (42)
Issuance of common shares:
- --employee stock plan................. 576,085 -- 11 -- -- -- 11
------------ ------ --------- ----------- -------- --------- ----------
Balance, December 31, 2003............ 99,908,318 $ 1 $2,010 $ -- $1,022 $ (656) $2,377
Comprehensive income--2004:
Net income............................ -- -- -- -- 469 -- 469 $469
Other comprehensive income (loss):
Foreign exchange translation
adjustment, net of tax
expense of $3....................... -- -- -- -- -- 217 -- 217
Unrealized loss on commodity
futures, net of tax
benefit of $3....................... -- -- -- -- -- (5) -- (5)
Reclassification of realized net
(gains) to net income, net of
tax expense of $10.................. -- -- -- -- -- 19 -- 19
Minimum pension liability, net of
tax benefit of $1................... -- -- -- -- -- (2) -- (2)
--------- ------------
Total comprehensive income............ -- -- -- -- -- 229 229 $ 698
--------- ============
Dividends paid........................ -- -- -- -- (51) -- (51)
Issuance of common shares:
- --public offering..................... 9,775,000 -- 331 -- -- -- 331
- --employee stock plan................. 988,132 -- 20 -- -- -- 20
------------ ------ --------- ----------- -------- --------- ----------
Balance, December 31, 2004............ 110,671,450 $ 1 $2,361 $ -- $1,440 $ (427) $3,375
(Continued on the following page)
F-8
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. dollars in millions, except share data)
Accumulated
Other
Comprehensive
Common Shares Additional Receivable Income Total Comprehensive
-------------------- Paid-in from Former Retained (Loss) Shareholders' Income
Shares Amount Capital Shareholder Earnings (Note 21) Equity (Loss)
------------ ------ --------- ----------- -------- --------- --------- ------------
Comprehensive income--2005:
Net income............................ -- $-- $-- $-- $ 530 $ -- $ 530 $530
Other comprehensive income (loss):
Foreign exchange translation
adjustment, net of tax
expense of $0......................... -- -- -- -- -- 101 -- 101
Unrealized loss on commodity
futures, net of tax benefit of $2..... -- -- -- -- -- (3) -- (3)
Unrealized investment gains, net
of tax expense of $4.................. -- -- -- -- -- 11 -- 11
Reclassification of realized net
losses to net income, net of tax
benefit of $2......................... -- -- -- -- -- 4 -- 4
Minimum pension liability, net of
tax expense of $1..................... -- -- -- -- -- 2 -- 2
--------- ------------
Total comprehensive income (loss)..... -- -- -- -- -- 115 115 $645
--------- ============
Dividends paid........................ -- -- -- -- (63) -- (63)
Deferred financing costs
reclassified.......................... -- -- (5) -- -- -- (5)
Tax benefits related to employee
stock plan............................ -- -- 6 -- -- -- 6
Issuance of common shares:
- --convertible notes conversion........ 7,777,927 -- 250 -- -- -- 250
- --employee stock plan................. 735,319 -- 18 -- -- -- 18
------------ ------ --------- ----------- -------- --------- ----------
Balance, December 31, 2005 119,184,696 $ 1 $2,630 $-- $1,907 $(312) $4,226
============ ====== ========= =========== ======== ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-9
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
Description of Business--Bunge Limited is a Bermuda holding company.
Bunge Limited, together with its consolidated subsidiaries through which Bunge's
businesses are conducted (collectively, "Bunge"), is an integrated, global
agribusiness and food company. Bunge Limited's common shares trade on the New
York Stock Exchange under the ticker symbol "BG". Bunge operates in three
divisions, which include four reporting segments: agribusiness, fertilizer,
edible oil products and milling products.
Agribusiness--Bunge's agribusiness segment is an integrated business
involved in the purchase, storage, transport, processing and sale of
agricultural commodities and commodity products. Bunge's agribusiness operations
and assets are located in North and South America, Europe and Asia and it has
international marketing offices throughout the world.
Fertilizer--Bunge's fertilizer segment is involved in every stage of
the fertilizer business, from mining of phosphate-based raw materials to sales
of blended fertilizer products. Bunge's fertilizer operations are primarily
located in Brazil.
Edible oil products--Bunge's edible oil products segment consists of
producing and selling edible oil products, such as bottled, packaged and bulk
oils, shortenings, margarine, mayonnaise and other products derived from
oilseeds. Bunge's edible oil products operations are located in North and South
America, Europe and Asia.
Milling products--Bunge's milling products segment includes the wheat
and corn milling businesses. The wheat milling business consists of producing
and selling wheat flours. Bunge's wheat milling activities are located in
Brazil. The corn milling business consists of producing and selling products
derived from corn. Bunge's corn milling activities are located in North America.
Basis of Presentation and Principles of Consolidation--The accompanying
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and include the
assets, liabilities, revenues and expenses of all subsidiaries over which Bunge
exercises control. Bunge's consolidated financial statements include the
accounts of all majority owned subsidiaries where our ownership is more than 50%
of common stock. Bunge has no non-consolidated majority owned subsidiaries. All
significant intercompany transactions and balances with consolidated
subsidiaries are eliminated in the consolidated financial statements. Minority
interest related to Bunge's ownership interests of less than 100% is reported as
minority interest in subsidiaries in the consolidated balance sheets. The
minority ownership interest of Bunge's earnings, net of tax, is reported as
minority interest in its consolidated statements of income.
Investments in 20% to 50% owned affiliates in which Bunge has the
ability to exercise significant influence are accounted for by the equity method
of accounting whereby the investment is carried at acquisition cost, plus
Bunge's equity in undistributed earnings or losses since acquisition.
Investments in less than 20% owned affiliates are accounted for by the cost
method unless such investments are marketable securities, which are carried at
market value.
Use of Estimates and Certain Concentrations of Risk--The accompanying
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and require
management to make certain estimates and assumptions. These may affect the
reported amounts of assets and liabilities at the date of the financial
statements. They may also affect the reported amounts of revenues and expenses
during the reporting period. Amounts affected include, but are not limited to,
allowances for doubtful accounts, inventories, allowances for recoverable taxes,
impairment of long-lived assets, restructuring charges, useful lives of
property, plant and equipment and intangible assets, contingent liabilities,
income tax valuation allowances and pension plan obligations. Actual amounts may
vary from those estimates.
F-10
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies (Continued)
The availability and price of agricultural commodities used in Bunge's
operations are subject to wide fluctuations due to unpredictable factors such as
weather, plantings, government (domestic and foreign) farm programs and
policies, changes in global demand and global production of similar and
competitive crops.
Translation of Foreign Currency Financial Statements--Bunge's reporting
currency is the U.S. dollar. The functional currency of the majority of Bunge's
foreign subsidiaries is their local currency and, as such, amounts included in
the consolidated statements of income are translated at the weighted average
exchange rates for the period. Assets and liabilities are translated at year end
exchange rates and resulting foreign exchange translation adjustments are
recorded in the consolidated balance sheets as a component of accumulated other
comprehensive income (loss).
Foreign Currency Transactions--Monetary assets and liabilities
denominated in currencies other than the functional currency are remeasured into
their respective functional currencies at exchange rates in effect at the
balance sheet date. The resulting exchange gains or losses are included in
Bunge's consolidated statements of income as foreign exchange gain (loss).
Cash and Cash Equivalents--Cash and cash equivalents include time
deposits and readily marketable securities with original maturity dates of three
months or less at the time of acquisition.
Accounts Receivable and Secured Advances to Suppliers--Accounts
receivable and secured advances to suppliers are stated at the historical
carrying amounts net of write-offs and allowances for uncollectible accounts.
Bunge establishes an allowance for uncollectible trade accounts receivable and
secured advances to farmers based on historical experience, market conditions,
current trends and any specific customer collection issues that Bunge has
identified. Uncollectible accounts are written off when a settlement is reached
for an amount that is less than the outstanding historical balance or when Bunge
has determined the balance will not be collected.
Inventories--Readily marketable inventories in the agribusiness
segment, which consist of merchandisable agricultural commodities, are stated at
market value (net realizable value). Readily marketable inventories are
agricultural commodities inventories that are readily convertible to cash
because of their commodity characteristics, widely available markets and
international pricing mechanisms. The merchandisable agricultural commodities
are freely traded, have quoted market prices, may be sold without significant
further processing and have predictable and insignificant disposal costs.
Changes in the market values of merchandisable agricultural commodities
inventories are recognized in earnings as a component of cost of goods sold.
Inventories that are not readily marketable inventories are principally
stated at the lower of cost or market. Cost is determined using the weighted
average cost method.
Derivatives--Bunge enters into derivatives that are related to its
inherent business and financial exposure as a multinational agricultural
commodities and food company. Bunge uses derivative instruments for the purpose
of managing the exposures associated with commodity prices, foreign currency
exchange rates, interest rates and energy costs.
Bunge uses exchange-traded futures and options contracts to minimize
the effects of changes in the prices of agricultural commodities on its
agribusiness inventories and agricultural commodities forward cash purchase and
sales contracts. Exchange-traded futures and options contracts are valued at the
quoted market prices. Forward purchase contracts and forward sale contracts are
valued at the quoted market prices, which are based on exchange quoted prices
adjusted for differences in local markets. Changes in the market value of
forward purchase and sale contracts, and exchange-traded futures and options
contracts, are recognized in earnings as a component of cost of goods sold.
These contracts are predominantly settled in cash. Bunge is exposed to loss in
the event of non-performance by the counter-party to forward purchase and
forward sales contracts. The values of these contracts are reduced by a
provision related to the potential loss in the event of non-performance.
In addition, Bunge hedges portions of its forecasted U.S. oilseed
processing production requirements, including forecasted purchases of soybeans
and sales of soy commodity products for quantities that usually do not exceed
three
F-11
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies (Continued)
months of processing capacity. The instruments used are exchange-traded
futures contracts, which are designated as cash flow hedges. The changes in the
market value of such futures contracts have historically been, and are expected
to continue to be, highly effective at offsetting changes in price movements of
the hedged item. To the extent they provide effective offset, gains or losses
arising from hedging transactions are deferred in accumulated other
comprehensive income (loss), net of applicable taxes, and are reclassified to
cost of goods sold in the consolidated statements of income when the products
associated with the hedged item are sold. Bunge expects to reclassify
approximately $4 million after tax net gains to cost of goods sold in the year
ending December 31, 2006, relating to exchange-traded futures contracts
designated as cash flow hedges. If at any time during the hedging relationship
Bunge no longer expects the hedge to be highly effective, the changes in the
market value of such futures contracts would prospectively be recorded in the
consolidated statements of income.
Bunge also enters into derivative financial instruments, such as
foreign currency options, forward contracts and swaps, to limit exposures to
changes in foreign currency exchange rates with respect to its recorded foreign
currency denominated assets and liabilities and its local currency operating
expenses. These derivative instruments are marked-to-market, with changes in
their fair value recognized as a component of foreign exchange in the
consolidated statements of income. Bunge may also hedge other foreign currency
exposures as deemed appropriate.
Bunge may also use derivative instruments, such as treasury rate locks,
to reduce the risk of changes in interest rates on forecasted issuance of fixed
rate debt. To the extent they are designated as cash flow hedges and provide
effective offset, gains and losses arising from these derivative instruments are
deferred in accumulated other comprehensive income (loss) and recognized in the
consolidated statements of income over the term of the underlying debt. In
addition, Bunge enters into interest rate swaps to manage its interest rate
exposure on a portion of its fixed rate debt. The interest rate swaps used by
Bunge are designated as fair value hedges and have been recorded at fair value
in other liabilities in the consolidated balance sheets with changes in fair
value recorded currently in earnings. Additionally, the carrying amount of
associated debt relating to interest rate swaps is adjusted currently in
earnings for changes in the fair value due to changes in interest rates.
All derivative financial instruments are marked-to-market and any
resulting unrealized gains and losses on such derivative contracts are recorded
in other current assets or other current liabilities in Bunge's consolidated
balance sheets.
Recoverable Taxes--Recoverable taxes represent value added taxes paid
on the acquisition of raw materials and other services which can be recovered in
cash or as compensation of outstanding balances against income taxes or certain
other taxes Bunge may owe. Recoverable taxes are offset by allowances for
uncollectible amounts if it is determined that collection is doubtful.
Property, Plant and Equipment, Net--Property, plant and equipment, net
is stated at cost less accumulated depreciation and depletion. Major renewals
and improvements are capitalized, while maintenance and repairs are expensed as
incurred. Costs related to legal obligations associated with the retirement of
assets are capitalized and depreciated over the lives of the underlying assets.
Depreciation is computed based on the straight line method over the estimated
useful lives of the assets. Useful lives for property, plant and equipment are
as follows:
Years
-----
Buildings...................................... 10-50
Machinery and equipment........................ 7-20
Furniture, fixtures and other.................. 3-20
Included in property, plant and equipment are mining properties that
are stated at cost less accumulated depletion. Depletion is calculated using the
unit of production method based on proven and probable reserves. The useful
lives of Bunge's mines operated in its fertilizer operations, relating to the
reserve depletion, range from 18 to 55 years.
F-12
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies (Continued)
Bunge capitalizes interest on borrowings during the construction period
of major capital projects. The capitalized interest is recorded as part of the
asset to which it relates, and is depreciated over the asset's estimated useful
life.
Goodwill--Goodwill relates to the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets acquired in a
business acquisition. Goodwill is tested annually for impairment based upon the
fair value of the reporting unit with which it resides (see Note 7 of the notes
to the consolidated financial statements). Impairment losses are included in
cost of goods sold in the consolidated statements of income.
Other Intangible Assets--Other intangible assets that have finite
useful lives include brands and trademarks recorded at fair value at the date of
acquisition. Other intangible assets with finite lives are amortized on a
straight line basis over their estimated useful lives, ranging from 10 to 40
years. Other intangible assets with indefinite lives are not amortized but
rather tested annually for impairment (see Note 8 of the notes to the
consolidated financial statements).
Impairment of Long-Lived Assets--Bunge reviews for impairment its
long-lived assets whenever events or changes in circumstances indicate that
carrying amounts of an asset may not be recoverable. In performing the review
for recoverability, Bunge estimates the future cash flows expected to result
from the use of the asset and from its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized;
otherwise, no impairment loss is recognized. Bunge records impairments related
to long-lived assets used in the processing of its products in cost of goods
sold, which is a component of income from continuing operations before income
tax and minority interest, in the consolidated statements of income. The
measurement of an impairment loss to be recognized for long-lived assets and
identifiable intangibles that Bunge expects to hold and use is the excess of the
carrying value over the fair value of the asset.
Long-lived assets and certain identifiable intangibles to be disposed
of are reported at the lower of carrying amount or fair value less cost to sell.
Stock-Based Compensation--Bunge has an Equity Incentive Plan and a
Non-Employee Directors' Equity Incentive Plan, which are described more fully in
Note 23 of the notes to the consolidated financial statements. In accordance
with the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), Bunge has elected to
continue to account for stock-based compensation using the intrinsic value
method under Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and Financial Accounting Standards Board
(FASB) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans (FIN 28). Bunge has granted stock options,
performance-based restricted stock unit awards and time-vested restricted stock
unit awards under its Equity Incentive Plan and stock options under its
Non-Employee Directors' Equity Plan. In accordance with APB 25, Bunge accrues
costs for its restricted stock unit awards granted over the vesting or
performance period, and adjusts costs related to its performance-based
restricted stock units for subsequent changes in the fair market value of the
awards as well as the number of shares issued upon settlement of the awards.
These compensation costs are recognized in the consolidated statements of
income. There is no compensation cost recorded for stock options granted under
either plan, since the exercise price is equal to the fair market value of the
underlying common shares on the date of grant.
Compensation expense related to restricted stock unit awards is based
on the quoted market price of Bunge's common shares and is recorded in the
consolidated statements of income based on the vesting terms. In accordance with
APB 25, Bunge recorded compensation expense of $17 million, $25 million and $9
million for the years ended December 31, 2005, 2004 and 2003, respectively, for
grants of restricted stock unit awards.
F-13
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies (Continued)
In accordance with SFAS No. 123 and the disclosure provisions of SFAS
No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
Bunge discloses the pro forma effect of accounting for stock-based awards under
the fair value method. The following table sets forth pro forma information as
if Bunge had applied the fair value recognition provisions of SFAS No. 123 to
stock-based awards granted to determine its stock-based compensation cost. The
assumptions used to determine fair value are disclosed below.
Year Ended December 31,
------------------------------
(US$ in millions, except per share data) 2005 2004 2003
---------------------------------------- --------- --------- --------
Net income, as reported.............................................. $ 530 $ 469 $ 411
Deduct: Total stock-based employee compensation expense
determined under fair value based method for stock awards granted,
net of related tax effects........................................... (8) (7) (7)
--------- --------- --------
Pro forma net income................................................. $ 522 $ 462 $ 404
========= ========= ========
Earnings per common share (see Note 22):
Basic--as reported.................................................... $4.73 $4.42 $4.12
Basic--pro forma...................................................... $4.66 $4.36 $4.05
Diluted--as reported(1)............................................... $4.43 $4.10 $3.83
Diluted--pro forma(1)................................................. $4.36 $4.04 $3.76
-----------------------------
(1) The numerator for the calculation of diluted-as reported earnings
per share and diluted-pro forma earnings per share for the years ended
December 31, 2005, 2004 and 2003 includes interest expense, net of tax
of $5 million, $5 million and $5 million, respectively, related to
Bunge's 3.75% convertible notes due 2022 (see Note 22 of the notes to
the consolidated financial statements).
The estimated fair value of Bunge's options on the date of grant was
calculated using the Black-Scholes option-pricing model. The weighted average
fair value of each stock option granted during 2005, 2004 and 2003 was
approximately $18.48, $14.17 and $9.82, respectively. The following assumptions
were used for the years ended December 31, 2005, 2004 and 2003:
Assumptions:
2005 2004 2003
------- ------- -------
Expected option life (in years) 6.00 8.96 8.79
Expected dividend yield 1.15% 1.30% 1.57%
Expected volatility of market price 32% 29% 34%
Risk-free interest rate 4.04% 3.70% 4.10%
Income Taxes--Income tax expenses are recognized based on the tax
jurisdictions in which Bunge's subsidiaries operate. Under Bermuda law, Bunge is
not required to pay taxes in Bermuda on either income or capital gains. The
provision for income taxes includes income taxes currently payable and deferred
income taxes arising as a result of temporary differences between financial and
tax reporting. Deferred tax assets are reduced by valuation allowances if it is
determined that it is more likely than not that the deferred tax asset will not
be realized.
Revenue Recognition--Sales of agricultural commodities, fertilizers and
all other products are recognized when title to the product and risk of loss
transfer to the customer, which is dependent on the agreed upon sales terms with
the customer. These sales terms provide for passage of title either at the time
shipment is made or at the time of the delivery of product. Net sales are gross
sales less discounts related to promotional programs and sales taxes. Shipping
and handling costs are included as a component of cost of goods sold.
Research and Development--Research and development costs are expensed
as incurred. Research and development expenses were $18 million, $14 million and
$8 million in 2005, 2004 and 2003, respectively.
F-14
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies (Continued)
Adoption of New Accounting Pronouncements--In March 2005, the FASB
issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement No. 143 (FIN 47). FIN 47
clarifies that an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the fair value of
the liability can be reasonably estimated. FIN 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. FIN 47 is effective December 31, 2005 for calendar
year companies. The adoption of FIN 47 did not have a material impact on Bunge's
consolidated financial statements.
New Accounting Pronouncements--In May 2005, Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
154, Accounting Changes and Error Corrections (SFAS No. 154). SFAS No. 154
requires retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless such application is
impracticable. SFAS No. 154 also requires that a change in the method of
depreciation, amortization or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is effected by a change in
accounting principle, rather than reporting such a change as a change in
accounting principle as previously reported under Accounting Principles Board
(APB) Opinion No. 20 (APB 20). SFAS No. 154 replaces APB 20 and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements, carrying forward
many provisions of APB 20 and the provisions of SFAS No. 3. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005, however, earlier application is permitted for
fiscal years beginning after June 1, 2005. SFAS No. 154 does not change the
transition provisions of any existing accounting pronouncements, including those
that are in a transition phase as of the effective date of SFAS No. 154.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment
(SFAS No. 123R), that requires all share-based payments, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123R was
effective for the first interim or annual periods beginning July 1, 2005. In
April 2005, the SEC issued an amendment to Rule 4-01(a) of Regulation S-X of the
Exchange Act regarding the compliance date for SFAS No. 123R. The amendment
requires companies to prepare financial statements in accordance with SFAS No.
123R beginning with the first interim or annual period of a company's first
fiscal year beginning on or after June 15, 2005, therefore, for companies with a
calendar fiscal year end, the effective date is January 1, 2006. Bunge currently
reports stock compensation based on APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) with pro forma disclosures regarding fair value.
Bunge is currently evaluating the provisions of SFAS No. 123R to determine the
impact on its financial statements.
Reclassifications--Certain reclassifications were made to the prior
years' consolidated financial statements to conform to the current year's
presentation.
2. Business Acquisitions
During 2005, Bunge completed acquisitions having an aggregate purchase
price of $27 million, which consisted primarily of $13 million related to a 61%
share acquisition of an integrated soybean crushing and refining company in the
port city of Rizhao, China, from Sanwei Group Ltd. and several other smaller
acquisitions totaling $14 million. Bunge has completed a preliminary purchase
price allocation for these acquisitions. Bunge recognized $3 million of goodwill
as result of these acquisitions as of December 31, 2005. Pro forma financial
information is not presented as the pro forma results do not materially differ
from actual results.
In addition, in 2005, Bunge acquired for $23 million a premium bottled
oil brand from Molinos International, a subsidiary of Molinos Rio de la Plata
S.A. The acquisition encompasses exclusive rights to the Ideal(TM) premium oil
brand in Russia and the former Soviet Union countries. Bunge has assigned this
brand to its edible oil products segment.
F-15
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Business Acquisitions (Continued)
In the second half of 2004, Bunge acquired the remaining 17% of the
outstanding capital stock of Bunge Brasil S.A. that it did not already own for
$314 million in cash. The acquisition was funded with net proceeds of a public
offering of Bunge's common shares in June 2004 (see Note 21 of the notes to the
consolidated financial statements). As a result of the acquisition, Bunge now
owns 100% of Bunge Brasil and its subsidiaries, Bunge Alimentos S.A., Bunge's
Brazilian agribusiness and food products subsidiary, and Bunge Fertilizantes
S.A., Bunge's Brazilian fertilizer subsidiary. Bunge has been consolidating
Bunge Alimentos and Bunge Fertilizantes since 1997. The acquisition was
accounted for under the purchase method as a step acquisition of minority
interest.
The following table summarizes the allocation of $137 million, which is
the excess of the cost to acquire the minority interest in Bunge Brasil over the
historical book value of the acquired minority interest, to certain intangible
assets and segments based on the finalization of the fair value of these assets.
Edible Oil Milling
(US$ in millions) Agribusiness Fertilizer Products Products Total
- ----------------- ------------ ---------- -------- -------- -----
Property, plant and equipment................. $15 $101 $6 $4 $126
Trademarks/brands............................. -- 25 4 4 33
Licenses...................................... -- 5 -- -- 5
Goodwill...................................... 18 -- 5 6 29
Deferred income tax liabilities............... (5) (45) (3) (3) (56)
------------- ------------ ---------- --------- -------
Total......................................... $28 $86 $12 $11 $137
3. Discontinued Operations
In 2003, Bunge sold its U.S. bakery business to a third party. The sale
includes the facilities that manufactured, marketed and sold dry mixes, frozen
bakery products, syrups and toppings that were historically reported in the
milling and baking products segment until its sale. The proceeds from the sale
were $82 million, net of expenses. The divestiture resulted in a gain to Bunge
of $2 million, net of tax expense of $1 million, which has been reported as
discontinued operations in the consolidated statement of income. In addition, in
2003, discontinued operations in the consolidated statement of income included
an environmental expense of $3 million, net of tax benefit of $3 million,
related to discontinued operations Bunge sold in 1995.
Year Ended
(US$ in millions) December 31, 2003
----------------- -----------------
Net sales................................... $180
(Loss) income before income taxes........... $(15)
4. Inventories
In the first quarter 2006 Form 10-Q, Bunge reclassified certain edible
oil product lines from the agribusiness segment to the edible oil products
segment. As a result, the inventory amounts below at December 31, 2005 and 2004
have been reclassified to conform to the 2006 presentation.
Inventories consist of the following:
December 31,
--------------------
(US$ in millions) 2005 2004
----------------- -------- ----------
Agribusiness--Readily marketable
inventories at market value(1)................... $1,534 $1,264
Fertilizer....................................... 421 522
Edible oils...................................... 375 489
Milling.......................................... 73 58
Other(2)......................................... 366 303
--- ---
Total............................................ $2,769 $2,636
====== ======
- ------------------------
F-16
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Readily marketable inventories are agricultural commodities inventories
that are readily convertible to cash because of their commodity
characteristics, widely available markets and international pricing
mechanisms.
(2) Agribusiness inventories carried at lower of cost or market.
5. Other Current Assets
Other current assets consist of the following:
December 31,
(US$ in millions) 2005 2004
----------------- -------- ---------
Prepaid commodity purchase contracts............... $ 93 $ 37
Secured advances to suppliers...................... 635 697
Unrealized gains on derivative contracts........... 196 310
Recoverable taxes.................................. 216 138
Marketable securities.............................. 9 14
Other.............................................. 488 381
-------- ---------
Total.............................................. $1,637 $1,577
======== =========
Prepaid commodity purchase contracts--Prepaid commodity purchase
contracts represent payments to producers in advance of delivery of the
underlying commodities. Prepaid commodity purchase contracts are recorded at
market.
Secured advances to suppliers--Bunge provides cash advances to
suppliers, which primarily include farmers of soybeans and other agricultural
commodities, to finance a portion of the suppliers' production cost. The
advances are generally collateralized by physical assets of the supplier and
carry a market interest rate. Secured advances to suppliers are stated at the
original value of the advance plus accrued interest, less allowances for
uncollectible advances. In addition to the current secured advances, Bunge has
long term secured advances to suppliers, primarily farmers, in the amount of
$196 million and $198 million at December 31, 2005 and 2004, respectively. The
allowance for uncollectible advances totaled $32 million and $43 million at
December 31, 2005 and 2004, respectively.
Marketable securities--These securities are classified as trading
securities and recorded at fair value based on quoted market prices. The related
gains or losses are recognized in other income (expense)--net in the
consolidated statements of income.
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
--------------------
(US$ in millions) 2005 2004
----------------- --------- ---------
Land............................................. $ 132 $ 140
Mining properties................................ 224 206
Buildings........................................ 1,171 917
Machinery and equipment.......................... 3,094 2,482
Furniture, fixtures and other.................... 230 224
-------- --------
4,851 3,969
Less: accumulated depreciation and depletion..... (2,491) (1,810)
Plus: construction in process.................... 540 377
-------- --------
Total............................................ $ 2,900 $ 2,536
======== ========
Bunge capitalized interest on construction in progress in the amount of
$12 million, $6 million and $8 million in 2005, 2004 and 2003, respectively.
Depreciation and depletion expense was $272 million, $208 million and $182
million in 2005, 2004 and 2003, respectively.
F-17
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. Goodwill
Bunge performed its annual impairment test in the fourth quarter of
2005 and 2004 and has determined that there was no goodwill impairment for the
years ended December 31, 2005 and 2004.
In the fourth quarter of 2003, Bunge performed its annual impairment
test and recorded in cost of goods sold in the consolidated statements of income
a pretax goodwill impairment charge of $16 million relating to its Austrian
oilseed processing operations. The write-down resulted from a weak operating
environment in this region causing the fair value of the reporting unit to be
lower than its carrying value. No other impairment charges resulted from the
required impairment evaluations on the rest of Bunge's reporting units. In
assessing the recovery of goodwill, projections regarding estimated discounted
future cash flows, market conditions and other factors are made to determine the
fair value of the reporting units and the respective assets. These projections
are based on historical data, anticipated market conditions and management
plans. If these estimates or related projections change in the future, Bunge may
be required to record additional impairment charges.
The changes in the carrying amount of goodwill by segment at December
31, 2005 and 2004 are as follows:
Edible Oil Milling
(US$ in millions) Agribusiness Products Products Total
- ----------------- ------------- ---------- ---------- -------
Balance, January 1, 2004.......................... $138 $5 $5 $148
Goodwill acquired................................. 29 2 -- 31
Tax benefit on goodwill amortization (1).......... (10) -- -- (10)
Allocation of acquired goodwill (2)............... (3) -- (3) (6)
Foreign exchange translation...................... 3 1 -- 4
------------- ---------- ---------- -------
Balance, December 31, 2004........................ 157 8 2 167
Goodwill acquired (3)............................. 3 -- -- 3
Tax benefit on goodwill amortization (1).......... (13) -- -- (13)
Allocation of acquired goodwill (2)............... (9) 5 6 2
Foreign exchange translation...................... 17 -- -- 17
------------- ---------- ---------- -------
Balance, December 31, 2005........................ $155 $13 $8 $176
============= ========== ========== =======
- -----------------------------
(1) Bunge's Brazilian subsidiary's tax deductible goodwill is in excess of
its book goodwill. For financial reporting purposes, the tax benefits
attributable to the excess tax goodwill are first used to reduce
associated goodwill and then intangible assets to zero, prior to
recognizing any income tax benefit in the consolidated statements of
income.
(2) In 2005, upon completion of the final valuation of the Bunge Brasil S.A.
minority interest purchase completed in 2004, Bunge reallocated acquired
goodwill of $5 million to the edible oil products segment and $6 million
to the milling products segment from the agribusiness segment. In
addition, Bunge reallocated $2 million of an intangible asset acquired in
2004 to goodwill. In 2004, Bunge assigned $3 million of goodwill acquired
in its agribusiness segment to property, plant and equipment and $3
million of goodwill acquired in its milling products segment to
intangible assets upon completion of final valuation related to certain
smaller acquisitions.
(3) See Note 2 of the notes to the consolidated financial statements.
F-18
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. Other Intangible Assets
Bunge's other intangible assets consist of trademarks/brands, licenses,
software technology and unamortized prior service costs relating to Bunge's
employee defined benefit plans (see Note 18 of the notes to the consolidated
financial statements). The aggregate amortization expense for other intangible
assets was $6 million, $4 million and $2 million for the years ended December
31, 2005, 2004 and 2003, respectively. The annual estimated amortization expense
for 2006 to 2010 is approximately $5 million per year.
Intangible assets consist of the following:
December 31,
-------------------
(US$ in millions) 2005 2004
----------------- -------- ---------
Trademarks/brands-finite lived.................. $109 $87
Licenses........................................ 7 5
Other........................................... 15 18
-------- ---------
131 110
Less: accumulated amortization:
Trademarks/brands............................ (7) (3)
Licenses..................................... (3) (2)
Other........................................ (2) (1)
-------- ---------
(12) (6)
Trademarks/brands-indefinite lived.............. 2 40
Unamortized prior service costs of
defined benefit plans (Note 18)................. 11 12
-------- ---------
Intangible assets, net of accumulated
amortization.................................... $132 $156
======== =========
Bunge has assigned a 30-year life to the Ideal(TM) premium oil brand
acquired in 2005 (see Note 2 of the notes to the consolidated financial
statements).
In 2005, Bunge received a favorable U.S. tax ruling with respect to the
tax status of certain entities acquired in the 2002 acquisition of Cereol S.A.
(Cereol). As a result of receipt of the favorable U.S. tax ruling and in
accordance with EITF Issue No. 93-7, Uncertainties Related to Income Taxes in a
Purchase Business Combination, Bunge reduced certain indefinite lived intangible
assets acquired in the Cereol acquisition by $39 million, net of deferred tax
liabilities, to zero (see Note 13 of the notes to the consolidated financial
statements).
In addition, in 2005, upon finalization of the purchase price
allocation of certain smaller acquisitions made in 2004, Bunge reallocated $2
million to goodwill and $1 million to property, plant and equipment that was
preliminarily allocated to intangible assets.
9. Long-Lived Asset Impairment and Restructuring Charges
Impairment--In 2005, Bunge recorded a pretax non-cash impairment charge
in its agribusiness segment of $32 million related to write-downs of two South
American oilseed processing facilities due to a deteriorating operating
environment caused by industry conditions and a strengthening Brazilian real
which resulted in the fair value of these two facilities being lower than their
carrying value. Based on an appraisal valuation, these facilities were written
down to their estimated fair value and were permanently closed. In addition,
Bunge recorded a pretax non-cash impairment charge in its agribusiness segment
of $3 million related to an oilseed processing plant in India as a result of a
decline in the projected cash flows caused by competitive conditions in this
region, which resulted in the carrying value of this facility being written down
to its estimated fair value.
In 2004, Bunge recorded pretax non-cash impairment charges of $17
million relating to write-downs of its refining and bottling facilities in the
agribusiness segment in Western Europe attributable to planned closing of these
facilities in response to changed market conditions and competition in Western
Europe and to the write-downs of refining and packaging facilities in the edible
oil products segment in North and South America. These impairment
F-19
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
charges were a result of planned closings of older less efficient plants with
planned replacement of new more efficient refining facilities in South America.
The carrying value of these assets was written down to their estimated fair
value.
F-20
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. Long-Lived Asset Impairment and Restructuring Charges (Continued)
In 2003, Bunge recorded a pretax non-cash impairment charge of $40
million related to its fixed assets at its European oilseed processing
facilities. These facilities were older, less efficient crushing facilities, and
these operations were dependent on soybeans imported from North and South
America for production. The European operations experienced operating losses
during 2003. During the fourth quarter of 2003, Bunge updated its operating
forecast, which included the effects of certain events occurring in the fourth
quarter, such as the shortfall in the North American soy crop, increased export
tariffs for Brazilian soy exports, and increased freight rates. Furthermore,
Bunge determined that maintenance capital expenditures for the facilities would
be substantially higher than previously forecasted. As a result of these
factors, Bunge tested the assets for impairment based upon an undiscounted cash
flow model and determined that these cash flows would not recover the carrying
value of the assets. The impairment was measured based upon the amount by which
the carrying value exceeded the discounted cash flows.
Bunge has recorded these impairment charges in cost of goods sold in
the consolidated statements of income for the years ended December 31, 2005,
2004 and 2003.
Restructuring--In 2005, Bunge recorded restructuring charges of $10
million, $2 million and $2 million predominantly in Bunge's South American
agribusiness, fertilizer and edible oil products segments, respectively,
primarily relating to administrative employee termination costs for an aggregate
of approximately 1,000 employees as part of its 2005 restructuring program. The
restructuring charge of $5 million in the agribusiness segment was recorded in
cost of goods sold and the remaining $5 million of restructuring charges in the
agribusiness segment and the restructuring charges in the fertilizer and edible
oil products segments were recorded in selling, general and administrative
expenses in the consolidated statement of income for the year ended December 31,
2005 and in other current liabilities in the consolidated balance sheet at
December 31, 2005. The 2005 restructuring program was designed to streamline
costs and rationalize the corporate structure in these segments. Bunge paid $7
million of these costs in 2005 with the remaining $7 million to be paid over the
next two years. Funding for these costs is provided by cash flows from
operations. Bunge expects to finalize its 2005 restructuring program in 2006 and
expects to incur additional costs related to employee terminations, the amount
of which has not yet been determined.
In connection with the 2004 impairment charges in its agribusiness
segment, Bunge recorded $7 million of restructuring charges related to employee
termination benefit obligations for 62 plant and administrative employees in its
oilseed processing operations as part of its restructuring plan. These
restructuring charges were included in cost of goods sold for the year ended
December 31, 2004 and in other current liabilities in the consolidated balance
sheet at December 31, 2004. The restructuring plan was designed to streamline
Bunge's costs and simplify its oilseed processing operations in Western Europe.
In 2005, this restructuring plan was finalized and all related costs were paid.
No significant unresolved issues exist related to this restructuring plan.
10. Investments in Affiliates
Bunge has investments in affiliates that are accounted for on the
equity method of accounting. The most significant of these affiliates are the
following companies:
The Solae Company (Solae)--Bunge has a 28% ownership interest in this
joint venture which is engaged in the global production and distribution of
specialty food ingredients. In connection with the formation of Solae, Bunge
contributed its North American and European ingredients operations. In exchange,
Bunge received a 28% interest in Solae based on the fair value of its
contribution. The carrying value of net assets contributed also equaled the fair
value of $520 million. Bunge did not recognize any gain or loss on this
transaction. In addition, in 2003, Bunge sold its Brazilian soy ingredients
operations to Solae for $251 million in cash, net of expenses of $5 million.
Consequently, Bunge recognized a non-taxable gain on sale of $111 million in the
second quarter of 2003 that was included in net income. Bunge did not recognize
any additional ownership percentage in Solae as a result of this sale. In 2005
and 2004, Bunge received a capital return of $35 million and $17 million,
respectively, from Solae.
Solae was organized as a U.S. limited liability company that has
elected to be taxed as a partnership. As a result, Bunge is responsible for U.S.
income taxes applicable to its share of Solae's U.S. taxable income. Therefore,
net income for Solae does not reflect any provision for income taxes that would
be incurred by its parents.
F-21
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. Investments in Affiliates (Continued)
Saipol S.A.S.--Bunge has a 33.34% ownership interest in this joint
venture which is engaged in oilseed processing and production of branded bottled
vegetable oils in France.
Terminal 6 S.A. and Terminal 6 Industrial S.A.--Bunge has a 40% and 50%
ownership interest, respectively, in these joint ventures, which operate a port
facility and oilseed processing facility in Argentina.
AGRI Bunge, LLC--Bunge has a 50% voting interest and a 34% interest in
the equity and earnings of this joint venture, which originates grain and
operates Mississippi river terminals in the U.S.
Fosbrasil S.A.--Bunge has a 44.25% ownership interest in this joint
venture, which operates a phosphoric acid production facility in Brazil.
EWICO S.p.z.o.o.--Bunge has a 50% ownership interest in this joint
venture, which manufactures edible oils in Poland.
Harinera La Espiga, S.A. de C.V.--Bunge has a 31.5% ownership interest
in this joint venture which has wheat milling and bakery dry mix operations in
Mexico.
Terminal de Graneis do Guaruja S.A. (TGG)--Bunge has a joint venture in
Brazil with Ferronorte S.A.-Ferrovias Norte Brasil and Amaggi Exportacao e
Importacao Ltda. for the construction of a terminal in the port of Guaruja.
Bunge has a 49% interest in TGG. In 2005, Bunge invested $14 million in TGG to
commence construction of the terminal.
Diester Industries International S.A.S.--In December 2005, Bunge
entered into a joint venture with Diester Industries, a company specializing in
the production and marketing of biodiesel. Diester Industrie is a subsidiary of
Sofiproteol. In connection with the creation of this joint venture, Bunge
transferred its biodiesel assets to a new company called Diester Industries
International S.A.S. (DII). The joint venture was created by combining the two
companies' biodiesel assets in Europe, except for those owned and operated in
France. In exchange for contributing its biodiesel assets, Bunge received $19
million in cash, a note receivable from DII for $10 million and a 40% interest
in the joint venture. Bunge recognized an $8 million gain on the formation of
this joint venture.
Summarized unaudited combined financial information reported for all
equity method affiliates and a summary of the amounts recorded in Bunge's
consolidated financial statements as of December 31, 2005 and 2004 follows:
(US$ in millions) 2005 2004
----------------- -------- --------
Amounts recorded by Bunge:
Investments(1)..................................... $585 $564
Equity income...................................... 31 12
Combined results of operations:
Revenues........................................... $2,819 $2,600
Income before income tax and minority interest..... 197 42
Net income......................................... 120 39
Combined financial position:
Current assets..................................... $993 $934
Non-current assets................................. 2,161 2,177
-------- --------
Total assets....................................... $3,154 $3,111
======== ========
Current liabilities................................ $570 $582
Non-current liabilities............................ 729 682
Stockholders' equity............................... 1,855 1,847
======== ========
Total liabilities and stockholders' equity......... $3,154 $3,111
F-22
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. Investments in Affiliates (Continued)
------------------------
(1) At December 31, 2005 and 2004, Bunge's investment exceeded its
underlying equity in the net assets of Solae by $11 million
and $12 million, respectively. Straight line amortization of
this excess against equity income amounted to $4 million, $4
million and $3 million in 2005, 2004 and 2003, respectively.
Amortization of the excess has been attributed to intangible
assets of Solae, which are being amortized over five years.
11. Other Current Liabilities
Other current liabilities consist of the following:
December 31,
--------------------
(US$ in millions) 2005 2004
----------------- -------- ----------
Accrued liabilities.............................. $669 $729
Unrealized loss on derivative contracts.......... 264 242
Advances on sales................................ 202 158
Other............................................ 52 156
-------- ----------
Total............................................ $1,187 $1,285
======== ==========
12. Asset Retirement Obligations
Bunge has asset retirement obligations with the carrying amount of the
asset retirement obligations totaling $33 million and $30 million at December
31, 2005 and 2004, respectively, primarily relating to its mining assets
assigned to the fertilizer segment and certain of its edible oil refining
facilities assigned to the edible oil products segment. Asset retirement
obligations in Bunge's fertilizer segment relate to restoration of land used in
its mining operations and asset retirement obligations in its edible oil
products segment relate to the removal of certain storage tanks associated with
its edible oil refining facilities. The change in the carrying value at December
31, 2005 consisted of a settlement of an obligation for $3 million related to
the sale of the land of a previously sold refining facility in the edible oil
products segment, $2 million of accretion and $4 million of currency translation
adjustment. The change in the carrying value at December 31, 2004 consisted of
$2 million of accretion and $3 million of currency translation adjustment.
13. Income Taxes
Bunge has elected to use the U.S. income tax rates to reconcile the
actual provision for income taxes with the income tax provision computed by
applying the U.S. statutory rates.
The components of pretax income (loss) before minority interest and
discontinued operations are as follows:
Year Ended December 31,
---------------------------------
(US$ in millions) 2005 2004 2003
----------------- --------- --------- -----------
United States................... $ 47 $ (44) $ (23)
Non-United States............... 472 948 746
--------- --------- -----------
Total........................... $ 519 $ 904 $ 723
========= ========= ===========
F-23
13. Income Taxes (Continued)
The components of the income tax benefit (expense) are:
Year Ended December 31,
--------------------------------
(US$ in millions) 2005 2004 2003
----------------- ---------- --------- ---------
Current:
United States.......................................................... $ (7) $ (6) $ (7)
Non-United States...................................................... (149) (339) (211)
---------- --------- ---------
(156) (345) (218)
---------- --------- ---------
Deferred:
United States.......................................................... 80 23 20
Non-United States...................................................... 158 33 (3)
---------- --------- ---------
238 56 17
---------- --------- ---------
Total.................................................................. $ 82 $(289) $(201)
========== ========= =========
Reconciliation of the income tax expense at the U.S. statutory rate to
the effective rate is as follows:
Year Ended December 31,
--------------------------------
(US$ in millions) 2005 2004 2003
----------------- ---------- --------- ---------
Income from continuing operations before income tax and minority
Interests............................................................ $ 519 $ 904 $ 723
Income tax rate......................................................... 35% 35% 35%
---------- --------- ---------
Income tax expense at the statutory rate................................ (182) (316) (253)
Adjustments to derive effective tax rate:
Earnings of subsidiaries taxed at different statutory rates............. 102 31 45
Change in valuation allowance........................................... 79 (60) 16
Recognition of tax loss benefits on merger of foreign subsidiaries...... -- 60 --
Reversal of deferred tax liability on undistributed assets of affiliates 77 -- --
Foreign exchange expense................................................ (42) (19) (40)
Benefit from interest on capital dividends paid by Brazilian companies.. 28 17 14
Investment tax credits in Brazil........................................ 7 11 --
Benefits from U.S. export incentive..................................... 12 17 16
Basis difference in determining foreign taxable income.................. (19) (17) (23)
Tax on equity investments............................................... 10 2 --
Effect of tax free gain on sale of soy ingredients business............. -- -- 39
Adjustment resulting from the finalization of prior years' tax returns.. -- -- 3
Other................................................................... 10 (15) (18)
---------- --------- ---------
Income tax benefit (expense)............................................ $ 82 $(289) $(201)
========== ========= =========
In 2005, Bunge received a favorable U.S. tax ruling with respect to the
tax status of certain entities acquired in the 2002 acquisition of Cereol S.A.
(Cereol). Bunge had recorded a $125 million deferred tax liability in the
initial balance sheet of Cereol in 2002, related to unremitted earnings of a
subsidiary that were not considered to be permanently reinvested. Based upon the
final ruling received in 2005, it was determined that the subsidiary could be
liquidated without generating tax on the unremitted earnings. As a result of
receipt of the favorable U.S. tax ruling and in accordance with EITF Issue No.
93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination,
Bunge first reduced certain indefinite lived intangible assets acquired in the
Cereol acquisition by $39 million, net of deferred tax liabilities, to zero and
then recognized a $86 million non-cash tax benefit in the consolidated
statements of income. In conjunction with this transaction, Bunge incurred $9
million of tax expense in 2005, related to the repatriation of unremitted
earnings of a subsidiary in connection with the American Jobs Creation Act of
2004 (the Jobs Creation Act).
F-24
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. Income Taxes (Continued)
In 2003, the sale of Bunge's Brazilian soy ingredients business to
Solae for a gain of $111 million did not result in taxable income and therefore
no income tax was provisioned. However, Bunge recorded a net tax expense of $23
million relating to new tax laws in South America.
Bunge has in the past obtained tax benefits under U.S. tax laws
providing incentives under the provisions of the Extraterritorial Income Act
(ETI) legislation. However, the Jobs Creation Act ultimately repeals the ETI
benefit. Under the Jobs Creation Act, the ETI will be phased out with 100% of
the otherwise available ETI benefit retained for 2004, 80% of the otherwise
available ETI benefit retained for 2005, 60% of the otherwise available ETI
benefit retained for 2006 and the ETI benefit phased out completely in 2007. The
ETI benefit has been replaced with an income tax deduction intended to allocate
benefits previously provided to U.S. exporters across all manufacturers when
fully phased in. Although most of Bunge's U.S. operations qualify as
"manufacturing," Bunge does not expect to receive significant benefits from this
new tax legislation as it has from the prior one primarily due to Bunge's U.S.
tax position.
In 2003, a tax law was enacted in South America affecting exporters of
certain products, including grains and oilseeds. The tax law generally provides
that in certain circumstances when an export is made to a related party that is
not the final purchaser of the exported products, the income tax payable by the
exporter with respect to such sales must be based on the greater of the contract
price of the exported products or the market price of the products at the date
of shipment. The tax effect of this law was reflected in income tax expense in
the consolidated statements of income for the years ended December 31, 2005,
2004 and 2003.
Certain Bunge subsidiaries had undistributed earnings amounting to
approximately $731 million, $541 million and $519 million at December 31, 2005,
2004 and 2003. These are considered to be permanently reinvested and,
accordingly, no provision for income taxes has been made. It is not practicable
to determine the deferred tax liability for temporary differences related to
these undistributed earnings.
The primary components of the deferred tax assets and liabilities and
the related valuation allowance are as follows:
December 31,
(US$ in millions) 2005 2004
- ----------------- --------- ---------
Deferred income tax assets:
Net operating loss carry-forwards........................................................... $ 550 $ 519
Excess of tax basis over financial statement basis of property, plant and equipment......... 13 17
Accrued retirement costs (pension and postretirement cost) and other accrued employee
compensation........................................................................... 64 59
Other accruals and reserves not currently deductible for tax purposes....................... 217 198
Tax credit carry-forwards................................................................... 14 15
Other....................................................................................... 29 48
---------- --------
Total deferred tax assets................................................................... 887 856
Less valuation allowance.................................................................... (96) (177)
---------- --------
Net deferred tax assets..................................................................... 791 679
---------- --------
Deferred tax liabilities:
Excess of financial statement basis over tax basis of property, plant and equipment......... 359 366
Undistributed earnings of affiliates........................................................ -- 125
Other....................................................................................... 51 90
---------- --------
Total deferred tax liabilities.............................................................. 410 581
---------- --------
Net deferred tax assets..................................................................... $381 $98
========== ========
F-25
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. Income Taxes (Continued)
At December 31, 2005, Bunge's gross tax loss carry-forwards totaled
$1,609 million, of which $445 million have no expiration. However, applicable
income tax regulations limit some of these tax losses available for offset of
future taxable income to 30% of annual pretax income. The remaining tax loss
carry-forwards expire at various periods beginning in 2006 through the year
2025.
Bunge continually reviews the adequacy of its valuation allowance and
recognizes tax benefits only as reassessment indicates that it is more likely
than not that the benefits will be realized. The majority of the valuation
allowances relate to net operating loss carry-forwards in certain of its
non-U.S. subsidiaries where there is an uncertainty regarding their realization
and will more likely than not expire unused. In 2005, the decrease in the
deferred tax asset valuation allowance resulted from the projected utilization
of net operating loss carry-forwards by Bunge's Brazilian subsidiaries. Bunge
was able to recognize these operating loss carry-forwards because of the legal
restructuring of Bunge's Brazilian subsidiaries, increased statutory taxable
income of these subsidiaries caused by effects of the real appreciation and
actions undertaken to recover the net operating loss carry-forwards. In 2004,
Bunge merged several European subsidiaries, which generated statutory tax losses
and the recognition of $60 million of net operating loss carry-forwards. Bunge
increased its valuation allowance by $60 million as it is more likely than not
that the assets will not be realized. In 2003, Bunge decreased its valuation
allowance by $16 million, which resulted from the utilization of net operating
loss carry-forwards by its Brazilian and Argentine subsidiaries. Bunge was able
to recognize these net operating carry-forwards because of increased statutory
taxable income of these subsidiaries caused by effects of the real and peso
appreciation and a change in South American tax law.
In 2005, 2004 and 2003, Bunge paid income taxes, net of refunds, of
$169 million, $210 million and $112 million, respectively. In addition, Bunge
offset income taxes payable of $46 million and $95 million in the years ended
December 31, 2005 and 2004, respectively, against recoverable taxes receivable
in certain South American jurisdictions in accordance with the applicable local
tax laws.
14. Financial Instruments
Bunge uses various financial instruments in its operations, including
certain components of working capital such as cash and cash equivalents, trade
accounts receivable and accounts payable. Additionally, Bunge uses short-term
and long-term debt to fund operating requirements and derivative financial
instruments to manage its foreign exchange, commodity price and interest rate
risk exposures. The counterparties to these debt financial instruments are
primarily major financial institutions and Banco Nacional de Desenvolvimento
Economico e Social (BNDES) of the Brazilian government, or in the case of
commodity futures and options, a commodity exchange. Cash and cash equivalents,
trade accounts receivable and accounts payables, marketable securities,
short-term debt and all derivative instruments are carried at fair value. The
fair values of all of Bunge's derivative instruments are based on quoted market
prices and rates and are reflected as mark-to-market adjustments to the carrying
value in the consolidated financial statements.
Fair Value of Financial Instruments--The carrying amounts and fair
values of financial instruments were as follows:
December 31,
--------------------------------------------------------
2005 2004
--------------------------------------------------------
Carrying Carrying
(US$ in millions) Value Fair Value Value Fair Value
------------------ ------------ ------------- ------------- -------------
Marketable securities.............................. $ 9 $ 9 $ 14 $ 14
Long-term debt, including current portion.......... 2,735 2,773 2,740 2,895
Cash and cash equivalents, trade accounts receivable, accounts payable
and short-term debt--The carrying value approximates the fair value because of
the short-term maturity of these instruments. All investment instruments with a
maturity of three months or less are considered cash equivalents.
Marketable securities--The fair value was determined based on quoted
market prices.
F-26
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. Financial Instruments (Continued)
Long-term debt--The fair value of long-term debt was calculated based
on interest rates currently available to Bunge for similar borrowings.
Derivative instruments--In 2005, Bunge entered into various interest
rate swap agreements with a total notional amount of $400 million maturing in
2015 for the purpose of managing its interest rate exposure associated with the
$400 million of 5.10% senior notes due 2015. Under the terms of the interest
rate swaps, Bunge will make payments based on six-month LIBOR set in arrears,
and will receive payments based on fixed interest rates. In 2004, Bunge entered
into various interest rate swap agreements maturing in 2008 and 2014 for the
purpose of managing its interest rate exposure on a portion of our fixed rate
debt. Bunge has accounted for these interest rate swap agreements as fair value
hedges.
In 2004, Bunge terminated certain interest rate swap agreements and
received $60 million in cash, which was comprised of $8 million of accrued
interest and a $52 million gain on the net settlement of the swap agreements.
The $8 million of accrued interest was recorded as a reduction of interest
expense for the year ended December 31, 2004 in the consolidated statement of
income and the $52 million gain was recorded as an adjustment to the carrying
amount of the related debt in the consolidated balance sheet. The $52 million
gain is amortized to earnings over the remaining term of the debt. In the year
ended December 31, 2005 and 2004, Bunge recognized approximately $7 million and
$3 million, respectively, as a reduction of interest expense in the consolidated
statements of income, related to this gain.
The interest rate swaps used by Bunge as hedging instruments have been
recorded at fair value in other liabilities in the consolidated balance sheet
with changes in fair value recorded currently in earnings. Additionally, the
carrying amount of the associated debt is adjusted through earnings for changes
in the fair value due to changes in interest rates. Ineffectiveness, as defined
in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133), is recognized to the extent that these two adjustments do not
offset. During 2005, Bunge recognized no ineffectiveness related to its interest
rate swap hedging instruments. The derivatives Bunge entered into for hedge
purposes are assumed to be perfectly effective under the shortcut method of SFAS
No. 133. The differential to be paid or received based on changes in interest
rates is recorded as an adjustment to interest expense. The interest rate swaps
settle every six months until expiration.
The following table summarizes Bunge's outstanding interest rate swap
agreements accounted for as fair value hedges as of December 31, 2005.
Maturity Fair Value Loss
----------------------------- -------------------
(US$ in millions) 2008 2014 2015 Total December 31, 2005
---------------- --------- -------- -------- -------- -------------------
Receive fixed/pay variable notional amount..... $500 $500 $400 $1,400 $(33)
Weighted average variable rate payable (1)..... 5.23% 5.63% 4.93%
Weighted average fixed rate receivable......... 4.375% 5.35% 5.10%
-----------------------------
(1)Interest is payable in arrears based on a forecasted rate of
six-month LIBOR plus a spread.
Bunge recognized approximately $1 million of accrued interest as
interest expense in the year ended December 31, 2005 and $6 million of accrued
interest as a reduction of interest expense in the year ended December 31, 2004
in the consolidated statements of income relating to its outstanding swap
agreements.
In 2005, 2004 and 2003, Bunge reclassified approximately a $2 million
loss in each year from other comprehensive income (loss) to interest expense in
the consolidated statements of income, which related to a settlement of certain
derivative contracts recorded as cash flow hedges, in connection with forecasted
issuances of debt financing. Bunge expects to reclassify approximately $2
million to interest expense in 2006 (see Note 21 of the notes to the
consolidated financial statements).
F-27
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. Short-Term Debt and Credit Facilities
Short-term borrowings consist of the following:
December 31,
---------------------
(US$ in millions) 2005 2004
------------------ --------- ---------
Commercial paper with an average interest rate of 4.31% at December 31, 2005......... $265 $401
Lines of credit:
Unsecured variable interest rates from 4.37% to 4.48%................................ 146 140
--------- ---------
Total short-term debt................................................................ $411 $541
` ========= =========
Bunge's short-term borrowings, predominantly held with commercial
banks, are primarily used to fund readily marketable inventories and other
working capital requirements. The weighted average interest rate, which includes
related fees, on short-term borrowings as of December 31, 2005 and 2004 was 5.8%
and 4.2%, respectively.
In connection with the financing of readily marketable inventories,
Bunge recorded interest expense on debt financing readily marketable inventories
of $39 million, $46 million and $34 million for the years ended December 31,
2005, 2004 and 2003, respectively.
At December 31, 2005, Bunge had a $600 million commercial paper program
facility to fund working capital requirements. At December 31, 2005, Bunge had
approximately $335 million of unused and available borrowing capacity under its
commercial paper program facility.
16. Long-Term Debt
Long-term obligations are summarized below:
December 31,
-----------------------
(US$ in millions) 2005 2004
------------------ ---------- -----------
Payable in U.S. Dollars:
Senior notes, fixed interest rates of 4.38% to 7.80%, maturing 2007 through 2015..... $2,395 $2,023
Senior notes, fixed interest rates from 7.23% to 7.94%, maturing 2021................ 121 129
Convertible notes, fixed interest rate of 3.75%, maturing 2022....................... -- 250
Trust certificates, fixed interest rates of 8.61%, payable 2005...................... -- 18
Note collateralized by future export commodity contracts, fixed interest rate of
8.09%, payable through 2006....................................................... 13 34
Other notes payable, fixed interest rates from 3.47% to 5.87%, payable through 2009.. 73 93
Long-term debt, variable interest rates indexed to LIBOR(1) plus .75% to 2.75%,
payable through 2014.............................................................. 17 36
Payable in Brazilian Reals:
BNDES(2) loans, variable interest rate indexed to IGPM(3) plus 6.5% payable
through 2008...................................................................... 96 134
Other................................................................................ 20 23
---------- -----------
2,735 2,740
Less: Installments due within one year.............................................. (178) (140)
---------- -----------
Total long-term debt................................................................. $2,557 $2,600
========== ===========
-----------------------------
(1) LIBOR three and six month rates as of December 31, 2005 were
4.54% and 4.70% and as of December 31, 2004 were 2.56% and
2.78%, respectively.
(2) BNDES loans are Brazilian government industrial development
loans.
(3) IGPM is a Brazilian inflation index published by Fundacao
Getulio Vargas. The annualized rate for the years ended
December 31, 2005 and 2004 was 1.21% and 12.42%, respectively.
F-28
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. Long-Term Debt (Continued)
In July 2005, Bunge completed the sale of $400 million aggregate
principal amount of unsecured senior notes bearing interest at 5.10% per year
that mature in July 2015. The notes were issued by Bunge's wholly owned finance
subsidiary, Bunge Limited Finance Corp., and are fully and unconditionally
guaranteed by Bunge. Interest on these unsecured senior notes is payable
semi-annually in arrears in January and July of each year, commencing in January
2006. Bunge used the net proceeds of this offering, approximately $396 million,
for the repayment of outstanding indebtedness.
At December 31, 2005, Bunge had approximately $838 million of unused
and available borrowing capacity under its committed long-term credit facilities
with a number of lending institutions.
Certain land, property, equipment and investments in consolidated
subsidiaries having a net carrying value of approximately $760 million at
December 31, 2005 have been mortgaged or otherwise collateralized against
long-term debt of $143 million at December 31, 2005.
Redemption of Convertible Notes--In October 2005, Bunge Limited Finance
Corp., a subsidiary of Bunge Limited, together with Bunge Limited, announced its
intent to redeem for cash on November 22, 2005 the remaining outstanding 3.75%
convertible notes due 2022. As provided in the indenture governing the
convertible notes, the redemption price was $1,015 for each $1,000 principal
amount of convertible notes to be redeemed, together with accrued and unpaid
interest up to, but not including, the redemption date. In accordance with the
indenture, holders of the convertible notes had the right to convert their
convertible notes into Bunge Limited common shares at any time before the close
of business on the second business day immediately preceding November 22, 2005.
In November 2005, the remaining outstanding amount of approximately $242 million
convertible notes were converted into 31.1137 common shares of Bunge Limited for
each $1,000 principal amount of convertible notes. This represents a price of
$32.1402 per share at which Bunge Limited common shares were issued and
delivered following conversion. Substantially all holders of the aggregate
principal amount of the $250 million convertible notes converted their notes
into an aggregate of 7,777,927 shares of Bunge Limited common stock, of which
7,532,542 shares were issued upon conversion of the convertible notes in
November 2005.
Principal Maturities--Principal maturities of long-term debt at
December 31, 2005 are as follows:
(US$ in millions)
-----------------
2006........................................... $ 178
2007........................................... 152
2008........................................... 523
2009........................................... 79
2010........................................... 3
Later years.................................... 1,800
----------
Total.......................................... $ 2,735
==========
Bunge's indentures, credit facilities, other long-term debt agreements
and commercial paper program contain various restrictive covenants which require
the satisfaction of certain financial covenants related to minimum net worth and
working capital and a maximum long-term debt to net worth ratio. Bunge was in
compliance with these covenants at December 31, 2005.
In 2005, 2004 and 2003, Bunge paid interest, net of interest
capitalized, of $213 million, $162 million and $152 million, respectively.
F-29
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. Accounts Receivable Securitization
In October 2005, certain of Bunge's European subsidiaries entered into
an accounts receivable securitization facility (Euro securitization facility).
Through the Euro securitization facility, Bunge's European subsidiaries may
offer to sell and the investor has the option to buy, without recourse, on a
monthly basis certain eligible trade accounts receivable up to a maximum amount
of Euro 200 million. Eligible accounts receivable are based on accounts
receivable in certain designated European countries. Bunge accounts for its
transfers of accounts receivable as sales under SFAS No. 140, Accounting for
Transfers and Servicing of Financial assets and Extinguishments of Liabilities.
Bunge's European subsidiaries retain collection and administrative
responsibilities for the accounts receivable sold. At the time an account
receivable is sold and title transferred, it is removed from the consolidated
balance sheet and the proceeds are reflected in cash provided by operating
activities. The effective yield rates on the accounts receivable sold are based
on monthly EUR LIBOR plus .295% per annum. Bunge recognized approximately $2
million in related expenses for the year ended December 31, 2005, which are
included in selling, general and administrative expenses in Bunge's consolidated
statement of income.
The initial term of the Euro securitization facility expires in 2010,
but may be terminated earlier upon the occurrence of certain limited
circumstances. Bunge's European subsidiaries retain beneficial interests in
certain accounts receivable that do not qualify as a sale under SFAS No. 140.
The beneficial interests are subordinate to the investors' interests and are
valued at historical cost, which approximate fair value. The beneficial
interests are recorded in other current assets in the consolidated balance
sheet.
As of December 31, 2005, Bunge sold approximately $192 million of
accounts receivable to the Euro securitization facility, of which it has
retained a $37 million beneficial interest in certain accounts receivable that
did not qualify as a sale. In addition, Bunge recorded an allowance for doubtful
accounts of $4 million against the beneficial interest at December 31, 2005 in
other current assets in the consolidated balance sheet.
In addition, Bunge has two other accounts receivable securitization
facilities, through its wholly owned North American operating subsidiaries.
Through agreements with certain financial institutions, Bunge may sell, on a
revolving basis, undivided percentage ownership interests (undivided interests)
in designated pools of accounts receivable without recourse up to a maximum
amount of approximately $177 million. Collections reduce accounts receivable
included in the pools, and are used to purchase new receivables, which become
part of the pools. One of the facilities expires in 2006, with an option to
renew, and the other facility expires in 2007. The effective yield rates
approximate the 30-day commercial paper rate plus annual commitment fees ranging
from 29.5 to 40 basis points.
During 2005 and 2004, the outstanding undivided interests averaged $116
million and $115 million, respectively. Bunge retains collection and
administrative responsibilities for the accounts receivable in the pools. Bunge
recognized $5 million, $2 million and $3 million in related expenses for the
years ended December 31, 2005, 2004 and 2003, respectively, which are included
in selling, general and administrative expenses in Bunge's consolidated
statements of income.
In addition, Bunge retains interests in the pools of accounts
receivable not sold. Due to the short-term nature of the accounts receivable,
Bunge's retained interests in the pools are valued at historical cost, which
approximate fair value. The full amount of the allowance for doubtful accounts
has been retained in Bunge's consolidated balance sheets since collections of
all pooled accounts receivable are first utilized to reduce the outstanding
undivided interests. Accounts receivable at December 31, 2005 were net of $105
million representing the outstanding undivided interests in pooled accounts
receivable. At December 31, 2004, there were no undivided interests in the
pooled receivables outstanding.
F-30
18. Employee Benefit Plans
Employee Defined Benefit Plans--Certain U.S., Canadian and European
based subsidiaries of Bunge sponsor noncontributory defined benefit pension
plans covering substantially all employees of the subsidiaries. The plans
provide benefits based primarily on participants' salary and length of service.
The funding policies for the defined benefit pension plans are
determined in accordance with statutory funding requirements. The U.S. funding
policy requires at least those amounts required by the Employee Retirement
Income Security Act of 1974 and no more than those amounts permitted by the
Internal Revenue Code. Assets of the plans consist primarily of equity and fixed
income investments.
Postretirement Healthcare Benefit Plans--Certain U.S. based
subsidiaries of Bunge have benefit plans to provide certain postretirement
healthcare benefits to eligible retired employees of those subsidiaries. The
plans require minimum retiree contributions and define the maximum amount the
subsidiaries will be obligated to pay under the plans.
Plan Amendments--In 2004, certain non-qualified key executive plans
were created and the related past service costs reflected in the benefit
obligations as of December 31, 2004. In addition, effective January 1, 2004, the
qualified defined benefit pension plans for all non-union U.S. employees were
merged into one plan and that plan was amended to include certain hourly
employees, to introduce unreduced early retirement benefits at age 62 and to
redefine salary to include a portion of variable compensation. In addition,
certain postretirement healthcare benefits plans were amended, which reduced
Bunge's liability related to future retirees. These pension and postretirement
healthcare benefit plan amendments were reflected in the benefit obligations as
of December 31, 2003.
In 2003, Bunge recognized $26 million in pretax curtailment gains for
the defined benefit pension and postretirement healthcare plans, of which $2
million was recognized in discontinued operations resulting from the sale of the
U.S. bakery business. These gains largely resulted from a reduction in pension
and postretirement healthcare benefit liabilities relating to the transfer of
employees to Solae, Bunge's joint venture and a reduction of postretirement
healthcare benefits of U.S. employees.
F-31
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Employee Benefit Plans (Continued)
The following table sets forth in aggregate a reconciliation of the
changes in the defined benefit pension and the postretirement healthcare benefit
plans' benefit obligations, assets and funded status at December 31, 2005 and
2004 for plans with assets in excess of benefit obligations and plans with
benefit obligations in excess of plan assets. The projected benefit obligation
related principally to U.S. plans and therefore Bunge has aggregated U.S. and
foreign plans for the following disclosures. A measurement date of September 30,
2005 was used for all plans.
Postretirement
Pension Benefits Healthcare Benefits
December 31, December 31,
-------------------- ---------------------
(US$ in millions) 2005 2004 2005 2004
----------------- --------- --------- ---------- ---------
Change in benefit obligations:
Benefit obligation as of beginning of year.................. $ 342 $ 318 $ 26 $ 27
Service cost................................................ 10 10 -- --
Interest cost............................................... 19 19 1 1
Actuarial losses, net....................................... 8 9 4 --
Employee contribution....................................... -- -- 1 --
Plan amendments............................................. -- 3 -- --
Curtailment/settlement (gains).............................. -- (1) -- --
Benefits paid............................................... (14) (20) (3) (2)
Impact of foreign exchange rates............................ (1) 4 -- --
--------- --------- ---------- ---------
Benefit obligation as of end of year........................ $ 364 $ 342 $ 29 $ 26
========= ========= ========== =========
Change in plan assets:
Fair value of plan assets as of beginning of year........... $ 227 $ 205 $ -- $ --
Actual return on plan assets................................ 23 21 -- --
Employer contributions...................................... 12 19 2 2
Employee contributions...................................... -- -- 1 --
Benefits paid............................................... (14) (20) (3) (2)
Impact of foreign exchange rates............................ 1 2 -- --
--------- --------- ---------- ---------
Fair value of plan assets as of end of year................. $ 249 $ 227 $ -- $ --
========= ========= ========== =========
Funded status and net amounts recognized:
Plan assets less than benefit obligation.................... $ (115) $ (115) $ (29) $ (26)
Contribution adjustment..................................... 3 4 1 --
Unrecognized prior service cost............................. 12 14 -- --
Unrecognized net actuarial losses........................... 65 65 5 1
Unrecognized net transition asset........................... (1) (1) -- --
--------- --------- ---------- ---------
Net liability recognized in the balance sheet............... $ (36) $ (33) $ (23) $ (25)
========= ========= ========== =========
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost........................................ $ 6 $ 8 $ -- $ --
Accrued benefit cost........................................ (86) (89) (23) (25)
Intangible asset............................................ 11 12 -- --
Accumulated other comprehensive income...................... 33 36 -- --
--------- --------- ---------- ---------
Net liability recognized.................................... $ (36) $ (33) $ (23) $ (25)
========= ========= ========== =========
F-32
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Employee Benefit Plans (Continued)
Bunge has aggregated certain pension plans with projected benefit
obligations in excess of fair value of plan assets with pension plans that have
fair value of plan assets in excess of projected benefit obligations. At
December 31, 2005, the $364 million projected benefit obligation includes plans
with projected benefit obligations of $349 million, which was in excess of the
fair value of related plan assets of $230 million. At December 31, 2004, the
$342 million projected benefit obligation includes plans with projected benefit
obligations of $328 million, which was in excess of the fair value of related
plan assets of $209 million.
The accumulated benefit obligation for the defined benefit pension
plans was $331 million and $309 million at December 31, 2005 and 2004,
respectively.
The following table summarizes information relating to aggregated
pension plans with an accumulated benefit obligation in excess of plan assets.
December 31,
------------------
(US$ in millions) 2005 2004
------------------ -------- --------
Projected benefit obligation.................................................... $349 $328
Accumulated benefit obligation.................................................. 316 294
Fair value of plan assets....................................................... 230 209
The components of net periodic costs are as follows:
Postretirement
Pension Benefits Healthcare Benefits
Year Ended Year Ended
December 31, December 31,
------------------------------- -----------------------------
(US$ in millions) 2005 2004 2003 2005 2004 2003
------------------ --------- -------- ---------- -------- -------- ---------
Service cost................................ $ 10 $ 10 $ 8 $ -- $ -- $ 1
Interest cost............................... 19 19 16 2 2 2
Expected return on plan assets.............. (19) (17) (16) -- -- --
Amortization of unrecognized prior service
cost...................................... 1 1 1 -- -- --
Amortization of unrecognized net loss....... 3 3 1 -- -- --
Amortization of transition asset............ -- (1) (1) -- -- --
--------- -------- ---------- -------- -------- ---------
Net periodic benefit costs.................. $ 14 $ 15 $ 9 $ 2 $ 2 $ 3
========= ======== ========== ======== ======== =========
Bunge has recorded a minimum pension liability for the actuarial
present value of accumulated benefits that exceeded plan assets and the accrued
pension liabilities that were exceeded by the unfunded accumulated benefit
obligation. The accrued additional minimum pension liability at December 31,
2005 and 2004 was $44 million and $48 million, respectively. At December 31,
2005 and 2004, Bunge also has an intangible asset of $11 million and $12
million, respectively, related to unamortized prior service costs for which a
minimum pension liability was recorded. At December 31, 2005 and 2004, Bunge has
$33 million and $36 million, respectively, of the excess of the additional
minimum pension liability over the amount recognized as an intangible asset in
other accumulated comprehensive income (loss). Bunge recorded a decrease in
additional minimum pension liability of $3 million for the year ended December
31, 2005 and an increase of $3 million and $17 million for the years ended
December 31, 2004 and 2003, respectively, which was included in other
comprehensive income (loss).
F-33
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Employee Benefit Plans (Continued)
The weighted average assumptions used in determining the actuarial
present value of the projected benefit obligations under the defined benefit
plans are as follows:
December 31,
---------------------
2005 2004
---------- ---------
Discount rate..................................................................... 5.6% 5.7%
Increase in future compensation levels............................................ 3.2% 3.3%
The weighted average assumptions used in determining the net periodic
benefit cost under the defined benefit plans are as follows:
Year Ended December 31,
---------------------------------
2005 2004 2003
---------- ---------- ---------
Discount rate........................................................ 5.7% 6.0% 6.8%
Increase in future compensation levels............................... 3.3% 3.4% 4.5%
Expected long-term rate of return on assets.......................... 8.0% 8.0% 8.4%
The sponsoring subsidiaries select the expected long-term rate of
return on assets in consultation with their investment advisors and actuaries.
These rates are intended to reflect the average rates of earnings expected to be
earned on the funds invested or to be invested to provide required plan
benefits. The plans are assumed to continue in effect as long as assets are
expected to be invested.
In estimating the expected long-term rate of return on assets,
appropriate consideration is given to historical performance for the major asset
classes held or anticipated to be held by the applicable plan trusts and to
current forecasts of future rates of return for those asset classes. Cash flow
and expenses are taken into consideration to the extent that the expected
returns would be affected by them. As assets are generally held in qualified
trusts anticipated returns are not reduced for taxes.
At December 31, 2005, for measurement purposes, a 9% annual rate of
increase in the per capita cost of covered healthcare benefits was assumed for
2006 decreasing to 6% by 2009, remaining at that level thereafter. At December
31, 2004, for measurement purposes, a 6% annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2005.
A one-percentage point change in assumed health care cost trend rates
would have the following effects at December 31, 2005:
One percentage One percentage
point point
(US$ in millions) increase decrease
-------------------- ---------------- -----------------
Effect on total service and interest cost components............ $-- $--
Effect on postretirement benefit obligation..................... $2 $2
F-34
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Employee Benefit Plans (Continued)
The pension plans' weighted average asset allocations as of the
measurement date for 2005 and 2004, by category are as follows:
Plan Assets
----------------------
Asset Category 2005 2004
--------------- --------- -----------
Equities...................................... 63% 61%
Fixed income securities....................... 34% 34%
Cash.......................................... 3% 5%
--------- -----------
Total......................................... 100% 100%
========= ===========
The objectives of the plans' trust funds are to sufficiently diversify
plan assets to maintain a reasonable level of risk without imprudently
sacrificing return, with a target asset allocation of approximately 40% fixed
income securities and approximately 60% equities. Bunge retains investment
managers who select investment fund managers to implement the investment
strategy, such that the investments approximate the target asset allocation.
Bunge's policy is not to invest plan assets in Bunge Limited shares.
Bunge expects to contribute $7 million to its defined benefit pension
plans and $3 million to its postretirement healthcare benefit plans in 2006.
The following benefit payments, which reflect future service as
appropriate, are expected to be paid:
Postretirement
Pension Healthcare
(US$ in millions) Benefits Benefits
------------------ ---------- ---------------
2006......................................... $ 14 $ 3
2007......................................... 14 3
2008......................................... 15 3
2009......................................... 16 3
2010......................................... 18 3
2011-2015.................................... 115 12
Employee Defined Contribution--Bunge also makes contributions to
qualified defined contribution plans for eligible employees. Contributions to
these plans amounted to $11 million, $9 million and $7 million in 2005, 2004 and
2003, respectively.
Multi-Employer Plan--In addition, certain salaried employees of Bunge's
Brazilian fertilizer operations participate in a multi-employer defined benefit
pension plan, Fundacao Petrobras de Securidade Social (Petros), to which Bunge
makes contributions. Contributions to this plan were $1 million in each of the
years ended December 31, 2005, 2004 and 2003.
F-35
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
19. Related Party Transactions
Notes receivable--In connection with the sale of Lesieur, a French
producer of branded bottled vegetable oil, to Saipol, Bunge's oilseed processing
joint venture with Sofiproteol, Bunge holds a note receivable from Saipol having
a carrying value of $31 million and $39 million at December 31, 2005 and 2004,
respectively. The note receivable matures in July 2009 with interest payable
annually at a variable rate of 4.21% in 2005. Bunge has a 33.34% ownership
interest in the Saipol joint venture, which is accounted for under the equity
method (see Note 10 of the notes to the consolidated financial statements).
In addition, Bunge holds a note receivable from EWICO, its 50% owned
joint venture in Poland, having a carrying value of approximately $7 million and
$14 million at December 31, 2005 and 2004, respectively. The EWICO notes
receivable mature on demand at Bunge's option with interest payable annually at
variable rates of one or six month Warsaw Interbank Borrowing Rate (WIBOR) plus
2.5%.
Bunge has recognized interest income related to these notes receivable
of approximately $2 million, $5 million and $1 million for the years ended
December 31, 2005, 2004 and 2003, respectively, in interest income in its
consolidated statements of income. The carrying value of the notes receivable
are included in other non-current assets in the consolidated balance sheets.
Other--Bunge purchased soybeans, related soybean commodity products and
other commodity products from its unconsolidated joint ventures (primarily Solae
and its other North American joint ventures), which totaled $503 million, $457
million and $62 million for the years ended December 31, 2005, 2004 and 2003,
respectively. Bunge also sold soybean commodity products and other commodity
products to these joint ventures, which totaled $233 million, $92 million and
$62 million for the years ended December 31, 2005, 2004 and 2003, respectively.
Bunge believes these transactions are recorded at values similar to those with
third parties.
Mutual Investment Limited--Bunge has entered into an administrative
services agreement with Mutual Investment Limited, Bunge's former parent company
prior to the 2001 initial public offering, under which Bunge provides corporate
and administrative services to Mutual Investment Limited, including financial,
legal, tax, accounting, human resources administration, insurance, employee
benefits plans administration, corporate communication and management
information system services. The agreement has a quarterly term that is
automatically renewable unless terminated by either party. Mutual Investment
Limited pays Bunge for the services rendered on a quarterly basis based on
Bunge's direct and indirect costs of providing the services. In 2005, 2004 and
2003, Mutual Investment Limited paid Bunge $492 thousand, $623 thousand and $661
thousand, respectively, under this agreement. In July 2004, Bunge purchased a
wheat mill in Brazil from Mutual Investment Limited for approximately $2
million. In June 2003, Bunge received $55 million from Mutual Investment
Limited, as final payment on a long-term secured note. In addition, in 2003
Bunge recorded interest income of $1 million pertaining to this long-term
secured note. In December 2003, Bunge sold an inactive Netherlands subsidiary to
Mutual Investment Limited for $64 thousand, its estimated fair value, in
connection with a reorganization of certain of Mutual Investment Limited's
investments.
20. Commitments and Contingencies
Bunge is party to a large number of claims and lawsuits, primarily tax
and labor claims in Brazil, arising in the normal course of business. After
taking into account the liabilities recorded for the foregoing matters,
management believes that the ultimate resolution of such matters will not have a
material adverse effect on Bunge's financial condition, results of operations or
liquidity. Included in other non-current liabilities at December 31, 2005 and
2004 are the following accrued liabilities:
December 31,
------------------------
(US$ in millions) 2005 2004
------------------ ---------- ------------
Tax claims.................................... $173 $153
Labor claims.................................. 121 112
Civil and other............................... 70 78
---------- ------------
Total......................................... $364 $343
========== ============
F-36
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. Commitments and Contingencies (Continued)
Tax Claims--The tax claims relate principally to claims against Bunge's
Brazilian subsidiaries, including primarily value added tax claims (ICMS and
IPI) and sales tax claims (PIS and COFINS). The determination of the manner in
which various Brazilian federal, state and municipal taxes apply to the
operations of Bunge is subject to varying interpretations arising from the
complex nature of Brazilian tax law.
Labor Claims--The labor claims relate principally to claims against
Bunge's Brazilian subsidiaries. The labor claims primarily relate to dismissals,
severance, health and safety, salary adjustments and supplementary retirement
benefits.
Civil and Other--The civil and other claims relate to various disputes
with suppliers and customers.
Oleina Holding Arbitration--Bunge had previously been involved in
arbitration proceedings at the ICC International Court of Arbitration with the
former joint venture partner of Cereol S.A. (Bunge acquired Cereol in October
2002 from Edison S.p.A.) over the final purchase price of Oleina Holding S.A.
and related issues (collectively referred to as the Oleina Disputes). Cereol
purchased the 49% of Oleina it did not already own from its former joint venture
partner for $27 million in February 2002, with the final purchase price to be
determined by arbitration. In June 2005, the parties agreed to settle all claims
relating to the Oleina Disputes. In connection with the settlement, Bunge paid
Cereol's former joint venture partner $90 million, $85 million of which was
funded by Edison, pursuant to the terms of an agreement between Edison and
Bunge. Pursuant to Bunge's agreement with Edison, relating to Bunge's
acquisition of Cereol, Bunge was entitled to be indemnified by Edison for
certain amounts relating to the Oleina Disputes. The net impact of this
settlement on Bunge's consolidated financial statements was not material.
Settlement of Ducros Arbitration--In 2003, Cereol and Cereol Holding
France entered into a settlement agreement with McCormick & Company,
Incorporated, McCormick France SAS and Ducros S.A. relating to a claim for
(euro)155 million brought by McCormick over the purchase price of Ducros, which
was sold to McCormick in August 2000. Under the settlement agreement, Bunge paid
McCormick $57 million, which was included in the opening balance sheet of the
acquired Cereol business. In connection with the settlement, Bunge paid an
additional purchase price to Edison S.p.A. and Cereol's former public
shareholders of approximately $42 million in the aggregate.
Antitrust Approval of Manah Acquisition--In 2000, Bunge acquired Manah
S.A., a Brazilian fertilizer company that had an indirect participation in
Fosfertil S.A. Fosfertil is the main Brazilian producer of phosphate used to
produce NPK fertilizers. This acquisition was approved by the Brazilian
antitrust commission in February 2004. The approval was conditioned on the
formalization of an operational agreement between Bunge and the antitrust
commission relating to the maintenance of existing competitive conditions in the
fertilizer market. Although the terms of the operational agreement have not yet
been approved, Bunge does not expect them to have a material adverse impact on
its business or financial results.
Electrobras Litigation--Several of Bunge's Brazilian subsidiaries have
litigation pending in Brazil against Centrais Eletricas Brasileiras S.A.
(Electrobras), a publicly-traded, government controlled holding company for
Brazilian electric companies. The litigation is seeking interest, including
adjustments for inflation, on amounts deposited with Electrobras that were
required by law from 1977 to 1993. In 2005, a Brazilian court issued a judgment
in favor of a Brazilian subsidiary of Bunge in respect of its claim against
Electrobras. The judgment did not specify the amount which Bunge can recover
from Electrobras. Bunge is currently negotiating the final settlement amount
with Electrobras and expects to complete the negotiations during 2006. The
negotiated settlement requires court approval. As of December 31, 2005, Bunge
has not recognized any amounts related to this claim in the consolidated
financial statements pending the outcome of the negotiations with Electrobras
and the court approval. Although, Bunge expects to receive up to $45 million
upon final settlement based on its subsidiary's claims against Electrobras for
which a judgment has been issued, amounts ultimately negotiated and approved by
the Brazilian court could be substantially less. Bunge's other Brazilian
subsidiaries' claims have not yet been decided by the Brazilian courts.
F-37
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. Commitments and Contingencies (Continued)
Guarantees--Bunge has issued or was a party to the following guarantees
at December 31, 2005:
Maximum Potential
(US$ in millions) Future Payments
------------------ -------------------
Operating lease residual values(1).................. $ 60
Unconsolidated affiliates financing(2).............. 26
Customer financing(3)............................... 184
--------
Total............................................... $270
========
-----------------------------
(1) Prior to January 1, 2003, Bunge entered into synthetic lease
agreements for barges and railcars originally owned by Bunge
and subsequently sold to third parties. The leases are
classified as operating leases in accordance with SFAS No. 13,
Accounting for Leases. Any gains on the sales were deferred
and recognized ratably over the initial lease terms. Bunge has
the option under each lease to purchase the barges or railcars
at fixed amounts, based on estimated fair values or to sell
the assets. If Bunge elects to sell, it will receive proceeds
up to fixed amounts specified in the agreements. If the
proceeds of such sales are less than the specified fixed
amounts, Bunge would be obligated under a guarantee to pay
supplemental rent for the deficiency in proceeds up to a
maximum of approximately $60 million at December 31, 2005. The
operating leases expire through 2010. There are no recourse
provisions or collateral that would enable Bunge to recover
any amounts paid under this guarantee.
(2) Prior to January 1, 2003, Bunge issued a guarantee to a
financial institution related to debt of its joint ventures in
Argentina, its unconsolidated affiliates. The term of the
guarantee is equal to the term of the related financing, which
matures in 2009. There are no recourse provisions or
collateral that would enable Bunge to recover any amounts paid
under this guarantee.
(3) Bunge issued guarantees to financial institutions in Brazil
related to amounts owed the institutions by certain of its
customers. The terms of the guarantees are equal to the terms
of the related financing arrangements, which can be as short
as 120 days or as long as 360 days. In the event that the
customers default on their payments to the institutions and
Bunge would be required to perform under the guarantees, Bunge
has obtained collateral from the customers. At December 31,
2005, $75 million of these financing arrangements were
collateralized by tangible property. Bunge has determined the
fair value of these guarantees to be immaterial at December
31, 2005.
In addition, Bunge has issued parent level guarantees for the repayment
of certain senior notes and senior credit facilities, which were issued or
entered into by its wholly owned subsidiaries, with a carrying amount of $2,398
million at December 31, 2005. All outstanding debt related to these guarantees
is included in Bunge's consolidated balance sheets at December 31, 2005 (see
Note 16 of the notes to the consolidated financial statements). There are no
significant restrictions on the ability of Bunge Limited Finance Corp. or any
other Bunge subsidiary to transfer funds to Bunge.
Also, certain of Bunge's subsidiaries have provided guarantees of
indebtedness of certain of their subsidiaries under certain lines of credit with
various institutions. The total borrowing capacity under these lines of credit
was $308 million as of December 31, 2005, of which approximately $5 million of
related debt was outstanding as of such date.
F-38
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. Commitments and Contingencies (Continued)
Freight Supply Agreements--In the ordinary course of business, Bunge
enters into purchase commitments for time on ocean freight vessels and freight
service on railroad lines for the purpose of transporting agricultural
commodities. In addition, Bunge sells the time on these ocean freight vessels
when excess freight capacity is available. These agreements typically range from
two months to six years, in the case of ocean freight vessels, depending on
market conditions, and 9 to 22 years in the case of railroad services. Future
minimum payment obligations due under these agreements are as follows:
(US$ in millions)
-------------------
Less than 1 year...................................... $ 238
1 to 3 years.......................................... 412
4 to 5 years.......................................... 252
After five years...................................... 1,408
---------
Total................................................. $ 2,310
=========
Actual amounts paid under these contracts may differ due to the
variable components of these agreements and the amount of income earned on the
sales of excess capacity. The agreements for the freight service on railroad
lines require a minimum monthly payment regardless of the actual level of
freight services used by Bunge. The costs of Bunge's freight supply agreements
are typically passed through to the customers as a component of the prices
charged for its products.
21. Shareholders' Equity
In 2005, approximately $250 million of Bunge's 3.75% convertible notes
due 2022 were converted into 31.1137 common shares of Bunge Limited for each
$1,000 principal amount of convertible notes. This represents a price of
$32.1402 per share at which Bunge Limited common shares were issued and
delivered following conversion (see Note 16 of the notes to the consolidated
financial statements).
In 2004, Bunge completed a public offering of 9,775,000 of its common
shares for net proceeds of $331 million, after underwriting discounts,
commissions and expenses. Bunge used the net proceeds of the offering to acquire
the additional 17% of the total outstanding shares of Bunge Brasil, its
publicly-traded Brazilian subsidiary that it did not already own, for $314
million in cash.
Accumulated Other Comprehensive Income (Loss)--The following table
summarizes the balances of related after tax components of accumulated other
comprehensive income (loss):
Foreign Deferred Deferred Accumulated
Exchange Gain (Loss) Treasury Minimum Gain (Loss) Other
Translation on Hedging Rate Lock Pension on Comprehensive
(US$ in millions) Adjustment(1) Activities Contracts Liability Investments Income (Loss)
- ------------------ ------------- ------------ ------------ ------------ ------------ ---------------
Balance, January 1, 2003........ $ (1,098) $ 5 $ (21) $ (11) $ (1) $ (1,126)
Other comprehensive income (loss),
net of tax................... 489 (12) 2 (10) 1 470
------------- ------------ ------------ ------------ ------------ ---------------
Balance, December 31, 2003...... (609) (7) (19) (21) -- (656)
Other comprehensive income (loss),
net of tax................... 217 12 2 (2) -- 229
------------- ------------ ------------ ------------ ------------ ---------------
Balance, December 31, 2004...... (392) 5 (17) (23) -- (427)
Other comprehensive income (loss),
net of tax................... 101 (1) 2 2 11 115
------------- ------------ ------------ ------------ ------------ ---------------
Balance, December 31, 2005...... $ (291) $ 4 $ (15) $ (21) $ 11 $ (312)
============ ============ ============ ============ ============= ===============
- -----------------------------
(1) Bunge has significant operating subsidiaries in Brazil, Argentina and
Europe. The functional currency of Bunge's subsidiaries is the local
currency. The assets and liabilities of these subsidiaries are
translated into U.S. dollars from local currency at month end exchange
rates, and the resulting foreign exchange translation gains and losses
are recorded in the consolidated balance sheets as a component of
accumulated other comprehensive income (loss).
F-39
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding, excluding any dilutive
effects of stock options, restricted stock unit awards and convertible notes
during the reporting period. Diluted earnings per share is computed similar to
basic earnings per share, except that the weighted average number of common
shares outstanding is increased to include additional shares from the assumed
exercise of stock options, restricted stock unit awards and convertible notes,
if dilutive. The number of additional shares is calculated by assuming that
outstanding stock options were exercised and that the proceeds from such
exercises were used to acquire common shares at the average market price during
the reporting period. In addition, prior to conversion of the convertible notes
in 2005 (see Notes 16 and 21 of the notes to the consolidated financial
statements), Bunge accounted for the effect of the convertible notes on its
diluted earnings per share computation using the if converted method. Under this
method, the convertible notes were assumed to be converted and the interest
expense, net of tax, related to the convertible notes is added back to earnings.
The computation of diluted earnings per common share for the years
ended December 31, 2005, 2004 and 2003 includes the weighted average common
shares that would be issuable upon conversion of Bunge's 3.75% convertible notes
due 2022. Substantially all holders of the aggregate principal amount of the
$250 million convertible notes converted their notes into an aggregate of
7,777,927 shares of Bunge Limited common stock, of which 7,532,542 shares were
issued upon conversion of the convertible notes in November 2005 at the
conversion rate of 31.1137 common shares of Bunge Limited for each $1,000
principal amount of convertible notes. This represents a price of $32.1402 per
share at which Bunge Limited common shares were issued and delivered following
conversion (see Note 16 and 21 of the notes to the consolidated financial
statements). The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2005, 2004 and 2003.
Year Ended December 31,
-----------------------------------------------
(US$ in millions, except for share data) 2005 2004 2003
- ----------------------------------------- -------------- -------------- ---------------
Income from continuing operations--basic.............................. $ 530 $ 469 $ 418
Interest on convertible notes, net of tax............................. 5 5 5
-------------- -------------- ---------------
Income from continuing operations--diluted............................ $ 535 $ 474 $ 423
============== ============== ===============
Weighted average number of common shares outstanding:
Basic................................................................. 112,131,739 106,015,869 99,745,825
Effect of dilutive shares:
- --stock options and awards............................................ 1,994,337 1,879,762 1,129,777
- --convertible notes................................................... 6,727,852 7,778,425 7,778,425
-------------- -------------- ---------------
Diluted............................................................... 120,853,928 115,674,056 108,654,027
============== ============== ===============
Income from continuing operations per share:
Basic................................................................ $ 4.73 $ 4.42 $ 4.19
Diluted.............................................................. $ 4.43 $ 4.10 $ 3.89
23. Stock-Based Compensation
Equity Incentive Plan--Bunge has an Equity Incentive Plan, which is a
shareholder approved plan. Under the plan, the compensation committee of the
board of directors may award equity based compensation to officers, employees,
consultants and independent contractors. Awards under the plan may be in the
form of stock options (statutory or non-statutory), restricted stock units
(performance-based or time-vested) or other awards.
Stock Option Awards--Generally, stock options to purchase Bunge Limited
common shares are non-statutory and granted at not less than fair market value
on the date of grant, as determined under the Equity Incentive Plan. Options
generally vest on a pro-rata basis over a three-year period on the anniversary
date of the grant. Vesting may be accelerated in certain circumstances such as a
change in control of Bunge.
F-40
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23. Stock-Based Compensation (Continued)
Restricted Stock Units--Performance-based restricted stock units and
time-vested restricted stock units are granted to a limited number of key
employees. The performance-based restricted stock units are awarded at the
beginning of a three-year performance period and vest following the end of the
three-year performance period. The vesting of the performance-based restricted
stock units is dependent on Bunge obtaining certain targeted cumulative earnings
per share (EPS) or segment operating profit (for awards granted to employees of
operating companies) during the three-year performance period. The targeted
cumulative EPS under the plan is based on income per share from continuing
operations adjusted for non-recurring charges and other one-time events at the
discretion of Bunge's compensation committee. Vesting may be accelerated in
certain situations such as a change in control of Bunge. The actual award is
calculated based on a sliding scale whereby 50% of the granted performance-based
restricted stock unit award vests if the minimum target is achieved. No vesting
occurs if cumulative EPS or the segment operating profit is less than the
minimum target. The award is capped at 150% of the grant for cumulative EPS
performance in excess of the maximum target for the award grants prior to 2004
and at 200% of the grant for cumulative EPS performance or segment operating
profit in excess of the maximum target beginning with the 2004 award grants. For
awards granted in or prior to 2004, performance-based restricted stock unit
awards may be paid out, at the participant's election, subject to the discretion
of Bunge's compensation committee, in cash, in Bunge Limited common shares or a
combination thereof, once the specified terms and conditions of the award are
satisfied. Beginning with awards granted in 2005, performance-based restricted
stock unit awards will be settled solely in common shares. At the time of
settlement, a participant holding a vested performance-based restricted stock
unit award will also be entitled to receive corresponding dividend equivalent
payments.
The time-vested restricted stock unit awards are subject to vesting
periods varying from three to five years and vest on a pro-rata basis over the
applicable vesting period or at the end of the applicable vesting period.
Vesting may be accelerated in certain circumstances such as a change in control
of Bunge. The time-vested restricted stock units are paid out in Bunge Limited
common shares once the applicable vesting terms are satisfied. At the time of
pay out, a participant holding a time-vested restricted stock unit award will
also be entitled to receive corresponding dividend equivalent payments.
At December 31, 2005 and 2004, there were 1,115,366 and 763,208,
respectively, of performance-based and time-vested restricted stock units
granted that had not yet vested. During 2005, Bunge issued approximately 102,185
shares with a weighted average fair value of $54.01 per share primarily pursuant
to outstanding performance-based restricted stock unit awards that had become
vested. During 2004, Bunge issued approximately 74,894 shares with a weighted
average fair value of $38.52 per share primarily pursuant to outstanding
performance-based restricted stock unit awards that had become vested.
Non-Employee Directors' Equity Incentive Plan--Bunge has a Non-Employee
Directors' Equity Incentive Plan (Directors' Plan). The Directors' Plan is a
shareholder approved plan. The Directors' Plan provides for awards of
non-statutory stock options to non-employee directors. The options vest and are
exercisable on the January 1st following the date of grant, assuming the
director continues service as a member of the board of directors of Bunge until
such date. Vesting may be accelerated in certain situations such as a change in
control of Bunge.
Available Options--Bunge has reserved 11,918,470 and 595,923 common
shares for grants of stock options and other stock awards under the Equity
Incentive Plan and the Directors' Plan, respectively. At December 31, 2005,
5,228,000 and 153,923 common shares were available for grant under the Equity
Incentive Plan and Directors' Plan, respectively. The Equity Incentive Plan and
the Directors' Plan provide that up to 10.0% and 0.5%, respectively, of Bunge's
total outstanding common shares may be reserved for issuance pursuant to awards
under the plans. Therefore, the number of shares reserved under the plans will
increase as the number of Bunge's total issued common shares outstanding
increases.
F-41
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23. Stock-Based Compensation (Continued)
A summary of Bunge's stock option activity for the Equity Incentive
Plan and the Directors' Plan and related information was as follows:
Weighted
Average
Number of Exercise Price
Shares per Share
--------------- ------------------
Options outstanding at January 1, 2003............................... 3,180,759 $18.53
Granted.............................................................. 1,123,800 25.22
Exercised............................................................ (407,653) 17.54
Forfeited............................................................ (21,666) 20.38
Expired.............................................................. -- --
---------------
Options outstanding at December 31, 2003............................. 3,875,240 $20.57
Granted.............................................................. 801,600 36.93
Exercised............................................................ (913,238) 19.09
Forfeited............................................................ (43,300) 26.00
Expired.............................................................. -- --
---------------
Options outstanding at December 31, 2004............................. 3,720,302 $24.40
Granted.............................................................. 607,550 53.46
Exercised............................................................ (633,134) 20.99
Forfeited............................................................ (43,228) 33.91
Expired.............................................................. -- --
---------------
Options outstanding at December 31, 2005............................. 3,651,490 $29.72
===============
Exercisable options:
December 31, 2003.................................................... 1,726,865 $18.28
December 31, 2004.................................................... 1,950,706 $19.49
December 31, 2005.................................................... 2,279,826 $22.60
Information regarding stock options outstanding and exercisable at
December 31, 2005 was as follows:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------------
Weighted
Average
Weighted Remaining Weighted
Average Contractual Average
Range of Exercise Prices Number Exercise Price Life in Years Number Exercise Price
- ------------------------ ------------ ----------------- --------------- -------------- ------------------
$15.88-$16.00.................... 562,219 $15.97 5.3 562,219 $15.97
$18.88-$21.61.................... 933,886 $20.97 5.9 933,886 $20.97
$21.62-$25.22.................... 812,885 $25.22 7.2 504,536 $25.22
$35.46-$37.08.................... 746,016 $36.92 8.2 278,351 $36.66
$52.66-$61.51.................... 596,484 $53.48 9.2 834 $52.66
F-42
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24. Lease Commitments
Bunge routinely leases storage facilities, transportation equipment and
office facilities under operating leases. Minimum lease payments under
non-cancelable operating leases at December 31, 2005 were as follows:
(US$ in millions)
------------------
2006........................................................... $118
2007........................................................... 107
2008........................................................... 94
2009........................................................... 59
2010........................................................... 50
Thereafter..................................................... 152
----
Total.......................................................... $580
====
Rent expense under non-cancelable operating leases was $134 million,
$89 million and $62 million for 2005, 2004 and 2003, respectively.
25. Argentina
In 2002, Bunge commenced recording an allowance against certain
recoverable taxes owed to it by the Argentine government due to delayed payment
and uncertainty regarding the local economic environment. The balance of this
allowance fluctuated depending on the sales activity of existing inventories,
the purchase of new inventories, seasonality, changes in applicable tax rates,
cash payment by the Argentine government and compensation of outstanding
balances against income or certain other taxes owed to the Argentine government.
At December 31, 2005 and 2004, this allowance for recoverable taxes was zero and
$27 million, respectively. In the year ended December 31, 2005, Bunge decreased
the remaining balance of this allowance in the amount of $27 million as a result
of the Argentine recoverable tax payments being received without delays and the
improvement in the Argentine government's financial condition. In the year ended
December 31, 2004, Bunge increased this allowance in the amount of $2 million as
a result of increased purchases of commodity inventories in the first half of
the 2004 year. In the year ended December 31, 2003, Bunge decreased this
allowance in the amount of $39 million as a result of either cash recoveries by
Bunge or compensation against taxes owed by Bunge to the Argentine government.
26. Operating Segments and Geographic Areas
During 2004, Bunge reclassified certain consumer product lines from the
agribusiness segment to the edible oil products segment. As a result, amounts
for the year ended December 31, 2003 have been reclassified to conform to the
2004 presentation.
In the first quarter 2006 Form 10-Q, Bunge reclassified certain edible
oil product lines from the agribusiness segment to the edible oil products
segment. As a result, amounts for the years ended December 31, 2005, 2004 and
2003 have been reclassified to conform to the 2006 presentation.
Bunge has four reporting segments--agribusiness, fertilizer, edible oil
products and milling products, which are organized based upon similar economic
characteristics and are similar in nature of products and services offered, the
nature of production processes, the type and class of customer and distribution
methods. The agribusiness segment is characterized by both inputs and outputs
being agricultural commodities and thus high volume and low margin. The
activities of the fertilizer segment include raw material mining, mixing
fertilizer components and marketing products. The edible oil products segment
involves the manufacturing and marketing of products derived from vegetable
oils. The milling products segment involves the manufacturing and marketing of
products derived primarily from wheat and corn. Bunge evaluates segment
performance based on operating segment profit.
F-43
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. Operating Segments and Geographic Areas (Continued)
The "Unallocated" column in the following table contains the
reconciliation between the totals for reportable segments and Bunge consolidated
totals, which consists primarily of corporate items not allocated to the
operating segments, inter-segment eliminations and principally the Solae joint
venture. Transfers between the segments are generally valued at market. The
revenues generated from these transfers are shown in the following table as
"Inter-segment revenues."
Operating Segment Information
Edible
Oil Milling
(US$ in millions) Agribusiness Fertilizer Products Products Other Unallocated Total
- ------------------ --------------- ----------- --------- --------- ------- ------------ --------
2005
Net sales to external customers........ $ 17,357 $ 2,674 $ 3,385 $ 859 $ -- $ -- $24,275
Inter-segment revenues................. 1,974 -- 84 22 -- (2,080) --
Gross profit(1)........................ 821 341 284 125 -- -- 1,571
Foreign exchange gain (loss)........... 29 (47) -- (1) -- (3) (22)
Interest income........................ 21 57 3 2 -- 21 104
Interest expense....................... (140) (41) (35) (7) -- (8) (231)
Segment operating profit............... 275 81 37 63 -- -- 456
Depreciation, depletion and amortization
expense............................. (110) (104) (50) (14) -- -- (278)
Investments in affiliates.............. 57 9 75 21 -- 423 585
Total assets........................... 5,867 2,774 1,682 388 -- 735 11,446
Capital expenditures................... $ 267 $ 135 $ 109 $ 11 $ -- $ -- $ 522
2004
Net sales to external customers........ $ 17,911 $ 2,581 $ 3,872 $ 804 $ -- $ -- $25,168
Inter-segment revenues................. 1,433 -- 54 17 -- (1,504) --
Gross profit(2)........................ 936 601 257 92 -- -- 1,886
Foreign exchange gain (loss)........... (17) (32) 5 -- -- 13 (31)
Interest income........................ 21 50 6 3 -- 23 103
Interest expense....................... (111) (50) (32) (8) -- (13) (214)
Segment operating profit............... 358 372 79 41 -- -- 850
Depreciation, depletion and amortization
expense............................. (89) (70) (41) (12) -- -- (212)
Investments in affiliates.............. 17 8 64 20 -- 455 564
Total assets........................... 5,510 2,428 1,692 328 -- 949 10,907
Capital expenditures................... $ 211 $ 158 $ 59 $ 9 $ -- $ -- $ 437
2003
Net sales to external customers....... $ 16,224 $ 1,954 $ 3,184 $ 751 $ 52 $ -- $22,165
Inter-segment revenues................ 646 -- 70 22 -- (738) --
Gross profit(3)(4).................... 549 373 284 81 18 -- 1,305
Foreign exchange gain (loss).......... 89 (20) -- -- (1) 24 92
Interest income....................... 26 53 6 -- -- 17 102
Interest expense...................... (80) (35) (24) (8) (2) (66) (215)
Segment operating profit(5)........... 252 242 86 30 8 -- 618
Depreciation, depletion and amortization
expense............................ (77) (57) (37) (13) -- -- (184)
Investments in affiliates............. 5 6 36 8 -- 482 537
Total assets.......................... 5,872 1,738 1,213 324 -- 737 9,884
Capital expenditures.................. $ 169 $ 73 $ 48 $ 14 $ -- $ -- $ 304
- -----------------------------
(1) In the fourth quarter of 2005, Bunge recorded in cost of goods sold in
its consolidated statement of income a pretax long-lived asset
impairment charge of $35 million in its agribusiness segment related to
two oilseed processing plants in Brazil and an oilseed processing plant
in India. In the fourth quarter of 2005, Bunge also recorded
restructuring charges in Brazil and Europe of $10 million in its
agribusiness segment, $2 million in its edible oil products segment and
$2 million in its fertilizer segment (see Note 9 of the notes to the
consolidated financial statements).
F-44
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. Operating Segments and Geographic Areas (Continued)
(2) In 2004, Bunge recorded pretax long-lived asset impairment charges of
$7 million in its edible oil segment, related to its refining and
packaging operations in North and South America. In addition, in 2004,
Bunge recorded a $10 million long-lived asset impairment charge and a
$7 million restructuring charge in its agribusiness segment related to
its oilseed operations in Western Europe. These charges are included in
cost of goods sold in Bunge's consolidated statement of income (see
Note 9 of the notes to the consolidated financial statements).
(3) In the fourth quarter of 2003, Bunge recorded in cost of goods sold in
its consolidated statement of income a pretax goodwill impairment
charge of $16 million and a pretax long-lived asset impairment charge
of $40 million in its agribusiness segment related to fixed assets at
its European oilseed processing facilities (see Note 9 of the notes to
the consolidated financial statements).
(4) Agribusiness gross profit for the year ended December 31, 2003,
included a pretax non-cash curtailment gain of $15 million reflecting a
reduction of pension and postretirement healthcare benefits of certain
U.S. employees recorded in cost of goods sold. Edible oil products and
milling products gross profit included a pretax non-cash curtailment
gain of $1 million and $1 million, respectively, for year ended
December 31, 2003, related to the reduction of pension and
postretirement healthcare benefits of certain U.S. employees recorded
in cost of goods sold.
(5) Agribusiness segment profit for year ended December 31, 2003, included
pretax non-cash curtailment gains totaling $20 million reflecting a
reduction of pension and postretirement healthcare benefit liabilities
due to the transfer of employees to Solae and a reduction of pension
and postretirement healthcare benefits of certain U.S. employees
recorded in cost of goods sold and in selling, general and
administrative expenses (SG&A). Edible oil products and milling
products segment operating profit included total pretax non-cash
curtailment gains of $2 million and $2 million, respectively, for the
year ended December 31, 2003, related to the reduction of pension and
postretirement healthcare benefits of certain U.S. employees recorded
in cost of goods sold and in SG&A.
Segment operating profit, a measure of segment profitability, includes
the allocation of the financial costs of carrying operating working capital,
including foreign exchange gains and losses and interest expense on debt
financing working capital and interest income earned on working capital items,
which is consistent with how management views the results for operational
purposes.
A reconciliation of income from continuing operations before income tax
and minority interest to total consolidated segment operating profit follows:
Year Ended December 31,
--------------------------------------
(US$ in millions) 2005 2004 2003
- ------------------ ----------- ------------ -----------
Income from continuing operations before income tax and minority interest.... $519 $904 $723
Unallocated (income) expense--net(1).......................................... (63) (54) 6
Gain on sale of ingredients business......................................... -- -- (111)
----- ----- -----
Segment operating profit..................................................... $456 $850 $618
===== ===== =====
- -----------------------------
(1) Unallocated (income) expense--net included interest income, interest
expense, foreign exchange gains and losses and other income and expense
not directly attributable to Bunge's operating segments.
F-45
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. Operating Segments and Geographic Areas (Continued)
Net sales by product group to external customers were as follows:
Year Ended December 31,
----------------------------------------
(US$ in millions) 2005 2004 2003
- ------------------ ------------ ----------- -------------
Agricultural commodities products... $17,357 $17,911 $16,224
Fertilizer products................. 2,674 2,581 1,954
Edible oil products................. 3,385 3,872 3,184
Wheat milling products.............. 564 479 500
Corn milling products............... 295 325 251
Soy ingredient products............. -- -- 52
------- ------- -------
Total............................... $24,275 $25,168 $22,165
======= ======= =======
Geographic area information for net sales to external customers,
determined based on the location of the subsidiary making the sale, and
long-lived assets follows:
Year Ended December 31,
----------------------------------------
(US$ in millions) 2005 2004 2003
- ------------------ ------------ ----------- -------------
Net sales to external customers:
Europe.......................... $ 8,904 $ 8,777 $ 7,176
United States................... 6,076 6,783 6,129
Brazil.......................... 4,994 4,939 3,894
Asia............................ 2,956 3,225 3,451
Canada.......................... 957 1,160 1,216
Argentina....................... 362 262 275
Rest of world................... 26 22 24
---------- ---------- ----------
Total.............................. $ 24,275 $ 25,168 $ 22,165
========== ========== ==========
December 31,
----------------------------------------
(US$ in millions) 2005 2004 2003
- ------------------ ------------ ----------- -------------
Long-lived assets(1):
Brazil.......................... $ 2,035 $ 1,759 $ 1,323
United States................... 963 1,021 1,052
Europe.......................... 505 410 302
Argentina....................... 137 113 80
Rest of world................... 153 120 110
---------- ---------- ----------
Total.............................. $ 3,793 $ 3,423 $ 2,867
========== ========== ==========
- -----------------------------
(1) Long-lived assets include property, plant and equipment, net, goodwill
and other intangible assets, net and investments in affiliates.
F-46
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. Quarterly Financial Information (Unaudited)
Quarter
----------------------------------------------------------------------------------
First Second Third Fourth Year End
----------------- -------------- -------------- -------------- --------------
(US$ in millions, except per share data)
2005
Volumes (in millions of metric tons).. 26 32 30 29 117
Net sales............................. $ 5,451 $ 5,872 $ 6,226 $ 6,726 $ 24,275
Gross profit(1)....................... 385 427 407 352 1,571
Income from continuing operations..... 98 113 170 149 530
Net income............................ $ 98 $ 113 $ 170 $ 149 $ 530
Earnings per common share--basic(4)
Income from continuing operations..... $ .88 $ 1.02 $ 1.53 $ 1.29 $ 4.73
----------------- -------------- -------------- -------------- --------------
Net income per share.................. $ .88 $ 1.02 $ 1.53 $ 1.29 $ 4.73
================= ============== ============== ============== ==============
Earnings per common share--diluted(3)(4)
Income from continuing operations..... $ .82 $ .94 $ 1.41 $ 1.25 $ 4.43
----------------- -------------- -------------- -------------- --------------
Net income per share.................. $ .82 $ .94 $ 1.41 $ 1.25 $ 4.43
================= ============== ============== ============== ==============
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 110,752,441 110,986,481 111,361,292 115,384,311 112,131,739
outstanding--basic..................
Weighted average number of shares
outstanding--diluted................ 120,638,146 120,893,138 120,982,588 120,773,361 120,853,928
- ---------------------------------------------------------------------------------------------------------------------------
Market price:
High............................... $ 57.75 $ 65.10 $ 67.31 $ 57.01
Low................................ $ 50.84 $ 48.99 $ 51.95 $ 48.30
- ---------------------------------------------------------------------------------------------------------------------------
2004
Volumes (in millions of metric tons).. 24 29 29 27 109
Net sales............................. $ 5,739 $ 6,657 $ 6,560 $ 6,212 $ 25,168
Gross profit(2)....................... 365 496 553 472 1,886
Income from continuing operations..... 70 112 182 105 469
Net income............................ $ 70 $ 112 $ 182 $ 105 $ 469
Earnings per common share--basic(4)
Income from continuing operations..... $ .70 $ 1.08 $ 1.65 $ .95 $ 4.42
----------------- -------------- -------------- -------------- --------------
Net income per share.................. $ .70 $ 1.08 $ 1.65 $ .95 $ 4.42
================= ============== ============== ============== ==============
Earnings per common share--diluted(3)(4)
Income from continuing operations..... $ .65 $ 1.00 $ 1.53 $ .89 $ 4.10
----------------- -------------- -------------- -------------- --------------
Net income per share.................. $ .65 $ 1.00 $ 1.53 $ .89 $ 4.10
================= ============== ============== ============== ==============
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 100,016,833 103,434,409 110,080,027 110,438,941 106,015,869
outstanding--basic..................
Weighted average number of shares
outstanding--diluted................ 109,565,699 112,891,787 119,624,913 120,279,197 115,674,056
- ---------------------------------------------------------------------------------------------------------------------------
Market price:
High............................... $ 40.22 $ 41.27 $ 40.98 $ 57.08
Low................................ $ 32.99 $ 34.07 $ 36.96 $ 38.80
- ---------------------------------------------------------------------------------------------------------------------------
- -----------------------------
(1) In the fourth quarter of 2005, Bunge recorded in cost of goods sold in
its consolidated statement of income a pretax long-lived asset
impairment charge of $35 million in its agribusiness segment related to
two oilseed processing plants in Brazil and an oilseed processing plant
in India. In the fourth quarter of 2005, Bunge also recorded
restructuring charges in Brazil and Europe of $10 million in its
agribusiness segment, $2 million in is edible oil products segment and
$2 million in its fertilizer segment (see Note 9 of the notes to the
consolidated financial statements).
(2) In the first quarter of 2004, Bunge recorded in cost of goods sold in
its consolidated statement of income a pretax long-lived asset
impairment charge of $3 million in its edible oil products segment in
North America related to its refining and packaging operations. In the
fourth quarter of 2004, Bunge recorded long-lived asset impairment
charges of $10 million in its agribusiness segment related to the
oilseed operations in Western Europe and $4 million in its edible oil
products segment related to the refining and packaging operations in
South America. In addition, Bunge recorded a restructuring charge of $7
million in its agribusiness segment related to the oilseed operations
in Western Europe (see Note 9 of the notes to the consolidated
financial statements).
F-47
(3) Diluted earnings per share include common shares that would have been
issuable upon the conversion of convertible notes and related interest
expense in the calculation of diluted earnings per share for the period
presented (see Note 22 of the notes to the consolidated financial
statements).
(4) Earnings per share for both basic and diluted is computed independently
for each period presented. As a result, the sum of the quarterly
earnings per share for the years ended December 31, 2005 and 2004 does
not equal the total computed for the year.
28. Subsequent Events
On February 24, 2006, Bunge announced that it will pay a regular
quarterly cash dividend of $.15 per share on May 31, 2006 to shareholders of
record on May 17, 2006. In addition, on February 28, 2006, Bunge paid a regular
quarterly cash dividend of $.15 per share to shareholders of record on February
14, 2006.
F-48