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JBS S.A
Brazilian corporate legislation
Quarterly
Financial
Statements
and
Independent Auditor's Review Report
As of September 30, 2010 and 2009
1
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JBS S.A.
Balance sheets
(In thousands of Reais)
September 30, 2010
December 31,2009
September 30, 2010
December 31,2009
ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT ASSETS
CURRENT LIABILITIES
Cash and cash equivalents (Note 7)
2,652,369
4,097,027
Trade accounts payable (Note 15)
437,334
627,542
Trade accounts receivable, net (Note 8)
1,709,523
1,273,377
Loans and financings (Note 16)
4,149,607
3,926,390
Inventories (Note 9)
1,019,602
758,536
Payroll, social charges and tax obligation (Note 19)
339,542
287,082
Recoverable taxes (Note 10)
1,041,479
841,306
Declared dividends
-
122,953
Prepaid expenses
15,652
13,233
Debit with third parties for investment (Note 21)
124,658
427,523
Other current assets
207,426
296,882
Other current liabilities
311,716
485,145
TOTAL CURRENT ASSETS
6,646,051
7,280,361
TOTAL CURRENT LIABILITIES
5,362,857
5,876,635
NON-CURRENT ASSETS
NON-CURRENT LIABILITIES
Long-term assets
Loans and financings (Note 16)
6,428,106
5,311,023
Convertible debentures (Note 18)
3,462,212
3,462,212
Judicial deposits and others
58,502
70,640
Deferred income taxes (Note 22)
357,396
375,061
Deferred income taxes (Note 22)
29,924
30,357
Provision for contingencies (Note 20)
131,543
210,088
Recoverable taxes (Note 10)
553,770
550,848
Debit with related parties (Note 11)
1,775,033
1,106,890
Debit with third parties for investment (Note 21)
156,268
162,976
Other non-current liabilities
104,829
56,882
Total long-term assets
642,196
651,845
TOTAL NON-CURRENT LIABILITIES
12,415,387
10,685,132
SHAREHOLDERS' EQUITY (Note 23)
Investments in subsidiaries (Note 12)
10,568,139
7,234,791
Other investments
10
10
Capital stock
18,046,067
16,483,544
Property, plant and equipment, net (Note 13)
7,535,545
7,602,767
Capital reserve
709,172
714,503
Intangible assets, net (Note 14)
11,298,810
11,299,624
Revaluation reserve
108,168
112,352
Profit reserves
885,392
810,538
29,402,504
26,137,192
Valuation adjustments to shareholders' equity
761
(914)
Accumulated translation adjustments
(1,077,790)
(612,392)
Accumulated profit
240,737
-
TOTAL NON-CURRENT ASSETS
30,044,700
26,789,037
18,912,507
17,507,631
TOTAL SHAREHOLDERS' EQUITY
18,912,507
17,507,631
TOTAL ASSETS
36,690,751
34,069,398
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
36,690,751
34,069,398
The accompanying notes are an integral part of the financial statements
2
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JBS S.A.
Statements of income for the nine months period ended September 30, 2010 and 2009
(In thousands of Reais)
Adjusted IFRS
2010
2009
NET SALE REVENUE (Note 24)
8,739,143
3,800,419
Cost of goods sold
(6,863,594)
(3,093,330)
GROSS INCOME
1,875,549
707,089
OPERATING INCOME (EXPENSE)
General and administrative expenses
(364,909)
(140,623)
Selling expenses
(716,184)
(362,222)
Financial income (expense), net (Note 25)
(1,053,105)
(386,837)
Equity in subsidiaries (Note 12)
547,342
177,071
Non-recurring expenses (Note 26)
(56,090)
-
Other (expense) income, net
861
2,045
(1,642,085)
(710,565)
NET INCOME BEFORE TAXES
233,464 (3,476)
Current income taxes
2,155
2,232
Deferred income taxes
934
(11,048)
3,089
(8,816)
NET INCOME (LOSS) OF THE PERIOD
236,553
(12,292)
Net Income (Basic) per thousand shares reais
93.77
(8.79)
Statement of EBITDA (Earnings before income taxes, interest, depreciation
and amortization)
Net income before taxes
233,464
(3,476)
Financial income (expense), net (Note 25)
1,053,105
386,837
Depreciation and amortization
214,476
68,192
Equity in subsidiaries (Note 12)
(547,342)
(177,071)
Non-recurring expenses (Note 26)
56,090
-
AMOUNT OF EBITDA
1,009,793
274,481
The accompanying notes are an integral part of the financial statements
3
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JBS S.A.
Statements of income for the three months period ended September 30, 2010 and 2009
(In thousands of Reais)
Adjusted IFRS
2010
2009
NET SALE REVENUE (Note 24)
3,104,689
1,305,379
Cost of goods sold
(2,418,238)
(1,061,098)
GROSS INCOME
686,451
244,281
OPERATING INCOME (EXPENSE)
General and administrative expenses
(145,967)
(51,117)
Selling expenses
(281,760)
(124,318)
Financial income (expense), net (Note 25)
(139,210)
48,685
Equity in subsidiaries (Note 12)
65,410
78,745
Non-recurring expenses (Note 26)
(45,450)
-
Other (expense) income, net
(3,300)
1,024
(550,277)
(46,981)
NET INCOME BEFORE TAXES
136,174
197,300
Current income taxes
701
770
Deferred income taxes
(3,387)
(13,560)
(2,686)
(12,790)
NET INCOME OF THE PERIOD
133,488
184,510
Net Income (Basic) per thousand shares reais
52.91
131.89
Statement of EBITDA (Earnings before income taxes, interest, depreciation
and amortization)
Net income before taxes
136,174
197,300
Financial income (expense), net (Note 25)
139,210
(48,685)
Depreciation and amortization
70,548
24,723
Equity in subsidiaries (Note 12)
(65,410)
(78,745)
Non-recurring expenses (Note 26)
45,450
-
AMOUNT OF EBITDA
325,972
94,593
The accompanying notes are an integral part of the financial statements
4
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JBS S.A.
Statement of changes in shareholders' equity for the nine months period ended September 30, 2010
(In thousands of Reais)
Capital
reserve
Valuation
adjustments to Accumulated
Capital
Revaluation
For
Accumulated
stock
Goodwill
reserve
Legal
expansion
Profit
Total
BALANCE AS OF DECEMBER 31, 2009
16,483,544
714,503
112,352
7,768
23,225
(914)
(612,392)
-
16,728,086
Adjustments to first-time adoption of IFRS (note 2)
-
-
-
-
779,545
-
-
-
779,545
BALANCE ADJUSTED AS OF JANUARY 1, 2010
16,483,544
714,503
112,352
7,768
802,770
(914)
(612,392)
-
17,507,631
Capital increase
1,600,000
-
-
-
-
-
-
-
1,600,000
Transaction costs for the issuing of titles and securities
(37,477)
-
-
-
-
-
-
-
(37,477)
Treasury shares
-
(5,331)
-
-
-
-
-
-
(5,331)
Adjustment of net income destination from previous year
-
-
-
-
61,476
-
-
-
61,476
Realization of revaluation reserve
-
-
(4,184)
-
-
-
-
4,184
-
Valuation adjustments in subsidiaries shareholders' equity
-
-
-
-
-
1,675
-
-
1,675
Accumulated translation adjustments in subsidiaries shareholders' equity
-
-
-
-
-
-
42,907
-
42,907
Exchange variation rate of investments in foreign currency
-
-
-
-
-
-
(508,305)
-
(508,305)
Net income of the period
-
-
-
-
-
-
-
236,553
236,553
IFRS adjustment
-
-
-
-
13,378
-
-
-
13,378
BALANCE AS OF SEPTEMBER 30, 2010
18,046,067
709,172
108,168
7,768
877,624
761
(1,077,790)
240,737
18,912,507
The accompanying notes are an integral part of the financial statements
translation
adjustments
Profit reserves
shareholders'
equity
5
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JBS S.A.
Statement of changes in shareholders' equity for the three months period ended September 30, 2010
(In thousands of Reais)
Capital
reserve
Valuation
adjustments to Accumulated
Capital
Revaluation
For
Accumulated
stock
Goodwill
reserve
Legal
expansion
Profit
Total
BALANCE AS OF JUNE 30, 2010
18,047,181
714,503
109,530
7,768
890,184
1,059
(744,943)
105,887
19,131,169
-
Capital increase
-
-
-
-
-
-
-
-
-
Transaction costs for the issuing of titles and securities
(1,114)
-
-
-
-
-
-
-
(1,114)
Treasury shares
-
(5,331)
-
-
-
-
-
-
(5,331)
Realization of revaluation reserve
-
-
(1,362)
-
-
-
-
1,362
-
Valuation adjustments in subsidiaries shareholders' equity
-
-
-
-
-
(298)
-
-
(298)
Accumulated translation adjustments in subsidiaries shareholders' equity
-
-
-
-
-
-
(6,078)
-
(6,078)
Exchange variation rate of investments in foreign currency
-
-
-
-
-
-
(326,769)
-
(326,769)
Net income of the period
-
-
-
-
-
-
-
133,488
133,488
IFRS adjustment
-
-
-
-
(12,560)
-
-
-
(12,560)
BALANCE AS OF SEPTEMBER 30, 2010
18,046,067
709,172
108,168
7,768
877,624
761
(1,077,790)
240,737
18,912,507
The accompanying notes are an integral part of the financial statements
translation
adjustments
Profit Reserves
shareholders'
equity
6
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JBS S.A.
Statements of cash flows for the nine months period ended September 30, 2010 and 2009
(In thousands of Reais)
2010
2009
Cash flow from operating activities
. Net income of the period
236,553
1,554
Adjustments to reconcile net income to cash provided
. Depreciation and amortization
214,476
68,192
. Allowance for doubtful accounts
5,807
4,493
. Equity in subsidiaries
(547,342)
(202,396)
. Write-off of fixed assets
40,956
2,718
. Deferred income taxes
(934)
11,048
. Current and non-current financial charges
102,854
(450,240)
. Provision for contingencies
(78,546)
4,094
. Capital loss on investments
9,199
-
. Adjustment of assets and liabilities to present value
-
325
(16,977)
(560,212)
Variation in operating assets and liabilities
Increase in trade accounts receivable
(549,389)
(41,330)
Decrease (increase) in inventories
(261,066)
243,158
Increase in recoverable taxes
(195,657)
(88,439)
Decrease (increase) in other current and non-current assets
(15,582)
91,002
Decrease in trade accounts payable
(189,807)
(125,050)
Increase (decrease) in other current and non-current liabilities
(479,843)
120,385
Increase in debits with related parties
781,123
1,084,111
Net cash generated by (used in) operating activities
(927,198)
723,625
Cash flow from investing activities
Additions to property, plant and equipment and intangible assets
(432,290)
(412,667)
Increase in investments
(2,858,441)
(71,128)
Net cash used in investing activities
(3,290,731)
(483,795)
Cash flow from financing activities
Loans and financings
5,690,022
1,660,894
Payments of loans and financings
(4,456,167)
(1,721,313)
Capital increase
1,600,000
-
Transaction costs for the issuing of titles and securities
(55,252)
-
Shares acquisition of own emission
(5,331)
(28,530)
Net cash provided by financing activities
2,773,272
(88,949)
Net increase (decrease) in cash and cash equivalents
(1,444,657)
150,881
Cash and cash equivalents at the beginning of the period
4,097,026
1,522,973
Cash and cash equivalents at the end of the period
2,652,369
1,673,854
The accompanying notes are an integral part of the financial statements
7
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JBS S.A.
Statements of cash flows for the three months period ended September 30, 2010 and 2009
(In thousands of Reais)
2010
2009
Cash flow from operating activities
. Net income of the period
133,488
151,495
Adjustments to reconcile net income to cash provided
. Depreciation and amortization
70,548
24,723
. Allowance for doubtful accounts
1,248
1,200
. Equity in subsidiaries
(65,410)
(49,361)
. Write-off of fixed assets
12,185
1,686
. Deferred income taxes
3,387
13,560
. Current and non-current financial charges
(266,536)
(189,046)
. Provision for contingencies
3,529
2,447
. Capital loss on investments
9,199
-
. Adjustment of assets and liabilities to present value
-
1,242
(98,362)
(42,054)
Variation in operating assets and liabilities
Decrease in trade accounts receivable
95,241
8,766
Increase in inventories
(98,135)
(10,767)
Increase in recoverable taxes
(88,135)
(30,353)
Increase in other current and non-current assets
82,835
(19,319)
Increase in trade accounts payable
195,806
1,459
Increase in other current and non-current liabilities
(151,638)
67,154
Increase (decrease) in debits with related parties
(354,746)
156
Net cash generated by (used in) operating activities
(417,134)
(24,958)
Cash flow from investing activities
Additions to property, plant and equipment and intangible assets
(167,866)
(116,790)
Decrease (increase) in investments
15,355
(1,519)
Net cash used in investing activities
(152,511)
(118,309)
Cash flow from financing activities
Loans and financings
2,282,806
266,405
Payments of loans and financings
(817,808)
(350,141)
Transaction costs for the issuing of titles and securities
(18,889)
-
Shares acquisition of own emission
(5,331)
(15,504)
Net cash provided by financing activities
1,440,778
(99,240)
Net increase (decrease) in cash and cash equivalents
871,133
(242,507)
Cash and cash equivalents at the beginning of the period
1,781,236
1,916,361
Cash and cash equivalents at the end of the period
2,652,369
1,673,854
The accompanying notes are an integral part of the financial statements
8
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
1
a) Activities in Brazil
JBS Embalagens Metálicas Ltda. (JBS Embalagens) produces metal cans in its plant located in the State of São Paulo, for the Company use.
The subsidiary JBS Confinamento Ltda. (JBS Confinamento) is located in Castilho, State of São Paulo and in Nazario, State of Goias, and engages in
cattle feedlot operations.
Incorporation of Bertin S.A. (Bertin)
Due to Bertin's incorporation on December 29, 2009 synergy and interaction of JBS and Bertin has been created and, as a result, since December 29,
2009 the Company assumed Bertin's operations.
Bertin was a wholly Brazilian company and was engaged in slaughter, processing and distribution of beef and derivatives, leather processing, processing
and sale of personal hygiene and domestic cleaning products, production of pet food, production of metal packaging, cargo transportation and recycling.
Bertin's activities were grouped into the following business units: meat, leather, electricity, oil, biodiesel, personal care and hygiene, pet products, can
plant, logistics and environmental.
Beef Snacks do Brasil Indústria e Comércio de Alimentos Ltda. (Beef Snacks), an indirect subsidiary of the Company is located in Santo Antônio da
Posse, State of São Paulo, in operation since August 2007 produces Beef Jerky. Beef Snacks purchases fresh meat in the domestic market and exports
to the United States of America.
Due to Bertin's incorporation, the asset and liabilities accounts of Bertin were consolidated into the Company as of December 29, 2009, as well as, on
the interim financial statements as of December 31, 2009.
Bertin had a total of forty nine units, of which fifteen leather units located in the States of São Paulo, Maranhão, Goiás, Mato Grosso, Mato Grosso do
Sul, Espírito Santo, Tocantins, Pará, Rondônia and Minas Gerais; fifteen slaughtering plants located in the States of São Paulo, Mato Grosso, Mato
Grosso do Sul, Goiás, Pará, Tocantins, Bahia, Minas Gerais and Rondônia; six commercial units located in the States of Rio de Janeiro, Bahia, Minas
Gerais, Paraná and Rio Grande do Sul; four cosmetics units in the State of São Paulo and Paraná; two transportation companies located in the State of
São Paulo; three beef stores located in the State of São Paulo; one by-product unit in the State of Minas Gerais; one beef jerky unit located in the State
of Pernambuco; one pet products unit located in the State of São Paulo and one recycling unit in the State of São Paulo.
Operating activities
The Company owns and operates slaughterhouses, cold storage and meat processing operations for the production of beef, canned goods, fat, animal
rations and beef by-products, which are produced in the twenty six plants located in the States of São Paulo, Goiás, Mato Grosso, Mato Grosso do Sul,
Rondônia, Minas Gerais, Acre, Rio de Janeiro and Paraná.
Aiming to minimize transportation costs, the Company uses its own operations for the transport of cattle for slaughter and products intended for export.
The Company distributes its products through distribution centers located in the State of São Paulo, Rio de Janeiro, Brazilia, Manaus e Curitiba and a
container terminal for export in the city of Santos.
JBS S.A (the Company) is a listed company in the Novo Mercado segment, which requires the highest level of corporate governance in the Brazilian
market and its shares are traded on the BM&F Bovespa S.A - Stock Exchange, Commodity and Forward.

The operations of the Company and its subsidiaries consists of:
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
b) Activities abroad
Smithfield beef, currently known as JBS Packerland, owns four cattle units and one feedlot cattle unit, and Five Rivers, known as JBS Five Rivers, own
ten cattle feedlot units.
The Company owns 50% of Inalca JBS S.p.A, (Inalca JBS), that is Italy's leading beef company and one of the main operators in the European
processing beef sector. It produces and markets a complete range of fresh and frozen meat, vacuum-packed, portioned products, canned meat, ready-to-
eat meals, fresh and frozen hamburger, minced meats and, pre-cooked products. Inalca JBS owns six facilities in Italy, specialized by production line,
and nine foreign facilities in Europe and Africa.
Inalca JBS's wholly-owned subsidiary Montana Alimentari S.p.A. (Montana) is among Italy's leading companies in the segment of production, marketing
and distribution of cured meats, snacks and ready-to-eat products, with over 230 products. Montana owns the well-known brands "Montana" and "IBIS"
and four facilities, specialized by product line and located in areas with Protected Denomination of Origin (P.D.O.) and Protected Geographic Indication
(P.G.I.). Montana is also one of Italy's largest operators in the canned and pre-sliced meat market.
The indirect subsidiary Toledo International NV (Toledo) and its subsidiaries Toledo International NV, Toledo Europe BVBA, Toledo Interfoods BVBA
and Clayton Foods do Brasil, located in Belgium, have basically trading operations for the European, African, South American, Dutch and Belgian
markets, selling cooked meat and other products. Additionally they develop logistics operations, warehousing, product customization and new product
development.
A direct subsidiary CJSC Prodcontract (Prodcontract) is a company located in Russia, an importer and distributor of fresh beef and frozen for the
Russian Market, among the three largest importers of beef from the Russian market.
JBS Trading USA, Inc. (JBS Trading USA) and its subsidiaries, Tupman Thurlow Co., Inc. (Tupman) and Astro Sales International, Inc. (Astro) located in
the United States of America sale processed beef products mainly in the North-American market.
Global Beef Trading Sociedade Unipessoal Lda (Global Beef Trading), an indirect wholly-owned subsidiary of the Company, located in Ilha da Madeira,
Portugal, sells food products such as beef, chicken and pork. Global Beef Trading imports the products from Latin America and exports to several
countries in Europe, Africa and Asia.
Jerky Snack Brands, Inc (Jerky Snack), an indirect wholly-owned subsidiary of the Company, located in the United States of America, produces and sells
meat snacks (Beef Jerky, Smoked Meat Sticks, Kippered Beef Steak, Meat&Cheese, Turkey Jerky and Hunter Sausage). Jerky Snack purchases meat
from Brazil and in the local market and its the consumer market is mainly the United States of America.
JBS Argentina S.A. (JBS Argentina), an indirect wholly-owned subsidiary of the Company, operates slaughterhouses and cold storage facilities for the
production of beef, canned goods, fat, animal food and beef by-products, in seven plants located in the provinces of Buenos Aires, Entre Rios, Santa Fé
and Córdoba.
JBS Argentina has three subsidiaries: One meat-packing slaughterhouse in Berezategui (Consignaciones Rurales), other can factory located in Zarate
(Argenvases), both located in the province of Buenos Aires, and one meat-packing slaughterhouse in Cordoba.
On the currently scenario that the meat industry is going through, the Company has decided to temporarily suspend the operations of the following units:
San Jose, Colonia, Caroya, Consignaciones Rurales and partially in Pontevedra.
JBS USA Holdings Inc. (JBS USA) engages in slaughtering, processing, packaging and delivery of fresh, further processed and value-added beef and
pork "in natura" products for sale to customers in the United States and international markets. The fresh meat products prepared by JBS USA include
chilled meat cuts following standard industry specifications.
The Company has indirect subsidiaries located in England and Egypt, which are responsible for the sales and distribution of the Company's products in
Europe, Asia, and Africa.
JBS USA divides its operation into three categories: Beef, Pork and Chicken, which operates the business of poultry purchased by the PPC in US
market.
In the United States of America, JBS USA owns eight beef slaughtering plants, three pork processing facilities, one lamb slaughtering plant, one case
ready plant and eleven feedlot locations. In Australia, JBS USA owns ten beef and small animals slaughterhouses and operates five feedlots, which
provide grain-fed cattle for its processing operations.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
c) Inalca JBS and it's subsidiary, Montada Alimentari and it's subsidiaries.
The indirect subsidiary Sampco, Inc. (Sampco), localized on Chicago, in the United States of America, imports processed meats primarily from South
America for sale principally in the United States, Canada and the Caribbean. Sampco also imports other foods such as canned fish, fruits and vegetables
from other regions, including the Far East, for sale in North America and Europe.
As of December 28, 2009 the Company concluded the operation by its subsidiary JBS USA., through the subscription of new shares, and become the
owner of shares representing 64% of the capital stock and voting capital of PPC, located in Pittsburg, Texas, United Sates of America , by 800 millions of
US dollar which were settled in cash.
As of July 7, 2010, JBS S.A. filed an injunction in Italian court, aiming to discuss outstanding issues related to Corporate Governance of Group
Cremonini, which on December 22, 2007 JBS acquired 50% of Inalca, forming the Inalca JBS (representing on March 31, 2010, 2.8% of consolidated
revenue of JBS).
The PPC is a company located in Delaware, United States of America, one of the largest poultry processing in the United States of America, with
operations in Mexico and Puerto Rico. Export commodities chicken for more than 90 countries, the main products are "in-kind", chilled whole or in pieces.
The main customers are restaurant chains, food processors, distributors, supermarkets, wholesalers, distributors and other retail, and export to eastern
Europe (including Russia), Far East (including China), Mexico and other world markets .
Pilgrim's Pride Corporation (PPC) acquisition
The remaining issues are mainly related to the failure of certain contractual terms relating to (i) full access to all information and facilities of Inalca JBS by
board members appointed by JBS (including the Chairman) and (ii) the fulfillment of the contractual clause that delegates to JBS S.A., the appointment
of Administrative and Financial Director of Inalca JBS as well as Inalca JBS Managing Directors, (iii) - full operation of the Internal Audit. Through this
injunction, JBS S.A. believes that will reach the appropriate stability administrative of Inalca JBS and safeguarding the interests of its shareholders.
As of August 2, 2010, was filed with the ICC (International Chamber of Commerce) in Paris (France), request for action in the House to settle any
outstanding issues cited in Corporate Governance on Inalca JBS.
Incorporation of Bertin S.A. (Bertin)
The indirect subsidiary Bertin Paraguay S.A (Bertin Paraguay), located in Assunção, Paraguay, slaughters and process chilled and frozen beef and raw
leather. Most of its production is destined to export to others subsidiaries of JBS Group. It is licensed to export to the European Union, Chile, Russia and
other markets. In July 2009 Bertin Paraguay constituted a new plant, San Antonio, which starts its operation in the second half of 2010.
The indirect subsidiary Frigorífico Canelones S.A (Frigorífico Canelones), located on Canelones, Uruguay, slaughters and process "in natura" beef to
export and frozen and chilled meat for local markets. Also sells meat cuts with bones, mainly to the local market.
The indirect subsidiary Egygate Distribution (Egygate), located on Egypt, is a delivery center of food products located on Egypt.
The indirect subsidiary Trump Asia Enterprises Limited (Trump), located on China, has one leather processing plant, and two commercial offices in Hong
Kong.
The indirect subsidiary Misr Cold Centers and Storage (Misr Cold), located on Egypt, is a storage of fruits, meats and other kind of products that need to
be frozen or chilled.
The indirect subsidiary Rigamonti Salumificio SpA (Rigamonti), located in Italy, consists on the leadership of the Italian market in production and sales of
Bresaola (dry bovine beef). It is part of its operation also the production and sales of dry cured horse meat and flat cured pork belly (bacon), as well as
the commercialization of cured ham.
11
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
2
3
Elaboration and presentation of interim financial statements
The inability to exercise some control functions guaranteed by contract clauses valid under Corporate Governance of Inalca JBS generated concern
about the quality and credibility of accounting information presented in the financial statements of Inalca JBS, for the period of three and nine months
ended on September 30, 2010. As a result of all these legal procedures and doubts about the quality and credibility of accounting information of Inalca
JBS, the financial statements of JBS S.A. for the period ended September 30, 2010 were not consolidated with the updated accounting information of
Inalca JBS, for the six months period ended on September 30, 2010, see Note 3. Thus, for equity calculation purposes the financial statements have
been repeated the information from the first quarter of Inalca JBS.
The legal procedures are in its normal course, without any relevant information so far.
Significant accounting practices
The interim financial statements have been prepared and submitted in accordance with the CPC 21 - Interim Financial Reporting. In the preparation of
interim financial statements for the period of nine months ended September 30, 2010, all the pronouncements have been adopted, interpretations and
guidelines applicable to them, issued by the CPC. In addition, these pronouncements, interpretations and guidelines were applied consistently to the
annual financial statements of December 31, 2009 for comparison purposes and customer item 21 of the CPC 37.
The accounting practices in Brazil were changed during 2008, according to the Law n° 11.638 promulgated on December 28, 2007, with the respective
modifications introduced by the Executive Act n° 449 (actual Law nº 11.941/09) of December 3, 2008, and the effects of the initial adoption were only
recognized by the Company and its subsidiaries during the fourth quarter of 2008, and published in the financial statements of December 31, 2008.
The authorization for completion of these interim financial statements was given at the Board of Directors' meeting held on November 11, 2010.
The effects related the first-time adoption of all applicable Pronouncements, Interpretations and Orientations, issued by CPC are presented in the Note 4.
Transitional Tax Regime (Regime Tributário Transitório - RTT) - The amounts presented in financial statements are considering the adoption of the Tax
Regime Transition (RTT) by the Company, as allowed by Law n° 11.941/09, which aims to maintain neutrality tax changes in the Brazilian corporate law,
introduced by Law n° 11.638/07 and by the Law n° 11.941/09.
The Company included in its financial statements the Economic Value Added (EVA) report. The objective of this report is to demonstrate the wealth
generated by the Company, and the distribution of this wealth among the elements that contributed to its generation, such as employees, lenders,
shareholders, government and others, as well as the wealth portion not distributed.
a) Profit and loss calculation
The main accounting practices used in the preparation of these interim financial statements, as described below, have been consistently applied all over
the reported periods and years, unless otherwise stated.
Revenue and expenses are recorded on the accrual basis. Revenue includes the fair value of the payment received or receivable for sale of products
and services in the normal course of business.
Revenue is net of taxes, returns, rebates and discounts, as well as of intercompany sales. Revenue is recognized when the risks and rewards of
ownership have been transferred to the buyer.
According with the CPC 21 - Interim Financial Reporting, the Company maintains the same accounting policies adopted in the most recent annual
financial statements, and comparative. If these policies or methods have been changed, the Company discloses the nature and effects of such change.
12
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
d) Allowance for doubtful accounts
Inventories are stated at average cost of acquisition or production, not in excess of market or realizable value. The cost of inventories is recognized in
income when inventories are sold. Biological assets are stated by market value.
f) Investments
As mentioned in Note 1.c, the Company's financial statements do not have the effect of equity on its equity interest in Inalca JBS referring to the six
months ended September 30, 2010.
Investments in subsidiaries are accounted for using the equity method.
b) Accounting estimates
The preparation of interim financial statements requires management to adopt assumptions and exercise its judgment in determining and recording
accounting estimates. Significant estimates include the useful life of property, plant and equipment, allowance for doubtful accounts, inventories, deferred
tax assets, provision for contingencies and valuation of derivative instruments. Actual results could differ from those estimates.
c) Financial instruments
The Company and its subsidiaries record derivatives in accordance with CPC 38 - Financial Instruments: Recognition and measurement and OCPC 03 -
Financial Instruments. Financial instruments are recognized on the balance sheet only when the Company becomes a party to the contractual provisions
of these instruments. A financial asset or liability is initially recognized at fair value, plus transaction costs that are directly attributable to its acquisition or
issue.
Subsequent measurement of financial instruments occurs at each balance sheet date, according to the rules for each category of financial assets and
liabilities: (i) assets and liabilities measured at fair value through profit or loss, (ii) held to maturity, (iii) loans and receivables (iv) available for sale.
The financial instruments of the Company and its subsidiaries are represented by cash, accounts receivable, accounts payable, debentures, loans and
financing. They are initially recognized at fair value plus costs directly attributable to the acquisition or issue, except for financial instruments classified as
instruments measured at fair value through results, which the costs are recorded on profit and loss of the period. The main financial assets recognized
by the Company are: cash and cash equivalents and accounts receivable. The main financial liabilities recognized by the Company are: trade accounts
payable, loans and financing and debentures.
Allowance for doubtful accounts is recorded in an amount considered sufficient to cover probable losses on accounts receivable.
The allowance for doubtful accounts expense was recorded under the caption "Operating Expenses" in the Income Statement. When no additional
recovery is expected, the allowance for doubtful accounts is usually reversed against the definitive write-off of the account receivable.
e) Inventories
According to CPC 30 - Revenue, the Company recognizes revenue when, and only when:
(i) the amount of revenue can be measured reliably;
(ii) it is probable that the economic benefits will flow to the Company; and
(iii) specific criteria for each activity of the Company and its subsidiaries have been met. The amount of revenue is not considered reliably measurable
until all contingencies related to the sale have been transferred to the buyer. The Company's estimates are based on historical data, considering the type
of customer, type of transaction and specifications of each sale.
13
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
ASSETS
JBS S.A.
Company*
Inalca JBS **
JBS S.A.
Pro forma
Cash and cash equivalents
2,652,369
-
2,652,369
Trade accounts receivable, net
1,709,523
-
1,709,523
Inventories
1,019,602
-
1,019,602
Recoverable taxes
1,595,249
-
1,595,249
Other current and non current assets
311,514
-
311,514
Investments in subsidiaries
10,568,139
13,644
10,581,783
Property, plant and equipment, net
7,535,545
-
7,535,545
Intangible assets, net
11,298,810
-
11,298,810
TOTAL ASSETS
36,690,751
13,644
36,704,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable
437,334
-
437,334
Loans and financings
10,577,713
-
10,577,713
Convertible debentures
3,462,212
-
3,462,212
Other current and non-current liabilities
3,300,985
-
3,300,985
Shareholders' equity
18,912,507
13,644
18,926,151
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
36,690,751
13,644
36,704,395
JBS S.A.
Company*
Inalca JBS **
JBS S.A.
Pro forma
Net sale revenue
8,739,143
-
8,739,143
Costs of goods sold
(6,863,594)
-
(6,863,594)
GROSS INCOME
1,875,549
-
1,875,549
General and administrative expenses
(1,081,093)
-
(1,081,093)
Financial income (expense), net
(1,053,105)
-
(1,053,105)
Equity in subsidiaries
547,342
13,644
560,986
Other (expenses) income
(55,229)
-
(55,229)
Current income taxes
3,089
-
3,089
NET INCOME OF THE PERIOD
236,553
13,644
250,197
Net income before taxes
233,464
13,644
247,108
Financial income (expense), net
1,053,105
-
1,053,105
Depreciation and amortization
214,476
-
214,476
Equity in subsidiaries
(547,342)
(13,644)
(560,986)
Non-recurring expenses
56,090
-
56,090
AMOUNT OF EBITDA
1,009,793
-
1,009,793
Statement of EBITDA (Earnings before income taxes, interest, depreciation and
amortization)
Nine months period ended on September 30, 2010
In order to provide additional information for the users of financial statements, considering the importance of investment in the Company Inalca JBS, and
therefore provide more detail for comparison purposes, the pro forma financial statements of the Company will be presented for the six months period
ended on September 30, 2010 with the effects of equity accounting of Inalca JBS for the three months period ended on September 30, 2010.Thus, for
consolidation purposes the financial statements have been repeated the information from the first quarter of Inalca JBS.
September 30, 2010
14
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
JBS S.A.
Company*
Inalca JBS ***
JBS S.A.
Pro forma
Net sale revenue
3,104,689
-
3,104,689
Costs of goods sold
(2,418,238)
-
(2,418,238)
GROSS INCOME
686,451
-
686,451
General and administrative expenses
(427,727)
-
(427,727)
Financial income (expense), net
(139,210)
-
(139,210)
Equity in subsidiaries
65,410
(410)
65,000
Non-recurring expenses
(48,750)
-
(48,750)
Current income taxes
(2,686)
-
(2,686)
NET INCOME OF THE PERIOD
133,488
(410)
133,078
Net income before taxes
136,174
(410)
135,764
Financial income (expense), net
139,210
-
139,210
Depreciation and amortization
70,548
-
70,548
Equity in subsidiaries
(65,410)
410
(65,000)
Non-recurring expenses
45,450
-
45,450
AMOUNT OF EBITDA
325,972
-
325,972
According to CPC 37 - First-time adoption of International Financial Reporting Standards - IFRS, an entity may elect to measure an item of fixed assets
at the date of transition to IFRS at its fair value and use that fair value as its estimated cost at that date . Thus, the fixed asset is recorded the fair value,
stated at historical acquisition cost plus spontaneous revaluations conducted on various dates until December 31, 2007 for a significant proportion of
goods in fixed assets, based on reports of specialized company. Such reassessments are being performed in its entirety, based on depreciation or
disposal of revalued assets.
Depreciation is computed using the straight-line method, based on the estimated useful lives of the assets at the annual rates mentioned in Note 13.
h) Intangible assets
Intangible assets are stated at acquisition cost, less amortization. Intangible assets with indefinite useful lives are not amortized but tested for impairment
annually.
i) Impairment
Property, plant and equipment, intangible assets, deferred charges and other assets (current and noncurrent) are tested for impairment at least annually,
if indications of potential impairment exist. Goodwill and intangible assets with indefinite useful lives are tested for impairment on an annual basis,
regardless of whether or not there is any indication of impairment, pursuant to CPC 01 - Impairment.
Other current and noncurrent assets are stated at cost or realizable value including, if applicable, income earned through the balance sheet date.
g) Property, plant and equipment
Three months period ended on September 30, 2010
Statement of EBITDA (Earnings before income taxes, interest, depreciation and
amortization)
** Unaudited information, for the second and third quarter 2010 of Inalca JBS.
* Contemplating the first quarter 2010 of Inalca JBS.
j) Other current and noncurrent assets
*** Unaudited information, for the third quarter 2010 of Inalca JBS.
15
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
n) Segment reporting
Segment reporting is presented consistently with the internal report provided to the Company's Executive Board in charge of allocation of funds,
performance evaluation by segment and strategic decision making.
k) Current and noncurrent liabilities
m) Income tax and social contribution
Current taxes
Current and noncurrent liabilities are stated at known or estimated amounts, including, if applicable, charges and monetary or exchange variations.
l) Contingent assets and liabilities
Contingent assets are recognized only when their realization is virtually certain, based on favorable final judicial decision. Contingent assets are
disclosed where an inflow of economic benefits is probable.
Contingent liabilities are accrued when losses are probable and the amounts can be estimated reliably. Contingent liabilities classified as possible are
only disclosed and contingent liabilities classified as remote are neither accrued nor disclosed.
Current taxes are computed based on taxable income at tax rates in effect, according to prevailing legislation.
Deferred taxes
Deferred income and social contribution tax liabilities arise from revaluation reserves and temporary differences. Deferred income tax assets arise from
tax losses and temporary differences and deferred social contribution tax assets arise from temporary differences.
o) Adjustment of assets and liabilities to present value
In the present value calculation adjustment the Company considered the following assumptions: (i) the amount to be discounted; (ii) the dates of
realization and settlement; and (iii) the discount rate.
Long-term monetary assets and liabilities as well as current items, when the effect is material in relation to the interim financial statements as a whole,
are adjusted to their present value.
Customer's receiving and suppliers' payable period of the overseas subsidiaries are substantially shorter than local market, as well the discounting rates
used on assumptions of present value calculation.
During the current year, due to recent worldwide financial crisis, the Company has adopted some procedures to minimize customers default risk and
increase the cash structure. In addition, the Company reviewed its credit policy, adopted the reduction of customers' receiving period, improved the
management of suppliers' payable period, the resources applications and also, in some situations, applied customer's advances policy.
The discount rate assumption relies on current market valuations as to time value of money and specific risks for each asset and liability.
The amounts of customers, suppliers and taxes on the Company has increased due to the recent businesses combinations as well the reduction in
financial cycle became the current adjustment to present value irrelevant relating the amounts that it is related.
16
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Functional and reporting currency
4
Due to the merging process of Brazilian General Acceptable Accounting Principles - BRGAAP into International Financial Reporting Standards - IFRS by
Law 11.638/07, new Pronouncements, Interpretations and Orientations had been issued during 2009.
In connection with the merging process into IFRS, the opening balance on January 1, 2009 and the Equities on December 31, 2009 and September 30,
2010 including the Statements of Income on September, 2009 and September, 2010 had been reconciliated to be in accordance with the new accounting
procedures adopted in Brazil, where no relevant adjustments were identified.
(a) New Pronouncements, Interpretations and Orientations issued by CPC with adoption on January 1, 2010, that reflect the operation and the
Financial Statements of the Company
Considering the relevance of implementation of IFRS in Brazil which increase the reliability of the financial statements, in accordance with Instruction
CVM n 457, of July 13, 2007, and based on Deliberation CVM n 609 of December 22, 2009 that explain the first-time adoption of IFRS, the management
of the Company decided to present, the interim financial reporting in accordance with full CPC. Thus, the interim financial reporting are prepared in
accordance with all applicable Pronouncements, Orientations and Interpretations issued by CPC, accordingly with the first-time adoption procedures.
q) Dividends
The dividend distribution proposed by Management that is equivalent to the mandatory minimum dividend of 25% is recorded under the caption
"Declared Dividends" in liabilities since it is considered a legal obligation established by the Company's bylaws. However, the amount of dividends higher
than the mandatory minimum dividend, declared after the period covered by the interim financial statements but before the date of authorization for
release of the interim financial statements, is recorded under the caption "Proposed Additional Dividends" in shareholders' equity, with a disclosure in the
notes to the financial statements.
The items of the interim financial statements are measured using the currency of the primary economic environment in which the Company operates
("functional currency"). The Company's functional currency is the Real (R$).
Based on the above, the Company reviewed its present value calculations of long-term assets and liabilities, and short term when relevant, as of
December 31, 2009 and concluded that the costs to develop this information is higher than the benefits regarding the immateriality. The Company's
management supported by the requirements of CPC 12, deemed appropriated the write-off of the Present Value Adjustment accounted until December
31, 2009, accordingly the management's decision does not impact in the quality and reliability of the financial statements. In accordance with CPC 12,
the Company will perform time basis analysis (at least on reporting period), and if identified the need for accounting the Present Value Adjustment, to
improve the quality and presentation of its financial statements, the adoption of the accounting will occur immediately.
p) Foreign currency translation
r) Statement of comprehensive income
The interim financial statements present the results of business combinations under the acquisition method in accordance with CPC 15. In the
consolidated balance sheet, identifiable assets acquired and liabilities and any contingencies assumed in the business combinations are initially
recognized at fair value at the acquisition date.
s) Business combination
First-time adoption of full CPC
t) Statements of Cash Flow
The statements of cash flows have been prepared by the indirect method starting from the financial information in accordance with the instructions
contained in CPC 3 - Statement of Cash Flows.
This statement presents net revenue, foreign currency translation, derivatives adjustment (net of taxes), unrealized gain (loss) on pensions, unrealized
gains (losses) on securities, net of taxes, as described in note 27.
17
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
January 1, 2009
Shareholders'
Equity
Amount in BRGAAP*
Ref
6,134,411
a
14,893
b
(2,458)
c
(1,603)
d
794,059
e
55,321
Others
f
(728)
Total relating accounting practices adjustments
859,484
Amount in BRGAAP (CPC)
6,993,895
Shareholders'
Equity
Net income
Amount in BRGAAP *
Ref
15,085,196
129,424
a
37,036
22,143
b
1,642,890
-
g
(6,342)
(6,342)
d
480,533
(136,220)
h
185,189
185,189
e
84,796
29,475
f
(1,667)
(2,959)
Total relating accounting practices adjustments
2,422,435
91,287
,
,
,
Amount in BRGAAP (CPC)
17,507,631
220,711
The explanation of the differences in accounting practices which affects the Company are described in the footnotes bellow.
Borrowings costs adjustments
December 31, 2009
CPC 15 ­ Business Combinations ­ The adoption of this Pronouncement impact significantly the concepts and methodology of recognition,
measurement and presentation of a business combination, particularly the procedures for allocation of goodwill regarding future economic benefits within
the balance sheet accounts, through the fair value. The main impact in the Financial Statements of the Company will be presented by the businesses
combinations of the incorporation of Bertin, presented in the Note 6.
CPC 20 ­ Borrowing Costs ­ The Pronouncement requires the Company capitalization of borrowing costs directly attributable to the acquisition,
constructions or production of a qualifying assets as part of the cost of that asset, presented as "Construction in Progress" in the Financial Statements.
The borrowing costs of the Company and its subsidiaries regarding to the qualifying asset are compound by interest expenses and exchange variations
that will not be fully allocated in the Statements of Income, due to part of these costs must be recognized as assets costs.
Borrowings costs adjustments
Adjustments related investments in subsidiaries
Reclassification of minority interests to the shareholders' equity
Assets deferred reversal
Fair value on businesses combinations
Deferred taxes
Bargain purchase on PPC
Fair value on businesses combinations
Deferred taxes
Others
Adjustments related investments in subsidiaries
Reclassification of minority interests to the shareholders' equity
Measurement adjustment on biological assets
18
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Shareholders'
Equity
Net income
Amount in BRGAAP *
Ref
17,304,938
525,323
a
46,022
8,986
b
1,116,794
-
g
37,879
44,221
d
223,739
(256,794)
h
185,189
-
e
(387)
(85,183)
f
(1,667)
-
Total relating accounting practices adjustments
1,607,569
(288,770)
Amount in BRGAAP (CPC)
18,912,507
236,553
* BRGAAP are the Brazilian generally accounting accepted practices in place since January 1, 2009, CPC 01 to CPC 14.
5
Incorporation of Bertin S.A. (Bertin)
September 30, 2010
(g) - According with CPC 29, the biological assets must be valued at market price.
The Company incorporated Bertin on December 31, 2009, as announced to the market at that time.
Due to the incorporation of Bertin by the Company near the end of year 2009, the statements of income as of September 30, 2010 had a significant
increase, making impossible a comparison with the interim financial statements for the prior period. To enhance comparability of these consolidated
interim financial statements, shown below is (pro forma) statements of income as of September 30, 2009 including the incorporation made by the
Company, for the purpose of presenting the combined result of these companies in the nine months period ended as of September 30, 2009 with the net
income of the Company in the current quarter:
(b) - Reclassification on the presentation of minority interests into shareholders' equity in accordance with CPC 36.
(h) - Refers to the difference in practices related to the letter (b), where there was gain on bargaining because of the negotiated acquisition price ,
whereas the PPC was in bankruptcy protection, leading to a trading value lower than the market value.
(c) - According to CPC 01, deferred charges was extinguished, and any remaining balances classified as an expense (if applicable).
(d) - Refers to the adjustment of practice adopted between the accounting treatment for acquisitions, fair value, since in JBS USA has applied the
methodology of accounting for acquisitions of companies through its fair value, being classified in its profit and loss of the period consisting mainly of
depreciation and amortization.
(e) - Refers to the impact of deferred income tax relating to differences in practices identified.
CONSOLIDATED STATEMENTS OF INCOME - Pro forma
(a) - In accordance with CPC 36 (R) borrowing costs related to funding for construction of qualifying assets must be added to the cost of the asset.
(f) - Other adjustments related to the differences in practices.
Others
Deferred taxes
Reclassification of minority interests to the shareholders' equity
Measurement adjustment on biological assets
Fair value on businesses combinations
Bargain purchase on PPC
Borrowings costs adjustments
Adjustments related investments in subsidiaries
19
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
2010
JBS S.A.
JBS S.A.
(Company)
Bertin S.A.
(Company)
JBS S.A.
Bertin S.A.
Net operating revenue
8,739,143
3,800,419
4,387,907
8,188,326
Cost of products sold
(6,863,594)
(3,093,330)
(3,527,637)
(6,620,967)
GROSS INCOME
1,875,549
707,089
860,270
1,567,359
Selling, general and administrative expenses
(1,081,093)
(502,845)
(519,454)
(1,022,299)
Financial expenses, net
(1,053,105)
(386,837)
(98,301)
(485,138)
Other (expenses) income
(55,229)
2,045
5,020
7,065
Income and social contribution taxes
3,089
(8,816)
(35,989)
(44,805)
Equity in subsidiaries
547,342
177,071
43,542
220,613
NET INCOME (LOSS)
236,553
(12,292)
255,088
242,796
Income (loss) before provision for income and social contribution taxes
233,464
(3,476)
291,077
287,601
Financial income, net
1,053,105
386,837
98,301
485,138
Depreciation and amortization
214,476
68,192
109,524
177,716
Equity in subsidiaries
(547,342)
(177,071)
(43,542)
(220,613)
Non-recurring expenses
56,090
-
-
-
EBITDA
1,009,793
274,481
455,360
729,841
2010
JBS S.A.
JBS S.A.
(Company)
Bertin S.A.
(Company)
JBS S.A.
Bertin S.A.
Net operating revenue
3,104,689
1,305,379
1,393,606
2,698,985
Cost of products sold
(2,418,238)
(1,061,098)
(1,153,031)
(2,214,129)
GROSS INCOME
686,451
244,281
240,575
484,856
Selling, general and administrative expenses
(427,727)
(175,435)
(171,781)
(347,216)
Financial expenses, net
(139,210)
48,685
(76,367)
(27,682)
Other (expenses) income
(48,750)
1,024
3,639
4,663
Income and social contribution taxes
(2,686)
(12,790)
26,450
13,660
Equity in subsidiaries
65,410
78,745
18,431
97,176
NET INCOME (LOSS)
133,488
184,510
40,946
225,456
Income (loss) before provision for income and social contribution taxes
136,174
197,300
14,496
211,796
Financial income, net
139,210
(48,685)
76,367
27,682
Depreciation and amortization
70,548
24,723
33,952
58,675
Equity in subsidiaries
(65,410)
(78,745)
(18,431)
(97,176)
Non-recurring expenses
45,450
-
-
-
EBITDA
325,972
94,593
106,385
200,978
Three months period ended as of September 30,
2009 - Pro-forma
Statement of EBITDA (Earnings before interest, taxes, depreciation and
amortization)
2009 - Pro-forma
Statement of EBITDA (Earnings before interest, taxes, depreciation and
amortization)
Nine months period ended as of September 30,
20
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
6
6.1 - Bertin's Incorporation
Amount invested in Bertin
11,987,963
Bertin's shareholders' equity as of Dec 31, 2009
2,527,354
Goodwill 9,460,609
Goodwill arising from operation
9,460,609
(-) Fair value of property, plant and equipment
(146,152)
(-) Fair value of trademarks and patents
(267,959)
(+) Effect of income and social contribution taxes of inve
23,428
Residual goodwill
9,069,926
The business value, related to the merger with Bertin, was R$ 11,987,963, equivalent to the merger of 100% of the acquirer's shareholders' equity. The
amount paid is based on the economic value of Bertin at the date of the deal, and total goodwill (excess) was R$ 9,460,609, as shown below:
For purposes of goodwill allocation under CPC 15, only goodwill related to the groups of property, plant and equipment and intangible assets (basically
trademarks and patents) was taken into account. Deferred tax liabilities and other adjustments to assets (such as prepaid expenses) are not applicable in
accordance with CPC 15 and CPC 32. Regarding trademarks and patents, the measurements of the dairy products division (Vigor and Leco) as well as
of the processed meat division (Bertin) were considered. The calculation of the residual goodwill after allocation of generated goodwill to the related
asset accounts is as follows:
On September 16, 2009, J&F and ZMF, until then shareholders of the Company, and the controlling shareholders of Bertin, agreed to initiate a process
to unify the operations of the two companies. Bertin was a Brazilian company and one of the largest meat exporters in Latin America. Pursuant to the
association agreement: (1) the controlling shareholders of the Company agreed to contribute the shares owned directly or indirectly by them,
representing 51.4% of the Company, in exchange for the shares to be issued by a recently created holding company called FB Participações S.A. (FB
Participações); and (2) the controlling shareholders of Bertin agreed to contribute all their shares representing 73.1% of Bertin's capital in exchange for
the shares to be issued by FB Participações.
Summary of goodwill allocation operation
Business Combinations
At the Extraordinary General Meeting held on December 29, 2009, the shareholders approved the acquisition of Bertin shares and a subsequent merger,
ratified at the Extraordinary General Meeting held on December 31, 2009, under the terms of the agreement entered into by and between the two parties,
which was disclosed to the market as material developments.
On December 28, 2009, the Company completed the process of association with the Bertin Group by a corporate restructuring that, after the previous
acquisition of all 28,636,178 Bertin shares by the Company on December 29, 2009, resulted in the merger with Bertin. The controlling shareholders of
Bertin contributed a total of 679,182,067 shares, that they received due to the above-mentioned share acquisition, to increase capital of FB
Participações, in the total amount of R$ 4,949,046, upon issue by FB Participações of 2,334,370,128 new registered common shares without par value.
On December 23, 2009 the former shareholders of the Company, J&F and ZMF, contributed, respectively, a total of 632,781,603 and 87,903,348
common shares to FB Participações, a current shareholder of the Company.
Goodwill allocation - R$ thousand
The residual goodwill after the above-mentioned allocations was recorded as "Goodwill" for accounting purposes, which is not amortizable and is tested
for impairment as required by CPC 01.
21
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
7
September 30,
2010
December 31, 2009
Cash and cash equivalents
647,327
3,712,853
CDB-DI (bank certificates of deposit)
1,617,377
367,757
Investment funds
289,672
16,417
National treasury bill
97,993
-
2,652,369
4,097,027
Shareholder's
equity
Notional
(a)
Shareholder's
equity
Notional
(a)
Novo Eldorado fund
136,761
578,945
13,930
10,057
Ediom fund
152,911
19,120,388
1,000
-
Sept 30, 2010
Dec 31, 2010
Forward (Bovespa, Cattle forward, Currency and Interests)
Acquired Positions
172,606
691
Sold Positions
406,339
9,366
Net effect - forward
(233,733)
(8,675)
Net effect - Forward
(233,733)
(8,675)
Cash and cash equivalents
Cash, bank accounts and short-term investments are the items of the balance sheet presented in the statements of the cash flows as cash and cash
equivalents and are described as below:
CDB-DI (bank certificates of deposit) are held by financial institutions, with floating-rate and yield an average of 100% of the variation of the interbank
deposit certificate (Certificado de Depósito Interbancário - CDI).
Investments in national treasury bill are fixed income assets.
Investments funds
The Company is the exclusive shareholder of Novo Eldorado Fundo de Investimento Multimercado (Novo Eldorado fund) and in Ediom Fundo de
Investimento Multimercado (Ediom fund), both investment funds, whose applications on September 30, 2010 were R$ 136,761 and R$ 152,911
respectively. These investmemts are classified as available for sale.
On September 30, 2010, the composition of these investments funds were approximately 90% investment in government securities remunerated by the
Selic variation, and of the remaining balance only 1.2% refers to investment in derivatives, which is considered immaterial as described in items 24, 26
and 30 of the Basic Conceptual Framework - appoved by CVM.
Bellow is the composition of equities and notional investment funds as of September 30, 2010 and December 31, 2009 the financial statements filed by
the respective funds at the CVM - Brazilian Securities Commission.
September 30, 2010
December 31, 2009
(a) - The accounting Notional, extracted from the financial statements of these funds, contemplates the sum of acquired and sold positions, without
considering the net effect between these positions.
Below is presented the Notional effect, showing the breakdown of Bovespa's products and the net effect of acquired and sold positions on September 30,
2010 and December 31, 2009:
Novo Eldorado fund
22
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Risks related to Novo Eldorado fund
Sept 30, 2010
Dec 31, 2010
Options (Currency and Interests)
Purchase Positions
9,518,613
-
Sold Positions
9,495,190
-
Net effect - options
23,423
-
Forward (Bovespa, Cattle forward, Currency and Interests)
Purchase Positions
106,585
-
Net effect - forward
106,585
-
Net effect - Options and forward
130,008
-
Risks related to Fundo Ediom fund
8 Trade accounts receivable, net
September 30,
2010
December 31, 2009
Receivables not yet due
1,294,339
770,116
Overdue receivables:
From 1 to 30 days
211,350
316,443
From 31 to 60 days
98,850
101,783
From 61 to 90 days
78,412
51,675
Above 90 days
152,680
156,962
Allowance for doubtful accounts
(126,108)
(123,602)
415,184
503,261
1,709,523
1,273,377
2010
December 31, 2009
Initial balance
(123,602)
(8,271)
(+) Additions
(5,755)
(6,018)
(+) Acquisition
-
(109,313)
(
-
) Write-offs
3,249
-
Final balance
(126,108)
(123,602)
Pursuant to CPC 38, below are the changes in the allowance for doubtful accounts, the Company's policy for collection of trade accounts receivable in
default and the estimate for recovery/losses of the accrued amounts.
The risks to which the fund is exposed are in line with the respective policies that allow leverage of funds, and are in accordance with the limitations of
VaR, stop loss and leverage permitted by the shareholders. VaR is calculated to 1 (one) day with a confidence interval of 99%.
On September 30, 2010 VaR - Value at Risk for the Novo Eldorado fund is R$ 1,555 (R$ 13 on December 31, 2009).
Ediom fund
The risks to which the fund is exposed are in line with the respective policies that allow leverage of funds, and are in accordance with the limitations of
VaR, stop loss and leverage permitted by the shareholders. VaR is calculated to 1 (one) day with a confidence interval of 99%.
On September 30, 2010 VaR - Value at Risk for the Ediom fund is R$ 483.
The net effect of the options on interest rates are referring to 32,000 contracts positions released (sold) against 32,000 contracts holders (purchased).
The net effect of the options on currencies summarize the positions of 600 contracts released (sold) and 600 contract holders (purchased).
23
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
9 Inventories
September 30,
2010
December 31, 2009
Finished products
590,302
422,202
Work in process
165,428
80,507
Raw materials
159,991
154,809
Warehouse spare parts
103,881
101,018
1,019,602
758,536
10 Recoverable taxes
September 30,
2010
December 31, 2009
Value-added tax on sales and services (ICMS / IVA / VAT)
985,701
896,294
Excise duty - IPI
57,593
55,544
Social contribution and taxation on billings - PIS and Cofins
404,983
282,683
Income tax withheld at source - IRRF
75,284
84,844
Other
71,688
72,789
1,595,249
1,392,154
Current and Long-term:
Current
1,041,479
841,306
Non-current
553,770
550,848
1,595,249
1,392,154
Value-added tax on sales and services (ICMS / IVA / VAT)
PIS and COFINS (social contribution on net income)
IRRF (withholding income tax)
Refers to non-cumulative PIS and COFINS credits arising from purchases of raw materials, packaging and other materials used in the products sold in
the foreign market.
The above-mentioned tax credit is under examination and homologation by the Tax Authority of the State of São Paulo. The Company expects to
recover the total amount of the tax credit, including the ICMS credits from other states (difference between the statutory rate for tax bookkeeping and the
effective rate for ICMS collection in the state of origin), which are being challenged by the São Paulo State. However, the procedure adopted by the
Company is supported by prevailing legislation, according to external and internal legal counsel.
Recoverable ICMS refers to excess of credits derived from purchases of raw materials, packaging and other materials over tax charges due on domestic
sales, since exports are tax-exempted.
Based upon previous decisions of the Board of Tax Appeals and the legal counsel's opinion, which considers that a favorable decision is almost certain,
the Company and JBS Embalagens recorded the monetary adjustment of their PIS, COFINS and IPI tax credits based on SELIC (Central Bank overnight
rate), in the amount of R$ 146,090. As of this date, the Company received R$ 28,986, and the remaining balance of R$ 117,104 is recorded in
noncurrent assets, in consolidated.
General comments
Refers to withholding income tax levied on short-term investments, which can be offset against income tax payable on profits.
24
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
11 Related parties transactions
COMPANY
Trade
accounts
receivable
Trade
accounts
payable
Trade accounts
receivable
Trade accounts
payable
Direct subsidiaries
JBS Confinamento Ltda.
1,944
36,553 138
4,638
JBS Embalagens Metálicas Ltda.
6
3,171 -
500
JBS USA, Inc
382
- -
-
Inalca JBS S.p.A
-
- 3,479
4
JBS Itália SRL
6,049
- -
-
Indirect subsidiaries
JBS Global Beef Company Lda.
48
- 48
-
JBS Global (UK) Limited
39,075
- 21,920
-
JBS Argentina S.A.
-
716 -
2,259
The Tupman Thurlow Co.
-
- 4,432
-
Global Beef Trading SU Lda.
9,821
1 521
-
Beef Snacks Brasil Ind.Com. Ltda.
9
- 7
-
Marr Russia L.L.C
1,177
- 1,734
-
Frimo Sam
151
- -
-
Austrália Meat
-
46 -
1,144
Subsidiaries incorporated
(1)
S.A. Fabrica de prod. alimenticios vigor
3,082 - 3,029 3,029
Cia Leco de Prod. Alimenticios
2,421 20 2,152 -
Cascavel Couros Ltda
13,754 709 112,872 230,771
Novaprom Food Ingredients Ltda
1,040 232 1,024 112
Biolins Energia Ltda
712 2,228 34,382 22
Sampco Inc.
26,604 - 30,529 -
Laticinios Serrabella Ltda
- - - -
Frigorífico Canelones S.A.
- 542 - 533
Rigamonti Salumificio Spa
3,481 - - -
Wonder Best Holding Company
29,759 - 10,857 -
Trump Asia Entreprise Ltd
10,123 - 6,422 -
Other related parties
JBS Agropecuária Ltda.
404 54 137 2,446
Flora Produtos de Hig. Limp. S.A.
4,472 767 5,297 238
154,514 45,039 238,980 245,696
September 30, 2010
December 31, 2009
Intercompany balances shown in the balance sheet and statement of operations are as follows:
25
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
September 30,
2010
December 31, 2009
COMPANY
Currency
Maturity
Annual rate
Mutual
Contracts
Mutual Contracts
Direct subsidiaries
Mouran Alimentos Ltda.
R$
Sep 13, 2011
CDI + 12% p.a. 41,898
11,455
JBS Confinamento Ltda.
R$
Apr 1, 2011
CDI + 4% p.a.
127,482
76,010
JBS Embalagens Metálicas Ltda.
R$
Aug 16, 2012
CDI + 12% p.a. 56,929
49,043
JBS USA, Inc
US$
Aug 16, 2011
Libor + 2,5% p.a. (773,607)
-
JBS Slovakia Holdings s.r.o.
EURO
Mar 12, 2012
4,5% p.a.
(1,126,053)
(941,640)
JBS Itália SRL
EURO
Jun 18, 2011
Libor + 3% p.a. 2,798
-
Indirect subsidiaries
JBS Global Beef Company Lda.
EURO
Dec 31, 2011
Libor + 2% p.a. (39,814)
(40,918)
JBS Argentina S.A.
US$
123,008
-
The Tupman Thurlow Co.
US$
May 5, 2011
Libor + 3% p.a. -
13,943
Beef Snacks Brasil Ind.Com. Ltda.
R$
Jan 24, 2011
CDI + 4% p.a.
82,923
74,373
Beef Snacks International BV
EURO
Dec 31, 2012
Libor + 2% - 3% p.a 3,651 3,569
JBS HU Ltd
EURO
May 19, 2011
12% p.a.
(95,122)
(90,108)
Subsidiaries incorporated
(1)
S.A. Fabrica de Prod. Alimenticios Vigor
R$
Dec 31, 2011
CDI
(199,318) (278,228)
Cascavel Couros Ltda
R$
Dec 31, 2011
CDI + 12% p.a. (29,061) -
Novaprom Food Ingredients Ltda
R$
Dec 31, 2011
CDI + 6% p.a.
8,311 -
Biolins Energia Ltda
R$
Dec 31, 2011
CDI + 12% p.a. 37,241 -
Sampco Inc.
US$
Jan 10, 2013
Libor + 5% p.a. - 11,951
Bertin Paraguay
US$
Jul 21, 2011
Libor + 5% p.a. 3,701 3,660
(1,775,033) (1,106,890)
Mutual contracts between related parties recorded on the balance sheet as credits and debits with related parties:
26
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Financial
income
(expenses)
Purchases
Sales of
products
Financial
income
(expenses)
Purchases
Sales of products
Direct subsidiaries
Mouran Alimentos Ltda.
1,252 -
-
1,234 -
-
JBS Confinamento Ltda.
9,385 82,946
2,360
4,688 39,484
1,576
JBS Embalagens Metálicas Ltda.
7,089 31,577
6
7,787 32,442
-
JBS Global A/S
- -
-
11 -
-
JBS USA, Inc
(11,547) -
2,835
21,636 -
2,831
Inalca JBS S.p.A
- -
18,568
- -
26,252
JBS Slovakia Holdings s.r.o.
(36,086) -
-
(16,458) -
-
JBS Itália SRL
25 -
6,269
- -
-
Indirect subsidiaries
JBS Global (UK) Limited
- -
75,815
- -
53,100
JBS Argentina S.A
- 4,725
-
- 9,302
-
The Tupman Thurlow Co.
93 -
6,293
633 -
35,321
Global Beef Trading SU Lda.
- 48
67,068
- -
43,951
Beef Snacks Brasil Ind.Com. Ltda.
7,620 18
-
7,212 11
-
Beef Snacks International
151 -
-
(56) -
-
JBS HU Ltd
(7,824) -
-
(3,520) -
-
Frimo Sam
- -
162
- -
-
Marr Russia L.L.C
- -
30,742
15 -
99,090
Australia Meat
- 2,238
-
- -
-
Swift & Company Trade Group
- -
124
- -
-
Subsidiaries incorporated
(1)
S.A. Fabrica de Prod. Alimenticios Vigor
- 63
34,808
- -
-
Laticinios Serrabella Ltda
- -
34
- -
-
Cascavel Couros Ltda
- 11,511
162,509
- -
-
Novaprom Food Ingredients Ltda
- 1,686
5,558
- -
-
Biolins Energia Ltda.
- 20,757
6,599
- -
-
Sampco Inc.
136 -
80,603
- -
-
Frigorífico Canelones S.A.
- 1,836
-
- -
-
Rigamonti Salumificio Spa
- -
3,611
- -
-
Wonder Best Holding Company
- -
31,331
- -
-
Trump Asia Entreprise Ltd
- -
7,746
- -
-
Bertin Paraguay
163 717
-
- -
-
Other related parties
JBS Agropecuária Ltda.
- 29,681
1,344
- 50,940
1,022
Flora Produtos de Hig. Limp. S.A.
- 428
31,081
- 1,418
47,525
(29,543) 188,231
575,466
23,182 133,597
310,668
September 30, 2009
(1)
- Refers to the subsidiaries of the incorporated Bertin, that for better visualization and understanding of the users of the information, were segregated,
impacting only assets and liabilities.
Impacts of related party transactions on Income Statements:
September 30, 2010
27
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
September 30,
2010
December 31, 2009
Beef Snacks do Brasil Ltda.
41,462
37,186
Beef Snacks International BV.
3,708
3,720
Jerky Snack Brands, Inc.
6,751
6,661
51,921
47,567
b) Companies partially consolidated
J&F Oklahoma is still part in 2 commercial agreements with subsidiaries of the Company:
i) Cattle supply and feeding agreement with JBS Five Rivers, where it takes the responsibility for the cattle from J&F Oklahoma and collects the
medicinal and fattening costs, besides a daily fee of rent in line with market terms;
ii) Sales and purchase cattle agreement with JBS USA of at least 500,000 animals/year, starting from 2009 up to 2011 with market prices.
JBS Five Rivers also guarantee in third degree, after warranty of the assets from J&F Oklahoma and its parent company, up to US$ 250 million in a line
of credit of J&F Oklahoma.
The amount of R$ 51,921 (R$ 47,567 as of December 31, 2009) refers to credits of subsidiaries partially consolidated, as follows :
Guarantees provided and / or received
The parent company J&F Participações S.A guarantees Eurobonds operation of the Company in the amount of US$ 275 million with final maturity in
2011.
JBS USA together with its subsidiaries, JBS USA, LLC and Swift Beef Company, guarantee, in an unsecured way, US$ 300 million of notes issued by the
Company in 2016 as a result of commitment contained in the indenture governing such notes.
Details of transactions with related parties
The consolidated balance of related parties, on the amount of R$ 181.574 as of September 30, 2010 (R$ 326,972 as of December 31, 2009), has the
following composition:
a) Not consolidated Companies
The amount of R$ 129,653 (R$ 279,405 as of December 31, 2009) regarding part of the line of credit of US$ 200 million, with market interests, between
the indirect subsidiary JBS Five Rivers and J&F Oklahoma, subsidiary of J&F Participações S.A., not consolidated, where J&F Oklahoma uses this credit
for cattle acquisition for fattening that are placed in the fattening of JBS Five Rivers to be prepared for the slaughter.
The Company and its subsidiaries conduct commercial transactions between them, mainly sales operations, realized with normal price and market
conditions, when existing.
On the mutual contracts are calculated exchange rate and interests, when applicable.
No allowance for doubtful accounts or bad debts expenses relating to related-party transactions were recorded for the nine months period ended as of
September 30, 2010, and the year ended December 31, 2009.
JBS USA purchase and sale agreement
The Company guarantees US Bonds operation of the subsidiary JBS USA in the amount of US$ 700 million with final maturity in 2014.
On December 21, 2009, the Company and JBS USA entered into a purchase and sale agreement pursuant to which it has been agreed to issue and sell
20%-25% of JBS USA common stock to the Company for an aggregate purchase price of US$2.0 billion. The percentage of shares to be issued and sold
shall be equal to US$ 2.0 billion divided by the valuation of assets in U.S. dollars of JBS USA, based on the number of shares outstanding immediately
prior to the IPO of JBS USA (the "JBS USA's IPO "), but calculated based on the IPO price per share of JBS USA, multiplied by 100. As a result of this
purchase and sale. Accordingly, prior to the completion of JBS USA anticipated initial public offering ("IPO"), JBS USA will anticipate that to the Company
that will hold a 20%-25% interest directly, in addition to the remaining controlling interest the Company will continue to hold in JBS USA indirectly through
JBS Hungary Holdings Kft.
28
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Members
September 30,
2010
Dec 31, 2009
Executive Board and Board of Directors
14
3,741
4,243
14
3,741
4,243
12
Investments in subsidiaries
Relevant information about subsidiaries in the year ended on September 30, 2010:
Number of
shares
(Thousand)
Participation
Capital stock
Shareholders'
equity
Net income (loss)
JBS Embalagens Metálicas Ltda.
10,002
99%
2
32,964
(1,967)
JBS Global Investments S.A.
93,000
100%
157,560
75,112
11,416
JBS Holding Internacional S. A.
804,235
100%
804,235
239,760
(137,530)
JBS Global A/S (Denmark)
1,250
100%
456,979
465,156
4,497
Mouran Alimentos Ltda.
120
100%
120
(32,428)
(4,590)
JBS USA, Inc.
0.1
100%
4,992,663
6,849,640
532,386
JBS Trading USA, Inc.
20
100%
16,942
(5,076)
(3,530)
JBS Confinamento Ltda.
415,001
100%
415,001
402,304
1,968
Inalca JBS S.p.A
280,000
50%
674,128
928,188
24,492
JBS Slovakia Holdings, s.r.o.
0.001
100%
1,192,531
1,262,858
82,100
JBS Italia S.R.L.
0.100
100%
23
(813)
(849)
CJSC Prodcontract
10
70%
-
(20,427)
4,754
Subsidiaries of incorporated
(1)
Bertin Holding GMBH
96
100%
77
166,362
(4,840)
Novaprom Foods e Ingredientes Ltda
792
60%
792
3,126
(1,967)
S.A. Fabrica de Prod. Alimenticios Vigor
165,447
99%
104,031
219,022
40,838
Cascavel Couros Ltda
265,127
100%
240,861
298,856
12,400
Bertin USA Corporation
-
100%
-
48,697
66
Biolins Energia S.A.
10,672
100%
43,727
43,827
100
The Counsel Director and Investor Relations Director are part of the employment contract regime CLT (which is the Consolidation of Labor Laws), where
follows all the legal prerogatives of payments and benefits. Not included any remuneration bonuses of the Company or other corporate benefits to
additional employees or that should be extended to their family.
Except to those described above, the other members of the Executive Board, and Management Board are not part of any employment contract or any
other contracts for additional business benefits such as post-employment benefits or other long-term benefits, termination of work that does not conform
to those requested by the CLT , where applicable, or payment based on shares.
Remuneration of key management
The Company's management includes the Executive Board and the Board of Directors. The aggregate amount of compensation received by the
members of the Company's management for the services provided in their respective areas of business in the nine months period ended as of
September 30, 2010, in the year ended December 31, 2009 is the following:
The alternate members of the Board of Directors are paid for each meeting of Council in attendance
September 30, 2010
29
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
December, 2009
Addition
(disposal)
Exchange rate
variation (i)
Shareholders'
Equity (ii)
Income
Statements September,
2010
JBS Embalagens Metálicas Ltda.
34,581
-
-
-
(1,947)
32,634
JBS Global Investments S.A.
66,037
-
(1,783)
(558)
11,416
75,112
JBS Holding Internacional S. A.
402,886
-
-
(25,596)
(137,530)
239,760
JBS Global A/S
143,657
353,389
(34,169)
(2,218)
4,497
465,156
Mouran Alimentos Ltda.
(19,486)
(9,199)
-
-
(3,743)
(32,428)
JBS USA, Inc.
4,122,234
2,482,743
(332,948)
45,225
532,386
6,849,640
JBS Trading USA, Inc.
(1,766)
-
47
173
(3,530)
(5,076)
JBS Confinamento Ltda.
56,677
350,000
-
(6,341)
1,968
402,304
Inalca JBS S.p.A
463,011
-
(18,416)
7,253
12,246
464,094
JBS Slovakia Holdings, s.r.o.
1,251,415
-
(98,288)
27,631
82,100
1,262,858
JBS Italia S.R.L.
-
24
(1)
13
(849)
(813)
Prodcontract
-
(18,139)
703
(191)
3,328
(14,299)
Subsidiaries of incorporated
(1)
Bertin Holding GMBH
142,582
32,001
(3,381)
-
(4,840)
166,362
Novaprom Foods e Ingredientes Ltda
3,056
-
-
-
(1,180)
1,876
S.A. Fabrica de Prod. Alimenticios Vigor
177,927
(864)
(554)
-
40,454
216,963
Cascavel Couros Ltda
283,847
2,609
-
-
12,400
298,856
Bertin USA Corporation
43,154
6,678
(1,201)
-
66
48,697
Biolins Energia S.A.
43,727
-
-
-
100
43,827
21,252
-
-
-
-
52,616
Total
7,234,791
3,199,242
(489,991)
45,391
547,342
10,568,139
(i) - As defined in CPC 2, refers to the exchange rate variation of foreign currency investments that are accounted under the equity method, which was
accounted directly to shareholders' equity of the Company on the line "Accumulated translation adjustments".
Equity in subsidiaries
(1)
- Refers to the subsidiaries of the incorporated Bertin, that for better visualization and understanding of the users of the information, were segregated.
Transfer
to
Other
current
liabilities
(Negative equity)
(ii) - Refers to the reflex of valuation adjustments and exchange rate variation of foreign investments, accounted in valuation adjustments to
shareholders' equity in the subsidiaries, whose effect is being recognized when calculating the equity in subsidiaries, directly to shareholders' equity of
the Company.
30
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
13
Average annual
depreciation
rates
Cost
Revaluation
Accumulated
depreciation
September 30,
2010
December 31, 2009
Buildings
3 a 20%
2,535,133
116,742
(190,176)
2,461,699
2,385,975
Land
-
938,826
9,352
-
948,178
1,262,583
8 a 10%
3,208,612
44,753
(383,309)
2,870,056
2,495,004
Facilities
10%
806,604
21,815
(83,371)
745,048
697,255
20 a 100%
65,440
743
(37,026)
29,157
26,338
Vehicles
14 a 50%
433,083
190
(177,782)
255,491
262,679
-
195,780
-
-
195,780
446,176
Other
10 a 100%
51,047
3,865
(23,204)
31,708
26,757
(1,572)
-
-
(1,572)
-
8,232,953
197,460
(894,868)
7,535,545
7,602,767
Changes in property, plant and equipment
December 31,
2009
Additions
First-time
adoption of CPC
Write-offs
(1)
Depreciation
September 30, 2010
7,602,767
527,064 8,985 (390,953) (212,318) 7,535,545
Interest capitalization - Borrowing costs
September 30,
2010
December 31, 2009
Construction in progress
149,758
409,052
(+) capitalized borrowing costs
46,022
37,124
195,780 446,176
Property, plant and equipment, net
Machinery and equipment
Computer equipment
Construction in progress
Until December 2007, revaluations were performed on property, plant and equipment items of several Company's plants, as supported by reports issued
by the specialized firm SETAPE- Serviços Técnicos de Avaliações do Patrimônio e Engenharia S/C Ltda., and offsetting entries were made to the
revaluation reserve account and the provision for deferred income and social contribution taxes. The method and assumption applied to estimate the fair
value of the assets were determined based on current market prices. As of September 30, 2010, the total amount of property, plant and equipment
revaluation is R$ 197,460 which the revaluation reserve is R$ 108,168 and the provision for income and social contribution taxes is R$ 51,150. For
revalued property, plant and equipment, the Company recorded accumulated depreciation of R$ 38,141.
(1)
- R$ 350 million related to the capitalization of Planura farm from the Company to the subsidiary JBS Confinamento, Note 12.
Net amount
Pursuant to CPC 20 ­ Borrowing costs, the Company capitalized those borrowing costs directly attributable to the construction of qualifying assets, which
are exclusively represented by construction in progress. The borrowing costs allocated to the qualifying assets as of September 30, 2010 and December
31, 2009 are shown below:
The balance of construction in progress refers to investments for expansion, modernization and adaptation of meat-packing plants, aiming to maintain
current and obtain new certifications required by the market. When these assets are concluded and start operating, they will be transferred to a proper
property, plant and equipment account and then will be subject to depreciation.
The Company demand its subsidiaries reviewed the useful life of their property, plant and equipment by engaging a The Company and its subsidiaries
engaged the specialized firm SETAPE ­ Serviços Técnicos de Avaliações do Patrimônio e Engenharia S/C Ltda. to review the useful life of their
property, plant and equipment. Significant divergences were found in comparison with the useful lives adopted as of December 31, 2009. The useful life
of all property, plant and equipment items was duly reviewed and has been applied since January 1, 2010
Impairment
Property, plant and equipment are tested for impairment at least annually if indications of potential impairment exist.
31
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
14 Intangible assets, net
September 30,
2010
December 31, 2009
Goodwill
10,840,478
11,108,844
Trademarks
452,574
184,615
Softwares
5,758
6,165
11,298,810
11,299,624
Changes in intangible assets
December 31,
2009
Additions
Write-offs
Amortization
(1)
September 30, 2010
11,299,624
19,891
(2,158)
(18,547)
11,298,810
(1)
- Refers to the amortization of definite intangible assets acquired in business combinations.
Goodwill
Company
Company - Resulting from the incorporated Bertin
Goodwill from Bertin USA Corporation
13,183
Goodwill from Novaprom Foods Ingredients
12,000
Goodwill from Vigor shares
798,503
Goodwill from Phitoderm
4,044
Goodwill from Goult Participações
48,598
Goodwill from Leco shares
13,846
890,174
In July 2007 the Company acquired a 100% interest in Swift Foods Company, currently known as JBS USA , with goodwill of R$ 877,609, based on
expected future earnings of the acquired business, which will be paid over a period of 5 years. Goodwill amortized as of December 31, 2008 is R$
248,656.
In accordance with CVM Decision No. 565, dated December 17, 2008, and CVM Decision No. 553, dated November 12, 2008, since January 1, 2009 the
Company has adopted the criterion of not to amortize goodwill based upon expected future earnings, which is in line with CPC 15. Under these CVM
decisions and the CPC 01, intangible assets with indefinite life can no longer be amortized.
On December 29, 2009 the Company acquired Bertin. The market value of this operation was ascertained based on an appraisal report prepared by a
specialized company. The base value of the operation of share exchange between the companies amounted to R$ 11,987,963, generating a goodwill of
R$ 9,069,926. Pursuant to CPC 15 ­ Business combinations, in 2010 the goodwill was allocated to the respective asset accounts, based on the
appreciation of assets.
On December 22, 2007 the Company acquired a 50% interest in Inalca S.p.A., presently known as Inalca JBS, with goodwill of 94,181 thousand Euros,
equivalent to R$ 217,596 as of September 30, 2010, based on expected future earnings of the acquired business.
In January 2007 the Company acquired 100% of JBS Trading USA, Inc., with goodwill of R$ 21,725 based on expected future earnings of the acquired
business, which will be amortized over the period and extent of the related projections, no more than ten years. As of December 31, 2008, accumulated
goodwill amortization is R$ 6,035.
In July 2010 the Company acquired 70% interest in CJSC Prodcontract, with a goodwill of R$ 18,140, based on expected future earnings of the acquired
business.
32
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
15 Trade accounts payable
September 30,
2010
December 31, 2009
Commodities
107,968
149,351
Materials and services
307,369
444,625
Finished products
21,997
33,566
437,334
627,542
16 Loans and financings
Type
Average annual
rate of interest
and
commissions
September 30,
2010
December 31, 2009
FINAME
290,010
330,159
FINAME
366
563
FINAME
12,686
24,465
FINEM
36,592
426,675
FINEM
-
22,588
FININP
-
974
ACC - (advances on exchange contracts)
1,559,590
1,499,167
EXIM - export credit facility
795,558
185,136
EXIM - export credit facility
52,803
326,678
BNDES Automatic
16,829
-
Euro Bonds
468,079
485,439
Working capital- Brazilian Reais
208,259
14,976
Prepayment
1,592,514
1,514,128
144-A
2,663,791
545,670
NCE/COMPROR
2,847,190
1,510,450
Foreign loan
-
624,342
Foreign loan from multilateral organisms
-
87,370
FCO - Middle West Fund
2,016
2,470
FNO - North Fund
30,875
34,670
Working capital - Agriculture
-
75,686
Working capital - Processing
-
212,425
Working capital - Foreign currency
-
117,498
Credit note - Export
555
1,195,328
Other
-
556
10,577,713
9,237,413
Breakdown:
Current liabilities
4,149,607
3,926,390
Non current liabilities
6,428,106
5,311,023
10,577,713
9,237,413
Interest of 10.00%
Exchange variation + interest of
8.25% to 10.50%
Exchange variation + Interest from
10.25%
TR and Interest of 10.50%
Interest of 152.00% of CDI
Interest of 124.50% of CDI
Interest from 113.9% to 120.0%%
of CDI
Currency basket and interest from
3.30% to3.73%
Exchange variation and interest of
9.375%
CDI + interest of 6.00%
Exchange variation + Libor and
interest from 1.00 to 2.30%
Interest of 10.00%
Currency basket and interest of
3.2%
Exchange variation and interest of
3.8%
Exchange variation, Libor plus
interest from 0.45% to 7.20%
TJLP and interest from 3.00% to
5.5%
Interest from 5.19% to 18.27% and
exchange variation
BNDES currency basket and
interest of 2.90%
Exchange variation + Libor and
interest of 1.85%
Interest from 6.83% to 11.2%
TJLP and interest of 3.00% to
TJLP and interest from 1.5% to
3.08%
Exchange variation + Interest of
4.50%
33
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Maturities of long-term debt are as follows:
2011
307,952
2,482,552
2012
1,617,694
922,847
2013
1,083,476
528,826
2014
459,236
187,092
2015
306,090
32,559
2016
1,109,395
1,139,869
2017
6,938
6,862
2018
1,533,353
6,443
2019
3,972
3,973
6,428,106
5,311,023
17 Credit operations, guarantees and covenants
As mentioned above, the terms and conditions for Notes 2011 include covenants. They forbid the Company and its subsidiaries, besides JBS USA, to
incur any debts (observed certain exceptions) unless the pro forma net debt / EBITDA ratio of the Company (as defined in the indenture) at the date the
debt is incurred is lower than 4,75/1.0.
. incurring additional debt, if the ratio net debt/EBITDA is higher than a determined index;
. putting lien on goods, revenue or assets;
. making certain loans or investments;
. selling or disposing of assets;
. paying certain dividends and making other payments;
. paying in advance, cancelling or changing certain debts;
. liquidating, consolidating, merging or acquiring the business or assets of other entities;
. taking part in certain joint-ventures or creating certain types of subsidiaries;
. having certain transactions with related parties;
. executing lease transactions with repurchase option (sale/leaseback).
. changing the control without making a purchase offer on Notes 2011.
EUROBONDS - On January 26, 2006 the Company issued bonds in the total amount of US$ 200 million and, on February 8, 2006, issued US$ 75 million
bonds, totaling US$ 275 million, with a payment term of 5 years and coupon of 9.375% per year. The operation is guaranteed by the Company and its
indirect subsidiary J&F Participações S.A.
ACCs (advances on exchange contracts) are credit facilities obtained from financial institutions by the Company, and the acquired company Bertin, in the
amount of US$ 920.547 as of December 31, 2009 (US$ 860,996 as of December 31, 2009), to finance export transactions.
Notes 2011 - JBS S.A. - On February 6, 2006, the Company issued Notes 2011, maturing in February 2011, at the value of US$275 million. Notes 2011
are guaranteed by J&F, by Flora Produtos de Higiene e Limpeza Ltda. (a subsidiary of J&F) and by JBS Agropecuária Ltda. The interest rate applicable
to the notes is 9.375% starting February 6, 2006, and quarterly paid on February 7, May 7, August 7 and November 7, counted upon May 7, 2006. The
principal amount of the notes should be fully paid by February 7, 2011.
Covenants. The issuance instrument of Notes 2011 contains covenants that restrict the Company and some of its subsidiaries from:
FINAME / FINEM ­ Financing agreements with BNDES are secured by the assets subject matter of the financing.
144-A - It refers to three capture operations by the issuance of 144-A notes in the international market, with a payment term of 10 years performed on the
Company as the following: on July 28, 2006, on the amount of R$ 300 million with a coupon of 10.5% p.a., guaranteed and endorsement by the
Company; on July 29, 2010, on the amount of R$ 900 million, with a coupon of 8.25% p.a., guaranteed endorsement by the Company, and on October
13, 2006 by the incorporated Bertin, on the amount of R$ 350 million with a coupon of 10.25% p.a. without guarantee.
34
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Again, as mentioned above, Notes 2011 establish restrictions to the Company and its subsidiaries in the execution of certain actions, such as: (i) paying
dividends or making any other payments of securities; (ii) paying debts or other obligations; (iii) obtaining loans or advances; or (iv) transferring its
properties or assets. Despite that, such payments can be made in certain cases, such as, (a) when there are certain obligations incurred before the
issuance of the notes; (b) they are established in law; (c) when the transfer of assets takes place in the normal course of business, or under clauses
usually accepted in joint venture agreements executed by the subsidiaries; or (d) when imposed by standard documents of BNDES (National Bank of
Economic and Social Development).
Besides, according to Notes 2011, the Company will not be able, directly or indirectly, to declare or pay any dividends or make any distributions related to
securities issued by the Company (except for debt instruments convertible or exchangeable for such amounts), if (i) there has been default in relation to
the notes 2011; (ii) the Company incurs at least US$ 1.00 of debt under the terms of the net income/EBITDA ratio test established in the indenture of the
notes mentioned in the paragraph above; and (iii) the total value to be paid does not exceed 50% of the jointly net income in a certain year or when in a
determined year where there is loss, the payment value does not exceed US$30 million.
Default events. The indenture of Notes 2011 establishes usual default events. They include non-compliance with or violation of terms, restrictions and
other agreements contained in the mentioned instrument, besides default of other debt in case the effect leads to anticipated payment, lack of payment
within the grace periods applicable of other debt waived or extended, rendering of unfavorable sentences or court orders against the issuer or its
subsidiaries, and certain events related to bankruptcy and insolvency. If default takes place, the issuer or holder of at least 25% of the principal amount
of the notes outstanding at the time is entitled to declare immediately payable the principal and accumulated interest on the notes.
Repurchase offer. In December 2009, the Company made an offer on the repurchase of Notes 2011, at a total approximate value of US$2.4 million. The
mentioned offer was made according to the Company's obligation under the indenture that governs the notes of making an offer to buy them in case of a
change in control (as defined in the indenture). A control change took place on December 31, 2009, when the Company merged Bertin S.A.
Notes 2016 - JBS S.A. - On August 4, 2006, the Company issued Notes 2016 maturing in 2016, at the value of US$300 million. The interest rate
applicable to the notes is 10.50% p.a. and are semiannually paid on February 4 and August 4, counted upon February 4, 2007. The principal amount of
the notes should be fully paid by February 4, 2016. JBS Finance Ltd is the co-issuer of Notes 2016.
Covenants: The indenture governing Notes 2016 requires that any significant subsidiary (i.e., any subsidiary that represents at least 20% of the total
assets or annual gross revenue of the Company, according to its most recent financial statements) ensures entire obligation of the Company as stated in
Notes 2016. Notes 2016 are guaranteed by JBS Hungary Holdings Kft (indirect wholly owned subsidiary of the Company), by JBS USA Holdings and its
subsidiaries, JBS USA, LLC and Swift Beef Company. Other subsidiaries of the Company (including subsidiaries of JBS USA) may be required to
guarantee the Notes 2016 in the future.
Covenants. The issuance instrument of Notes 2016 contains covenants that restrict the Company and some of its subsidiaries from:
. incurring additional debt, if the ratio net debt/EBITDA is higher than a determined index;
. putting lien on goods, revenue or assets;
. selling or disposing of assets;
. paying certain dividends and making other payments;
. having certain transactions with related parties;
. liquidating, consolidating, merging or acquiring the business or assets of other entities;
. taking part in certain joint-ventures or creating certain types of subsidiaries;
. executing lease transactions with repurchase option (sale/leaseback).
. changing the control without making a purchase offer on Notes 2016.
As mentioned above, the terms and conditions for Notes 2016 include covenants. They forbid the Company and its subsidiaries, besides JBS USA, to
incur any debts (observed certain exceptions) unless the pro forma net debt / EBITDA ratio of the Company (as defined in the indenture) at the date the
debt is incurred is lower than 4,75/1.0.
35
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Again, as mentioned above, Notes 2016 establish restrictions to the Company and its subsidiaries in the execution of certain actions, such as: (i) paying
dividends or making any other payments of securities; (ii) paying debts or other obligations; (iii) obtaining loans or advances; or (iv) transferring its
properties or assets. Despite that, such payments can be made in certain cases, such as, (a) when there are certain obligations incurred before the
issuance of the notes; (b) they are established in law; (c) when the transfer of assets takes place in the normal course of business, or under clauses
usually accepted in joint venture agreements executed by the subsidiaries; or (d) when imposed by standard documents of BNDES (National Bank of
Economic and Social Development).
Besides, according to Notes 2016, the Company will not be able, directly or indirectly, to declare or pay any dividends or make any distributions related to
securities issued by the Company (except for debt instruments convertible or exchangeable for such amounts), if (i) there has been default in relation to
the notes 2016; (ii) the Company incurs at least US$ 1.00 of debt under the terms of the net income/EBITDA ratio test established in the indenture of the
notes mentioned in the paragraph above; and (iii) the total value to be paid does not exceed 50% of the jointly net income in a certain year or when in a
determined year where there is loss, the payment value does not exceed US$30 million.
Default events: The indenture of Notes 2016 establishes usual default events. They include non-compliance with or violation of terms, restrictions and
other agreements contained in the mentioned instrument, besides default of other debt in case the effect leads to anticipated payment, lack of payment
within the grace periods applicable of other debt waived or extended, rendering of unfavorable sentences or court orders against the issuer or its
subsidiaries, and certain events related to bankruptcy and insolvency. If default takes place, the issuer or holder of at least 25% of the principal amount
of the notes outstanding at the time is entitled to declare immediately payable the principal and accumulated interest on the notes.
Guarantees - The indenture that governs Bertin's Notes 2016 requires that any significant subsidiaries (as previously mentioned ) guarantee all
obligations of the Company established in Bertin's Notes 2016. They are guaranteed by JBS Hungary Holdings Kft. (indirect wholly-owned subsidiary of
the Company), by JBS USA and its subsidiaries, JBS USA Holdings, Inc., JBS USA, LLC, Flora Produtos de Higiene e Limpeza Ltda. (subsidiary of J&F)
and by Swift Beef Company. Other controlled companies of the Company (including the subsidiaries of JBS USA) can be required to guarantee the
Bertin's Notes 2016 in the future.
Covenants. The indenture of Notes 2016 contains usual contract restrictions, restricting the Company and some of the subsidiaries from:
. incurring additional debt if the net debt/EBITDA ratio is higher than a determined index and if the operation is not specifically allowed in the indenture of
Bertin's Notes 2016;
. putting lien on goods;
. paying dividends or making certain payments to shareholders;
. selling or disposing of assets;
. having certain transactions with related parties;
. liquidating, consolidating, merging or acquiring the business or assets of other entities;
. executing lease transactions with repurchase option (sale/leaseback);
. changing the company's control without making a purchase offer on Bertin' Notes 2016.
. in a general manner, limits dividends or other payments to shareholders by restricted subsidiaries.
As indicated above, the terms and conditions for Bertin's Notes 2016 include covenants that forbid the Company (as legal successor of Bertin) and the
subsidiaries, to incur any debts (observing certain exceptions) unless the pro form net debt / EBITDA ratio of the Company (as defined in the indenture)
at the date the debit is incurred is lower than 4.75/1.0.
Bertin's Notes 2016 - On November 9, 2006, Bertin S.A., an enterprise of which the Company is the successor through merger, issued Bertin's Notes
2016 at the principal value of US$350 million (still under the name of Bertin Ltda.). The interest applicable to Bertin's Notes 2016 corresponds to 10.25%,
per annum, paid every six months on April 5 and October 5, beginning April 5, 2007. The principal value of the notes should be fully paid by October 5,
2016.
Besides, Bertin's Notes 2016 restrict the Company and its subsidiaries from: (i) paying dividends or making any other payments of securities; (ii) paying
debts or other obligations; (iii) making loans or advances; or (iv) transferring its properties or assets. Despite that, such payments can be made in certain
cases, such as, (a) when there are certain obligations incurred before the issuance of the notes; (b) they are established in law; (c) when the transfer of
assets takes place in the normal course of the business, or under clauses usually accepted in joint venture agreements executed by the subsidiaries; (d)
when imposed by standard documents of BNDES or other international governmental agencies.
36
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Besides, according to the notes, the Company can only, directly or indirectly, declare or pay any dividends or make any distributions related to securities
issued by the Company (except for debt instruments convertible or exchangeable for such amounts), if (i) it is not in default in relation to the notes; (ii) the
Company incurs at least US$ 1.00 of debt under the terms of the net income/EBITDA ratio test established in the indenture of the notes mentioned in the
paragraph above; and (iii) the total value to be paid does not exceed 50% of the jointly net income in a certain year or when in a determined year where
there is loss, the payment value does not exceed US$ 30 million.
Default events: The issuance instrument of Bertin's Notes 2016 establishes usual default events. They include non-compliance with or violation of terms,
restrictions and other agreements contained in the mentioned instrument, besides default of other debt in case the effect leads to anticipated payment,
lack of payment within the grace periods applicable of other debt waived or extended, rendering of unfavorable sentences or court orders against the
issuer or its subsidiaries, and certain events related to bankruptcy and insolvency. If default takes place, the issuer or holder of at least 25% of the
principal amount of the notes outstanding at the time is entitled to declare immediately payable the principal and accumulated interest on the notes.
On December 14, 2009, Bertin began a process of consent solicitation with the holders of Bertin's Notes 2016 . It aimed, among others, (i) to turn even
certain terms of the indenture of the notes, especially those related to the covenants and default events of the Company's Notes 2016; and (ii) except the
control change of Bertin, due to its merger by the Company, from the cases of control change.
Notes 2018 - JBS S.A. - On Julys 29, 2010, the Company issued Notes 2018 maturing in 2018, at the value of US$900 million. The interest rate
applicable to the notes is 8.25% p.a. and are semiannually paid on January 29 and July 29 of each year, counted upon January 29, 2011. The principal
amount of the Notes 2018 should be fully paid by January 29, 2018. JBS Finance Ltd is the issuer of Notes 2018.
They are guaranteed by JBS Hungary Holdings Kft. (indirect wholly-owned subsidiary of the Company) and by the Company.
Covenants. The indenture of Notes 2018 contains usual contract restrictions, restricting the Company and some of the subsidiaries from:
. incurring additional debt if the net debt/EBITDA ratio is higher than a determined index and if the operation is not specifically allowed in the indenture of
Bertin's Notes 2016;
. putting lien on goods;
. paying dividends or making certain payments to shareholders;
. selling or disposing of assets;
. having certain transactions with related parties;
. liquidating, consolidating, merging or acquiring the business or assets of other entities;
. executing lease transactions with repurchase option (sale/leaseback);
. changing the company's control without making a purchase offer on Notes 2018.
As mentioned above, the terms and conditions for Notes 2016 include covenants. They forbid the Company and its subsidiaries, besides JBS USA, to
incur any debts (observed certain exceptions) unless the pro forma net debt / EBITDA ratio of the Company (as defined in the indenture) at the date the
debt is incurred is lower than 4,75/1.0.
Again, as mentioned above, Notes 2018 establish restrictions to the Company and its subsidiaries in the execution of certain actions, such as: (i) paying
dividends or making any other payments of securities; (ii) paying debts or other obligations; (iii) obtaining loans or advances; or (iv) transferring its
properties or assets. Despite that, such payments can be made in certain cases, such as, (a) when there are certain obligations incurred before the
issuance of the notes; (b) they are established in law; (c) when the transfer of assets takes place in the normal course of business, or under clauses
usually accepted in joint venture agreements executed by the subsidiaries; or (d) when imposed by standard documents of BNDES (National Bank of
Economic and Social Development).
37
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
The net outcome of the offer and sale of Notes 2014 (less US$100 million) was used in the amortization of accumulated interest and part of the principal
amount of loans between companies of the same group. Besides, JBS USA executed a loan agreement between companies of the same group at the
principal value of US$6 million under the same terms of the previous loan agreement between companies of the consolidated group.
Besides, according to Notes 2018, the Company will not be able, directly or indirectly, to declare or pay any dividends or make any distributions related to
securities issued by the Company (except for debt instruments convertible or exchangeable for such amounts), if (i) there has been default in relation to
the notes 2018; (ii) the Company incurs at least US$ 1.00 of debt under the terms of the net income/EBITDA ratio test established in the indenture of the
notes mentioned in the paragraph above; and (iii) the total value to be paid does not exceed 50% of the jointly net income in a certain year or when in a
determined year where there is loss, reduced 100% loss.
Default events: The indenture of Notes 2018 establishes usual default events. They include non-compliance with or violation of terms, restrictions and
other agreements contained in the mentioned instrument, besides default of other debt in case the effect leads to anticipated payment, lack of payment
within the grace periods applicable of other debt waived or extended, rendering of unfavorable sentences or court orders against the issuer or its
subsidiaries, and certain events related to bankruptcy and insolvency. If default takes place, the issuer or holder of at least 25% of the principal amount
of the notes outstanding at the time is entitled to declare immediately payable the principal and accumulated interest on the notes.
Guaranteed revolving credit line of J&F Oklahoma - J&F Oklahoma has a revolving line of credit at an amount of US$ 600 million with a commercial
bank. Its controlling company, J&F, has executed an agreement with J&F Oklahoma where it will made contributions to J&F Oklahoma if J&F Oklahoma
does not comply with the financial obligations established under that line of credit. In the event J&F Oklahoma does not comply with the obligations and
that is not remedied by J&F, under the terms of the filiations contract, Five Rivers will be forced to pay US$250 million of the obligations. That line of
credit is available for revolving loans and letters of credit.
Commitment fee of 0.45% is applicable to new credit. That line of credit matures on October 7, 2011. Such credit line and the respective guarantees are
supported by assets of J&F Oklahoma and of Five Rivers. The credit line is used to finance the purchase of cattle by J&F Oklahoma, that is then fed in
Five River's feed wards according to the supply and cattle feeding agreements above-described. The cattle is sold to JBS USA, LLC pursuant to the
cattle purchase and sale agreements also described above.This facility was amended and restated on September 10, 2010. The amended and restated
facility has availability up to $800,0 million and matures on September 23, 2014.
Revolving line of credit for J&F Oklahoma - Five Rivers is a party to an agreement with J&F Oklahoma, where Five Rivers undertook to grant up to
US$200 million in revolving loans to J&F Oklahoma. The loans will be used by J&F Oklahoma to acquire animals for confinement in the feed yards of
Five Rivers. Interest is applicable to those loans at annual LIBOR, plus 2.25% or basic prime rate plus 1%, and the interest is payable at least quarterly.
The maturity of the line of credit is on October 24, 2011. The interest rate at September 26, 2010 was 4,25%. This facility was amended on September
10, 2010 to mature on September 11, 2016. As of September 26, 2010, outstanding borrowings were $76,5 million.
Loans among companies of the same group payable by JBS USA Holdings, Inc. to a subsidiary of JBS S.A. - On March 29, 2009, JBS USA owed
a total of US$658.6 million for various loans between companies of the same group of the Company, from now on called JBS HU Liquidity Management
LLC (Hungary), an indirect wholly-owned subsidiary of the Company. The product of those loans was destined to finance the operations of JBS USA and
for the Acquisition of the enterprises Tasman and JBS Packerland. On April 27, 2009, the loan agreements were consolidated in a single loan
agreement, the due dates of the principal amount of the loans were extended to April 18, 2019, and the interest rate was changed 12% per annum.
Description of Indebtedness of JBS USA
Senior Secured Credit Facility -- On November 5, 2008, JBS USA entered into a senior secured revolving credit facility (the "Credit Agreement") that
allows borrowings up to US$400.0 million, and terminates on November 5, 2011. Up to US$75.0 million of the Credit Agreement is available for the
issuance of letters of credit. At September 30, 2010, US$31.5 million of the availability was used towards letters of credit. Borrowings that are index rate
loans will bear interest at the prime rate plus a margin of 2.25% and the all-in rate as of September 30, 2010 was 5.5%. Upon approval by the lender,
LIBOR rate loans may be taken for one, two or three month terms, (or six months at the discretion of the agent) at LIBOR plus a margin of 3.25%. There
were no outstanding borrowings at September 30, 2010.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
On April 27, 2009, the Credit Agreement was amended to allow the execution of the US$700.0 million senior unsecured notes due 2014 described
below. Under the amendment, the existing limitation on distributions between JBS USA and JBS USA Holdings was amended to allow the proceeds of
the senior unsecured notes due 2014, less transaction expenses and US$100.0 million retained by JBS USA, to be remitted to JBS USA Holdings as a
one time distribution. Also, the unused line fee was increased from 37.5 basis points to 50.0 basis points.
On August 13, 2009, the Credit Agreement was amended to eliminate JBS USA's obligation to report daily mark-to-market summary of inventory market
values to the administrative agent.
On September 11, 2009, the Credit Agreement was amended to modify the change of control definition so that JBS S.A. is required to own, directly or
indirectly, more than 50% rather than 100% of the capital stock of JBS USA Holdings. In addition, the amendment excludes capital expenditures that are
financed with initial public offering proceeds from the fixed charge coverage ratio covenant calculation and any capital expenditures and acquisitions that
are financed with such proceeds are not subject to the respective covenant limitations in the Credit Agreement. Finally, the aggregate amount of
permitted capital leases was increased from US$25.0 million to US$50.0 million.
On May 7, 2010 the Credit Agreement was amended and restated ("Amended and Restated Credit Agreement") to allow JBS USA Holdings to make
acquisitions with proceeds from an equity contribution or loan from JBS S.A. or a subsidiary of JBS S.A. that is not a subsidiary of JBS USA Holdings. In
addition, the permitted acquisitions requirements under the Amended and Restated Credit Agreement for such acquisitions as well as acquisitions
financed with any potential initial public offering proceeds of JBS USA Holdings have been modified. Furthermore, any capital expenditures that are
financed with such proceeds are not subject to the covenant limitations in the Amended and Restated Credit Agreement. Finally, the aggregate amount
of permitted capital leases and fixed asset indebtedness was increased from US$50.0 million to US$100.0 million.
The Credit Agreement also contains customary events of default, including failure to perform or observe terms, covenants or agreements included in the
Credit Agreement, payment of defaults on other indebtedness, defaults on other indebtedness if the effect is to permit acceleration, entry of unsatisfied
judgments or orders against a loan party or its subsidiaries, failure of any collateral document to create or maintain a priority lien and certain events
related to bankruptcy and insolvency or environmental matters. If an event of default occurs the lenders may, among other things, terminate their
commitments, declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees, and exercise remedies
under the collateral documents relating to the Credit Agreement. At September 30, 2010, JBS USA was in compliance with all covenants.
Availability. Availability under the Credit Agreement is subject to a borrowing base. The borrowing base is based on certain JBS USA domestic wholly-
owned subsidiaries' assets as described below, with the exclusion of JBS Five Rivers. The borrowing base consists of percentages of eligible accounts
receivable, inventory and supplies less certain eligibility and availability reserves. As of September 30, 2010, borrowing availability was US$366.2
million.
Security and Guarantees. Borrowings made by JBS USA under the Credit Agreement are guaranteed by JBS S.A., JBS USA Holdings and all domestic
subsidiaries of JBS USA except JBS Five Rivers. Furthermore, the borrowings are collateralized by a first priority perfected lien and interest in accounts
receivable, finished goods and supply inventories of all domestic subsidiaries of JBS USA except JBS Five Rivers.
Covenants. The Credit Agreement contains customary representations and warranties and a springing financial covenant that requires a minimum fixed
charge coverage ratio of not less than 1.15 to 1.00. This ratio is only applicable if borrowing availability falls below the minimum threshold, which is the
greater of 20% of the aggregate commitments or US$70.0 million. The Credit Agreement also contains negative covenants that limit the ability of JBS
USA and certain of its subsidiaries to, among other things:
· have capital expenditures greater than US$175.0 million per year, plus 50% of unused permitted capital expenditures from the preceding year;
· incur additional indebtedness;
· create liens on property, revenue or assets;
· make certain loans or investments;
· sell or dispose of assets;
· pay certain dividends and other restricted payments;
· prepay or cancel certain indebtedness;
· dissolve, consolidate, merge or acquire the business or assets of other entities;
· enter into joint ventures other than certain permitted joint ventures or create certain other subsidiaries;
· enter into new lines of business;
· enter into certain transactions with affiliates and certain permitted joint ventures;
· agree to restrictions on the ability of the subsidiaries to make dividends;
· agree to enter into negative pledges in favor of any other creditor; and
· enter into sale/leaseback transactions and operating leases.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
On July 27, 2010, JBS USA executed an amendment to the Amended and Restated Credit Agreement to permit the Company to guarantee any new
debt issuances by JBS S.A. or its subsidiaries with certain exceptions.
Installment note payable ­ The installment note payable relates to JBS USA financing of a capital investment. The note bears interest at LIBOR. The
rate as of September 30, 2010 was 0.26% plus a fixed margin of 1.75% per annum with payments due on the first of each month. The note matures on
August 1, 2013.
Intercompany loans ­ From October 26, 2009 through April 28, 2010, JBS USA made eight intercompany loans to Swift Australia amounting to US$167.0
million to fund working capital and general corporate purposes. Each loan had a one year maturity with interest at the three-month LIBOR plus a fixed
margin of 5% per annum. While these loans eliminated upon consolidation, the loans were denominated in USD, but reported by our Australian
subsidiary in AUD. Therefore, the loans generated foreign currency transaction gains or losses depending on fluctuations in the period end AUD to USD
exchange rate. On May 4, 2010, the loans payable and related interest were paid in full. The agreements were terminated.
A$250 million revolving loan payable between JBS USA and Swift Australia ­ On May 4, 2010, JBS USA issued a long-term intercompany revolving
promissory note to Swift Australia for A$250.0 million with interest based on the three-month Bank Bill Swap Bid Rate ("BBSY") plus 3% and a maturity
date of May 4, 2012 to fund working capital and general corporate purposes. While these loans eliminate upon consolidation, the loans are denominated
in AUD, but reported by JBS USA in USD. Therefore, the loans generate foreign currency transaction gains or losses depending on fluctuations in the
period end AUD to USD exchange rate. The average interest rate at September 30, 2010 was 7.85%.
A$50 million revolving loan receivable from Swift Australia ­ On May 4, 2010, JBS USA Holdings issued an intercompany revolving promissory note to
Swift Australia for A$50.0 million with interest based on the three-month BBSY plus 3% and a maturity date of May 4, 2012 to fund working capital and
general corporate purposes. While these loans eliminate upon consolidation, the loans are denominated in AUD, but reported by JBS USA Holdings in
USD. Therefore, the loans generate foreign currency transaction gains or losses depending on fluctuations in the period end AUD to USD exchange rate.
As of September 30, 2010, outstanding borrowings were A$47.5 million, or approximately $45.6 million. The average interest rate at September 30, 2010
was 7.89%.
Unsecured credit facility ­ Swift Australia entered into an Australian dollar ("A$") denominated A$120.0 million unsecured credit facility on February 26,
2008 to fund working capital needs and letter of credit requirements. This facility terminated on October 1, 2009 with the A$40.0 million letter of credit
facility extended to June 30, 2010. On May 5, 2010, the facility was revised to reflect current letters of credit requirements to a facility limit of A$1.9
million and is subject to an annual review starting June 30, 2011. At September 30, 2010, the amount of outstanding letters of credit under this facility
was US$1.8 million.
US$50 million revolving loan receivable from JBS USA ­ On April 19, 2010, JBS USA Holdings issued a US$50.0 million intercompany revolving
promissory note to JBS USA with interest based on the three-month LIBOR plus a fixed margin of 2.5% and a maturity date of March 31, 2012 to fund
working capital and general corporate purposes. There were no outstanding borrowings at September 30, 2010.
Unsecured term loan facility ­ On February 12, 2010, Swift Australia entered into an unsecured $10.0 million facility with Banco Santander. The loan
bears interest at the three-month LIBOR plus a fixed margin of 3% per annum. The interest rate at September 30, 2010 was 3.66%. There were no
outstanding borrowings at September 30, 2010.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Secured credit/ multi-option bridge facility ­ JBS Southern entered into an A$80.0 million secured multi-option bridge facility on May 2, 2008 to fund
working capital and letter of credit requirements. This facility terminated on January 26, 2010.

11.625% senior unsecured notes due 2014 ­ JBS USA Holdings' wholly-owned subsidiaries JBS USA and JBS USA Finance, Inc. issued 11.625% notes
due 2014 in an aggregate principal amount of $700.0 million on April 27, 2009. These notes are guaranteed by JBS USA Holdings, JBS S.A., JBS
Hungary Holdings Kft., and each of the U.S. restricted subsidiaries that guarantee the Credit Agreement (subject to certain exceptions). Interest on
these notes accrues at a rate of 11.625% per annum and is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on
November 1, 2009. The principal amount of these notes is payable in full on May 1, 2014. The original issue discount of approximately $48.7 million is
being accreted over the life of the notes.
Covenants. The indenture for the 11.625% senior unsecured notes due 2014 contains customary negative covenants that limit JBS USA and its
restricted subsidiaries' ability to, among other things:
· incur additional indebtedness, based on net debt to EBITDA ratio;
· incur liens;
· sell or dispose of assets;
· pay dividends or make certain payments to our shareholders;
· permit restrictions on dividends and other restricted payments by its restricted subsidiaries;
· enter into related party transactions;
· enter into sale/leaseback transactions; and
· undergo changes of control without making an offer to purchase the notes.
Events of default. The indenture also contains customary events of default, including failure to perform or observe terms, covenants or other
agreements in the indenture, defaults on other indebtedness if the effect is to permit acceleration, failure to make a payment on other indebtedness
waived or extended within the applicable grace period, entry of unsatisfied judgments or orders against the issuer or its subsidiaries, and certain events
related to bankruptcy and insolvency matters. If an event of default occurs, the trustee or the holders of at least 25% in aggregate principal amount of
the notes then outstanding may declare such principal and accrued interest on the notes to be immediately due and payable. At September 26, 2010,
JBS USA and JBS USA Finance, Inc. were in compliance with all covenants.
Dividend Restrictions ­ Certain covenants of indebtedness and debt guarantee terms include restrictions on our ability to pay dividends, make loans or
advances. As of December 27, 2009 and September 26, 2010, the Company had $107.2 million and $302.4 million, respectively, of retained earnings
available to pay dividends.
The five various intercompany loans issued in 2008 described below from JBS S.A., were subsequently assigned to JBS HU Liquidity Management LLC
("Hungary"), a wholly-owned, indirect subsidiary of JBS S.A. which is organized in the country of Hungary. On April 27, 2009, in connection with the
issuance of the 11.625% senior unsecured notes by JBS USA, these intercompany loan agreements were consolidated into one loan agreement, the
maturity date was extended to April 18, 2019, and the interest rate was changed from approximately 6.5% to 12% per annum with interest payable semi-
annually. The net proceeds of the offering of the 11.625% senior unsecured notes due 2014 (other than $100.0 million) were used to repay accrued
interest and a portion of the principal on these intercompany loans. On January 1, 2010, the Company capitalized interest in the amount of $5.5 million
into this loan. On March 12, 2010, the loan payable and related interest was paid in full.
US$100 million loan payable to JBS HU Liquidity ­ On April 28, 2008, the Company entered into an unsecured loan agreement with its parent, JBS S.A.,
for US$100.0 million with a maturity date of April 28, 2011. The funds received from this loan were used to fund the Tasman Acquisition (see Note 2).
On March 27, 2009, this loan was assigned to Hungary.
US$25 million loan payable to JBS HU Liquidity ­ On May 5, 2008, the Company entered into an unsecured loan agreement with JBS S.A. for US$25.0
million with a maturity date of May 5, 2011. The funds received were used to fund operations. On March 27, 2009, this loan was assigned to Hungary.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
$25 million loan payable to JBS HU Liquidity ­ On June 10, 2008, the Company entered into an unsecured loan agreement with JBS S.A. for $25.0
million with a maturity date of June 10, 2011. The funds received from this loan were used to fund operations. On March 27, 2009, this loan was
assigned to Hungary.
$350 million loan payable to JBS HU Liquidity ­ On June 30 2008, the Company entered into an unsecured loan agreement with JBS S.A. totaling
$350.0 million with a maturity date of June 30, 2011. The funds received were used to pay outstanding unsecured bank debt. On March 27, 2009, this
loan was assigned to Hungary.
$250 million loan payable to JBS HU Liquidity ­ On October 21, 2008, the Company entered into an unsecured loan agreement with JBS S.A. for $250.0
million with a maturity date of October 21, 2011. The funds received were used for the Smithfield Acquisition (see Note 2). On March 27, 2009, this loan
was assigned to Hungary.
US$6 million loan payable to JBS HU Liquidity ­ On May 20, 2009, the Company entered into an unsecured loan agreement with Hungary for US$6.0
million with a maturity date of May 20, 2019. The proceeds were used to repay a portion of the consolidated intercompany note referenced above. The
loan agreement has a stated interest rate of 12% with interest payable semi-annually. On January 1, 2010, the Company capitalized interest in the
amount of US$0.4 million into this loan. On March 12, 2010, the loan payable and related interest was paid in full.
Description of Indebtedness of PPC
On December 28, 2009, PPC used the proceeds received from borrowings under the Exit Credit Facility (see below) and available cash to repay
indebtedness under its prior credit agreements in the amount of $1.4 billion. PPC also used the proceeds received from the sale of 64% of the
outstanding common stock of the reorganized PPC to repay indebtedness under the Senior Unsecured Notes totaling $651.9 million.
Senior Unsecured Note ­ PPC has indebtedness under Senior Notes due in 2015 bearing interest at a rate of 7 5/8% and a principal amount outstanding
of $0.1 million at September 26, 2010.
Senior Subordinated Unsecured Notes ­ PPC has indebtedness under senior subordinated notes due in 2017 bearing interest at 8 3/8% and a principal
amount outstanding of $3.5 million at September 26, 2010. PPC has indebtedness under senior subordinated notes due in 2013 bearing interest at 9
1/4% and a principal amount outstanding of $0.3 million as of September 26, 2010.
Exit Credit Facility ­ Upon exiting from bankruptcy on December 28, 2009, PPC and certain of its subsidiaries, the To-Ricos, Ltd. and To-Ricos
Distribution, Ltd., entered into the Exit Credit Facility ("Exit Credit Facility"). This facility provides for an aggregate commitment of $1.8 billion consisting
of a revolving loan commitment of $600.0 million, Term A loan commitments ("Term A") of $375.0 million and Term B loan commitments ("Term B") of
$775.0 million. The revolving loan commitment and the Term A loans will mature on December 28, 2012. Term B loans will mature on December 28,
2014. On December 28, 2009, PPC borrowed $375.0 million under the Term A loan, $775.0 million under the Term B loan. On December 28, 2009,
PPC also paid transaction costs totaling $50.0 million related to the Exit Credit Facility (see Note 3). The availability under the revolving loan commitment
was $447.5 million as of September 26, 2010.
The Term A must be repaid in 12 equal quarterly principal installments of US$12.5 million beginning on April 15, 2010, with the final installment due on
December 28, 2012. The Term B must be repaid in 16 equal quarterly principal installments of US$12.5 million beginning on April 15, 2011, with the final
installment due on December 28, 2014. Additionally, following the end of each fiscal year, a portion of PPC's excess cash flow must be used to repay
outstanding principal amounts under the Term A and Term B loans. Covenants in the Exit Credit Facility also require PPC to use the proceeds they
receive from certain asset sales and specified debt or equity issuances and upon the occurrence of other events to repay outstanding borrowings under
the Exit Credit Facility.
The Exit Credit Facility includes a $50.0 million sub-limit for swingline loans (loans with same day availability), and a $200.0 million sub-limit for letters of
credit. Outstanding borrowings under the revolving loan commitment bear interest at a per annum rate equal to 3.5% plus the greater of the U.S. prime
rate, the average federal funds rate plus 0.5%, and the one-month LIBOR rate plus 1.0%, in the case of alternate base rate loans, or 4.5% plus the one,
two, three or six-month LIBOR rate adjusted by the applicable statutory reserve, in the case of Eurodollar loans. Outstanding Term A and Term B-1 loans
bear interest at a per annum rate equal to 4.0% plus greater of the U.S. prime rate, the average federal funds rate plus 0.5%, and the one month LIBOR
rate plus 1.0%, in the case of alternate base rate loans, or 5.0%, plus the one, two, three or six-month LIBOR Rate adjusted by the applicable statutory
reserve, in the case of Eurodollar loans.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Outstanding Term B-2 loans bear interest at a per annum rate equal to 9.0%. Commitment fees charged on the unused revolving commitments under
the Exit Credit Facility bear interest at a per annum rate equal to 1.0%. As of September 26, 2010, PPC had approximately US$40.8 million of
outstanding letters of credit.
All obligations under the Exit Credit Facility are unconditionally guaranteed by certain of PPC's subsidiaries and are secured by a first priority lien on the
domestic (including Puerto Rico) accounts receivable and inventory of PPC and its subsidiaries; 100% of the equity interests in the To-Ricos Borrowers
and PPC's domestic subsidiaries and 65.0% of the equity interests in PPC's direct foreign subsidiaries; substantially all of the personal property and
intangibles of PPC, the To-Ricos Borrowers and the guarantor subsidiaries; and substantially all of the real estate and fixed assets of PPC and the
subsidiary guarantors.
The Exit Credit Facility contains customary representations and warranties. Actual borrowings by PPC under the Exit Credit Facility are subject to a
borrowing base, based on certain eligible inventory, eligible receivables and restricted cash under the control of the Exit Facility agent. The borrowing
base formula is reduced by the sum of inventory reserves, rent and collateral access reserves, and any amount more than 15 days past due that is owed
by PPC or its subsidiaries to any person on account of the purchase price of agricultural products or services (including poultry and livestock) if that
person is entitled to any grower's or producer's lien or other security arrangement. Revolving loan availability under the borrowing base is also limited to
an aggregate of US$25.0 million with respect to To-Ricos as joint borrower.
The Exit Credit Facility provides that PPC may not incur capital expenditures in excess of $225.0 million in fiscal year 2010, $275.0 million in fiscal year
2011 and $350.0 million per fiscal year thereafter. PPC must also maintain a minimum fixed charge coverage ratio and a minimum level of tangible net
worth and may not exceed a maximum leverage ratio. The Exit Credit Facility contains various covenants that restrict PPC's ability to, among other
things, incur additional indebtedness, incur liens, pay dividends or make certain restricted payments, consummate certain asset sales, enter into certain
transactions with JBS USA and other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of PPC's assets. PPC was in
compliance with all covenants as of September 26, 2010 and expects to remain in compliance for the foreseeable future, however, chicken prices,
commodity prices, access to export markets and other factors could affect PPC's ability to maintain compliance with its financial covenants.
Of these financial covenants, PPC management believes the fixed charge coverage ratio will be the most susceptible to these factors. In order to
continue to meet the covenant, gross profit will have to improve over the results PPC experienced in the thirteen and thirty-nine weeks ended September
26, 2010, or PPC management will have to initiate additional cost-cutting or restructuring activities.
The Exit Credit Facility allows PPC to provide additional advances to its subsidiaries up to $61.8 million. After the Term A loans are repaid in full, PPC
may provide additional advances to its subsidiaries up to $131.8 million, subject to certain conditions. Management believes that all of PPC's
subsidiaries, including PPC's Mexican subsidiaries, will be able to operate within this limitation.
ING Credit Agreement ­ On September 25, 2006, a subsidiary of PPC, Avícola Pilgrim's Pride de México, S. de R.L. de C.V. (the "Mexico Borrower"),
entered into a secured revolving credit agreement (the "ING Credit Agreement") with ING Capital, LLC, as agent (the "Mexico Agent") and the lenders
party thereto (the "Mexico Lenders"). The ING Credit Agreement has a revolving commitment of 557.4 million Mexican pesos, a U.S. dollar-equivalent
$44.0 million at September 26, 2010. There were no outstanding borrowings at September 30, 2010. The availability under the Mexico revolving credit
facility was $44.0 million as of September 30, 2010.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
For the fiscal years ending December:
Capitalized
Lease
Obligations
Noncancellable
Operating Lease
Obligations
1,984 18,277
2011
6,498 59,057
2012
5,423 36,825
2013
5,285 24,832
2014
5,275 11,613
Thereafter
23,000 24,370
47,465
174,974
Less: Amount representing interest
(4,522)
-
Present value of net minimum lease payments
42,943 174,974
18 Convertible debentures
The funds were fully used to subscribe a capital increase in JBS USA, in order to complete the transaction reflected in the Stock Purchase Agreement
whereby the JBS USA, by subscription of new shares, became the owner of shares representing 64% (sixty-four per cent) of the total voting capital of
PPC and strengthen the capital structure consolidated by the Company for implementation of investment plans and expansion projects, and enable the
completion of the integration of operations with Bertin.
The Agreement Investment signature was approved by the Board of Directors in a resolution held on December 7, 2009.
The Company received on December 22, 2009 correspondence from BNDES Participações SA - BNDESPAR, communicating the approval of the
investment conduct through the subscription of subordinated debentures, convertible into shares and transfer clause of the first private placement the
Company to be held in single series.
Liquidity event means to combine the completion of an initial public offering of JBS USA, in the minimum amount equivalent to US$ 1,5 billion with
primary placement of at least 50%, either through IPO or follow-on, where JBS USA (a) becomes a Reporting company with the Securities and Exchange
Commission, (b) has shares listed on the New York Stock Exchange or NASDAQ, (c) has a minimum free float (excluding potential involvement of
debenture holders ) of 15% and (d) that the capital of JBS USA, on the day of the liquidity event, be composed of single species and class stocks, noting
that will be allowed to issue classes of preferred shares with different political rights after the liquidity event.
On December 28, 2009, the Company issued 2,000,000 debentures at the unit par value of R$ 1,739.80. The total value of the debentures is
R$3,479,600. Issuance and transaction costs corresponded to R$17,388 and there is no premium in the in this fund raising operation. Under the terms of
the indenture, the debentures corresponded to US$2 billion at issuance date. The 2,000,0000 debentures will be obligatorily exchangeable for
certificates of deposit of securities (Brazilian Depositary Receipt - BDR) sponsored Level II or III, supported by voting common shares issued by JBS
USA Holdings, Inc., or obligatorily convertible into shares issued by the Company, in the event the latter does not have liquidity.
Capital and Operating Leases ­ The Company and certain of its subsidiaries lease the corporate headquarters in Greeley, Colorado; a waste water
treatment facility in Mayfield, Kentucky; a freezer in Nacogdoches, Texas; a hatchery in Center, Texas; and a vehicle maintenance facility in Tenaha,
Texas under capital leases. Under operating leases, the Company and certain of its subsidiaries lease distribution facilities located in New Jersey,
Florida, Nebraska, Colorado and Texas; a feedlot in New Mexico; warehouses in Arkansas, Georgia and Puerto Rico; administrative offices in Georgia
and Texas; sales offices in Kentucky, Tennessee, Texas and Virginia; a data center in Texas; marketing liaison offices in South Korea, Japan, Mexico,
China, and Taiwan; its distribution centers and warehouses in Australia; and a variety of equipment. These operating leases expire between 2010 and
2022. Future minimum lease payments at September 26, 2010, under capital and noncancellable operating leases with terms exceeding one year are as
follows (in thousands):
Net minimum lease payments
Rent expense associated with operating leases was $9.0 million and $29.6 million for the thirteen and thirty-nine weeks ended September 27, 2009,
respectively. Rent expense associated with operating leases was $25.5 million and $79.0 million for the thirteen and thirty-nine weeks ended September
26, 2010, respectively.
Outstanding amounts under the ING Credit Agreement bear interest at a rate per annum equal to the LIBOR Rate, the Base Rate or the TIIE Rate, as
applicable, plus the Applicable Margin (as those terms are defined in the ING Credit Agreement).
The ING Credit Agreement requires PPC to make a mandatory prepayment of the revolving loans in an aggregate amount equal to 100% of the net cash
proceeds received by certain Mexico subsidiaries of PPC (the "Mexico Subsidiaries"), as applicable, in excess of thresholds specified in the ING Credit
Agreement, from the sale of certain assets by the Mexico Subsidiaries; from any casualty or other insured damage to, or any taking under power of
eminent domain or by condemnation or similar proceedings of, any property or asset of any Mexico Subsidiary; or from the incurrence of certain
indebtedness by a Mexico Subsidiary. Any such mandatory prepayments will permanently reduce the amount of the commitment under the ING Credit
Agreement. The Mexico Subsidiaries pledged substantially all of their receivables, inventory, and equipment and certain fixed assets.
2010 (remaining)
44
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Shareholders' Agreement
The Liquidity event has to occur until December 31, 2010, subject to mandatory conversion into shares of debentures. However, the Company may, at
least 5 days before the deadline, notify the trustee that intends to extend the deadline until December 31, 2011, in this case it must pay on the date of
notification and in national currency, the debenture holders a premium of 15% on par value of all the Debentures then outstanding.
During the term of the Shareholders' Agreement, and while it continues being an Eligible Shareholder, the shareholder BNDESPAR will be entitled to
interfering in any of the matters mentioned below (each one is an "Approval Item"):
Due to the end of the deadline for apportionment of surplus in the issuance of debentures, on February 19, 2010, the Company communicated, based on
the information received from bank Bradesco S.A., depository institution of the Company's debentures, that all debentures issued were subscribed, as
approved during a general extraordinary meeting held on December 31, 2009 at the Company.
The maturity of the debentures will be 60 years from the issuance date, on December 28, 2069.
Each debenture can only be converted into shares of the Company, exclusively in the following cases: (i) if the Liquity Event has not occurred within the
period established in the indenture, (ii) in case certain requirements described in the indenture are not met, or (iii) in the occurrence of an Anticipated
Expiration as established in the indenture. The number of common shares issued by the Company in the conversion of the debentures is based on the
division of (a) their unit par value, plus a prize of 10% (ten percent); and (b) a conversion price based on the weighted average of the price of the
common shares in negotiation ("JBSS3") in the 60 (sixty) trading sessions before date of conversion of the debentures. Such average should be adjusted
for the declared proceeds, limited to the a floor of R$6.50 (six reais and fifty cents) per share action and a ceiling of R$12.50 (twelve reais and fifty cents)
per share ("Conversion into Shares"). The Liquidity Event should take place until December 31, 2010, and the Company can extend such period to
December 31, 2011, subject to the payment of an extension premium of 15% (fifteen percent) on the unit par value of all outstanding debentures.
In case the Liquidity Event does not occur until the limit date and the Company has not paid the extension premium, the debentures will be obligatorily
converted into shares of the Company on January 31, 2011. In the event the period was extended from the limit date and the Liquidity the has not
occurred until January 31, 2011, the debentures will be obligatorily converted into actions of the Company on January 31, 2012.
(ii) the distribution of dividends, interest on equity capital or any other form of compensation to the shareholders by the Company, implying that the ratio
of the division between Net Debt and EBITDA (in both cases related to the last four quarters, according to the quarterly or annual consolidated financial
statements of the Company) calculated on a pro forma basis and after distribution, is higher than 4.0 ("Managerial Indebtedness Limit");
(iii) a reduction in the capital stock of the Company, of JBS USA and/or of any of their respective controlled companies, that, if executed, would exceed
the Managerial Indebtedness Limit. Exceptions to this restriction are the controlled companies whose capital stock is directly or indirectly held by JBS in a
percentage equal to or higher than 99% ("Exempt Controlled Companies");
(iv) proposition of an extrajudicial recovery plan, judicial recovery plan or filing of bankruptcy by the Company or by JBS USA;
(v) liquidation or dissolution of JBS, of JBS USA or of any of their controlled companies (except for Exempt Controlled Companies);
(vi) reduction in JBS's obligatory dividends;
(vii) amendments to article 33 of JBS's by-laws, so that the audit committee would start working in a non-permanent manner or any other changes in the
by-laws of JBS regarding the business purpose (aiming a significant change in the business carried out by JBS), or other changes that conflict with any
dispositions of the Shareholders' Agreement;
(i) contracting by the Company and/or by any of its controlled companies of any debt (except in relation to refinancing of debt or already existing
obligation, or debt between companies of the same group that do not affect the Maximum Debt Limit), implying that the ratio of the division between the
Net Debt and EBITDA (in both cases related to the last four quarters, according to the quarterly or annual consolidated financial statements of the
Company) calculated on a pro forma basis is higher than 5.5 (" Maximum Debt Limit");
On December 22, 2009 the Company celebrated a Shareholder Agreement with J&F Participações S.A., ZMF Fundo de Investimento and BNDES
PARTICIPAÇÕES - BNDESPAR, where BNDESPAR assumed commitment of accomplishing an investment in the Company through the subscription of
debentures of the Company, as detailed above.
45
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
19 Payroll, social charges and tax obligation
September 30,
2010
December 31, 2009
Payroll and related social charges
68,976
65,564
Accrual for labor liabilities
150,166
81,650
Income tax
13,114
2,715
Social contribution
4,736
1,059
ICMS / VAT tax payable
13,303
15,899
PIS / COFINS tax payable
56
27,257
FOMENTAR (Brazilian social contribution)
3,978
3,986
FUNRURAL (Brazilian Rural Workers' Assistance Fund)
69,074
69,079
Others
16,139
19,883
339,542
287,092
(viii) change, merger, spin-off, combination, including of shares, or any other corporate restructuring involving JBS, JBS USA and their controlled
companies (except for (a) operations between Exempt Controlled Companies, or (b) in operations between (i) JBS or JBS USA and (ii) any of their
Exempt Controlled Companies), including exchange, payment through shares or assignment of share subscription rights;
(ix) any operations between JBS and/or its controlled companies, on the one hand, and any related parties of JBS, on the other hand, amounting to more
than R$100,000,000.00 (one hundred million reais) for a period of 12 (twelve) months, taken as a whole or individually;
(x) disposal or encumbrance, by JBS and/or by its controlled companies, of noncurrent assets that, individually or cumulatively, have, in a period of 12
(twelve) months, a value of more than 10% (ten percent) of the Company's total assets (column 'Company", that is, non-consolidated numbers), based
on the most recent financial statements;
(xi) approval of the annual budget of JBS and/or of its controlled companies in the event an increase in the ratio Net Debt/EBITDA would exceed the
Managerial Indebtedness Limit;
(xii) investments of capital, as a whole or individually, not considered in the business plan or budget approved by the Board of Directors of the Company,
that, if made, would exceed the Managerial Indebtedness Limit;
(xiii) (A) the cancellation of the registration of the Company or of JBS USA, as public-held corporations, or a reduction in the listing level of the Company
with the Stock and Exchange of São Paulo (BMF&BOVESPA); or (B) the creation of types or classes of share of JBS USA under different policies or
equity rights (including, without limitation, preferred shares);
(xiv) any acquisition operation by JBS or by its controlled companies of (a) ownerships interests that would be considered significant investments for JBS
(even if acquired by a controlled company) as defined in the applicable legislation, and not included in the of business plan or budget approved by the
Board of Directors of JBS or (b) noncurrent asset items, that, if executed, would exceed the Managerial Indebtedness Limit; and
(xv) giving of collateral or guarantees by JBS and/or its controlled companies to guarantee obligations of third parties, except for obligations of JBS
and/or of its controlled companies, at an individual value lower than R$ 200,000,000.00 (two hundred million reais).
46
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
20 Provision for contingencies
Number of
lawsuits
September 30,
2010
Dec 31, 2009
Labor
5,938
42,839
40,579
Civil
355
5,938
4,229
Tax and Social Security
424
82,766
165,280
Total
6,717
131,543
210,088
Tax Proceedings
b) Social contributions -- Rural Workers' Assistance Fund (FUNRURAL)
c) Other tax and social security procedures
The Tax Authority of the State of São Paulo (Secretaria da Fazenda do Estado de São Paulo) filed several administrative proceedings against the
Company, under which the Tax Authority challenges the amount of the Company's ICMS tax credits arising from the purchase of cattle and meat transfer
by the Company in other Brazilian states. The Tax Authority of the State of São Paulo claims that the tax incentives should be approved by Confaz , and
are known as a "Tax War". The Tax Authority of the State of São Paulo do not recognizes the Company's ICMS tax credits up to the amount of the ICMS
tax guaranteed in such other states. The Company estimates that the claims under these administrative proceedings amount to R$ 1,087,263 in the
aggregate. In addition to presenting its defense in such administrative proceedings, the Company has filed legal proceedings seeking the payment of
damages from such other states if the Tax Authority of the State of São Paulo prevails in these administrative proceedings.
The Tax Authority of the State of Goiás filed other administrative proceedings against the Company, due to interpretation divergences of the Law
concerning the export VAT credits. Based on the opinion of the Company's external legal counsel, the management of the Company believes the
Company will prevail in most of these proceedings, on the amount of R$ 204,094. The management believes, based on the advices from its legal
counsel, that its arguments will prevail in these procedures, which is the reason why no provision were done.
The legal proceedings filed by the Company suspended the requirements of the State of São Paulo. Based on the opinion of the Company's legal
counsels. The management believes, based on the advices from its legal counsel, that its arguments will prevail in these procedures, which is the reason
why no provision were done.
The INSS has not timely appealed from this decision and, accordingly, the proceeding has been submitted to the review of the Regional Federal Court of
the 3
rd
Region as a matter of law. Currently, the proceedings await a ruling by such appellate court. Based on the opinion of the Company's legal
counsel supported by precedents of the Federal Supreme Court in a similar case, the Company's management believes that the Company will prevail in
these proceedings. Accordingly, the Company has not established any provision for contingencies arising from these proceedings.
The Company is a Party in additional 307 tax and social security procedures, in which the individual contingencies are not relevant for the Company's
context. We highlight that the ones with probable loss risk have contingencies for R$82,766, as of September 30, 2010.
Recently, according recent decision of the STF (Brazilian Supreme Courte) in other comparative claims, the Administration still believes that the final
decision of it administrative claims will be favorable to the Company, excluding the obligation to pay the amounts described by this claim.
In September 2002, the INSS (Brazilian Social Security Institute) filed two administrative proceedings (autos de infração) against the Company, seeking
to collect certain social security contributions (which are referred to as contributions to the Rural Workers' Assistance Fund (NOVO FUNRURAL)
referring the period from January 1999 to December 2003, in the amount of R$ 69,200, and from 2003 until 2006, in the amount of R$ 198,800, with the
aggregate amount of R$ 268,000 million, that the Company should have allegedly withheld in connection with purchases of cattle from individual
ranchers. As a result of a decision by a lower court in a proceeding to adjudicate a writ of mandamus action filed by the Company in order to challenge
the constitutionality of such social security contributions, the administrative proceedings have been stayed and the INSS has been enjoined from
collecting these social security contributions from the Company.
a) ICMS - Value Added Tax (Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre a Prestação de Serviços de Transporte
Interestadual e Intermunicipal e de Comunicação)
The
Company is part in several procedure arising out of the regular course of their businesses, to which the provisions based on estimation of their
legal consultants were established. The main information related to these procedures on September 30, 2010 and December 31, 2009, are as follows:
47
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Labor Proceedings
Civil Proceedings
a) Slaughterhouse at Araputanga
b) Trademark Infringement
c) Other civil proceedings
The parties are waiting for new appraisal. The first judicial expert appraisal was favorable to the company, that after evaluating the payments made by
Agropecuária Friboi, the appraisal concluded that the debit was already paid. The judicial appeal number 2006.01.00.024584-7 was judged favorably to
the Company, when the "TRF" Regional Federal Court declared valid the purchase title deeds of the property, object of discussion. Based on the
Company's legal advisers' opinion and based on Brazilian jurisprudence management of the Company believes that their arguments will prevail and no
provision was registered.
As (i) Frigorífico Araputanga was a beneficiary of certain tax benefits granted by the Federal Government through an agency responsible for fostering the
development of the northern region of Brazil (Superintendência de Desenvolvimento da Amazônia ­ SUDAM) and (ii) the slaughterhouse sold to the
Company was granted by Frigorífico Araputanga to SUDAM as collateral for these tax benefits the consent of SUDAM was required for the registration of
the public deed with the applicable real estate notary. In September 2004, Frigorífico Araputanga S.A. filed a lawsuit against the Company in a state
court located in the City of Araputanga, State of Mato Grosso, alleging that the Company breached the purchase agreement and seeking an injunction to
prevent the Company from finalizing the transfer of the slaughterhouse and a declaratory judgment that the purchase agreement and the public deed
registered with the real estate notary were null and void.
In 2001, the Company (formerly known as Friboi Ltda.), entered into a purchase agreement for the acquisition of one slaughterhouse located in the City
of Araputanga, State of Mato Grosso, from Frigorífico Araputanga S.A. ("Frigorífico Araputanga"). As a result of the payment of the purchase price by
the Company and the acknowledgement by Frigorífico Araputanga of compliance by the Company with its obligations under the purchase agreement, a
public deed reflecting the transfer of title of the slaughterhouse from Frigorífico Araputanga to the Company was registered with the applicable real estate
notary.
As of September 30, 2010 the Company was party to 5,938 labor and accident proceedings, involving total value of R$ 588,294 Based on the opinion of
the Company's external legal counsel, the Company's management recorded a provision in the amount of R$ 42,839 for losses arising from such
proceedings. Most of these lawsuits were filed by former employees of the Company seeking overtime payments and payments relating to their exposure
to health hazards.
In July 2005, Frigorífico Araputanga filed a lawsuit against the Company seeking damages in the amount of R$ 26,938 and punitive damages in the
amount of R$100,000 for the use by the Company of the trademark "Frigoara" without Frigorífico Araputanga's consent. The amounts of the claim were
based upon a report presented by Frigorífico Araputanga to the trial court, which appraised the value of the trademark "Frigoara" at R$ 315,000.
The Company presented its defense against this lawsuit alleging that (i) the lawsuit should be analyzed and reviewed together with the lawsuit relating to
the purchase of the slaughterhouse from Frigorífico Araputanga by the Company, (ii) the trademark "Frigoara" was used by the Company for a limited
period of time, with the written consent and upon the request of Frigorífico Araputanga (the use of the trademark by the Company was a requirement of
SUDAM to consent to the registration of the public deed contemplating the transfer of the slaughterhouse from Frigorífico Araputanga to the Company)
and (iii) the amount of any damages under the lawsuit should be limited to a percentage of products sold by the Company under the trademark
"Frigoara," pursuant to article 208 of the Intellectual Property Law. Almost all of the products manufactured by the Company were marketed under the
trademark "Friboi." The only product marketed by the Company under the trademark "Frigoara" was minced meat, in limited amounts.
Following a determination of the judge of the trial court, the lawsuit was submitted to the review of the Federal Court of Cáceres on January 17, 2007.
The judge of the Federal Court of Cárceres determined that this lawsuit be joined with the lawsuit relating to the purchase of the slaughterhouse by the
Company from Frigorífico Araputanga. The Federal Government will be notified to issue an opinion on the matter under discussion in this lawsuit. Based
on the Company's legal counsel opinion supported by precedents of the Federal Brazilian Supreme Court (Supremo Tribunal Federal) and the Brazilian
Superior Court of Justice (Superior Tribunal de Justiça), the Company's management believes that the Company will prevail in these proceedings.
The Company is also part to other civil proceedings that in the evaluation of the Administration and its legal advisers, the loss expectation on September
30, 2010 is R$ 5,938.
48
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Other proceedings
21 Debit with third parties for investment
22 Income taxes
a) Reconciliation of income tax and social contribution of the Company
2010
2009
136,174
197,300
Addition (exclusion), NET:
(225,594)
(73,492)
(9,961)
(39,881)
(99,381)
83,927
-
-
701
770
701
770
9,961
39,881
(3,387)
(13,560)
Temporary differences
Deferred income tax and social contribution
On September 30, 2010, the Company had other ongoing civil, labor and tax proceedings, on the approximately amounting of R$ 76,321 whose
materialization, according to the evaluation of legal advisors, it is possible to loss, but not probable, for which the Company's management does not
consider necessary to set a provision for possible loss, in line with the requirements of the CVM nº. 594 from 2009 and CPC 25.
Income tax and social contribution are recorded based on taxable profit in accordance with the laws and applicable rates. Income tax and
social contribution-assets are recognized on temporary differences. Income tax and social contribution tax-liabilities were recorded on the
revaluation reserves established by the Company and on temporary differences.
On incorporated Bertin current liabilities, the amount of R$ 120,976 as of September 30, 2010 (R$ 427,523 as of December 31, 2009 refers to the
acquisition of the remaining debt investments, with discharge during the year 2010. Investments acquired are i) Plant Pimenta Bueno (R$ 12,101), ii)
Gould Participações Ltda. concerning the acquisition of Grupo Vigor, acquired in 2007 (R$ 78,875) and iii) Electricity Co. Araguaia (R$ 30,000).
The Company refers to 65 million of Euros, corresponding, on September 30, 2010, to R$150,176 (R$ 162,976 on December 31, 2009) to be added to
the purchase price of Inalca JBS , should the company reaches, at least, one of the following goals: average EBITDA for the years 2008, 2009 and
2010 equal or higher than 75 million of Euros or, alternatively, an EBITDA equal or higher than 90 million of Euros for the fiscal year of 2010. If none of
these goals are met, this debit will revert to the amount of the premium assessed on the purchase.
On May 11, 2009 the Company made a purchase and sale agreement with C. Sola Participações e Representações S/A, regarding the acquisition of the
industrial complex of Teófilo Ottoni, State of Minas Gerais, in the amount of R$ 16,886, and in September 30, 2010 the Company has in the current
liabilities R$ 3,682 and of R$ 6,092 in the non-current liabilities (R$ 3,744 and R$ 8,962 respectively in December 30, 2009).
Three months period ended as of
September 30,
Reversal of income tax and CSLL of revaluation
Income tax and CSLL
Temporary differences
Calculation basis for income tax and social contribution
Permanent differences (substantially equity in subsidiaries)
Income (loss) before income tax and social contribution
49
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
b) Deferred income tax and social contribution
September 30,
2010
December 31, 2009
Assets:
. On tax losses and temporary differences
29,924
30,357
29,924
30,357
Liabilities:
. On revaluation reserve and temporary differences
357,396
375,061
357,396
375,061
September 30, 2010
2010
1,512
2011
6,049
2012
6,049
2013
6,049
2014
6,049
2,986
1,230
Total
29,924
23
a) Capital Stock
b) Profit reserves
Legal reserve
Reserve for expansion
c) Revaluation reserve
Shareholders' equity
The Company and its subsidiaries have a history of future taxable net income. The Company expects to recover the tax credits arising there from within
eight years due to the termination of the causes of their contingencies.
2015 to 2017
2018 to 2020
The Company expects to recover the tax credits referring to it deferred asset as following:
The criteria for utilization of tax losses in taxable compensation, comply with the limits of the relevant tax legislation, limited in Brazil 30% of the positive
basis for the calculation of income tax and social contribution.
The Company is authorized to increase its capital by an additional 3,000,000,000 ordinary nominative shares. According with the social statute the Board
of Directors shall determine the number, price, payment term and other conditions of the issuance of shares.
The Capital Stock on September 30, 2010 is represented by 2,567,471,476 ordinary shares, without nominal value. From the total shares, as described
in letter e) below, 44,690,100 shares are maintained in treasury.
The Company may grant options to purchase shares to directors, employees or persons who will provide services, or the directors, employees or
persons providing services companies under its control, excluding the preemptive rights of shareholders in issuing and exercise of stock options.
Computed based on 5% of the net income of the year.
Revaluation reserve reflects the appraisal effected by the Company, net of tax effects that are progressively offset against retained earnings to the same
extent that the increase in value of the revalued property is realized through depreciation, disposal or retirement.
Consists of the remaining balance of the net income after the computation of legal reserve and dividend distribution. The purpose of this reserve is to
provide funds to investment in assets.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
d) Dividends
e) Treasury shares
24 Net sale revenue
2010
2009
Gross sale revenue
Products sales revenues
Domestic sales
2,131,318
1,011,127
Foreign sales
1,255,842
454,356
3,387,160
1,465,483
Sales deduction
Returns and discounts
(119,970)
(43,852)
Sales taxes
(162,501)
(116,252)
(282,471)
(160,104)
NET SALE REVENUE
3,104,689
1,305,379
25 Financial income (expense), net
2010
2009
428,561
287,003
(373,642)
(211,251)
(239,912)
(90,993)
60,151
66,495
(14,368)
(2,569)
(139,210)
48,685
26 Non-recurring expenses
Interest - Gain
Exchange variation
Results on derivatives
Non-recurring expenses for the nine months period ended on September 30, 2010 are referring to reorganization and restructuring costs due to Bertin'
incorporation, and donations to political parties in election campaigns in 2010 elections.
The market value of the shares according to the BOVESPA as of September 30, 2010 R$ 7,31 (December 31, 2009 was R$ 9,32)
Interest - Loss
On September 30, 2010, the Company maintained 44,690,100 treasury shares, with an average unit cost of R$ 6,19 and the minimum and maximum
acquisition prices were R$ 2,68 and R$ 10,81, respectively, with no disposal of acquired shares. The amount of 44,690,100 treasury shares on
September 30, 2010, 9,763,900 shares were acquired during 2009, which were supported by approval of the Board of Directors' meeting occurred on
December 29, 2008, that approve the acquisition limit of 41,113,898 own issued shares. The Company have repurchased shares on the total amount of
700,000 during the current year.
Mandatory dividends corresponds to not less than 25% of the adjusted net income of the year, according to article 202 of Law 6.404/76.
Three months period ended as of
September 30,
The Board of Directors of the Company, based on the amendment of it by-laws and according to the normative instructions of CVM nº 10/80, 268/97 and
390/03, authorized the acquisition of not more than 41,113,898 shares for maintenance in treasury and subsequent cancel or alienation without reduction
of the social capital.
Three months period ended as of
September 30,
Taxes, contribution, tariff and others
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
27 Statement of comprehensive income
2010
2009
NET PROFIT (LOSSES) OF THE CONTINUING OPERATIONS
236,553
(12,292)
Other general results
Adjustment of assets evaluation in the controlled
1,675
1,555
Accumulated Adjustment of conversion in the Company
42,907
(234,768)
Exchange variation on foreign investments
(508,305)
(970,307)
Total comprehensive income for the period
(227,170)
(1,215,812)
Total comprehensive income for the period attributable to:
Company's Shareholders
(225,177)
(1,224,454)
Non-controllers
(1,993)
8,642
(227,170)
(1,215,812)
2010
2009
NET PROFIT (LOSSES) OF THE CONTINUING OPERATIONS
133,488
184,510
Other general results
Adjustment of assets evaluation in the controlled
(298)
(746)
Accumulated Adjustment of conversion in the Company
(6,078)
(72,305)
Exchange variation on foreign investments
(326,769)
(289,819)
Total comprehensive income for the period
(199,657)
(178,360)
Total comprehensive income for the period attributable to:
Company's Shareholders
(136,728)
(180,966)
Non-controllers
(62,929)
2,606
(199,657)
(178,360)
28 Transaction costs for the issuing of titles and securities
Three months period ended as of
September 30,
In accordance with CPC 21 - Interim Statements, the Company shall submit the statement of comprehensive income for the quarter and accumulated
period.
Nine months period ended as of
September 30,
In accordance with the prerequisites under the CPC 08 ­ Transaction costs for issuing of titles and securities, the costs related to the transactions in the
issuing of titles and securities must be accounted and stated in a highlighted in the financial statements.
During the fiscal years of 2009 and 2010, the Company has carried out , respectively, transactions for the issuance of debentures and Public Offering
of Shares - POS. However, to render this transactions effective, the Company incurred in transaction expenses, i.e., the expenses directly attributable
to the activities that are necessary to effect these transactions, exclusively.
52
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
a) Debentures
b) Initial Public Offering of shares - IPO
c) Bonds
29 Operating segments
The Poultry is represented by in natura products, refrigerated as a whole or in pieces, whose productive unities are located in the USA and in Mexico,
servicing restaurant chains, food processors, distributors, supermarkets, who sale and other retail distributors, in addition to exporting to the Eastern
Europe (including Russia), the Eastern Hemisphere ( including China), Mexico and other international markets.
As of September 30, 2010, the Company had incurred in expenses of the order of R$ 37,477 related to the costs of the transaction for securing
resources to initial Public Offering, whose recording is under the temporary accounts of the asset, as advanced payment. As soon as the process of
securing resources is over, there will be a reclassification of these values to the account that reduces the asset account, highlighted in the net asset,
eventual effects deducted.
On September 30, 2010, the Company had engaged in R$ 17,775 relating to the transaction costs of procedures for fundraising, by the Bonds emission -
on the amount of US$ 700,000 and US$ 200,000 made in July and September 2010 respectively, whose accounting is kept prominently in a reduction of
debts, the amortization will occur according with the debt payments.
The Administration has defined the operational segments that can report to the Group, based on the reports use to make strategic decisions, analyzed
by the Executive Board of Officers, which are segmented as per the commercialized product point of view, and per geographical location.
The Beef segment exploits the slaughter house and the frigorific of bovines, the industrialization of meat, preservatives, fat, feed and derivate products,
with 26 industrial unities located in the States of: São Paulo, Goiás, Mato Grosso, Mato Grosso do Sul, Rondônia, Minas Gerais, Acre, Rio de
Janeiro
and
Paraná. In addition, there are producing unities in the USA, Italy, Australia, Argentine, Uruguay, Paraguay, the three latter ones with
consolidated analyzes, as well as in the USA and Australia.
The Pork Meat segment slaughters, processes and delivers "in natura" meet with one operational unity in the USA servicing the internal and the foreign
market. The products prepared by JBS USA include, also, specific industrial standards cuts, refrigerated.
The Company, that is the main decision maker of its direct and indirect subsidiaries and considering the requirements of CPC 22 ­ Segment Reporting,
has opted for presenting the consolidated operating segment reporting.
Even though the Pork Meat segment does not meet the quantitative requirements of CPC 22, the Administration concluded that this segment ought to
be presented as t is monitored by the Executive Board of Officers as a segment with potential for growth and therefore must contribute, in the future,
significantly for the revenues of the Group.
To effect the transaction of issuance of debentures, the Company incurred in transaction expenses of R$ 17,388, which were classified as a reducer of
the fair value of the debentures , initially recognized for R$ 3,479,600, therefore, evidencing the net value received of R$ 3,462,212.
The debentures must be convertible, mandatorily, with security deposit certificates (Brazilian depositary receipts - BDRs) sponsored of levels II or III,
secured in ordinary shares, issued by JBS USA when the company went public (IPO), then the financial costs that support the issuance of the
debentures will be reclassified for the Fiscal Year results, If the Liquidity Event does not take place, the bonds will covert, mandatorily, into shares issued
by the Company. Therefore, the financial costs will be recorded directly under an account that reduces the Capital Stock .
In accordance with the CPC 38, the financial instruments hired by the Company must be presented at their fair values. Therefore, as this is a certain
Bond transaction, the par value expressed on the Bonds correspond to the fair value of the transaction, and the carrying out of adjustments related to the
variation between the par and the fair value is not necessary.
The modalities of commercialized products include Beef, Poultry and Pork Meat. Geographically, the Administration takes into account the operational
performance of its unities in s o Brazil, USA (including Australia), South America (Argentine, Paraguay and Uruguay), Italy.
53
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
2010
2009
Net revenue of the segment
Beef
8,980,587
7,274,429
Pork Meat
1,353,318
1,048,735
Poultry
2,994,078
-
Others
741,616
56,741
Total
14,069,599
8,379,905
2010
2009
Depreciation and amortization
Beef
132,373
235,483
Pork Meat
12,424
54,817
Poultry
150,324
-
Others
6,495
336
Total
301,616
290,636
2010
2009
EBITDA
Beef
429,003
410,089
Pork Meat
191,345
103,385
Poultry
309,515
-
Others
96,549
1,652
Total
1,026,412
515,126
The accounting policies of the operational segments are the same as the ones described in the significant accounting policies summary. The
Company evaluates its performance per segment, based on the profit or the losses before taxes, and it does not include the non-recurrent gains and
losses and the exchange losses ­ EBITDA.
Due to the significant percentage of the above-mentioned operational segments, the remaining segments and activities in which the Company acts are
not relevant and are presented as "Others".
29.1 - Net revenue by product line:
Three months period ended on
September 30,
29.2 - Depreciation by product line:
Three months period ended on
September 30,
29.3 - EBITDA by product line:
Three months period ended on
September 30,
The information per businesses' operational segment, analyzed by the Executive Board of Officers, and related to the period of September 30, 2010 and
2009, are as following:
There are no revenues arising out of transactions with one only foreign client that represent 10% or more of the total revenues
54
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
September 30,
2010
December 31, 2009
Assets
Beef
33,271,092
33,720,794
Pork Meat
1,097,921
750,411
Poultry
7,341,265
5,514,598
Others
3,521,802
4,712,157
Total
45,232,080
44,697,960
2010
2009
Net revenue
United States of America (including Australia)
10,223,348
6,368,551
South America
3,490,994
1,558,641
Italy*
67,763
390,652
Others
287,494
62,061
Total
14,069,599
8,379,905
2010
2009
Depreciation and amortization
United States of America (including Australia)
217,129
250,329
South America
83,078
29,178
Italy*
824
11,108
Others
585
21
Total
301,616
290,636
2010
2009
EBITDA
United States of America (including Australia)
653,975
439,721
South America
363,730
48,344
Italy*
(2,604)
26,480
Others
11,311
581
Total
1,026,412
515,126
29.5 - Revenues by geographic area:
29.4 - Assets by segment:
Three months period ended on
September 30,
Three months period ended on
September 30,
Three months period ended on
September 30,
29.7 - EBITDA by geographic area:
29.6 - Depreciation by geographic area:
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
September 30,
2010
December 31, 2009
Assets
United States of America (including Australia)
15,753,359
12,083,978
South America
26,506,430
29,762,734
Italy*
1,179,436
1,195,650
Others
1,792,855
1,655,598
Total
45,232,080
44,697,960
* As described in Note 1 and 3, it hasn't been contemplated the information from the third quarter 2010 of Inalca JBS.
30 Expenses by nature
Classification by nature
2010
2009
Depreciation and amortization
(70,548)
(24,723)
Expenses with personnel
(327,554)
(136,725)
Raw material use and consumption materials
(1,159,545)
(731,677)
Taxes, fees and contributions
(326,348)
(96,451)
Third party capital remuneration
(489,744)
(134,735)
Other expenses
(549,326)
16,232
(2,923,065)
(1,108,079)
Classification by function
2010
2009
Cost of goods sold
(2,418,238)
(1,061,098)
Selling expenses
(281,760)
(124,318)
General and administrative Expenses
(145,967)
(51,117)
Financial income (expense), net
(139,210)
48,685
Equity in subsidiaries
65,410
78,745
Other (expense) income, net
(3,300)
1,024
(2,923,065)
(1,108,079)
31 Insurance coverage
32 Risk management and financial instruments
29.8 - Assets by geographic area:
The Company has opted for the presentation of its Income Statement per function. As per requested by the CPC, following, there is the detailing of the
Income Statement per nature:
The Company and its subsidiaries are exposed to market risks arising from their operations, mainly related to possible changes in exchange rates,
interest rates, commodity prices, credit risks and liquidity risk that may adversely affect the value of assets, liabilities or projected cash flows and profits.
To minimize the risks of exposure the Company manages the risks of its financial instruments in assets and liabilities in an integrated way with its
subsidiaries, hiring derivative financial instruments to minimize the risk of their exposure integrated net.
Three months period ended on
September 30,
As of September 30, 2010, the maximum individual limit for coverage was R$ 99,000. This coverage includes all types of casualties.
For the incorporated Bertin, the insurance policy has the same above-mentioned characteristics; however, the maximum indemnification limit for
September 30, 2010 was of R$ 200,000.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
a) Management risk policy
b) Management risks objectives and strategies
c) Discretion of the Treasury
d) Interest rate risk
Net liabilities and assets exposure to CDI rate:
September 30,
2010
December 31, 2009
NCE / Compror / Others
3,217,241
3,356,542
CDB-DI
(1,657,402)
(497,268)
Investment funds
(398,971)
(18,821)
Subtotal
1,160,868 2,840,453
Liabilities exposure to LIBOR/EURIBOR rate:
ACC -advances on exchange contracts
1,691,881
1,760,571
Working capital - Euros
304,351
310,830
Working capital - Americans Dollars
59,128
46,446
Pre-payment
1,592,514
1,521,175
Foreign Loans
-
87,370
US revolver
785,281
489,152
Others
15,776
88,830
Subtotal
4,448,931 4,304,374
The Company is exposed, mainly, to oscillation of the LIBOR rate, the loans rates are relating to the LIBOR rate. The strategy of the Administration is not
to apply derivatives to this specific risk, because the possible oscillation would not affect materially the cash flow. The risk of exposure to interest rate of
the Company on September 30, 2010 is described below:
The Company has a formal risk administration policy, controlled by the administration treasury department that uses control instruments through
appropriate systems and qualified professionals in risk measurement, analysis and administration that make possible the reduction of the daily risk
exposure. This policy is permanently monitored by the financial committee and for Directors of the Company that have the responsibility of the strategy
definition to the risk administration, determining the position limits and exhibition. Additionally, operations with speculative financial instruments character
are not allowed.
Through management risks the Company looks for mitigating the economical and accounting exposure of its exchange variation operations, credit risks,
interest rates and commodities purchase prices (cattle). The strategies are based on detailed analyses of the Company's financial statements
customers, consult to monitoring risk and credit agencies, and also risk to bring to zero the expository of forwards on Stock Exchange.
The risk of interest rate on short term investments, loans and financing is reduced by the strategy of equalization of the rates contracted to CDI through
forward contracts on the Stock Exchange. The parameters for coverage take into consideration the relevance of the net exposure, based on amounts,
terms and interest rates compared to the CDI. The internal controls used for risk management and coverage are made through spreadsheets and
monitoring of operations performed and calculation of VAR for 1 day with a confidence interval of 99%. The nominal values of these contracts are not
recorded in the financial statements. The results of the daily adjustments of position of forward contracts on the Stock Exchange, Commodity and
Forward are recognized as income or expense in the income statement accounts.
Having identified the Company exposure, the business units prices and turn to zero their risks on the Treasury, which consolidates these risks and seeks
protection with market operations on Stock Exchange. These risks are monitored daily, to correct additional exposures caused by risks of "gaps" and
controls margins and adjustments. The discretion of the Treasury to determine the position limits necessary to minimize the Company's exposure to
foreign currencies and/or interest rates is limited to the analysis parameters of VAR (Value at Risk) portfolio of derivatives.
57
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
Liabilities exposure to TJLP rate:
September 30,
2010
December 31, 2009
FINAME / FINEM
340,879
988,477
EXIM - export credit facility
1,046,378
511,814
Subtotal
1,387,257 1,500,291
TOTAL
6,997,056 8,645,118
Breakdown of the derivatives financial instruments for interest risk protection
Derivative
Maturity
Receivable
Payable
Counterpart
(notional R$)
Market value- R$
Impact on the 3rd
quarter 2010 income
statements
Forwards
(BM&F)
July, 2011 to July,
2012
DI
R$
BM&F
98,121 31 (911)
e) Exchange variation risks
September 30,
2010
December 31,
2009
Exchange
variation
Derivatives
OPERATING
1,683,287
801,187
-
-
3,065,310
2,554,393
(61,773)
(37,052)
3,360,931
2,659,999
-
-
832,639
321,390
(20,793)
16,008
(2,206,218)
(1,863,872)
-
-
Subtotal
6,735,949
4,473,097
(82,566)
(21,044)
EXPOSURE
Cash and cash equivalents - US$ / / £
Accounts receivable - US$ / / £
Inventories - cattle - US$ / / £
The nominal values of these contracts are not recorded in the financial statements. The results of operations of the counter currency futures market,
accounted and not financially settled and the daily adjustments of position of currency futures contracts on the Stock Exchange, Commodity and Forward
- BM&F are recognized as income or expense in the income statement accounts.
Sales orders - US$ / / £
Trade accounts payable - US$ / / £
The risk of exchange rate variation on loans, financing, trade accounts receivable in foreign currency from exports, inventories and any other payables
denominated in foreign currency, are protected by a strategy of minimizing the daily position of assets and liabilities exposed to variation in exchange
rates, by engaging in hedging the foreign exchange futures at BM&F contracts SWAP, seeking to bring the position to zero. The parameter of protection
is based on net exposure in foreign currency, seeking to reduce excessive exposure to the risks of exchange rate changes balancing its assets not
denominated in the foreign currency, against its obligations not denominated in the functional currency, thereby protecting the balance sheet of the
Company and its subsidiaries. The internal controls used for risk management and hedging are made through spreadsheets and monitoring the
operations performed and calculation of VAR for 1 day with a confidence interval of 99%.
Income statements effects on third quarter
ended September 30, 2010
Bellow are presented the assets and liabilities exposed to exchange rate variation risks that are subject to derivative instruments, as well as the effects of
such accounts in the income statements for the period ended on September 30, 2010 and December 31, 2009:
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
FINANCIAL
-
-
128,093
-
(8,586,389)
(9,536,050)
305,306
(397,968)
(3,125)
(4,485)
566
-
(30,391)
(24,107)
-
-
Subtotal
(8,619,905)
(9,564,642)
433,965
(397,968)
TOTAL
(1,883,956)
(5,091,545)
351,399
(419,012)
September 30,
2010
December 31, 2009
Cash and cash equivalents - US$ / / £
1,683,287
801,187
Trade accounts receivable - US$ / / £
3,065,310
2,554,393
3,360,931
2,659,999
Sales orders - US$ / / £
832,639
321,390
Trade accounts payable - US$ / / £
(2,206,218)
(1,863,872)
Loans and financings - US$
(8,586,389)
(9,536,050)
Imports payable - US$
(3,125)
(4,485)
(1,853,565)
(5,067,438)
Forwards (BM&F) - Parent Company
1,485,151
1,302,755
Forwards (NewEdge ) - Parent Company
350,008
188,965
Swap (over-the-countermark - CETIP) - Parent Company
169,420
174,120
2,004,579
1,665,840
Foreign currency exposure in R$
(1,853,565)
(5,067,438)
Notional protection
2,004,579
1,665,840
Relation
108%
33%
Incorporation Bertin effects
Amounts receivable (payable) of forward contracts
Credits with subsidiaries - US$ /
Loans and financings - US$
However, as of December 31, 2009 the balances and expositors incorporated through Bertin impacted significantly the Company expositor relation (33%
of derivatives coverage). With the intention of providing additional information, the covering index was 84% eliminating the effects of the incorporation on
December 31, 2009, showing the continuous effectiveness of the Company in herein protection financial instruments.
Bertin was reducing its protection policy for exchange rates, and prices at sign cattle risks which it was exposed. The Company, after the incorporation,
has implemented its protection policy to those assets and liabilities mentioned above.
The changes in foreign rates can impact in losses to the Company, due to possible assets decrease or increase in the liabilities. The mainly exposure
that the Company is subjected, related to exchange variation, refers to US dollars, Euros and Pounds variations against Brazilian reais.
Below is presented the foreign currency exposure covered by derivative financial instruments:
Inventories - cattle - US$ / / £
Imports payable - US$
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
JBS USA Holdings Inc.
Derivative
Maturity
Receivable
Payable
Counterpart
(notional R$)
Market value- R$
Impact on the 3rd
quarter 2010 income
statements
Forwards
(BM&F)
November 2010
US$ exchange
variation
R$
BM&F
872,500 (11,294)
(420,901)
Total 872,500 (11,294)
(420,901)
Starting day
Swap
Principal
(Amortizations) US$
Maturity date
Swap
Contract value
(Assets)- R$
Fair value
(Assets) - R$
Contract value
(Liabilities)- R$
Fair value
(Liabilities) - R$
Swap result
September 30, 2010
(a)
(b)
(c)
(b)
(d)
16/08/10
100,000
16/11/10
2,610
2,400
5,180
4,764
(2,364)
16/11/10
100,000
14/02/11
2,608
2,327
5,305
4,735
(2,408)
14/02/11
100,000
16/05/11
14,578
12,622
17,341
15,015
(2,393)
(11,111)
-
-
-
-
16/05/11
88,889
15/08/11
14,610
12,266
17,216
14,454
(2,188)
(11,111)
-
-
-
-
15/08/11
77,778
14/11/11
14,644
11,912
17,085
13,898
(1,986)
(11,111)
-
-
-
-
14/11/11
66,667
14/02/12
14,687
11,570
16,884
13,301
(1,731)
(11,111)
-
-
-
-
14/02/12
55,556
14/05/12
14,660
11,178
16,623
12,674
(1,496)
(11,111)
-
-
-
-
14/05/12
44,444
14/08/12
14,686
10,834
16,297
12,022
(1,188)
(11,111)
-
-
-
-
14/08/12
33,333
14/11/12
14,672
10,470
15,926
11,364
(894)
(11,111)
-
-
-
-
14/11/12
22,222
14/02/13
14,604
10,080
15,459
10,670
(590)
(11,111)
-
-
-
-
14/02/13
11,111
14/05/13
14,418
9,626
14,862
9,922
(296)
136,777
105,285
158,178
122,820
(17,535)
2,800
On September 30, 2010, JBS USA and its subsidiaries had a high covering of its exchange risks, due to sales in foreign currency, and the related
derivatives.
Breakdown of the derivatives financial instruments for exchange variation risks
The financial instruments are derivative swap contract to hedge the net currency exposure of the Company and it's consolidated subsidiaries assets and
liabilities, and are classified as financial asset or liability measured at fair value through income. It has been hired by the Bank Credit Suisse.
Impact on the Income Statements on the third quarter period of 2010:
On the third quarter 2010, JBS USA and its subsidiaries recognized R$ 305 (-R$4.840 as of September 30, 2009), due to the variation of fair value and
liquidation of these derivatives. The fair value of these derivatives, on September 30, 2010, are registered in the assets and liability, by R$ 63,829 and
R$ 58,474 (R$ 9,091 and R$ 10,137 on December 31, 2009), respectively.
Breakdown of the derivatives financial instruments for exchange variation risks
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
(a)
(b)
(c)
(d)
Hedge accounting
f) Credit risks
g) Commodities purchase price (cattle)
The swap assets contract value is calculated based on the dollar exchange rate on the maturity plus interest of 6% p.a.
The assets and liabilities fair value is calculated based on the contracts adjusted by the present value of CDI on the maturity month of swap.
The parameters for reducing risk in cattle purchases are based on the physical position portfolio of the futures market, considering determined values
and terms. The internal controls used for risk management are done through spreadsheets and monitoring of the transactions concluded and calculating
1-day VAR, with 99% confidence interval.
Swap result is the difference between assets and liabilities.
The swap liabilities contract value is calculated based on the dollar exchange rate on the maturity date plus interest o 120% variation of maturity and
beginning month of CDI.
The Company limits its exposure to credit risk by customer and market, through its department of credit analysis and portfolio management clients. Thus,
the Company seeks to reduce the economic exposure to a particular customer and/or market that may represent significant losses to the Company in the
event contractual default or implementation of sanitary or trade barrier in countries to which it exports. The market risk exposure is monitored by the
Credit Committee of the Company that meets regularly with the commercial areas for analysis and control of the portfolio. Historically, there were no
significant losses on its accounts receivables.
The Administration of the Company describes as fair value hedge the orders sales contracts with the protection objective for the exchange risk between
the recruiting date and the date of shipment of the goods. The sale price in foreign currency is closed on the date of the contract. For this covering, the
Company uses dollar forward negotiated with BM&F. At least, at the financial statements preparation, the Company evaluates the effectiveness of these
operations that normally must stay in a covering of 85% to 125% of the variation of the fair value of the protected risk.
The parameters used are based on the daily flows of information monitoring operations that identify additional purchase volumes in the market, eventual
contracts default, bad checks, and protests or lawsuits against their customers. Internal controls include the assignment of credit limits and configuration
status granted to each individual client and automatic lock-billing in the event of default, timeouts or occurrence of restrictive information.
To minimize the credit risks of derivative contracts, the Company has a strategy to concentrate these operations in the futures market where the
counterparty is the futures and commodities exchange. For these instruments, the variations of just value of derivatives occurs by daily adjustments,
which are paid or received in cash daily, reducing the risk of default.
On September 30,2010, the Company had open derivatives position covering 90% of its needs for cattle purchases estimated until November 2010.
The notional is not registered in the balance sheet. The accounting is based on the methodology denominated hedge accounting, according to IAS 39 -
financial Instruments - Recognition and Measurement, the exchange variation of the sales orders to impact the derivatives protection.
The Company is potentially subject to credit risks related to accounts receivable, whose value is presented in Note 8. The Strategies to reduce the credit
risk is based on the spread of portfolio, not having customers or business group representing over 10% of consolidated sales, credit-related financial
ratios and operational health, credit limits, detailed analysis of the financial ability of customers through own federal tax number, affiliates companies and
partners federal tax number, and through consult with the agencies of information and constant monitoring of customers.
The Company's sector is exposed to volatility in cattle prices, whose fluctuation derives from factors out of the Company's control, such as climate
factors, supply levels, transportation costs, agricultural and other policies. The Company, in accordance with its policy of inventories, maintains its
strategy of risk management, based on physical control, which includes anticipated purchases, combined with operations in the futures market, and
reducing the daily position of purchases cattle contracts to future delivery through contracting of cattle future hedge at BM&F, aimed at resetting the
position and ensuring the market price.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
September 30,
2010
December 31, 2009
OPERATING
Firm Contracts for cattle purchase - R$
234,615
17,026
Firm contracts for grains and energy - R$
1,463,458
283,143
TOTAL
1,698,073
300,169
h) Liquidity Risk
On the third quarter 2010, the Company and its subsidiaries recognized R$ 9,553 (a gain of R$ 15,156 on the third quarter of 2009) in the cost of goods
sold, resulting from the fluctuation of fair value of these commodities instruments and of settlements of these instruments that took place in the period.
The fair value of these derivatives, on September 30, 2010, are registered in the assets and liabilities, for R$63,829 and R$ 58,474 (R$ 9,091 and R$
10,137 in December 31, 2009), respectively.
The segment in which JBS USA Holdings Inc. and its subsidiaries are present is exposed to volatility in cattle prices, in grains such as corn and soybean
meal and in energy, such as natural gas, electricity and diesel, whose fluctuations derive from factors out of the Company's control, such as climate,
supply levels, transportation costs, political conditions, supply and demand, among others. The direct subsidiary JBS USA and its subsidiaries purchase
derivatives aiming at reducing price risk related to the forecast needs for purchase of these commodities for the next 12 months. The Companies may
enter into long-term contracts for specific commodities in case necessary. On September 30, 2010, the direct subsidiary JBS USA Holdings, Inc. and its
subsidiaries had open derivatives positions covering 4.4% of its cattle purchase needs forecast until September 2011, 20.3% of its hogs needs forecast
until September 2011, 0.8% of its grains needs until September 2011.
The parameters for risk reduction are based on the constant monitoring of the commodities exposure, considering values and terms negotiated,
comparing that with the budget of the risk management team for the year. For these commodities fundamental to the business, such as live cattle, hogs,
grains and energy ("fundamental commodities"), the stop loss for a trader ("Stop Loss") is assumed to be 25% of his budget for the year, calculated
using the result of 10 days of operations and independent from the result accumulated in the current exercise of each trader ("calculating stop loss").
Each trader will be authorized to two "stop loss" in every 12-month period.
During these "stop loss", the trader will have to close his open positions and stay out of this transaction for two weeks or more, in case judged necessary
by the financial committee. In case the loss exceeds the 25% authorized, as previously mentioned, this committee will have a formal conversation with
the trader that exceeded the limit, analyzing if it will be appropriate to extend an additional "stop loss", reviewing the VAR limits and margins for this
trader or if the employment contract will be terminated.
EXPOSURE
Below is presenting the assets, liabilities and total firm commitments exposed to risks of commodities price fluctuations:
Liquidity risk arises from the management of working capital of the Company and its subsidiaries and amortization of financing costs and principal of the
debt instruments. It is the risk that the Company and its subsidiaries will find difficulty in meeting their financial obligations falling due.
The Company and its subsidiaries manage their capital based on parameters optimization of capital structure with a focus on liquidity and leverage
metrics that enable a return to shareholders over the medium term, consistent with the risks assumed in the transaction.
Based on the analysis of these indicators, the management of working capital has been defined to maintain the natural leverage of the Company and its
subsidiaries at levels equal to or less than the leverage ratio that we want to achieve.
The Management of the Company's liquidity is done taking into account mainly the immediate liquidity indicator modified, represented by the level of
cash plus investments divided by short-term debt. It is also maintained a focus on managing the overall leverage of the Company and its subsidiaries to
monitor the ratio of net debt to "EBITDA" at levels we considered to be manageable for continuity of operations.
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
September 30,
2010
December 31, 2009
Cash and cash equivalents
4,402,454
5,067,530
Loans and financings - Current
5,004,589
5,123,099
Liquidity indicator changed
0.88
0.99
Leverage indicator
2,9x
3,1x
September 30, 2010
Less than 1 year
Between 1 and 2
years
Between 3 and 5
years
More than 5 years
Fair Value
Trade accounts payable
2,604,687
-
-
-
2,604,687
Loans and Financings
5,004,589
2,916,126
4,171,296
2,860,577
14,952,588
Derivatives financing liabilities
24,194
5,310
887
-
30,391
TOTAL
7,633,470
2,921,436
4,172,183
2,860,577
17,587,666
December 31, 2009
Less than 1 year
Between 1 and 2
years
Between 3 and 5
years
More than 5 years
Fair Value
Trade accounts payable
2,546,036
-
-
-
2,546,036
Loans and Financings
5,123,099
4,837,860
3,095,835
1,370,319
14,427,113
Derivatives financing liabilities
24,155
18,251
2,523
-
44,929
TOTAL
7,693,290
4,856,111
3,098,358
1,370,319
17,018,078
i) Estimated market values
j) Guaranteed margins
The table below shows the fair value of financial liabilities of the Company and its subsidiaries according to their salaries, without considering the present
value discount cash flow hired:
The assets and liabilities are represented in the financial statements at cost and their appropriations of revenues and expenses are accounted for in
accordance with its expected realization or settlement.
The market values of non-derivative financial instruments and derivatives were estimated based on information available on the market.
The drop in the liquidity indicator was changed caused by the need to use cash to restructure the operations of companies acquired at the end of 2009.
The leverage of the company remained at similar levels.
The Company has securities pledged as collateral for derivative transactions with the commodities and futures whose balance at September 30, 2010 is
R$ 286,352 (R$ 230,643 at December 31, 2009). This warranty is superior to the need presented for these operations. The indirect subsidiary has
securities pledged as collateral for derivative transactions with the commodities and futures whose balance at September 30, 2010 is R$ 77,256 (R$
50,800 at December 31, 2009). This warranty is superior to the need presented for these operations.
The index of liquidity and leverage consolidated are shown below:
63
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
k) Fair value of financial instruments
Level 1
Level 2
Level 3
Derivatives
(12,856)
(17,535)
-
Find below, the comparison between accounting records and the respective fair values:
Book Value
Market Value
Book Value
Market Value
(i)
Cash and banks
2,346,081
2,346,081
4,551,441
4,551,441
(iii)
Financial investments
2,056,373
2,056,373
516,089
516,089
(iii)
Trade accounts receivable
3,889,885
3,889,885
3,201,437
3,201,437
(iii)
Credits with related parties
181,574
181,574
326,972
326,972
(i)
Derivatives
-
-
48,844
48,844
Total financial assets
8,473,913
8,473,913
8,644,783
8,644,783
(iii)
Trade accounts payable
2,604,687
2,604,687
2,546,036
2,546,036
(iii)
Loans and financings
14,952,588
14,952,588
14,427,113
14,427,113
(ii)
Convertible debentures
3,462,212
3,462,212
3,462,212
3,462,212
(i)
Derivatives
30,391
30,391
38,235
38,235
Total liabilities assets
21,049,878
21,049,878
20,473,596
20,473,596
(12,575,965)
(12,575,965)
(11,828,813)
(11,828,813)
Classification by financial instrument categories
(i) Financial assets and Liabilities measured at cost or fair value through income
(ii) Held to maturity
(iii) Loans and receivables
(iv) Available for sale
Current liabilities
The assets and liabilities are represented in the financial statements at cost and their appropriations of revenues and expenses are accounted for in
accordance with its expected realization or settlement. The derivatives market of future fair values are calculated based on daily adjustments for changes
in market prices of stock futures and commodities that act as counterparty. The swap is obtained by calculating independently the active and passive
parts, bringing them to their present value. The future prices used to calculate the curve of the contracts were drawn from the Bloomberg database.
September 30, 2010
December 31, 2009
In accordance with IFRS 7, the Company and its subsidiaries classify the measuring of fair value in accordance with the hierarchical levels that reflects
the significance of the indices used in this measurement, as the following levels:
Level 1: Prices quoted in active markets (unadjusted) for identical assets and liabilities;
Level 2 - Additional information available, except those of Level 1, in which prices are quoted for similar assets and liabilities, either directly by obtaining
prices in active markets or indirectly, as valuation techniques that use data from active markets.
Level 3 - The indices used for calculation are not derived from an active market. The Company and its subsidiaries do not have this level of
measurement instrument.
As noted above, the fair values of financial instruments, except for those maturing in the short term, equity instruments with no active market and
contracts with discretionary features that fair value can not be reliably measured, are presented in hierarchical levels of measurement below:
64
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
l) Sensibility analysis
Exchange risk
Exposure
Risk
Probable
scenario (I)
Scenario (II)
Variation - 25%
Scenario (III)
Variation - 50%
Depreciation R$
433,965
(1,198,596)
(2,397,191)
Depreciation R$
(82,566)
417,928
835,856
Appreciation R$
(419,012)
497,287
994,573
(67,613)
(283,381)
(566,762)
Exchange
1.6942
2.1178
2.5413
33
S.A. Fábrica de Produtos Alimentícios Vigor announces the results of its consent solicitation
Completion of the Acquisition of the Assets of Rockdale Beef
JBS announces a Joint Venture with Jack Link's Beef Jerky
With the aim of providing information on how to behave market risks to which the Company and its subsidiaries are exposed on September 30, 2010, we
simulate possible changes of 25% and 50% in the relevant variables of risk in relation to the likely scenario. The Administration believes that the closing
prices used in measuring assets and liabilities, based on the date of these interim consolidated financial statements represent a scenario likely to impact
the outcome. Following are the net result between the result of exposures and their derivatives:
Operation
Hedge derivatives
Premise
Material facts
S.A. Fábrica de Produtos Alimentícios Vigor ("Vigor"), a wholly owned subsidiary of JBS S.A., announced the results of their consent solicitation relating
to its U.S.$100.0 million in aggregate principal amount of 9.25% Step-up Notes due 2017 conducted in accordance with Vigor's Consent Solicitation
Statement, dated September 1, 2010, which expired on Friday, September 24, 2010.
Vigor received consents from holders representing approximately 86.6% of the aggregate principal amount of the Notes. Accordingly, Vigor received the
requisite consents to execute a supplemental indenture containing all of the provisions of the Proposed Amendments as described in the Consent
Solicitation.
In addition to the JV, JBS also announced that it has reached an agreement with the same Jack Link's Beef Jerky group to sell its United States based
meat snack plant in Mankato, Minnesota, for an undisclosed sum.
JBS S.A completed, through its wholly owned subsidiary, Swift Australia, the acquisition of the Assets of Rockdale Beef. JBS paid AUD 40.5 Million
(Approx USD 37.3 Million) for the business, which is subject to further adjustments based on the level of the working capital at completion. With a meat
works capacity of approximately 200,000 cattle per annum, and a feedlot capacity of over 53,000 cattle, Rockdale Beef will further enhance JBS's
Australian presence.
JBS S.A. reached an agreement with Jack Link's Beef Jerky whereby the largest beef producer in the world is uniting with the number 1 U.S. meat snack
brand to form a Joint Venture (JV) to operate two meat snack facilities owned by JBS in Brazil. The Brazilian facilities are located in Santo Antonio de
Posse and Lins, in the State of São Paulo, and carry state of the art equipment to produce meat snacks specific to the needs of consumers worldwide.
Under the terms of the agreement, JBS will supply the raw material at market prices and will jointly operate the facilities in Brazil with Jack Link's. JBS will
then sell the semi-manufactured product to Jack Link's Beef Jerky for further processing, packaging and distribution in the U.S. and elsewhere. Proceeds
from the JV will be shared on a 50/50 ratio and is expected to become operative before the end of this year.
Financial
65
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
34
2010
2009
Revenue
Sales of goods and services
9,229,485
4,120,721
Other income
11,922
2,071
Allowance for doubtful accounts constitution (write-off)
(5,807)
(4,493)
9,235,600
4,118,299
Goods
Cost of services and goods sold
(5,213,281)
(2,625,740)
Materials, energy, services from third parties and others
(1,340,581)
(618,435)
Others
-
(325)
(6,553,862)
(3,244,500)
Gross added value
2,681,738
873,799
Depreciation and Amortization
(214,476)
(68,192)
Net added value generated by the Company
2,467,262
805,607
Net added value by transfer
Equity in subsidiaries
547,342
202,396
Financial income
1,367,868
543,759
Others
(8,611)
2,313
Net added value to distribution
4,373,861
1,554,075
Distribution of added value
Labor
Salaries
740,693
325,669
Benefits
115,252
36,454
FGTS (Brazilian Social Charge)
50,381
17,350
906,326
379,473
Taxes and contribution
Federal
351,219
130,632
State
418,416
91,148
Municipal
1,804
147
771,439
221,927
Capital Remuneration from third parties
Interests
2,373,971
931,808
Rents
34,579
13,287
Others
50,993
6,026
2,459,543
951,121
Owned capital remuneration
Retained earnings of the period
236,553
1,554
236,553
1,554
Added value distributed
4,373,861
1,554,075
Nine months period ended September
30,
Supplemental information - Economic value added
66
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JBS S.A.
Notes to the consolidated interim financial statements for the nine months period ended September 30, 2010 and 2009
(Expressed in thousands of Brazilian reais)
2010
2009
Revenue
Sales of goods and services
3,266,276
1,421,650
Other income
5,008
1,042
Allowance for doubtful accounts constitution (write-off)
(1,248)
(1,200)
3,270,036
1,421,492
Goods
Cost of services and goods sold
(1,779,509)
(873,441)
Materials, energy, services from third parties and others
(523,682)
(226,147)
Others
-
(1,242)
(2,303,191)
(1,100,830)
Gross added value
966,845
320,662
Depreciation and Amortization
(70,548)
(24,723)
Net added value generated by the Company
896,297
295,939
Net added value by transfer
Equity in subsidiaries
65,410
49,361
Financial income
326,522
173,343
Others
(11,095)
763
Net added value to distribution
1,277,134
519,406
Distribution of added value
Labor
Salaries
261,616
113,904
Benefits
47,986
16,855
FGTS (Brazilian Social Charge)
17,952
5,966
327,554
136,725
Taxes and contribution
Federal
185,334
53,040
State
140,450
43,366
Municipal
564
45
326,348
96,451
Capital Remuneration from third parties
Interests
449,890
125,677
Rents
14,614
6,235
Others
25,240
2,823
489,744
134,735
Owned capital remuneration
Retained earnings of the period
133,488
151,495
133,488
151,495
Added value distributed
1,277,134
519,406
* * * * *
Supplemental information - Economic value added
Three months period ended
September 30,
67

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