ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-16625
BUNGE LIMITED
(Exact name of registrant as specified in its charter)
Bermuda
98-0231912
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
50 Main Street, White Plains, New York
10606
(Address of principal executive offices)
(Zip Code)
(914) 684-2800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller
reporting company)
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act of 1934). Yes No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, $0.01 par value per share
BG
New York Stock Exchange
As of May 3, 2019 the number of shares issued of the registrant was:
Common shares, par value $.01 per share: 141,477,794
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION, PRINCIPLES OF CONSOLIDATION, AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of Bunge Limited (“Bunge”), its subsidiaries and variable interest entities (“VIEs”) in which Bunge is considered to be the primary beneficiary, and as a result, include the assets, liabilities, revenues and expenses of all entities over which Bunge has a controlling financial interest. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to Securities and Exchange Commission (“SEC”) rules. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. The condensed consolidated balance sheet at December 31, 2018 has been derived from Bunge’s audited consolidated financial statements at that date. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019. The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018, forming part of Bunge’s 2018 Annual Report on Form 10-K filed with the SEC on February 22, 2019.
Cash, Cash Equivalents, and Restricted Cash
Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet that sums to the total of the same such amounts shown in the condensed consolidated statement of cash flows.
(US$ in millions)
March 31, 2019
March 31, 2018
Cash and cash equivalents
$
464
$
287
Restricted cash included in other current assets
5
5
Total
$
469
$
292
Statement of Cash Flows
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). Subsequent to the Company's initial adoption of ASU 2016-15, additional interpretative guidance was released by the SEC in the third quarter of 2018 that clarified the method to be used for calculating the cash received from payments on the deferred purchase price of securitized receivables. This additional guidance indicated that an entity must evaluate daily transaction activity to calculate the value of cash received from payments on the deferred purchase price. The company has applied this guidance on a retrospective basis, effective with the Form 10-Q for the quarterly period ended September 30, 2018, which resulted in additional reclassification of cash inflows from operating activities to cash inflows from investing activities. Therefore, the condensed consolidated statement of cash flows for the three months ended March 31, 2018 and certain amounts in Note 14, Trade Receivables Securitization Program, have been revised to reflect this change.
2.
ACCOUNTING PRONOUNCEMENTS
The below outlines updates on certain previously disclosed ASUs.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which introduces a new accounting model, referred to as the current expected credit losses ("CECL") model, for estimating credit losses on certain financial instruments and expands the disclosure requirements for estimating such credit losses. Under the new model, an entity is required to estimate the credit losses expected over the life of an exposure (or pool of
exposures). The guidance also amends the current impairment model for debt securities classified as available-for-sale securities. The new guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Bunge is evaluating the impact of this standard on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
On January 1, 2019 the Company adopted ASU 2016-02, Leases (Topic 842). Under the new provisions, all leases, except short-term leases, are recognized on the balance sheet as right-of-use assets and lease liabilities for the obligation to make payments under such leases. Bunge has elected the amended transition approach provided by ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows entities to apply the guidance as of the date of initial application by recognizing a cumulative-effect adjustment to opening retained earnings, with no retrospective adjustments. The Company also elected the package of practical expedients that permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification, and initial direct costs, as well as the practical expedient to not separate lease components from non-lease components in accounting for all classes of underlying assets. Upon adoption, the Company recorded $1,006 million of operating lease assets and $962 million of operating lease liabilities. Included in Operating lease assets at January 1, 2019 was $44 million of prepaid lease balances that were reclassified from Other non-current assets.
On January 1, 2019 the Company adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Act"). Consequently, the ASU eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. However, because this ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company's stranded tax effects relate to unrecognized costs associated with certain pension plans for which the tax benefit was initially recorded to AOCI. Absent this ASU, the Company's policy is to release stranded tax effects upon the pension plans' termination. Upon the adoption of this ASU, the Company elected to reclassify the income tax effects of the Tax Act, resulting in a decrease to AOCI and an increase to retained earnings of $21 million.
3. GLOBAL COMPETITIVENESS PROGRAM
In July 2017, Bunge announced a comprehensive global competitiveness program to improve its cost position and deliver increased value to shareholders (the “Global Competitiveness Program”). When fully implemented, the Global Competitiveness Program is expected to reduce the Company’s overhead costs by approximately $250 million annually by the end of 2019. The Company identified key elements of its strategy to meet this goal, including adopting a zero-based budgeting process that will target excess costs in specific budget categories and improving efficiency and scalability by simplifying organizational structures, streamlining processes and consolidating back office functions globally. In conjunction with the Global Competitiveness Program, the Company has implemented other cost reduction and strategic initiatives to enhance the efficiency and performance of the Company’s business.
The table below sets forth, by segment, the types of costs recorded for the Global Competitiveness Program.
Three Months Ended March 31,
2019
2018
(US$ in millions)
Severance and Other Employee Benefit Costs
Consulting and Professional Services
Other Program Costs
Total Program Costs
Severance and Other Employee Benefit Costs
Consulting and Professional Services
Total Program Costs
Agribusiness Segment
$
2
$
2
$
1
$
5
$
5
$
6
$
11
Edible Oils Segment
1
1
—
2
1
1
2
Milling Segment
—
—
—
—
1
1
2
Sugar and Bioenergy Segment
(1
)
—
—
(1
)
—
1
1
Total
$
2
$
3
$
1
$
6
$
7
$
9
$
16
In addition to the above charges, nil and $1 million of severance and other employee benefit costs were recorded related to other industrial productivity initiatives for the three months ended March 31, 2019 and 2018, respectively. For the
three months ended March 31, 2019 and 2018 costs recorded above, nil and $3 million, respectively, were recorded in Cost of goods sold and $6 million and $14 million, respectively, were recorded in Selling, general and administrative expenses.
Bunge's liability associated with the Global Competitiveness Program and other associated initiatives is primarily comprised of accruals for severance and other employee benefit costs. The following table sets forth the activity affecting the liability for severance and other employee benefit costs related to the Global Competitiveness Program and other associated initiatives, which is recorded in Other current liabilities on the condensed consolidated balance sheet.
(US$ in millions)
Severance and Other Employee Benefit Costs
Balance at January 1, 2019
$
3
Charges incurred
2
Cash payments
(2
)
Balance at March 31, 2019
$
3
In addition to the cash charges described above, the Company's restructuring initiatives may include the sale or disposal of long-lived assets and rationalization of certain investments. As Bunge continues to review its opportunities, certain gains and charges may be recorded in earnings, including those related to the disposal of assets or investments. For the three months ended March 31, 2019 and 2018, nil and $1 million, respectively, of such gains have been recognized.
4. LEASES
Bunge routinely leases storage facilities, transportation equipment, land, and office facilities which are typically classified as operating leases. The accounting for some of Bunge's leases may require significant judgment when determining whether a contract is or contains a lease, the lease term, and the likelihood of renewal or termination options. Leases with an initial term of more than 12 months are recognized on the balance sheet as right-of-use assets (Operating lease assets) and lease liabilities for the obligation to make payments under such leases (Current operating lease obligations and Non-current operating lease obligations). As of the lease commencement date, the lease liability is initially measured as the present value of lease payments not yet paid. The lease asset is initially measured equal to the lease liability and adjusted for lease payments made at or before lease commencement (e.g., prepaid rent), lease incentives, and any initial direct costs. Over time, the lease liability is reduced for lease payments made and the lease asset is reduced through expense, classified as either Cost of goods sold or Selling, general and administrative expense depending upon the nature of the lease. Lease assets are subject to review for impairment in a manner consistent with Property, plant and equipment. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet, and lease expense for these short-term leases is recognized on a straight-line basis over the lease term.
The Company’s leases range in length of term, with an average remaining lease term of 6.4 years, but with certain land leases continuing for up to 94 years. Additionally, certain leases contain renewal options that can extend the lease term up to an additional 5 years. Renewal options are generally exercisable solely at the Company’s discretion. When a renewal option is reasonably certain to be exercised, such additional terms are considered when calculating the associated operating lease asset and liability. When determining the lease liability at commencement of the lease, the present value of lease payments is based on the Company’s incremental borrowing rate determined using a portfolio approach and the Company’s incremental cost of debt, adjusted to arrive to the rate in the applicable country and for the applicable term of the lease, as the rate implicit in the lease is generally not readily determinable. As of March 31, 2019, such weighted average discount rate was 6.8%.
Certain of the Company’s freight supply agreements for ocean freight vessels and rail cars, as well as land leases associated with agricultural partnership agreements for the production of sugarcane, may include rental payments that are variable in nature. Variable payments on time charter agreements for ocean freight vessels under freight supply agreements are dependent on then current market daily hire rates. Variable payments for certain rail cars can be based on volumes, and in some cases, benchmark interest rates. Payments under the Company's agricultural partnership agreements in Brazil are dependent on the quantity of sugarcane produced per hectare, the total recoverable sugar ("ATR") per ton of sugarcane produced, and the price for each kilogram of ATR as determined by Consecana, the state of São Paulo sugarcane, sugar and ethanol council. Such variable payments are not included in the calculation of the associated operating lease asset or liability subsequent to the inception date of the associated lease and are recorded as expense in the period in which the adjustment to the variable payment obligation is incurred. Certain of the Company’s lease agreements related to railcars and barges contain residual value guarantees (see Note 16, Commitments and Contingencies). None of the Company’s lease agreements contain material restrictive covenants.
Supplemental cash flow information related to leases was as follows:
(US$ in millions)
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
79
Supplemental noncash information:
Right-of-use assets obtained in exchange for lease obligations
$
70
Maturities of lease liabilities for operating leases as of March 31, 2019, are as follows:
(US$ in millions)
Remaining in 2019
$
215
2020
237
2021
197
2022
157
2023
117
Thereafter
289
Total lease payments (1)
1,212
Less imputed interest
248
Present value of lease liabilities
$
964
(1) Minimum lease payments have not been reduced by minimum sublease income receipts of $42 million due in future periods under non-cancelable subleases. Non-cancelable subleases primarily relate to an agreement with a third party for the use of a portion of a port terminal facility with a remaining sublease term of approximately 5 years, as well as an agreement with an unconsolidated joint venture in which Bunge subleases rail cars with remaining sublease terms of approximately three to four years. Additionally, Bunge may enter into re-let agreements to sell the right to use ocean freight vessels under time charter agreements when excess capacity is available.
As of March 31, 2019, the Company has additional operating leases for freight supply agreements on ocean freight vessels, that have not yet commenced, of $162 million. These operating leases will commence in 2019 and 2020, with lease terms of up to seven years.
The following pertains to previously disclosed information from Note 21, Commitments and contingencies and Note 26, Lease commitments, contained in Bunge's 2018 Annual Report on Form 10-K, which incorporates information about leases now in scope of ASC 842, Leases, disclosed above.
Operating lease for storage facilities, transportation equipment and office facilities—Future minimum lease payments by year and in the aggregate under non-cancelable operating leases with initial term of one year or more at December 31, 2018 are as follows:
(US$ in millions)
2019
$
134
2020
107
2021
84
2022
58
2023
48
Thereafter
126
Total (1)
$
557
(1) Minimum lease payments have not been reduced by minimum sublease income receipts of $43 million due in future periods under non-cancelable subleases.
Freight Supply Agreements—In the ordinary course of business, Bunge enters into time charter agreements for the use of ocean freight vessels for the purpose of transporting agricultural commodities. In addition, Bunge sells the right to use these ocean freight vessels when excess freight capacity is available. These agreements generally range from two months to approximately seven years. Future minimum payment obligations due under these agreements as of December 31, 2018 are as follows:
(US$ in millions)
2019
$
172
2020 and 2021
176
2022 and 2023
121
2024 and thereafter
37
Total
$
506
5. TRADE STRUCTURED FINANCE PROGRAM
Bunge engages in various trade structured finance activities to leverage the value of its trade flows across its operating regions. For the three months ended March 31, 2019 and 2018, net returns from these activities were $5 million and $8 million, respectively, and were included as a reduction of cost of goods sold in the accompanying condensed consolidated statements of income. These activities include programs under which Bunge generally obtains U.S. dollar-denominated letters of credit (“LCs”), each based on an underlying commodity trade flow, from financial institutions and time deposits denominated in either the local currency of the financial institutions' counterparties or in U.S. dollars, as well as foreign exchange forward contracts, and other programs in which trade related payables are set-off against receivables, all of which are subject to legally enforceable set-off agreements.
As of March 31, 2019 and December 31, 2018, time deposits and LCs of $4,543 million and $4,729 million, respectively, were presented net on the condensed consolidated balance sheets as the criteria of ASC 210-20, Offsetting, had been met. At March 31, 2019 and December 31, 2018, time deposits, including those presented on a net basis, carried weighted-average interest rates of 3.82% and 3.76%, respectively. During the three months ended March 31, 2019 and 2018, total net proceeds from issuances of LCs were $1,117 million and $1,488 million, respectively. These cash inflows are offset by
the related cash outflows resulting from placement of the time deposits and repayment of the LCs. All cash flows related to the programs are included in operating activities in the condensed consolidated statements of cash flows.
6.
INVENTORIES
Inventories by segment are presented below. Readily marketable inventories (“RMI”) are agricultural commodity inventories, such as soybeans, soybean meal, soybean oil, corn, and wheat carried at fair value because of their commodity characteristics, widely available markets, and international pricing mechanisms. Bunge engages in trading and distribution, or merchandising activities, and part of RMI can be attributable to such activities and is not held for processing. All other inventories are carried at lower of cost or net realizable value.
(US$ in millions)
March 31, 2019
December 31, 2018
Agribusiness (1)
$
4,623
$
4,551
Edible Oil Products (2)
731
742
Milling Products
243
220
Sugar and Bioenergy (3)
253
280
Fertilizer
88
78
Total
$
5,938
$
5,871
(1)
Includes RMI of $4,372 million and $4,365 million at March 31, 2019 and December 31, 2018, respectively. Of these amounts, $3,360 million and $3,300 million can be attributable to merchandising activities at March 31, 2019 and December 31, 2018, respectively.
(2)
Includes RMI of $97 million and $88 million at March 31, 2019 and December 31, 2018, respectively.
(3)
Includes RMI of $33 million and $79 million at March 31, 2019 and December 31, 2018, respectively. Of these amounts, $27 million and $74 million can be attributable to merchandising activities at March 31, 2019 and December 31, 2018, respectively.
7.
OTHER CURRENT ASSETS
Other current assets consist of the following:
(US$ in millions)
March 31, 2019
December 31, 2018
Unrealized gains on derivative contracts, at fair value
$
1,014
$
1,071
Prepaid commodity purchase contracts (1)
238
253
Secured advances to suppliers, net (2)
301
257
Recoverable taxes, net
473
500
Margin deposits
248
348
Marketable securities, at fair value, and other short-term investments
343
162
Deferred purchase price receivable, at fair value (3)
97
128
Income taxes receivable
48
102
Prepaid expenses
144
165
Other
214
185
Total
$
3,120
$
3,171
(1)
Prepaid commodity purchase contracts represent advance payments against contracts for future delivery of specified quantities of agricultural commodities.
Bunge provides cash advances to suppliers, primarily Brazilian farmers of soybeans and sugarcane, to finance a portion of the suppliers’ production costs. Bunge does not bear any of the costs or operational risks associated with the related growing crops. The advances are largely collateralized by future crops and physical assets of the suppliers, carry a local market interest rate, and settle when the farmer’s crop is harvested and sold. The secured advances to farmers are reported net of allowances of $1 million at March 31, 2019 and $1 million at December 31, 2018.
Interest earned on secured advances to suppliers of $7 million and $10 million for the three months ended March 31, 2019 and 2018, respectively, is included in net sales in the condensed consolidated statements of income.
(3)
Deferred purchase price receivable represents additional credit support for the investment conduits in Bunge’s trade receivables securitization program (see Note 14).
Marketable Securities and Other Short-Term Investments - Bunge invests in foreign government securities, corporate debt securities, deposits, and other securities. The following is a summary of amounts recorded in the condensed consolidated balance sheets for marketable securities and other short-term investments.
(US$ in millions)
March 31, 2019
December 31, 2018
Foreign government securities
$
61
$
55
Corporate debt securities
115
91
Certificates of deposit/time deposits
164
15
Other
3
1
Total
$
343
$
162
As of March 31, 2019, total marketable securities and other short-term investments includes $176 million that are recorded at fair value and $167 million of other short-term investments. As of December 31, 2018, total marketable securities and other short-term investments includes $144 million that are recorded at fair value and $18 million as other short-term investments. Due to the short-term nature of these investments, carrying value approximates fair value.
8.
OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
(US$ in millions)
March 31, 2019
December 31, 2018
Recoverable taxes, net (1)
$
156
$
112
Judicial deposits (1)
116
115
Other long-term receivables
6
8
Income taxes receivable (1)
230
221
Long-term investments
85
91
Affiliate loans receivable
29
29
Long-term receivables from farmers in Brazil, net (1)
91
93
Other
108
154
Total
$
821
$
823
(1)
These non-current assets arise primarily from Bunge’s Brazilian operations and their realization could take several years.
Recoverable taxes, net - Recoverable taxes are reported net of allowances of $27 million and $27 million at March 31, 2019 and December 31, 2018, respectively.
Judicial deposits - Judicial deposits are funds that Bunge has placed on deposit with the courts in Brazil. These funds are held in judicial escrow relating to certain legal proceedings pending legal resolution and bear interest at the SELIC rate, which is the benchmark rate of the Brazilian central bank.
Income taxes receivable - Income taxes receivable includes overpayments of current income taxes plus accrued interest. These income tax prepayments are expected to be primarily utilized for settlement of future income tax obligations. Income taxes receivable in Brazil bear interest at the SELIC rate.
Affiliate loans receivable - Affiliate loans receivable are primarily interest-bearing receivables from unconsolidated affiliates with a remaining maturity of greater than one year.
Long-term receivables from farmers in Brazil, net - Bunge provides financing to farmers in Brazil, primarily through secured advances against farmer commitments to deliver agricultural commodities (primarily soybeans) upon harvest of the then-current year’s crop and through credit sales of fertilizer to farmers. Certain of such long-term receivables from farmers are originally recorded in other current assets as prepaid commodity contracts or secured advances to suppliers (see Note 7) and reclassified to other non-current assets when collection issues with farmers arise and amounts become past due and resolution of matters is expected to take more than one year.
The average recorded investment in long-term receivables from farmers in Brazil for the three months ended March 31, 2019 and the year ended December 31, 2018 was $203 million and $215 million, respectively. The table below summarizes Bunge’s recorded investment in long-term receivables from farmers in Brazil and the related allowance amounts.
March 31, 2019
December 31, 2018
(US$ in millions)
Recorded
Investment
Allowance
Recorded
Investment
Allowance
For which an allowance has been provided:
Legal collection process (1)
$
105
$
90
$
105
$
89
Renegotiated amounts (2)
15
15
17
17
For which no allowance has been provided:
Legal collection process (1)
48
—
51
—
Renegotiated amounts (2)
9
—
10
—
Other long-term receivables
19
—
16
—
Total
$
196
$
105
$
199
$
106
(1)
All amounts in legal process are considered past due upon initiation of legal action.
(2)
All renegotiated amounts are current on repayment terms.
The table below summarizes the activity in the allowance for doubtful accounts related to long-term receivables from farmers in Brazil.
Three Months Ended March 31,
(US$ in millions)
2019
2018
Beginning balance
$
106
$
113
Bad debt provisions
1
4
Recoveries
(1
)
(1
)
Foreign exchange translation
(1
)
—
Ending balance
$
105
$
116
9.
INCOME TAXES
Income tax expense is provided on an interim basis based on management’s estimate of the annual effective income tax rate and includes the tax effects of certain discrete items, such as changes in tax laws or tax rates or other unusual or non-recurring tax adjustments in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The effective tax rate is highly dependent on the geographic distribution of Bunge’s worldwide earnings or losses and tax regulations in each jurisdiction. Management regularly monitors the assumptions used in estimating its annual effective tax rate and adjusts estimates accordingly, including the realizability of deferred tax assets. Volatility in earnings within a taxing jurisdiction could result in a determination that additional valuation allowance adjustments may be warranted.
For the three months ended March 31, 2019 and 2018, income tax expense related to continuing operations was $38 million and $19 million, respectively. The effective tax rates for the first quarters of 2019 and 2018 were higher than the U.S. statutory rate of 21% primarily due to an unfavorable earnings mix associated with pretax losses in certain jurisdictions.
As a global enterprise, Bunge files income tax returns that are subject to periodic examination and challenge by federal, state and foreign tax authorities. In many jurisdictions, income tax examinations, including settlement negotiations or litigation, may take several years to finalize. While it is difficult to predict the outcome or timing of resolution of any particular matter, management believes that the condensed consolidated financial statements reflect the largest amount of tax benefit that is more likely than not to be realized.
10.
OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
(US$ in millions)
March 31, 2019
December 31, 2018
Unrealized losses on derivative contracts, at fair value
$
763
$
1,192
Accrued liabilities
517
618
Advances on sales
310
405
Other
250
287
Total
$
1,840
$
2,502
11.
FAIR VALUE MEASUREMENTS
The fair value standard describes three levels within its hierarchy that may be used to measure fair value.
Level
Description
Financial Instrument (Assets / Liabilities)
Level 1
Quoted price (unadjusted) in active markets for identical assets or liabilities.
Exchange traded derivative contracts.
Marketable securities in active markets.
Level 2
Observable inputs, including adjusted Level 1 quotes, quoted prices for similar assets or liabilities, quoted prices in markets that are less active than traded exchanges and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Readily marketable inventories.
Over-the-counter (‘‘OTC’’) commodity purchase and sale contracts.
OTC derivatives whose value is determined using pricing models with inputs that are generally based on exchange traded prices, adjusted for location specific inputs that are primarily observable in the market or can be derived principally from or corroborated by observable market data.
Marketable securities in less active markets.
Level 3
Unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities.
Assets and liabilities whose value is determined using proprietary pricing models, discounted cash flow methodologies or similar techniques.
Assets and liabilities for which the determination of fair value requires significant management judgment or estimation.
In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of input that is a significant component of the fair value measurement determines the placement of the entire fair value measurement in the hierarchy. Bunge’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.
Bunge’s policy regarding the timing of transfers between levels, including both transfers into and transfers out of Level 3, is to measure and record the transfers at the end of the reporting period.
For a further definition of fair value and the associated fair value levels, refer to the Financial Instruments and Fair Value Measurements footnote included in Bunge's 2018 Annual Report on Form 10-K.
The following table sets forth, by level, Bunge’s assets and liabilities that were accounted for at fair value on a recurring basis.
Fair Value Measurements at Reporting Date
March 31, 2019
December 31, 2018
(US$ in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets:
Readily marketable inventories (Note 6)
$
—
$
3,869
$
633
$
4,502
$
—
$
4,286
$
246
$
4,532
Unrealized gain on derivative contracts (1):
Interest rate
—
19
—
19
—
6
—
6
Foreign exchange
—
443
—
443
—
473
—
473
Commodities
64
422
27
513
128
407
18
553
Freight
15
—
4
19
6
—
6
12
Energy
34
—
—
34
30
—
—
30
Credit
—
1
—
1
—
—
—
—
Deferred purchase price receivable (Note 14)
—
97
—
97
—
128
—
128
Other (2)
96
100
—
196
67
98
—
165
Total assets
$
209
$
4,951
$
664
$
5,824
$
231
$
5,398
$
270
$
5,899
Liabilities:
Trade accounts payable (3)
$
—
$
449
$
397
$
846
$
—
$
394
$
47
$
441
Unrealized loss on derivative contracts (4):
Interest rate
—
24
—
24
—
42
—
42
Foreign exchange
—
398
—
398
—
499
—
499
Commodities
49
229
26
304
152
446
23
621
Freight
21
—
5
26
13
—
6
19
Energy
26
—
2
28
43
—
1
44
Equity
1
—
—
1
—
—
—
—
Total liabilities
$
97
$
1,100
$
430
$
1,627
$
208
$
1,381
$
77
$
1,666
(1)
Unrealized gains on derivative contracts are generally included in other current assets. There were $15 million and $3 million included in other non-current assets at March 31, 2019 and December 31, 2018, respectively.
(2)
Other includes the fair values of marketable securities and investments in other current assets and other non-current assets.
(3)
These payables are hybrid financial instruments for which Bunge has elected the fair value option.
(4)
Unrealized losses on derivative contracts are generally included in other current liabilities. There are $18 million and $33 million included in other non-current liabilities at March 31, 2019 and December 31, 2018, respectively.
Readily marketable inventories—RMI reported at fair value are valued based on commodity futures exchange quotations, broker or dealer quotations, or market transactions in either listed or OTC markets with appropriate adjustments for differences in local markets where Bunge's inventories are located. In such cases, the inventory is classified within Level 2. Certain inventories may utilize significant unobservable data related to local market adjustments to determine fair value. In such cases, the inventory is classified as Level 3.
If Bunge used different methods or factors to determine fair values, amounts reported as unrealized gains and losses on derivative contracts and RMI at fair value in the consolidated balance sheets and consolidated statements of income could differ. Additionally, if market conditions change subsequent to the reporting date, amounts reported in future periods as unrealized gains and losses on derivative contracts and RMI at fair value in the consolidated balance sheets and consolidated statements of income could differ.
Derivatives—Exchange traded futures and options contracts and exchange cleared contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. The majority of the Bunge’s exchange-traded agricultural commodity futures are cash-settled on a daily basis and, therefore, are not included in these tables. Bunge's forward
commodity purchase and sale contracts are classified as derivatives along with other OTC derivative instruments relating primarily to freight, energy, foreign exchange and interest rates, and are classified within Level 2 or Level 3 as described below. Bunge estimates fair values based on exchange quoted prices, adjusted as appropriate for differences in local markets. These differences are generally valued using inputs from broker or dealer quotations, or market transactions in either the listed or OTC markets. In such cases, these derivative contracts are classified within Level 2.
OTC derivative contracts include swaps, options and structured transactions that are generally fair valued using quantitative models that require the use of multiple market inputs including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets which are not highly active, other observable inputs relevant to the asset or liability, and market inputs corroborated by correlation or other means. These valuation models include inputs such as interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain OTC derivatives trade in less active markets with less availability of pricing information and certain structured transactions can require internally developed model inputs that might not be observable in or corroborated by the market.
Level 3 Measurements
The following relates to Level 3 measurements. An instrument may transfer into or out of Level 3 due to inputs becoming either observable or unobservable.
Level 3 Readily marketable inventories and other—The significant unobservable inputs resulting in Level 3 classification for RMI, physically settled forward purchase and sale contracts, and trade accounts payable, relate to certain management estimations regarding costs of transportation and other local market or location-related adjustments, primarily freight related adjustments in the interior of Brazil and the lack of market corroborated information in Canada. In both situations, Bunge uses proprietary information such as purchase and sale contracts and contracted prices to value freight, premiums and discounts in its contracts. Movements in the price of these unobservable inputs alone would not have a material effect on Bunge's financial statements as these contracts do not typically exceed one future crop cycle.
Level 3 Derivatives—Level 3 derivative instruments utilize both market observable and unobservable inputs within the fair value measurements. These inputs include commodity prices, price volatility, interest rates, volumes and locations.
The tables below present reconciliations for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2019 and 2018. These instruments were valued using pricing models that management believes reflect the assumptions that would be used by a marketplace participant.
Three Months Ended March 31, 2019
(US$ in millions)
Readily Marketable Inventories
Derivatives, Net
Trade
Accounts
Payable
Total
Balance, January 1, 2019
$
246
$
(6
)
$
(47
)
$
193
Total gains and losses (realized/unrealized) included in cost of goods sold (1)
37
2
5
44
Purchases
699
—
(361
)
338
Sales
(570
)
—
—
(570
)
Issuances
—
—
—
—
Settlements
—
1
(21
)
(20
)
Transfers into Level 3
276
1
27
304
Transfers out of Level 3
(55
)
—
—
(55
)
Balance, March 31, 2019
$
633
$
(2
)
$
(397
)
$
234
1)
Readily marketable inventories, derivatives, net and trade accounts payable, include gains/(losses) of $37 million, $6 million and $5 million, respectively, that are attributable to the change in unrealized gains/(losses) relating to Level 3 assets and liabilities still held at March 31, 2019.
Total gains and losses (realized/unrealized) included in cost of goods sold (1)
63
(3
)
10
70
Purchases
613
9
(248
)
374
Sales
(279
)
—
—
(279
)
Issuances
—
(9
)
—
(9
)
Settlements
—
8
40
48
Transfers into Level 3
124
(2
)
(3
)
119
Transfers out of Level 3
(26
)
—
—
(26
)
Balance, March 31, 2018
$
860
$
5
$
(317
)
$
548
1) Readily marketable inventories, derivatives, net and trade accounts payable, includes gains/(losses) of $(3) million, $(12) million and $0 million, respectively, that are attributable to the change in unrealized gains/(losses) relating to Level 3 assets and liabilities still held at March 31, 2018.
12.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Bunge uses derivative instruments to manage several market risks, such as interest rate, foreign currency rate, and commodity risk. Some of those hedges Bunge enter into qualify for hedge accounting in the financial statements (Hedge Accounting Derivatives) and some, while intended as economic hedges, do not qualify (Economic Hedge Derivatives). As these impact the financial statements in different ways, they are discussed separately below.
Hedge Accounting Derivatives - Bunge uses derivatives in qualifying hedge accounting relationships to manage certain of its interest rate and foreign currency risks. In executing these hedge strategies, Bunge primarily relies on the shortcut and critical terms match methods in designing its hedge accounting strategy, which results in little to no net earnings impact for these hedge relationships. Bunge monitors these relationships on a quarterly basis and will perform a quantitative analysis to validate the assertion that the hedges are highly effective if there are changes to the hedged item or hedging derivative.
Fair value hedges - These derivatives are used to hedge the effect of interest rate and currency exchange rate changes on certain long-term debt. Under hedge accounting, the derivative is measured at fair value and the carrying value of hedged debt is adjusted for the change in value related to the exposure being hedged, with both adjustments offset to earnings. In other words, the earnings effect of an increase in the fair value of the derivative will be substantially offset by the earnings effect of the increase in the carrying value of the hedged debt. The net impact of hedge accounting for interest rate swaps is recognized in Interest expense. For cross currency swaps the changes in currency risk on the derivative are recognized in Foreign exchange gains (losses), and the changes in interest rate risk are recognized in Interest expense. Changes in basis risk are held in Accumulated other comprehensive income (loss) until realized through the coupon.
Cash flow hedges of currency risk - Bunge manages currency risk on certain forecasted purchases, sales, and selling, general and administrative expenses with currency forwards. The change in the value of the forward is classified in Accumulated other comprehensive income (loss) until the transaction affects earnings, at which time the change in value of the currency forward is reclassified to Net sales, Cost of goods sold or Selling, general and administrative expenses. These hedges mature at various times through November 2020. Of the amount currently in Accumulated other comprehensive income (loss), $0 million is expected to be reclassified to earnings in the next twelve months.
Net investment hedges - Bunge hedges the currency risk of certain of its foreign subsidiaries with currency forwards and intercompany loans for which the currency risk is remeasured through Accumulated other comprehensive income (loss). For currency forwards, the forward method is used. The change in the value of the forward is classified in Accumulated other comprehensive income (loss) until the transaction affects earnings.
The table below provides information about the balance sheet values of hedged items and the notional amount of derivatives used in hedging strategies. The notional amount of the derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). The notional amount is used to compute interest or
other payment streams to be made under the contract and is a measure of Bunge’s level of activity. Bunge discloses derivative notional amounts on a gross basis.
(US$ in millions)
March 31, 2019
December 31, 2018
Hedging instrument type:
Fair value hedges of interest rate risk
Carrying value of hedged debt
$
2,238
$
2,229
Cumulative adjustment to long-term debt from application of hedge accounting
$
(3
)
$
(29
)
Interest rate swap - notional amount
$
2,249
$
2,266
Fair value hedges of currency risk
Carrying value of hedged debt
$
311
$
312
Cross currency swap - notional amount
$
312
$
313
Cash flow hedges of currency risk
Foreign currency forward - notional amount
$
81
$
50
Net investment hedges
Foreign currency forward - notional amount
$
1,503
$
1,888
Carrying value of non-derivative hedging instrument
$
895
$
912
Economic Hedge Derivatives - In addition to using derivatives in qualifying hedge relationships, Bunge enters into derivatives to economically hedge its exposure to a variety of market risks it incurs in the normal course of operations.
Interest rate derivatives are used to hedge exposures to the Company's financial instrument portfolios and debt issuances. The impact of changes in fair value of these instruments is primarily presented in Interest expense.
Currency derivatives are used to hedge the balance sheet and commercial exposures that arise from the Company's global operations. The impact of changes in fair value of these instruments is presented in Cost of goods sold when hedging commercial exposures and Foreign exchange gains (losses) when hedging monetary exposures.
Agricultural commodity derivatives are used primarily to manage the Company's inventory and forward purchase and sales contracts. Contracts to purchase agricultural commodities generally relate to current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of agricultural commodities generally do not extend beyond one future crop cycle. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
Bunge uses derivative instruments referred to as forward freight agreements ("FFA") and FFA options to hedge portions of its current and anticipated ocean freight costs. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
Bunge uses energy derivative instruments to manage its exposure to volatility in energy costs. Hedges may be entered into for natural gas, electricity, coal and fuel oil, including bunker fuel. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
The Company may also enter into other derivatives, including credit default swaps and equity derivatives to manage exposure to credit risk and broader macroeconomic risks, respectively. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
The table below summarizes the volume of economic derivatives as of March 31, 2019 and December 31, 2018. For those contracts traded bilaterally through the over-the-counter markets (e.g., forwards, forward rate agreements ("FRA") and swaps), the gross position is provided. For exchange traded (e.g., futures, FFAs and options) and cleared positions (e.g., energy swaps), the net position is provided.