Exhibit 99.1

 

INDEPENDENT AUDITOR’S REPORT

To

The Shareholders and Board of Directors of

Companhia Providência Indústria e Comércio

São José dos Pinhais - PR

We have audited the accompanying consolidated financial statements of Companhia Providência Indústria e Comércio and its subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated income statements and statements of comprehensive income, changes in equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board - IASB; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by Management, as well as evaluating the overall presentation of the consolidated financial statements.

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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Companhia Providência Indústria e Comércio and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board - IASB.

 

/s/ DELOITTE TOUCHE TOHMATSU

DELOITTE TOUCHE TOHMATSU

Auditores Independentes Curitiba, BR

May 13, 2014

 

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COMPANHIA PROVIDÊNCIA INDÚSTRIA E COMÉRCIO

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2012

All amounts in thousands of Brazilian reais (R$)

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

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COMPANHIA PROVIDÊNCIA INDÚSTRIA E COMÉRCIO

CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

All amounts in thousands of Brazilian reais (R$), unless otherwise stated

 

 

		2013				2012
Revenue (Note 21)			782,002				608,634
Cost of revenues (Note 22)			(578,579	)			(423,055	)
Gross profit			203,423				185,579
Selling expenses (Note 22)			(41,309	)			(34,596	)
Administrative expenses (Note 22)			(77,909	)			(62,034	)
Other income (Note 22)			(3,308	)			79
			(122,526	)			(96,551	)
Operating income			80,897				89,028
Finance income (Note 23)			6,028				15,375
Finance expenses (Note 23)			(45,393	)			(35,808	)
Finance expenses, net			(39,365	)			(20,433	)
Income before income tax and social contribution			41,532				68,595
Income tax and social contribution (Note 24)			(14,612	)			(23,524	)
Income from continuing operations			26,920				45,071
Net profit			26,920				45,071
Earnings per share (basic and diluted)
From continuing operations (Note 20 (g))			0.34				0.56

The accompanying notes are an integral part of these financial statements.

 

 

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COMPANHIA PROVIDÊNCIA INDÚSTRIA E COMÉRCIO

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

All amounts in thousands of Brazilian reais (R$)

 

 

		2013				2012
Net profit for the year			26,920				45,071
Other comprehensive income
Foreign currency translation adjustments			(1,078	)			(490	)
Total comprehensive income			25,842				44,581

The accompanying notes are an integral part of these financial statements.

 

 

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COMPANHIA PROVIDÊNCIA INDÚSTRIA E COMÉRCIO

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

All amounts in thousands of Brazilian reais (R$)

 

 

										Capital reserves												Profit reserves																								Valuation adjustments to equity
		Capital				Issuance costs				Share premium reserve				Stock options				Total				Legal reserve				Profit retention				Investment reserve				Total				Treasury shares				Retained earnings				Deemed cost adjustment				Accumulated other comprehensive income				Total				Total equity
As of December 31, 2011			422,269				(13,266	)			10,703				361				11,064				7,486				25,430				68,518				101,434				(813	)							168,688				(91	)			168,597				689,285
Profit for the period																																											45,071																45,071
Exchange rate changes on foreign investees (Note 12)																																																			(490	)			(490	)			(490	)
Total comprehensive income for the period																																											45,071								(490	)			(490	)			44,581
Realization of deemed cost (Note 14)																																											15,523				(15,523	)							(15,523	)
(-) Taxes on realization of deemed cost (Note 20)																																											(5,278	)			5,278								5,278
Other convergence adjustments
Total realization of deemed cost																																											10,245				(10,245	)							(10,245	)
Contributions/distributions to shareholders:
Share-based payment (Note 20)															814				814																																								814
Allocation of profit for the year:
Interim dividends paid (Note 20)																																											(19,273	)															(19,273	)
Dividends paid (Note 20)																											(25,430	)							(25,430	)																							(25,430	)
Legal reserve																							2,254												2,254								(2,254	)
Accrued additional proposed dividends																											33,789								33,789								(33,789	)
Total contributions/distributions to shareholders															814				814				2,254				8,359								10,613								(55,316	)															(43,889	)
As of December 31, 2012			422,269				(13,266	)			10,703				1,175				11,878				9,740				33,789				68,518				112,047				(813	)							158,443				(581	)			157,862				689,977
Profit for the period																																											26,920																26,920
Exchange rate changes on foreign investees (Note 12)																																																			(1,078	)			(1,078	)			(1,078	)
Total comprehensive income for the period																																											26,920								(1,078	)			(1,078	)			25,842
Realization of deemed cost (Note 14)																																											15,523				(15,523	)							(15,523	)
(-) Taxes on realization of deemed cost (Note 20)																																											(5,278	)			5,278								5,278
Other convergence adjustments
Total realization of deemed cost																																											10,245				(10,245	)							(10,245	)
Contributions/distributions to shareholders:
Treasury shares																																							713																				713
Share-based payment (Note 20)											162				385				547																								206																753
Allocation of profit for the period:
Interim dividends paid (Note 20)																																											(17,946	)															(17,946	)
Dividends paid (Note 20)																											(33,789	)							(33,789	)																							(33,789	)
Legal reserve																							1,346												1,346								(1,346	)
Transfer between reserves																															18,079				18,079								(18,079	)
Total contributions/distributions to shareholders											162				385				547				1,346				(33,789	)			18,079				(14,364	)			713				(37,165	)															(50,269	)
As of December 31, 2013			422,269				(13,266	)			10,865				1,560				12,425				11,086								86,597				97,683				(100	)							148,198				(1,659	)			146,539				665,550

The accompanying notes are an integral part of these financial statements.

 

 

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COMPANHIA PROVIDÊNCIA INDÚSTRIA E COMÉRCIO

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

All amounts in thousands of Brazilian reais (R$)

 

 

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit for the period			26,920				45,071
Adjustments:
Depreciation of property, plant and equipment			40,816				31,912
Amortization of intangible assets			4,267				3,906
Interests			31,601				21,667
Share-based payment			547				814
Deferred income tax and social contribution			12,423				21,125
Provision for doubtful accounts			117				958
			116,691				125,453
Changes in assets and liabilities:
(Increase) decrease in trade receivables			(23,646	)			18,138
Increase in inventories			(11,790	)			(2,178	)
Decrease in recoverable taxes			11,234				5,792
Decrease in other receivables			487				5,869
Increase in trade payables			16,585				8,135
Increase (decrease) in payroll, social security and related taxes			(2,084	)			196
Increase in taxes, fees and contributions			1,993				3,977
Decrease in other payables			(1,408	)			(2,703	)
			(8,629	)			37,226
Other cash flows from operating activities:
Payment of income tax and social contribution			(1,755	)			(1,510	)
Net cash provided by operating activities			106,307				161,169
Cash flows from investing activities
Purchase of property, plant and equipment			(26,190	)			(71,374	)
Acquisition of intangible assets			(2,403	)			(1,825	)
Related parties
Proceeds from the sale of fixed assets			301				109
Net cash used in investing activities			(28,292	)			(73,090	)
Cash flows from financing activities
Proceeds from borrowings and financing			106,127				51,184
Payment of borrowings and financing – principal			(129,299	)			(73,021	)
Payment of borrowings, financing – interest			(21,476	)			(18,148	)
Sale of shares			875
Dividends paid			(51,720	)			(44,700	)
Net cash used in financing activities			(95,493	)			(84,685	)
Effect of exchange rate changes on cash and cash equivalents			(2,417	)			(425	)
Decrease or increase in cash and cash equivalents, net			(19,895	)			2,969
Cash and cash equivalents at the beginning of period (Note 6)			84,145				81,176
Cash and cash equivalents at the end of period (Note 6)			64,250				84,145

The accompanying notes are an integral part of these financial statements.

 

 

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COMPANHIA PROVIDÊNCIA INDÚSTRIA E COMÉRCIO

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

In thousands of Brazilian reais, except when otherwise indicated

 

 

1	GENERAL INFORMATION

Companhia Providência Indústria e Comércio, headquartered in São José dos Pinhais, State of Paraná, Brazil, and its subsidiaries (the “Company” or the “Group”) are engaged in the manufacture and sale of plastic products, including nonwoven fabrics under the KAMI brand, resulting from the transformation of polypropylene.

The Company has two subsidiaries, one in the City of Pouso Alegre, State of Minas Gerais, Brazil, and another in Statesville, North Carolina, in the United States of America. In order to expand its production capacity in 2012, the Group installed two new machines. The first was installed in the second quarter in Pouso Alegre and the second in Statesville, which started to operate in the last quarter of 2012.

The issuance of these consolidated financial statements of the Group was authorized by the Board of Directors on May 13, 2014.

 

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all reporting periods, unless otherwise stated.

 

2.1

Statement of compliance

The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

 

2.2

Basis of preparation

The accompanying consolidated financial statements has been prepared based on the historical cost and adjusted in order to reflect financial assets and financial liabilities (including derivatives) stated at fair value through profit or loss, as well as the “deemed cost” of land, buildings, machinery and equipment on the date of transition to IFRS.

The preparation of financial statements requires Management to use certain critical accounting estimates and the exercise of judgment by the Company’s management when applying the accounting policies of the Company. The areas involving a higher degree of judgment and complexity, as well as those where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3.

 

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(a)

Changes in accounting policies and disclosures

There are no new IFRS pronouncements or interpretations effective beginning 2013 that had a material impact on the Company’s consolidated financial statements.

 

2.3

Consolidation

 

(a)

Consolidated financial statements

The following accounting policies are applied in the preparation of the consolidated financial statements.

Subsidiaries

Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies, whose interest held correspond to more than half of the voting rights (voting capital). The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity.

Subsidiaries are fully consolidated from the date control is transferred to the Company and, when applicable, such consolidation is discontinued from the date control ceases.

Intercompany transactions, balances and unrealized gains and losses are eliminated in consolidation. The accounting policies of subsidiaries are changed, where necessary, to ensure consistency with the policies adopted by the Company and its subsidiaries.

 

2.4

Segment reporting

Operating segments are reported consistently with the internal report provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing the performance of the operating segments, is the Board of Directors, which is also responsible for making the strategic decisions of the Company.

Considering that all decisions are made based on consolidated reports, the only product sold by the Company is the nonwoven fabric, and all decisions related to strategic and financial planning, purchases, sales, investments and allocation of funds are made on a consolidated basis, the Company concluded that they have only one reportable segment.

 

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2.5

Foreign currency translation

 

(a)

Functional and reporting currency

Items included in the financial statements of each of the consolidated companies are measured using the currency of the primary economic environment where the companies operates (“functional currency”). The consolidated financial statements are presented in Brazilian reais (R$), which is the Company’s functional currency, and also the reporting currency of the consolidated financial statements.

 

(b)

Transactions and balances

Foreign currency-denominated transactions are translated into the Company’s functional currency using the exchange rates prevailing at the transactions or the valuation dates, when items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation using yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement as “Finance income” or “Finance costs”.

 

(c)

Consolidated companies using a different functional currency

The results of operations and financial position of the subsidiary located in the United States, which has a functional currency different from the reporting currency, are translated into the reporting currency as follows:

 

(i)

The balances of assets and liabilities reported in each balance sheet are translated using the closing rate on the balance sheet date;

 

(ii)

Income and expenses reported in the income statement are translated using average exchange rates, which are a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates; and

 

(iii)

All resulting exchange differences are recognized as a separate component of equity.

 

2.6

Cash and cash equivalents

Cash and cash equivalents include cash, bank deposits and other highly liquid short-term investments, which are readily convertible into a known cash amount and subject to an insignificant risk of change in value.

 

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2.7

Financial assets

2.7.1 Classification

The Company classifies their financial assets in the following categories: at fair value through profit or loss and receivables. The Company does not have held-to-maturity and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets on initial recognition.

 

(a)

Financial assets at fair value through profit or loss

Financial assets and financial liabilities measured at fair value through profit or loss are derivatives contracted to be held to maturity, designated as hedging instruments. All financial assets and financial liabilities in this category are classified as current assets and current liabilities.

 

(b)

Receivables

Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, and comprise “trade and other receivables”. They are included in current assets, except for those with maturities 12 months after the end of the reporting period, which are classified as noncurrent assets.

2.7.2 Recognition and measurement

Financial assets are recognized on the trade date – the date in which the Company undertakes to purchase or sell the asset. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss are presented in the income statement in “Finance income (costs)” when earned or incurred.

2.7.3 Impairment of financial assets

Assets stated at amortized cost

The Company assess on the balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and such loss event (or events) affects the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

 

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The criteria that the Company uses to determine whether there is objective evidence of an impairment loss include:

 

(i)

significant financial difficulty of the issuer or debtor;

 

(ii)

a breach of contract, such as a default or delinquency in the payment of interest or principal;

 

(iii)

the Company, for economic or legal reasons arising from the borrower’s financial difficulty, grant to the borrower a concession that a lender would not otherwise consider;

 

(iv)

it becomes probable that the borrower will file for bankruptcy or other financial reorganization;

 

(v)

the disappearance of an active market for that financial asset because of financial difficulties; or

 

(vi)

observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified against the individual financial assets in the portfolio, including:

 

•

adverse changes in the payment status of borrowers in the portfolio; and

 

•

national or local economic conditions that correlate with defaults on the assets in the portfolio.

The amount of any impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the income statement. If a loan or held-to-maturity investment is subject to a variable interest rate, the discount rate for measuring an impairment loss is the current effective interest rate set out in the contract. As a practical measure, the Company may measure impairment on the basis of an instrument’s fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized loss is recognized in the income statement.

 

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2.8

Derivative financial instruments and hedging activities

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value, with the changes in fair value charged against profit or loss.

Although the Company uses derivatives for hedging purposes, it does not apply the hedge accounting.

The fair values of derivative instruments are disclosed in Note 7.

 

2.9

Trade receivables

Trade receivables are amounts due from customers for sales in the ordinary course of business of the Company. If collection is expected in one year or less, they are classified as current assets. Otherwise, they are presented as noncurrent assets.

Trade receivables are initially stated at present value, less the allowance for doubtful accounts, which is recognized when there is objective evidence that the Company will not be able to recover all the amounts due on their original terms. The allowance for doubtful accounts corresponds to the difference between the carrying amount and the recoverable value. The present value is calculated based on the market rates (Interbank Deposit Certificate (CDI which as of December 31, 2013 was equivalent to 9,77% p.a. (6.90% p.a. as of December 31, 2012).

 

2.10

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the moving weighted average method. The cost of finished products and work in process comprise raw materials, direct labor, other direct costs and related overhead expenses (based on normal operating capacity), except for borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less estimated implementation costs and selling expenses. Imports in transit are stated at the accumulated cost of each import.

 

2.11

Intangible assets

 

(a)

Goodwill

Goodwill is measured at cost, represented by its carrying amount at the date of transition to IFRS, less accumulated impairment losses, if any.

The carrying amount of goodwill at the date of transition to IFRS was established on the acquisition or subscription of capital in another entity, represented by the cost of acquisition of the investment which exceeds the book value of the investment, calculated by applying the appropriate acquisition or capital subscription percentage on the investee’s equity amount.

 

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In connection with the first time adoption of IFRS, beginning January 1, 2009, the Company no longer amortizes goodwill arising from investments acquired. Considering that goodwill continues to be amortized for tax purposes, the corresponding deferred tax effects are recorded on the portion of amortization deducted for tax purposes.

Goodwill is tested annually for impairment.

 

(b)

Software

Costs on the maintenance or development of software are recognized as an expense when incurred. Expenditures directly associated with identifiable and exclusive software, controlled by the Company and its subsidiaries, and which will probably generate economic benefits greater than the costs for over one year, are recognized as assets. Direct expenses include the compensation payable to the software development team and the appropriate portion of related general expenses.

Software development costs recognized as assets are amortized under the straight-line method over their useful lives, at the rates disclosed in Note 13.

 

2.12

Property, plant and equipment

Land, buildings and construction, machinery and equipment, industrial facilities and furniture and fixtures refer mainly to plants and offices and are stated at historical acquisition cost, adjusted for inflation through December 31, 1995, plus the deemed cost, in January 1, 2009.

Property, plant and equipment items are stated at their historical cost, less accumulated depreciation. The historical cost includes expenditures directly attributable to the acquisition of items and may also include financial charges on borrowings used to finance the construction of property, plant and equipment, which are capitalized over the period necessary to build and prepare the asset for the intended use.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, where appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the item cost can be measured reliably. The carrying amount of replaced items or parts is derecognized. All other repairs and maintenance are charged to profit or loss, when incurred.

Land is not depreciated. Depreciation of other assets is calculated under the straight-line method to allocate their costs to their residual values over the estimated useful lives. The useful lives are listed in Note 14.

The residual values and useful lives of assets are reviewed and adjusted, if applicable, at the end of each reporting period.

 

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The carrying amount of an asset is written down immediately to its recoverable amount its carrying amount is greater than its estimated recoverable amount (Note 2.13).

Gains and losses from sales are determined by comparing sales proceeds with the carrying amounts and recorded in line item “Other income (expenses), net” in the income statement.

 

2.13

Impairment of non-financial assets

Assets with indefinite useful life, e.g. goodwill, are not amortized and are tested annually for impairment. Property, plant and equipment and other non-financial assets are tested annually for impairment, and also whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In this case, the recoverable value is calculated to determine if assets are impaired. An impairment loss is recognized at the amount by which the carrying amount of an asset exceeds its recoverable amount, which is the higher of net selling price or the value in use of an asset. For measurement purposes, assets are grouped at the lowest level for which there are separately identifiable cash flows.

 

2.14

Trade payables

Trade payables refer to amounts payable for goods or services acquired from suppliers in the ordinary course of business, classified as current liabilities if payment is due within one year or less (or in the regular course of business, even if longer). Otherwise, they are recorded as noncurrent liabilities.

Trade payables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method. In practice, they are usually recognized at the related invoice amount.

 

2.15

Borrowings

Borrowings are initially recognized at fair value, less transaction costs incurred and subsequently carried at amortized cost. Any difference between the amounts raised (less transaction costs) and the settlement amount is recognized in the income statement over the period borrowings are outstanding, using the effective interest method.

Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

 

2.16

Provisions for tax, labor and civil risks

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, based on the opinion of their legal counsel, and the amount can be reliably estimated.

 

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Cia Providência Indústria e Comércio

 

2.17

Current and deferred income tax and social contribution

Income tax and social contribution expenses comprise current and deferred taxes, and are calculated based on the effective income tax and social contribution rates adjusted as prescribed in the prevailing tax laws. The offset of tax loss carry forwards is limited to 30% of taxable income in Brazil. Income taxes are recognized in the income statement, except to the extent that they relate to items recognized directly in comprehensive income or equity.

Deferred income tax and social contribution are recognized on tax loss carry forwards and the related temporary differences arising from differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax and social contribution are calculated at the rates of 15% (plus a 10% surtax, where applicable) and 9%, respectively Brazil.

Deferred income tax and social contribution assets are recognized only to the extent that it is probable that future taxable income will be available against which temporary differences may be offset. Therefore, in order to support recognition, Management prepares annually a study about the utilization of these income-based taxes, based on internal assumptions and future economic scenarios.

For the subsidiary Providencia USA Inc., current and deferred taxes are calculated at the rates of 32% for federal tax and 7% for state tax.

 

2.18

Employee benefits

 

(a)

Pension obligations

The Company offers their employees a defined contribution private pension plan (Note 25), whose purpose is to accumulate funds that can become monthly income to supplement the Government Social Security benefit. The plan provides for the employee’s voluntary contributions, deducted from the employee payroll, and contributions made by the Company and its subsidiaries, which are recorded as personnel expenses, with a corresponding entry to current liabilities.

 

(b)

Share-based payments

The Company offers to executives and certain employees, a share-based compensation plan (“Stock Options”), which is duly approved by the Board of Directors ((Note 20.b), according to which the Company receives services in exchange for the stock options granted. The fair value of share options granted, calculated on the grant date, is recognized as an expense with a corresponding increase in equity, during the vesting period, to the extent services are provided.

 

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(c)

Profit sharing

The Company recognizes a profit sharing liability and expense on accrual basis, in accordance with the compensation policy.

 

2.19

Capital

Ordinary shares are classified in equity. Incremental costs directly attributable to the issue of new shares or options are recorded in equity as a deduction from proceeds, net of taxes.

 

2.20

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of business of the Company. Revenue is stated net of taxes, returns, as well as after the elimination of intercompany sales. Revenue is recognized when:

 

•

The significant risks and rewards of ownership of the products are transferred to the buyer;

 

•

The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

•

The amount of revenue can be measured reliably;

 

•

it is probable that the economic benefits associated with the transaction will flow to the entity; and

 

•

the costs incurred or to be incurred in respect of the transaction can be measured reliably

Therefore, the Company recognizes revenues on the date the product is delivered to the buyer.

 

2.21

Distribution of dividends

Dividends declared to the Company’s stockholders are recognized as a liability in the financial statements, based on the Company’s bylaws. Any amount declared above the mandatory minimum dividend is only accrued on the date it is approved by shareholders at the General Meeting.

 

2.22

New and revised IFRS issued but not yet effective

The following standards issued were not yet effective on the issuance date of the financial statements. This list of standards and interpretations issued includes those which the Company reasonably expects to impact disclosures, financial condition or performance upon their application in the future. The Company intends to adopt such standards when they become effective.

 

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IFRS 9 Financial Instruments - Classification and Measurement - IFRS 9 completes the first part of the project to supersede “IAS 39 Financial Instruments: Recognition and Measurement”. IFRS 9 uses a simple approach to determine whether a financial asset is stated at amortized cost or fair value, based on how an entity manages its financial instruments (its business model) and contractual cash flows underlying the financial assets. The standard also requires the adoption of only one method to determine asset impairment. This standard is effective for years beginning January 1, 2015, and the Company does not expect any significant effect as a result of its adoption.

IASB issued clarifications on the standards and amendments to IFRS. Below are the main amendments:

IAS 32 – Financial Instruments – Presentation: provides clarifications on the offset between financial assets and financial liabilities, whose amendment is effective for years beginning on or after January 1, 2014, and the Company does not expect any significant effect as a result of its adoption.

There are no other standards and interpretations issued and not yet adopted that can significantly impact the profit or loss or equity reported by the Company, based on Management’s opinion.

 

3	CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Accounting estimates and judgments are continually assessed and are based on historical experience and other factors, including expected future events that are believed to be reasonable under the circumstances.

 

3.1

Critical accounting estimates and assumptions

Based on assumptions, the Company makes forward-looking estimates. By definition, the resulting accounting estimates will are rarely equal to actual results.

The estimates and assumptions that present a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year are discussed below.

 

(a)

Estimated impairment of goodwill

The Company tests annually whether goodwill is impaired, in accordance with the accounting policy stated in Note 2.11. The recoverable amounts of cash-generating units (CGUs) were determined based on the value-in-use, which is calculated based on estimates (Note 13).

Management believes that probable additional changes in the main assumptions on which the recoverable amounts are based would not cause its carrying amount to exceed the recoverable amount.

 

18

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(b)

Income tax, social contribution and other taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the carrying amount presented in the financial statements and the tax basis of assets and liabilities using effective tax rates. The Company also recognizes provisions as a result of circumstances where it is probable that additional taxes will be due. When the final tax outcome of these issues is different from the amounts that were initially estimated and recorded, such differences will impact current and deferred income tax assets and liabilities in the period in which such determination is made.

The Company reviews on a regular basis the possibility of recovery of their deferred tax assets, taking into account the historical profit generated and the projected future taxable income, based on a recoverability study.

 

(c)

Fair value of derivatives and other financial instruments

The Company assesses the fair value of financial instruments using available information and valuation methodologies set by Management. However, both the interpretation of market data and the selection of valuation methodologies require considerable judgment and reasonable estimates to produce the most appropriate realizable value. Consequently, the estimates presented in Note 7 are not necessarily indicative of the amounts that can be realized in the current market. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated realizable values.

 

(d)

Provisions for tax, labor and civil risks

The Company is party to several administrative proceedings and lawsuits, as described in Note 18. Consequently, it recognizes provisions for all risks on lawsuits and administrative proceedings with respect to which the likelihood of loss is assessed as probable and which the amount of the loss can be reliably estimated. The assessment of the likelihood of loss includes the analysis of available evidence, the hierarchy of laws, the applicable case law, most recent decisions issued by the courts and their relevance within the legal system, as well as the opinion of the outside legal counsel. The Company believes that the provisions for tax, civil and labor risks are properly presented in the financial statements.

 

(e)

ICMS tax incentives

The Company has State VAT (ICMS) tax incentives granted by the government of the State of Paraná and by the government of the State of Minas Gerais. The Federal Supreme Court (STF) handed down decisions in Direct Actions, declaring the unconstitutionality of several state laws that granted ICMS tax incentives without previous agreement between the States.

 

19

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Despite the fact that the Company does not have ICMS tax incentives covered by the decision handed down by the STF, it consulted its legal counsel, who issued an opinion on the matter, based on which the Company believes that it does not meet the criteria under IAS 37 for the recognition of a liability.

 

4	FINANCIAL RISK MANAGEMENT

 

4.1

Financial risk factors

The Company has a Risk Management Committee, designated by the Board of Directors, to assist it and is responsible for defining the policy and managing the risks and the financial instruments using control systems that set currency limits and interest exposures and identify financial institutions where Company’s cash and short-term investment funds will be invested in. The carrying amount of all financial instruments, including derivatives, as well as the results obtained compared to the proposed goals, are presented to and analyzed monthly by the Risk Management Committee and submitted to the approval of the Company’s Board of Directors.

Among the procedures defined by the current policy, the Company adopts monthly routines that enable it to project and assess currency exposure since it has transactions and debts in the foreign market and is exposed to these risks.

 

(a)

Market risk

 

(i)

Currency and interest rate risk

The Company is exposed to market risks related to adverse changes in interest and foreign exchange rates, 9% of the indebtedness is pegged to local currency and subject to variable and fixed interest rates, and the remaining 91% is indexed to the LIBOR (London Interbank Offered Rate) and SIFMA (Securities Industry and Financial Markets Association). A significant portion of revenues (30%) derives from sales in foreign markets and is equally exposed to fluctuations in exchange rates.

A portion of the indebtedness is indexed to the Interbank Deposit Certificate (CDI) and is, therefore, subject to variable interest rates. The financial result is partially affected by changes in the benchmark interest rate (Special System for Settlement and Custody (SELIC).

 

20

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Financial instruments are stated at amortized cost, which approximate their fair values.

The table below shows the Company’s foreign currency exposure.

 

		Consolidated
		December 31, 2013								December 31, 2012
		R$ mil				USD mil				R$ mil				USD mil
Assets:
Trade receivables			85,958				36,693				74,514				36,464
Liabilities:
Trade payables			(2,989	)			(1,276	)			(5,594	)			(2,737	)
Borrowings and financing			(540,393	)			(230,681	)			(485,153	)			(237,413	)
Liability exposure			(543,382	)			(231,957	)			(490,747	)			(240,150	)
Net exposure			(457,424	)			(195,264	)			(416,233	)			(203,686	)

The Company invests in foreign operations, whose net assets are exposed to the currency risk. Currency exposure arising from the investment in foreign operations is hedged mainly through borrowings denominated in the same currency as these investments.

Sensitivity to the foreign exchange rate - The impacts arising from a fluctuation by 25% and 50% in the reasonable possible scenario of the U.S. dollar exchange rate for each financial instrument exposed are as follows:

 

		Risk		(-) 50 %				(-) 25 %				Reasonable possible scenario				(+) 25 %				(+) 50 %
Foreign exchange rate		Dollar			1.2250				1.8375				2.4500				3.0625				3.6750
Trade receivables		Dollar			(41,009	)			(18,535	)			3,940				26,414				48,889
Borrowings		Dollar			257,809				116,517				(24,775	)			(166,068	)			(307,360	)
Trade payables		Dollar			1,426				644				(137	)			(919	)			(1,700	)
Gains or Losses					218,226				98,626				(20,972	)			(140,573	)			(260,171	)

In addition to the sensitivity analysis presented above, the Company measures its financial instruments considering the reasonable possible effects in profit or loss and equity against the risks assessed by the Company’s management at the end of the reporting period. Based on the financial position as of December 31, 2013, it is estimated that these effects would approximate the amounts disclosed in the reasonable possible scenario column of the table above, as the assumptions used by the Company approximate those described above.

 

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Sensitivity to the interest rate – The impacts of a 25% and 50% fluctuation of interest rates on profit or loss in the reasonable possible scenario of indexes (CDI/LIBOR6) in the 12-month period are described below:

 

		Risk				(-) 50 %				(-) 25 %				Reasonable possible scenario				(+) 25 %				(+) 50 %
Rates			CDI/Selic				5.25				7.88				10.5				13.13				15.75
Rates			LIBOR6				0.17				0.26				0.35				0.44				0.52
Short-term investments			CDI/Selic				2,857				4,338				5,855				7,408				8,999
Borrowings and financing			LIBOR6				(9,355	)			(9,680	)			(9,991	)			(10,293	)			(10,600	)
Loss							(6,498	)			(5,342	)			(4,136	)			(2,885	)			(1,601	)

In addition to the sensitivity analysis presented above, the Company measures its financial instruments considering the reasonable possible effects on profit or loss and equity against the risks assessed by the Company’s management at the end of the reporting period. Based on the financial position of outstanding short-term investments and borrowings and financing as of December 31, 2013, it is estimated that these effects would be close to the amounts disclosed in the reasonable possible scenario column of the table above, as the assumptions used by the Company are close to those described above.

 

(ii)

Derivative transactions

The Company carries out transactions in the foreign market and are exposed to market risks arising from fluctuations in foreign currencies and interest rates. The exposure to the risk arising from future payments in local currency of liabilities linked to the foreign exchange market is hedged mainly by the portfolio of trade receivables from export sales or realized by the Company.

The Company also carries out transactions with derivatives pegged to foreign currencies, mainly the U.S. dollar, for hedging purposes (hedge against possible interest and exchange rate fluctuations), based on the guidelines set in the Market Risk Management Policy approved by the Board of Directors and implemented by the Risk Management Committee.

The objective of the Market Risk Management Policy is basically to hedge at least 75% of the Company’s short-term cash flow for defined periods ranging from 9 to 12 months, primarily through traditional market transactions, such as, for example, Non-Deliverable Forward (NDF) contracts, options and the dollar futures on the Brazilian Commodities & Futures Exchange (BM&F), defining limits by type of transaction and counterparty.

 

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In order to measure the effects of the fluctuations in the indices and rates linked to derivative transactions, the Company prepared the sensitivity analysis table below, including a scenario considered as reasonable possible by the Company’s management, a situation considered possible of at least 25% reduction in the variables used, and a situation considered remote of at least 50% reduction in the risk variables:

Sensitivity analysis table

 

Transaction		Risk		(-) 50 %				(-) 25 %				Reasonable possible scenario				(+) 25 %				(+) 50 %
Swap US$ x CDI		CDI fluctuation			(19,243	)			(5,981	)			7,590				21,453				35,591
Currency forward (NDF)		US$ fluctuation			(12,318	)			(5,232	)			1,847				8,940				16,026
Gain (loss)					(31,561	)			(11,213	)			9,437				30,393				51,617

The amounts in the sensitivity analysis table were determined considering the U.S. dollar curve and the future U.S. dollar quotations published by the BM&F. Based on these rates, the Company applied the reduction percentages in accordance with each scenario, projected the cash flows up through to the maturity of transactions and discounted them through the balance sheet date.

This analysis was only considered for purposes of compliance with the prevailing legislation in Brazil for public companies (CVM 475/08), since the Company carries out derivative transactions only for hedging purposes and elimination of the effects of currency and interest rate fluctuations, which are not used for speculative purposes.

In addition to the sensitivity analysis, the Company measures its financial instruments considering the reasonable possible effects on profit or loss and equity against the risks assessed by the Company’s management at the end of the reporting period. Based on the financial position and notional amount of outstanding derivatives as of December 31, 2013, it is estimated that these effects would approximate the amounts disclosed in the reasonable possible scenario column of the table above, as the assumptions used by the Company approximate those described above.

The Company has no exotic derivative agreements outstanding as of December 31, 2013 and 2012.

 

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(b)

Credit risk

The Company’s sales policy is closely related to the Credit Policy established by the Company and to the level of credit risk which it is willing to accept in the course of its business. To minimize possible default, the Company diversifies its receivables portfolio, selects customers, and monitors sales terms and individual credit limits, and requires collaterals.

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings or to historical information about default rates for counterparties.

Trade receivables: the credit risk of customers is subject to the procedures, controls and policies established by the Company for this purpose. Credit limits are set for all customers based on internal classification criteria. The amounts classified in Group 1 refer to customers with no default in the past. The amounts in Group 2 refer to defaulting customers in the past, i.e., those which on any time were included in the criteria for recognition of allowance for doubtful accounts.

 

		December 31, 2013				December 31, 2012
Trade receivables
Group 1			175,662				144,308
Group 2			5,147				3,947
			180,809				148,255

Cash and cash equivalents: the credit risk of balances with banks and other financial institutions is managed by the treasury area according to the policy established.

 

Bank account, deposits and short-term investments		December 31, 2013				December 31, 2012
brAAA			43,742				56,536
brAA							7,380
brA+f			6,436				8,022
brA			7,579				7,036
AA-			6,493				5,171
			64,250				84,145

Source: Standard & Poor’s and Fitch Ratings

 

24

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(c)

Liquidity risk

Cash flow is projected in the operating entities consolidated by the Company’s Finance Department. The liquidity risk management of the Company, which is Management’s responsibility, monitors rolling forecasts of the liquidity requirements of the Company to ensure they have sufficient cash to meet operating needs.

Surplus cash held by the operating entities, in addition to the balance required for working capital management, is invested in short-term instruments, in order to offer maximum liquidity and cover disbursements.

The table below analyzes the consolidated non-derivative financial assets and liabilities and derivative financial assets and liabilities to be settled by the Company, according to relevant maturity dates, corresponding to the remaining period in the balance sheet through the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows.

 

		Up to 1 month				1 to 3 months				3 months to 1 year				1 to 5 years				Over 5 years				Total
At December 31, 2013
Assets
Cash and cash equivalents			64,250																				64,250
Derivative financial instruments			24,674																				24,674
Trade receivables			70,023				88,430				19,369				2,987								180,809
Escrow deposits															372								372
			158,947				88,430				19,369				3,359								270,105
Liabilities:
Trade payables			(50,886	)			(9,089	)															(59,975	)
Borrowings and financing
- Floating rates			(1,192	)			(14,783	)			(37,369	)			(294,403	)			(104,082	)			(451,829	)
- Fixed rates			(5	)			(14,861	)			(16,632	)			(154,264	)			(21,844	)			(207,606	)
			(52,083	)			(38,733	)			(54,001	)			(448,667	)			(125,926	)			(719,410	)
			106,864				49,697				(34,632	)			(445,308	)			(125,926	)			(449,305	)

Derivatives are managed based on net fair value. These derivatives include interest rate swaps, non-deliverable forward and e U.S. dollar option contracts used by the Company to manage the consolidated interest rate profile.

 

4.2

Capital management

The objectives of the Company in managing capital are to safeguard their ability to continue as going concerns in order to offer returns to shareholders and security to other stakeholders and to maintain an efficient capital structure.

 

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Capital management is monitored using the debt/capitalization ratio, whose objective is to maintain a ratio equal to or lower than 0.65. As of December 31, 2013, this ratio was 0.47 (0.44 as of December 31, 2012), which demonstrates that the Company’s capital structure is maintained within the preset limits. The table below shows the calculation:

 

		December 31, 2013				December 31, 2012
Total borrowings balance (note 16)			590,930				535,707
Equity balance			665,550				689,977
Capitalization			1,256,480				1,225,684
Total debt / capitalization
Total debt			0.47				0.44

 

4.3

Fair value estimation

The carrying amounts of trade receivables (net of allowance for doubtful accounts) and payables approximate their fair values. The fair values of financial liabilities for disclosure purposes are estimated by discounting the future contractual cash flows at the current market interest rate available to the Company for similar financial instruments, as disclosed in Note 16.

The Company categorize its financial instruments measured at fair value through profit or loss, according to the following hierarchy levels:

Level 1 - prices quoted (unadjusted) in active markets for identical assets or liabilities. This level does not apply to the Company as of December 31, 2013;

Level 2 - inputs other than prices quoted in active markets included in Level 1 that are observable for an asset or liability, either directly or indirectly; and

 

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Level 3 - techniques using input with significant effects on the fair value recorded that are not based on observable market inputs. This level does not apply to the Company as of December 31, 2013.

 

		December 31, 2013				December 31, 2012
		Level 2				Level 2
Current assets
Cash and cash equivalents
Fair value through profit or loss			64,250				84,145
			64,250				84,145
Derivative financial assets
Derivative financial instruments			24,674				10,708
			24,674				10,708
Total current assets			88,924				94,853

The Company did not transfer assets or liabilities between the hierarchy levels of fair value for the years ended December 31, 2013 and December 31, 2012.

 

5	FINANCIAL INSTRUMENTS BY CATEGORY

 

		December 31, 2013				December 31, 2012
Cash and cash equivalents
Banks and short-term investments			64,250				84,145
			64,250				84,145
Financial assets
Loans and receivables:
Trade receivables			180,809				148,255
Related parties
Escrow deposits			372				56
			181,181				148,311
Fair value through profit or loss:
Derivative financial instruments			24,674				10,708
			24,674				10,708
Total assets			270,105				243,164
Financial liabilities
Stated at amortized cost:
Trade payables			59,975				43,390
Borrowings and financing			590,930				535,707
Total liabilities			650,905				579,097

 

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6	CASH AND CASH EQUIVALENTS

The balance of line item ‘Cash and cash equivalents’ includes cash held by the Company. At the end of the reporting period, this balance, as recorded in the statement of cash flows, may be reconciled with the related balance sheet items, as shown below:

 

		December 31, 2013				December 31, 2012
Banks and cash on hand			11,124				11,475
Short-term investment funds			53,126				72,670
Cash and cash equivalents in the balance sheet			64,250				84,145

Short-term investment funds comprise mainly of investment funds, whose investment portfolios are comprised basically of highly liquid investments in federal government bonds, repurchase transactions and Bank Certificates of Deposit (CDB), yielding average interest of 102% (102% as of December 31, 2012) of the Interbank Deposit Certificate (CDI) fluctuation. The Company does not invest in exclusive investment funds.

 

7	DERIVATIVE FINANCIAL INSTRUMENTS

 

		Assets
		December 31, 2013				December 31, 2012
Interest rate swaps (a)			21,571				9,696
Foreign exchange forwards contracts (b)			1,487				311
U.S. dollar option contracts (c)			1,616				701
Current portion			24,674				10,708

The fair values of derivatives were calculated by the Company and represent the exit price on the balance sheet date. Consequently, the fair values calculated are only valid on the dates of the consolidated information and may be subject to subsequent changes due to changes in market variables in the future, in particular with respect to fluctuations in exchange rates.

The financial derivatives entered into by the consolidated companies do not require margin call, and amounts are only increased or reduced on the established dates.

 

(a)

Interest rate swaps - CDI x US$ and LIBOR6 floating x fixed

The notional amounts of the interest rate swap contracts outstanding as of December 31, 2013 total R$167,294 (R$129,133 as of December 31, 2012).

 

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In order to hedge its liability exposures (CDI and LIBOR interest rates) from borrowings and financing, the Company entered into swap contracts, traded in Bolsa de Mercadorias e Futuros - BM&F and registered with CETIP, whose balances and conditions are as follows:

 

•

Banco Itaú: US$52,4 million – Company receives in US$ + 4.85% p.a. and pays in CDI + 1.7% p.a., maturing on a semiannual basis through September 2018; and,

 

•

Banco Itaú: R$50 million – Company receives in R$ + 8% p.a., and pays in 98.70% of CDI p.a., maturing on a quarterly basis through February 2016.

 

(b)

Forward foreign exchange contracts:

The notional amounts of the outstanding forward foreign exchange contracts outstanding as of December 31, 2013 total R$28,147 (R$25,330 as of December 31, 2012).

In order to hedge against the volatility of liability exposures in U.S. dollars, arising from the total exposure (cash flows) through December 31, 2013, the Company entered into Non-Deliverable Forward contracts in U.S. dollars, in the following amounts and conditions:

 

•

Banco HSBC: US$1,7 million - long position in U.S. dollars, strike rate of R$2.0810, maturing on January 15, 2014;

 

•

Banco Santander: US$1,0 million – long position in U.S. dollars, strike rate of R$2.2794, maturing on March 17, 2014;

 

•

Banco Itaú BBA: US$2,8 million – long position in U.S. dollars, strike rate of R$2.4748, maturing on September 15, 2013;

 

•

Banco Bradesco: US$4 million – long position in U.S. dollars, strike rate of R$2.4126, maturing on June 16, 2014; July 15, 2014; August 15, 2014 and

 

•

Banco BTG: US$2,5 million – long position in U.S. dollars, strike rate of R$2.1240, maturing on February 17, 2014.

 

(c)

U.S. dollar call option contracts:

The notional values of the U.S. dollar call option contracts outstanding as of December 31, 2013 total R$27,713 (R$30,905 as of December 31, 2012). Total premium paid was R$163.

In order to hedge against the volatility of the liability exposures in U.S. dollar, arising from the total exposure (cash flows) through December 31, 2013, the Company entered into call option contracts in U.S. dollars in the following amounts and conditions:

 

•

Banco Votorantim: US$3,1 million - call option at the rate of R$2.3617, maturing on April 15, 2014 and July 15, 2014; premium paid: R$317 thousand;

 

•

Banco Itaú: US$5 million – call option at the rate of R$2.4447, maturing on May 15, 2014; June 16, 2014 and August 15, 2014; premium paid: R$554 thousand;

 

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•

Banco Bradesco: US$1,8 million – call option at the rate of R$2.1240, maturing on February 17, 2014; premium paid: R$132 thousand; and

 

•

Banco Citibank: US$1,9 million – call option at the rate of R$2.1929, maturing on January 15, 2014 and March 17, 2014; premium paid: R$161 thousand.

 

8	TRADE RECEIVABLES

 

		December 31, 2013				December 31, 2012
Trade receivables – domestic customers			99,840				78,307
Trade receivables – foreign customers			86,187				75,050
Allowance for doubtful accounts - domestic customers			(4,989	)			(4,566	)
Allowance for doubtful accounts - foreign customers			(229	)			(536	)
Trade receivables, net			180,809				148,255
Current portion			177,822				144,059
Noncurrent portion			2,987				4,196

As of December 31, 2013, the average days sales outstanding is 73 days (81 days as of December 31, 2012). The Company recognized an allowance for doubtful accounts for all domestic trade receivables past-due over 90 days. For foreign trade receivables, the allowance for doubtful accounts relies on the analysis of the current financial condition and the economic and political environment in the country where each borrower is located.

The aging list of trade receivables is as follows:

 

		December 31, 2013				December 31, 2012
Current			174,109				139,239
Up to 60 days past-due			4,996				6,960
61 to 90 days past-due			630				181
Over 90 days past-due			6,292				6,977
Total			186,027				153,357
Allowance for doubtful accounts			(5,218	)			(5,102	)
Total			180,809				148,255

The changes in the allowance for doubtful accounts were as follows:

 

		December 31, 2013				December 31, 2012
Opening balance			(5,102	)			(4,144	)
Provision for doubtful accounts			(946	)			(1,506	)
Recoveries, net of writte-offs			830				548
Closing balance			(5,218	)			(5,102	)

 

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The recognition and derecognition of the allowance for doubtful accounts were recorded in “Selling expenses” in the income statement. Amounts charged to the allowance for doubtful account are generally written off when there is no expectation of recovering the accounts.

The maximum exposure to credit risk on the reporting period is the carrying amount of each type of receivables mentioned above.

 

9	INVENTORIES

 

		December 31, 2013				December 31, 2012
Raw materials			15,760				8,616
Auxiliary raw materials			10,470				10,209
Work in process			1,116				1,958
Finished products			20,903				20,534
Storeroom supplies			15,870				10,900
Goods in transit							112
Total			64,119				52,329

Management expects inventories to be consumed within a period of less than 12 months.

 

10	RECOVERABLE TAXES

 

		December 31, 2013								December 31, 2012
		Current assets				Noncurrent assets				Current assets				Noncurrent assets
State VAT (ICMS)			10,936				592				12,388				3,122
Federal VAT (IPI)			6,241								3,355
Tax on revenue (COFINS)			19,672				4,817				12,202				14,975
Tax on revenue (PIS)			4,345				1,049				2,724				1,415
Prepayments of income tax and social contribution			1,456				86				6,303				82
Withholding income tax (IRRF)			2,338				1,043				6,209				1,034
Total			44,988				7,587				43,181				20,628

Current ICMS credits arise from purchase of raw materials consumed on production sold to foreign countries. The Company files qualification/accreditation processes with the State Government of Paraná, to subsequently trade (sale) and/or use them as part of the payment of the electric energy bill.

Noncurrent ICMS credits arise from the purchase of property, plant and equipment items which are realizable within 48 months, pursuant to prevailing regulations.

PIS/COFINS credits refer to taxes paid when importing a new machine, whose credits can be offset against with future PIS/COFINS payables.

 

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As of December 31, 2013, the period covered originally under the Special Regime for Recovery of Exporting Company Tax Amounts (REINTEGRA), introduced by Decree 7633/2011 and extended by MP 601/2012, ended. In 2013 the Company recorded R$6,410 (R$5,679 in 2012) relating to credits obtained through this tax grant, of which part will be received in cash in 2014 through a reimbursement request and the outstanding balance will be offset against other federal taxes.

 

11	DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION ASSETS

The Company adopted the Transitional Tax Regime (RTT) introduced by Law 11941/09, according to which corporate income tax (IRPJ), social contribution (CSLL), taxes on revenues (PIS and COFINS) for fiscal years 2008 and 2009 continue to be calculated based on the accounting methods and criteria prescribed by Law 6404, of December 15, 1976, effective as of December 31, 2007. Accordingly, deferred income tax and social contribution calculated on the adjustments arising from the adoption of the new accounting practices introduced by Law 11638/07 and Law 11941/09 (laws that regulated in Brazil the transition to IFRS) were recorded in the Company’s financial statements, when applicable, in conformity with IAS 12. The Company elected such option in the Corporate Income Tax Return (DIPJ) on June 30, 2011.

 

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The balances of deferred income tax and social contribution credits on tax loss carry forwards and temporary differences are as follows:

 

		December 31, 2013				December 31, 2012
Income tax and social contribution assets - Companhia Providência Indústria e Comércio
Income tax and social contribution
Accumulated tax losses			233,715				200,661
Income tax and social contribution rate			34	%			34	%
Deferred income tax and social contribution credits on tax losses			79,463				68,224
Deferred income tax and social contribution credits on goodwill arising from downstream merger			56,750				75,666
Total deferred income tax and social contribution assets - Companhia Providência Indústria e Comércio			136,213				143,890
Income tax - Providencia USA Inc
Accumulated tax losses			6,948				9,590
Federal tax (32% rate)			2,223				3,069
State tax – North Carolina (rate of 7%)			486				671
Exchange gain on foreign currency translation			984				487
Total deferred income tax asset - Providencia USA Inc			3,693				4,227
Total deferred income and social contribution tax assets			139,906				148,117
Income tax and social contribution liabilities
Income tax
Deemed cost of property, plant and equipment			(221,843	)			(237,212	)
Temporary differences*			(80,374	)			(56,073	)
			(302,217	)			(293,285	)
Income tax rate			25	%			25	%
Deferred income tax debts on deemed cost and temporary differences			(75,554	)			(73,320	)
Social contribution
Deemed cost of property, plant and equipment			(221,843	)			(237,212	)
Temporary differences*			(78,951	)			(54,650	)
			(300,794	)			(291,862	)
Social contribution rate			9	%			9	%
Deferred social contribution debts on deemed cost and temporary differences			(27,071	)			(26,268	)
Total deferred income tax and social contribution - liabilities			(102,627	)			(99,588	)
Total deferred income tax and social contribution, net			37,279				48,529

 

*

The balance of temporary differences is basically comprised of: difference on depreciation recognized for tax purposes and depreciation recognized in the accounting records according to the useful lives of property, plant and equipment items (Law 11638, art.1, § 7), allowance for doubtful accounts, accrued profit sharing and foreign currency changes recognized on the accrual basis.

 

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The realization of deferred income tax and social contribution are broken down by year as follows:

 

		December 31, 2013				December 31, 2012
Through December 2014			22,770				19,306
From January 2015 to December 2015			21,215				22,858
From January 2016 to December 2016			23,169				24,221
From January 2017 to December 2017			9,421				25,834
From January 2018 to December 2020			63,331				55,898
			139,906				148,117

Deferred income tax and social contribution assets, arising from tax loss carry forwards and temporary differences, are recognized to the extent that is probable that future taxable profit will be available, supported by projections using internal assumptions and future economic scenarios, which may, therefore, change, as approved by the Board of Directors.

Deferred income tax and social contribution assets on goodwill arising from downstream merger refers to tax effects of the reversed merger into the Company in February 2007 of Alnilan S.A., an investment vehicle used in the acquisition of Companhia Providência Indústria e Comércio, which recognized goodwill from such acquisition. As an investment vehicle Alnilan S.A. was not considered the accounting acquirer. As such, following the regulation prescribed by CVM Instruction 319/99 and CVM Instruction 349/2001, when going public in July 2007, the Company wrote off the goodwill merged by means of a full provision, and recognized the related deferred income tax and social contribution credit. For accounting and tax purposes, the goodwill and the related provision were amortized on a straight-line basis at the rate of 10% per annum through December 31, 2008.

Beginning January 1, 2009, as a result of the changes introduced by Law 11638/07 and Law 11941/09 and the adoption of IFRS, the goodwill arising from the merger and the related provision were no longer amortized for accounting purposes. Therefore, the amounts corresponding to the deferred income tax and social contribution benefits on future tax amortization of the goodwill are recognized as deferred income tax and social contribution credit.

 

12	INVESTMENTS

The adjustments resulting from the translation of the financial statements of Providencia USA. Inc., which were originally prepared in U.S. dollar and translated into Brazilian reais, were recorded as cumulative translation adjustments under accumulated other comprehensive income in equity. In the year ended December 31, 2013, the Company recognized as other comprehensive income foreign currency translation adjustment gain derived from exchange rate changes on foreign investments of R$1,078 (loss of R$490 in 2012).

 

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13	INTANGIBLE ASSETS

 

(a)

Breakdown

 

		Software				Goodwill				Total
As of December 31, 2012			9,550				33,133				42,683
Adjusted cost			23,510				39,759				63,269
Accumulated amortization			(15,513	)			(6,626	)			(22,139	)
As of December 31, 2013			7,997				33,133				41,130

 

(b)

Changes in intangible assets

 

		Internally-generated software development costs				Goodwill				Total
As of December 31, 2011			11,499				33,133				44,632
Additions			1,825								1,825
Amortization			(3,906	)							(3,906	)
Exchange rate changes			132								132
As of December 31, 2012			9,550				33,133				42,683
Additions			2,403								2,403
Amortization			(4,267	)							(4,267	)
Exchange rate changes			150								150
Transfer			161								161
As of December 31, 2013			7,997				33,133				41,130

In January 2008, the direct parent company Providência Participações Ltda. was merged (downstream merger) into its subsidiary Isofilme Indústria e Comércio de Plásticos Ltda. (Isofilme). The goodwill recognized by Providência Participações Ltda. in its accounting records, arising from the acquisition of Isofilme, was being amortized on a straight-line basis at the rate of 20% p.a. based on the expected future earnings, supported by an economic appraisal report prepared by a specialized company that used a real discount rate of 9.60% p.a. Beginning January 1, 2009, goodwill is no longer being amortized in the accounting records in a systematic manner, and is only subject to impairment tests, in accordance with IAS 36 -Impairment of assets.

Since the Company opted for the Transitional Tax Regime introduced by Law 11638/07 and Law 11941/09, the goodwill described above continued to be amortized for purposes of calculation of the provision for income tax and social contribution for the year ended December 31, 2009, and the related effects of deferred income tax and social contribution are recognized in profit or loss. Such goodwill was being amortized for tax purposes, and was fully amortized in February 2013.

 

35

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Goodwill, in the amount of R$33,133, is based on expected future profitability and annually tested for impairment. As of December 31, 2013, impairment test did not identify the need of adjustments to the goodwill amount. The assumptions adopted in the calculation of the recoverable amount through the projection of cash flows were based on the analysis of their performance over the past years, analysis and expectations of growth of the operating market, besides Management’s expectations and strategies. Projected amounts were presented in real terms, i.e., they did not consider future inflation effects, and cash flows from operating activities were projected from January 1, 2014 to December 31, 2023. As of December 31, 2013, no impairment indicators were identified for the aforementioned goodwill.

In order to calculate the recoverable amounts, the Company considered the present value of perpetuity of the cash flows for the last year of projection. The discount rate used to calculate the present value of projected cash flows was 9.77% p.a., corresponding to the CDI rate in December 2013 - Source: Focus Bulletin issued by the Central Bank of Brazil.

 

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14	PROPERTY, PLANT AND EQUIPMENT

 

		Land				Buildings and construction				Machinery and equipment				Plants				Construction in progress				Other tangible assets				Total
Cost of property, plant and equipment, gross
As of December 31, 2011			15,108				112,812				818,189				9,379				73,404				9,409				1,038,301
Additions							245				13,409				274				158,678				355				172,961
Currency gain (loss) on foreign currency translation			226				1,533				10,658				2				2,885				99				15,403
Write-offs							(1	)			(97	)											(19	)			(117	)
Transfers			5,046				24,440				99,225				652				(129,752	)			389
As of December 31, 2012			20,380				139,029				941,384				10,307				105,215				10,233				1,226,548
Additions							1,653				17,588				1,377				12,136				1,143				33,897
Currency gain (loss) on foreign currency translation			403				4,696				23,145				35				9,720				25				38,024
Write-offs											(316	)			(256	)							(14	)			(586	)
Transfers							8,970				112,109								(121,885	)			806
As of December 31, 2013			20,783				154,348				1,093,910				11,463				5,186				12,193				1,297,883
Accumulated depreciation:
As of December 31, 2011							(18,691	)			(328,874	)			(4,403	)							(5,628	)			(357,596	)
Depreciation							(3,677	)			(26,685	)			(650	)							(900	)			(31,912	)
Write-offs																							8				8
As of December 31, 2012							(22,368	)			(355,559	)			(5,053	)							(6,520	)			(389,500	)
Depreciation							(4,622	)			(34,415	)			(745	)							(1,034	)			(40,816	)
Write-offs							—				187				93								5				285
As of December 31, 2013							(26,990	)			(389,787	)			(5,705	)							(7,549	)			(430,031	)
Property plant and equipment, net:
As of December 31, 2011			15,108				94,121				489,315				4,976				73,404				3,781				680,705
As of December 31, 2012			20,380				116,661				585,825				5,254				105,215				3,713				837,048
As of December 31, 2013			20,783				127,358				704,123				5,758				5,186				4,644				867,852

 

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As allowed by IFRS 1, the Company adopted the deemed cost to determine the fair value of property, plant and equipment, whose carrying amount was substantially lower than its fair value.

The appraisal was carried out by an independent engineering company specialized in appraising assets, in accordance with the standards and requirements of the Brazilian Association of Technical Standards (ABNT).

The adjustment in the consolidated balance sheet as of January 1, 2009, which was made based on the appraisal report and reviewed by Management, totaled R$302,157. Depreciation on adjustments to the fair value in the periods ended December 31, 2013 and December 31, 2012 was R$15,523 for each period, deferred income tax and social contribution were realized on the depreciation amount of R$5,278.

Depreciation for the period ended December 31, 2013, allocated to the consolidated cost of revenues, totals R$36,025 (R$25,337 as of December 31, 2012), and operating expenses total R$4,791 (R$6,575 as of December 31, 2012).

In order to expand its production capacity, the Company has been investing in the acquisition of new machinery in Statesville plant (13th machinery), so that advances were made in line item “Constructions in progress”.

The amount of borrowing costs capitalized during 2013 amounts to R$1,036 (R$2,928 in 2012) and the capitalization rate used is 2.57% p.a. in 2013 (1.93% p.a. in 2012).

 

15	TRADE PAYABLES

 

		December 31, 2013				December 31, 2012
Trade payables			59,975				43,390
Total			59,975				43,390

As of December 31, 2013, the average payment period is 17 days (30 days as of December 31, 2012). The Company implements their financial risk management policies to ensure that all obligations are paid in accordance with the originally agreed terms and conditions.

 

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16	BORROWINGS AND FINANCING

 

Type

Finance charges

Currency

Maturities

December 31, 2013

December 31, 2012

Financing of a nonwoven manufacturing machinery – Kami 9 machine (a)

(a)

LIBOR +

U.S. dollar

Interest: Semiannual through 2013

312

1.25% p.a.

Principal: semiannual from 2009 to 2013

14,547

Export credit notes

(b)

8% p.a.

Real

Interest: quarterly through 2016

537

Principal: by 2016

50,000

EXIM-PSI

(c)

9% p.a.

Real

Interest: quarterly through 2013

554

Principal: May 2013

50,000

Prepayment

(d)

4.85% p.a.

U.S. dollar

Interest: semiannual through 2018

1,470

766

Principal: semiannual from 2013 to 2018

111,500

106,989

Machinery financing

(e)

LIBOR + 0.85% p.a.

U.S. dollar

Interest: semiannual through 2016

1

1

Principal: semiannual through 2016

9,482

11,769

(f)

LIBOR + 1.25% p.a.

U.S. dollar

Interest: semiannual through 2023

826

580

Principal: semiannual through 2023

84,698

73,121

Financing of USA plant

(g)

Libor + 4%

U.S. dollar

Interest: semiannual through 2013

166

Principal: semiannual through 2013

10,218

(h)

Libor + 2.45%

U.S. dollar

Interest: semiannual through 2015

60

Principal: semiannual through 2015

17,530

(i)

Libor + 3.91%

U.S. dollar

Interest: semiannual through 2014

66

60

Principal: semiannual through 2014

2,376

3,832

(j)

Libor + 3.08%

U.S. dollar

Interest: semiannual through 2016

116

143

Principal: semiannual through 2016

13,177

16,093

(k)

LIBOR + 2.50%

U.S. dollar

Interest: semiannual through 2016

32

99

Principal: 04/03/2016

11,713

10,217

(l)

SIFMA

U.S. dollar

Interest: monthly through 2030

571

4

Principal: 2030

20,176

18,225

 

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		(m)		LIBOR + 1.50%		U.S. dollar		Interest: semiannual through 2020			439				489
								Principal: semiannual through 2020			85,847				86,333
		(n)		LIBOR + 1.20%		U.S. dollar		Interest: semiannual through 2022			3				500
								Principal: semiannual through 2022			79,628				61,828
		(o)		LIBOR + 2.85%		U.S. dollar		Interest: semiannual through 2017			666				636
								Principal: 07/01/2017			46,381				40,277
		(p)		LIBOR + 3.05%		U.S. dollar		Interest: semiannual through 2014			201				141
								Principal: 08/21/2014			11,712				10,217
		(q)		LIBOR + 3.05%		U.S. dollar		Interest: semiannual through 2015			301
								Principal: 01/30/2015			15,227
		(r)		LIBOR + 2.10%		U.S. dollar		Interest: semiannual through 2015			61
								Principal: 01/28/2015			6,103
		(s)		LIBOR + 2.95%		U.S. dollar		Interest: semiannual through 2015			58
								Principal: 04/07/2015			7,028
		(t)		LIBOR + 2.60%		U.S. dollar		Interest: semiannual through 2015			49
								Principal: 06/18/2015			12,884
		(u)		LIBOR + 2.10%		U.S. dollar		Interest: semiannual through 2015			11
								Principal: 07/01/2015			4,685
		(v)		LIBOR + 2.75%		U.S. dollar		Interest: semiannual through 2015			21
								Principal: 12/02/2015			12,884
Total											590,930				535,707
Current portion											83,694				112,361
Noncurrent portion											507,236				423,346
											590,930				535,707

 

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a)	The export prepayment contract (machinery financing) is pledged by promissory notes in the amount of US$36,5 million, subject to interest and exchange rate changes, as set forth in the Credit Agreement entered into by the parties. The agreement was settled in July 2013.

b)	On February 8, 2013, the Company entered into a NCE – Export Credit Note transaction with Banco Itaú in the amount of R$50,000, at a fixed BRL rate + 8% p. a., together with a swap by the same amount, where Company receives BRL + 8% p. a. and pays 98.70% of CDI.

c)

On November 28, 2011, the Company entered into an agreement with Banco Votorantim to raise a loan using funds from the National Bank for Economic and Social Development (BNDES), through the “BNDES-Exim” program, under the “BNDES-Exim Pré-Embarque PSI” category, in the amount of R$50,000. The loan proceeds are used by the Company in the manufacture and export of products included in Group II of Circular Letter 31/2007 of July 30, 2007 issued by the BNDES. Interest was calculated at the rate of 9% p.a., including quarterly payments up to the final maturity of the principal. The agreement was settled on May 15, 2013.

d)

On December 26, 2011, the Company entered into a loan agreement Banco Itaú in the amount of US$52,4 million, with a two-year grace period and semiannual payments through September 26, 2018. The interest rate negotiated 4.85% p.a. In order to hedge this transaction against the fluctuations of the U.S. dollar, the Company contracted a swap transaction in the same amount, where Company receives in USD + 4.85% p.a. and pays in CDI + 1.70% p.a..

e)

The amount of R$9,483 refers to the loan agreement entered into between Isofilme and the German bank Kreditanstalt für Wiederaufbau (KFW), signed on July 27, 2005, for the purchase of machinery for the manufacture of nonwoven fabrics, bearing interest rate equivalent to the LIBOR fluctuation + 0.85% p.a., with semiannual payment of principal and interest through 2016.

f)

The amount of R$85,915 refers to the installments released, out of the total of US$36,5 million, contracted by Isofilme from Banco HSBC, collateralized by German agency Euler Hermes Kreditversicherungs AG. The amount was used to finance a machine set up in Pouso Alegre, Minas Gerais. The interest rate contracted corresponds to LIBOR fluctuation + 1.25% per annum, with semiannual payment of principal and interest.

g)	The financing agreement entered into among Providencia USA Inc. and Banco HSBC, on September 19, 2008, and used to finance the plant in the United States, was settled on August 26, 2013.

h)

On November 16, 2010 and December 31, 2010, loans totaling US$10,1 million were raised from HSBC to finance the working capital requirements of the plant in the United States, These loans mature on April 24, 2015 and November 25, 2015, and bear average interest rate equivalent to LIBOR fluctuation + 2.45% p.a., with semiannual payment. The agreement was settled on December 17, 2013.

 

41

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i)

On March 5, 2012, the Company entered into with HSBC a loan agreement in the amount of US$2,5 million to finance working capital requirements of the plant in the United States. The loan will mature on August 26, 2014; principal and interest will be paid semiannually and bears interest equivalent to LIBOR fluctuation + 3.91% p.a..

j)	On March 4, 2011 and July 7, 2011, US$9 million transactions were contracted from Banco Itaú to finance the US plant’s working capital. These transactions mature on March 4, 2016 and December 10, 2016, subject to semiannual interest based on LIBOR rate + 3.08% p.a., on average.

k)	On April 13, 2011, a loan contract of US$5 million was entered into with Banco do Brasil to finance the working capital requirements of the plant in the United States. This loan matures on April 3, 2016, and bears interest rate equivalent to LIBOR fluctuation + 2.50% p.a., with semiannual payment.

l)

On May 12, 2010, US$9,1 million was raised to finance the construction of the plant in the United States, The transaction, called as Recovery Zone Facility Bonds, consists of the issue of US government bonds of the county of Iredell, managed by a financial agent (Wells Fargo Bank), and collateralized by HSBC, bearing interest calculated on a weekly basis and paid on a monthly basis in accordance with the SIFMA (securities Industry and Financial Markets Association) rate. The SFIMA rate as of December 31, 2013 was 0.27% p.a.

m)

The amount of R$86,286 refers to the installments released out of the total loan contract amounting to US$51,8 million, entered into on February 12, 2010 between Providencia USA, Inc., and HSBC, collateralized by the German agent Euler Hermes Kreditversicherungs AG. The funds were used to finance the purchase of the machinery installed in the United States. The loan bears interest equivalent to LIBOR fluctuation + 1.50% p.a., with semiannual payment of interest and principal.

n)

The amount of R$79,631 refers to the installment released out of the total loan contract amounting to US$37,5 million entered into on August 8, 2011 between Providencia USA. Inc., and HSBC, collateralized by the German agent Euler Hermes Kreditversicherungs AG, to finance the purchase of the machinery to be installed in the United States, which is released as the machinery and its components are shipped. The loan bears interest equivalent to LIBOR fluctuation + 1.20% p.a. with semiannual payment of interest and principal.

o)	On July 27, 2012, a US$20 million transaction was contracted from Banco do Brasil to finance the purchase of the plant in the United States. The transaction will mature on December 29, 2017, subject to semi-annual interest based on LIBOR rate + 2.85% per year.

 

42

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p)	On August 16, 2012, a US$5 million transaction was contracted from Banco Bradesco to finance the US plant’s working capital. The transaction will mature on August 21, 2014, subject to semi-annual interest based on LIBOR rate + 3.05% per year.

q)	On January 30, 2013, a US$6,5 million transaction was contracted from Banco Bradesco to finance the US plant’s working capital. The transaction will mature on January 30, 2015, subject to semi-annual interest based on LIBOR rate + 3.05% per year.

r)	On February 6. 2013, a US$2,6 million transaction was contracted from Banco do Brasil to finance the US plant’s working capital. The transaction will mature on January 28, 2015, subject to semi-annual interest based on LIBOR rate + 2.10% per year.

s)	On April 7, 2013, a US$3,0 million transaction was contracted from Banco Bradesco to finance the US plant’s working capital. The transaction will mature on April 7, 2015, subject to semi-annual interest based on LIBOR rate + 2.95% per year.

t)	On September 18, 2013, a US$5,5 million transaction was contracted from Banco Bradesco to finance the US plant’s working capital. The transaction will mature on September 18, 2015, subject to semi-annual interest based on LIBOR rate + 2.60% per year.

u)	On July 9, 2013, a US$2,0 million transaction was contracted from Banco do Brasil to finance the US plant’s working capital. The transaction will mature on July 1, 2015, subject to semiannual interest based on LIBOR rate + 2.10% p.a.

v)	On December 11, 2013, a US$5,5 million transaction was contracted from Banco Santander to finance the US plant’s working capital. The transaction will mature on December 2, 2015, subject to semi-annual interest based on LIBOR rate + 2.75% per year.

The noncurrent portion matures as follows:

 

		December 31, 2013				December 31, 2012
2014							73,152
2015			123,365				60,534
2016			121,703				61,676
From 2017 to 2030			262,168				227,984
			507,236				423,346

Companhia Providência Indústria e Comércio has an international letter of guarantee issued by HSBC to collateralize the amount of US$9,1 million related to the funds raised through the Recovery Zone Facility Bond.

 

43

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The funds for the exclusive financing of machinery are collateralized by the financed machinery at the remaining balance of the financing. As of December 31, 2013, this amount represents R$260,924, of which R$165,917 refers to the machinery in the plant in the United States and R$95,007 refers to Isofilme’s machinery.

Domestic loans are not collateralized.

Abbreviations:

 

CDI		- Interbank Deposit Certificate
LIBOR		- London Interbank Offered Rate
NCE		- Export Credit Note
SIFMA		- Securities Industry and Financial Markets Association

Also with the objective of financing the construction and buildings and the working capital of the new plants, the Company has available credit lines totaling US$100 million from several financial institutions, bearing interest at rates ranging from Libor + 3% to Libor + 4.94% per annum. These funds will be released as the plants receiving the investments identify their cash requirements.

The carrying amounts of borrowings and financing their respective estimated fair values are as follows:

 

		Carrying amount								Fair value
		December 31, 2013				December 31, 2012				December 31, 2013				December 31, 2012
Borrowings and financing			590,930				535,707				576,566				539,201
			590,930				535,707				576,566				539,201

 

17	TAXES, FEES AND CONTRIBUTIONS PAYABLE

 

		December 31, 2013								December 31, 2012
		Current liabilities				Noncurrent liabilities				Current liabilities				Noncurrent liabilities
ICMS			419				154				472				218
PIS			10								121
COFINS			22								542
IRRF			559								578
Social security contribution on gross revenues			454								315
IRPJ and CSLL			523								614
Property tax – Statesville			2,324								1,395
Other taxes			451								423
			4,762				154				4,460				218

 

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18	PROVISIONS FOR TAX, LABOR AND CIVIL RISKS

The Company is a party to ongoing labor, tax and civil lawsuits at the administrative and judicial levels.

The amounts to be accrued are calculated based on the amounts effectively involved and on the opinion of the outside and in-house legal counsel in charge of the lawsuits. Provisions are only recognized for lawsuits whose likelihood of loss is assessed as probable.

The table below shows the provisions for probable losses and escrow deposits as of December 31, 2013:

 

		December 31, 2013								December 31, 2012
		Provision				Deposits				Provision				Deposits
Labor			1,037				339				977				23
Civil			25								25
Tax							33								33
Total			1,062				372				1,002				56
Current			250								427
Noncurrent			812				372				575				56

The changes in the provisions during the period ended December 30, 2013 were as follows:

 

Balance at December 31, 2012			1,002
Additions			457
Write-offs			(397	)
Balance at December 31, 2013			1,062

 

(a)

Labor lawsuits

In general, labor claims address to overtime, health hazard bonus and/or hazardous duty premium, salary equalization, vacation pay, pain and suffering resulting from accidents, occupational sick and joint liability involving service providers, among others.

 

(b)

Civil lawsuits

In general, civil claims address the usual matters inherent to the Company’s business and refer mainly to indemnity claims, collection of receivables, matters related to the declaration of undue collection of an execution instrument and suspension of protest.

 

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(c)

Tax lawsuits

As of December 31, 2013, Isofilme is a party to a lawsuit relating to ICMS (State VAT) on electric power made available but not used.

On April 15, 2013, Decree 46215, which regulates the relinquishment of payment of ICMS on power not effectively used, was published in the Official Gazette of the State of Minas Gerais.

 

(d)

Possible contingencies not accrued

The Company is a party to tax, labor and civil lawsuits whose likelihood of loss is assessed by Management and its legal counsel as possible; no provision was recorded for these lawsuits, as shown below:

 

		December 31, 2013				December 31, 2012
Labor			403				874
Civil			1,943				3,054
Tax*			154,904
			157,250				3,928

 

*

These lawsuits and administrative proceedings include two tax deficiency notices relating to the determination of the Companhia Providência Indústria e Comércio and Isofilme’s taxable income for 2007 and 2008, drawn up in August and November 2013, which are being timely challenged at administrative level.

 

(e)

Former controlling shareholders

As of December 31, 2013, the amounts relating to lawsuits under the responsibility of the former controlling shareholders, whose risks of loss are assessed by Management as possible and probable, amount to R$2,327 (R$2,442 as of December 31, 2012).

 

19	DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION LIABILITIES

Deferred tax liabilities are recorded to cover the realization of temporary differences and are stated on a net basis. They are broken down as follows:

 

		2013				2012
Liabilities
Income tax (IR) and Social contribution (CS)
Deferred on the effects of Laws 11638 and 11941 (see Note 11)			39,609				37,785
Deemed cost of property, plant and equipment			2,699				2,853
			42,308				40,638
Income tax and social contribution rate			34	%			34	%
Total deferred income tax and social contribution, net			14,385				13,817

 

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In subsidiary Isofilme, temporary differences that give rise to deferred income tax and social contribution liabilities refer mainly to the tax amortization of the goodwill on the acquisition of subsidiary Isofilme.

 

20

EQUITY

 

(a)

Capital

As of December 31, 2013, capital totaled R$409,003, represented by 80,041,132 book-entry, registered ordinary shares, without par value, held as follows:

 

Controlling shareholders and related parties
FIP Volluto			13,952,203				17.4	%
Investidores Institucionais II – Fundo de Investimento em Participações			10,074,423				12.6	%
FIP Bssf II			9,417,737				11.8	%
FIP Brasil Equity II			6,278,492				7.8	%
Banco Espírito Santo S.A.			5,861,269				7.3	%
Boreal Fundo de Investimentos em Participações*			4,651,081				5.8	%
Espírito Santo Capital – Sociedade de Capital de Risco S.A.			1,953,757				2.4	%
Fundo de Investimentos em Partic. C.A.			1,162,683				1.5	%
Fip Ggpar (Gov. e Gestão Investimentos Ltda.)			970,724				1.2	%
Boreal Ações III Fia*			2,690,700				3.4	%
Total controlling shareholders and related parties			57,013,069				71.2	%
Management
Executive Board			52,009				0.1	%
Board of Directors			4				0.0	%
Supervisory Board			4,000				0.0	%
Total Management			56,013				0.1	%
Free float shares
Sul América Invest. Distrib. de Títulos e Valores Mobiliários S.A.**			4,041,400				5.0	%
Victoire Brasil Investimentos Administração de Recursos Ltda.***			4,380,000				5.5	%
Others			14,532,350				18.2	%
Total free float shares			22,953,750				28.7	%
Treasury shares			18,300				0.0	%
Total treasury shares			18,300				0.0	%
Total shares			80,041,132				100.0	%

 

*	Shareholders related to Boreal Fundo de Investimentos em Participações.

 

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**	Sul América FI em Ações, Sul América Dividendos FI em Ações and NBF Sulamérica Master Prev FIM, three investment funds managed by Sul América Investimentos Distribuidora de Títulos e Valores Mobiliários S.A, with ownership interest equal to or above 5% of the Company’s capital.

***

Victoire Brazil Small Cap. Fund. SP, Victoire Small Cap. Ações FI., Victoire Dividendos FIA., Victoire Brazil Fund. LLC. and VBI Exclusivo Ações Fundo de Investimento (all managed by Victoire Brasil Investimentos Administração de Recursos Ltda.) exceeded the percentage of 5% of total common shares issued by Companhia Providência Indústria e Comércio

Under the Company’s bylaws, the Company is authorized to increase its capital up to 4,050,000 (four million and fifty thousand) book-entry, registered ordinary shares, with no par value, regardless of any amendment to the bylaws.

 

b)

Stock options

Under the Company’s bylaws, as approved by the Board of Directors and pursuant to the guidelines for the structuring of the Stock Option Plan approved at the Annual General Meetings held on May 11, 2007 and September 10, 2010, the Company is authorized to grant stock options or subscription warrants, with no preemptive rights for existing shareholders, executives and senior employees of the Company and its subsidiaries.

The guidelines adopted to grant stock options are set by the Board of Directors, which may grant stock options to the persons indicated. Stock options to be granted under these guidelines will correspond to, on any time, up to 3% of total shares issued by the Company. The terms and conditions, including the price per share, are set by the Board of Directors on grant or concession date. Pursuant to the provisions of Article 171, paragraph 3 of Brazilian Corporation Law, shareholders will not be entitled to any preemptive rights over the stock option term.

Currently, one stock option plan is effective (the 2^nd Stock Option Plan). The plan has three vesting periods to exercise the underlying options: After the lapse of 12 months, the plan’s participant is entitled to acquire 20% of the shares under the option; after the lapse of 24 months, the plan’s participant is entitled to acquire 30% of the shares under the option; and, after the lapse of 36 months, the plan’s participant is entitled to acquire the remaining 50% of the shares under the option. The plan expires within 7 (seven) years.

The recognition in the financial statements begins from the month in which the Company starts to receive the services related to the stock option plan.

The vesting of the stock option is contingent on the employee remaining in the Company.

 

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Up to December 31, 2013, 130,800 shares relating to the plan approved on May 30, 2011 were exercised. The shares delivered by the Company were acquired between September 26, 2011 and September 25, 2012 and were recorded as treasury shares. The effect for the year in the amount of R$162 of the options exercised was recorded as Capital Reserve. Options corresponding to 175,000 shares were also cancelled due to the withdrawal of persons eligible to the plan.

Below are details of the effective plan:

 

Approval date		Number of shares granted		Exercise price		Maturity date		Fair value		% of capital
05/30/2011		829,000		6.10		05/30/2018		1,510			1.04	%
05/25/2012		460,000		6.35		05/25/2019		711			0.58	%

The assumptions used in the calculation on the grant date fair value were as follows:

 

Approval date		Number of shares granted		Annual risk-free interest rate				Total term (in years)		Expected annual volatility				Option’s fair value as of the granting date
05/30/2011		829,000			12.15	%		3			52.86	%		1.82
05/25/2012		460,000			8.79	%		3			48.56	%		1.57

If options are fully exercised by their holders, the interest held by Company’s current shareholders will be diluted by 1.21%. Such dilution was calculated based on the ratio between (i) the total number of shares under the stock option plan in effect, and (ii) the total number of shares issued by the Company as of December 31, 2013, plus the total number of shares under the stock option plan, i.e.:

“Dilution as of 12/31/2013” = 983,200 / (80,041,132 + 983,200) x 100 = 1.21%

 

Changes in options		2013				2012
Balance at the beginning of the year			1,289,000				829,000
Options granted							460,000
Options exercised			(130,800	)
Options forfeited			(175,000	)
Balance at the end of the year			983,200				1,289,000
Exercise price – plan approved on 5/30/2011			6.10				6.10
Exercise price - plan approved on 5/25/2012			6.35				6.35
Expiry date – plan approved on 5/30/2011			05/30/2018				05/30/2018
Expiry date - plan approved on 5/25/2012			05/25/2019				05/25/2019

 

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(c)

Capital reserves

As of December 31, 2013, the capital reserve balance of R$12,425 (R$11,878 as of December 31, 2012) is comprised of a goodwill reserve recognized on the issuance of shares, in the amount of R$10,865 (R$10,703 as of December 31, 2012), as well as of a special reserve recognized to meet commitments from the new stock option plan, as mentioned in Note 20 (b), whose balance amounts to R$1,560 as of December 31, 2013 (R$1,175 as of December 31, 2012). A reversal of R$206 was made during the year due to forfeiture of stock options as described in Note 20 (b).

 

(d)

Treasury shares

 

Changes in treasury shares		Amount				Number
Balance at December 31, 2012			813				149,100
Stock Option Program			(713	)			(130,800	)
Balance at December 31, 2013			100				18,300

On September 26, 2011, the Company launched the third Share Buyback Program in connection with the Company’s shares, which expired on September 25, 2012.

In this period, the Company bought back 149,100 shares, at the amount of R$813. Through December 31, 2013, the Company sold 130,800 shares due to the exercise of options under the Stock Option plan.

 

(e)

Profit reserves

 

		December 31, 2013				December 31, 2012
Legal reserve			11,086				9,740
Reserve for future investments			86,597				68,518
Accrued proposed additional dividends							33,789
Total			97,683				112,047

The legal reserve is recorded at 5% of net profit, before any allocation, up to 20% of capital.

The reserve for future investments was proposed by Management and approved at the Shareholders’ Meeting to finance the Company’s investment project, which involves setting up new machinery.

 

(f)

Dividends

Shareholders are entitled to a mandatory minimum dividend of 25% of net profit, considering mainly the adjustments to the amounts allocated to the legal reserve in the year.

 

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Dividends were calculated as follows:

 

		December 31, 2013				December 31, 2012
(a) Calculation of mandatory minimum dividends:
Net profit for the year			26,920				45,071
Legal reserve - 5%			(1,346	)			(2,254	)
Basis for calculation of minimum dividends			25,574				42,817
Mandatory minimum dividends (25%)			6,394				10,704
(b) Adjusted dividend calculation basis
Net profit for the year			26,920				45,071
Legal reserve - 5%			(1,346	)			(2,254	)
Reversal of capital reserve (stock option)			206
Exclusion of the effect of the depreciation of deemed cost on the net profit of the year			10,245				10,245
Adjusted calculation base			36,025				53,062
(-) Mandatory minimum dividends (25%)			6,394				10,704
(=) Proposed additional dividends							42,358
			6,394				53,062
Dividend paid (R$0.22 per share in 2013 and R$0.24 in 2012)			(17,946	)			(19,273	)
Proposed additional dividend (equity)							33,789
Dividends per share						R$	0.42
Total dividend (paid + proposed)
Dividends per share		R$	0.22			R$	0.66

After allocation of the legal reserve, based on the proposal of the Board of Directors to be approved in an Annual General Meeting, the remaining balance of retained earnings as of December 31, 2013 (R$18,079) was allocated to Reserve for future investments.

With respect to the dividend policy, the Company will keep the policy set forth in the bylaws.

 

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(g)

Basic and diluted earnings per share

Basic and diluted earnings per share were calculated based on the profit attributable to the Company’s owners and noncontrolling interests in the period, as detailed in the table below. There were no changes in the number of shares issued, and the calculation of the number of dilutive shares made by the Company did not show any significant results that might cause earnings per share to be changed. Accordingly, diluted earnings per share did not present any difference that could be material for reporting purposes, that is, diluted earnings per share were virtually equal to basic earnings per share:

 

		2013				2012
Net profit for the period			26,920				45,071
Number of ordinary shares (thousands)			80,010				79,892
Earnings per share – basic and dilutive			0.34				0.56

 

(h)

Valuation adjustments to equity

 

		2013				2012
Deemed cost of property, plant and equipment (a)			148,198				158,443
Cumulative translation adjustments (b)			(1,659	)			(581	)
Total			146,539				157,862

Changes in the period refer to:

 

(a)	Deemed cost of property, plant and equipment: Realization of net income tax depreciation, in the amount of R$10,245, in the periods ended December 31, 2013 and December 31, 2012;

(b)	Accumulated translation adjustments: Exchange rate changes on the investment made in subsidiary Providencia USA Inc. (negative), in the amount of R$1,078.

 

21

REVENUE

The reconciliation between gross revenue and net revenue is as follows:

 

		2013				2012
Gross revenue			896,231				702,610
Sales returns			(26,716	)			(19,504	)
Taxes on sales			(87,513	)			(74,472	)
Net revenue			782,002				608,634

 

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22	EXPENSES BY NATURE AND COST OF REVENUES

The Company’s income statement is presented based on a classification of the expenses according to their function. Information on the nature of these expenses recognized in the income statement is shown below:

 

		2013				2012
Cost of revenues			(578,579	)			(423,055	)
Selling expenses
Logistics			(35,226	)			(29,670	)
Commissions			(3,662	)			(2,119	)
Other			(2,421	)			(2,807	)
Total selling expenses			(41,309	)			(34,596	)
Administrative expenses
Personnel			(28,805	)			(23,589	)
Management			(5,657	)			(6,700	)
Employee benefit expense			(10,715	)			(9,195	)
Utilities			(2,476	)			(1,247	)
Services rendered			(10,360	)			(7,110	)
Travel			(2,855	)			(2,282	)
Taxes and fees			(1,717	)			(892	)
Depreciation and amortization expenses			(9,058	)			(6,575	)
Other			(6,266	)			(4,444	)
Total administrative expenses			(77,909	)			(62,034	)
Other income (expenses)							939
Provision for risks *			(2,717	)			(27	)
Other			(591	)			(833	)
Total other income (expenses)			(3,308	)			79
Total			(701,105	)			(519,606	)

 

*	Includes the amount of R$2,631 relating to payments made to former owners which, by contract were entitled to reimbursement of certain tax recoveries relating to period prior to 2007, and was settled on December 12, 2013.

 

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23	FINANCE INCOME AND EXPENSES

 

(a)

Finance income

 

		2013				2012
Interest			748				1,635
Income from derivative transactions			846				7,691
Interest from short-term investments			4,334				5,938
Other			100				111
			6,028				15,375

Changes in finance income in the period ended December 31, 2013, compared to the same period in 2012, are due mainly to the effect of exchange rate changes on assets denominated in foreign currency and the reduction in the earnings on short-term investments due to the decrease in the amounts invested and decrease in income from derivative transactions.

Revenues from derivatives refer to income (loss) on swap transactions, forward exchange contracts and U.S. dollar option contracts.

 

(b)

Financial expenses

 

		2013				2012
Interest			(32,893	)			(21,828	)
Exchange losses			(5,003	)			(3,704	)
Expenses from derivative transactions			(5,085	)			(8,205	)
Other			(2,412	)			(2,071	)
			(45,393	)			(35,808	)

The changes in financial expenses for the period ended December 31, 2013, compared to the same period in 2012, refer mainly to addition of interest due to the increase in interest rates in the period, reversal of interest on recoverable taxes and to the effect of rate changes in foreign currency-denominated liabilities.

Expenses on derivatives refer to income (loss) on swap transactions, forward exchange contracts and U.S. dollar option contracts.

 

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24	INCOME TAX AND SOCIAL CONTRIBUTION EXPENSES

 

(a)

Reconciliation of the effective rate of taxes

 

		2013				2012
Income before income tax and social contribution			41,532				68,595
Statutory tax rate (income tax and social contribution)			34	%			34	%
Income tax and social contribution expenses at statutory rates			(14,121	)			(23,322	)
Tax effects from (additions) deductions:
Permanent items, net			(491	)			(202	)
Amounts charged to profit or loss			(14,612	)			(23,524	)
Current			(2,189	)			(2,399	)
Deferred			(12,423	)			(21,125	)
Amounts charged to profit or loss			(14,612	)			(23,524	)

 

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(b) Statement of changes in deferred income tax and social contribution, net, as of December 31, 2013

 

		2012				Changes				2013
Tax loss carryforwards			201,307				32,408				233,715
Tax losses – USA			9,590				(2,642	)			6,948
1) Tax effects on deferred income tax and social contribution assets			72,185				9,988				82,173
Temporary difference subject to statutory rate of 34%:
Temporary additions			17,548				(305	)			17,243
Depreciation			(82,397	)			(27,634	)			(110,031	)
Other			9,563				5,373				14,936
Temporary difference subject to statutory rate of 9%:
Provisions			1,423								1,423
2) Tax effects on deferred income tax and social contribution assets			(18,670	)			(7,545	)			(26,215	)
Deferred IRPJ – goodwill			55,637				(13,909	)			41,728
Deferred CSLL – goodwill			20,029				(5,007	)			15,022
Deferred IRPJ - deemed cost			(59,303	)			3,841				(55,462	)
Deferred CSLL - deemed cost			(21,349	)			1,383				(19,966	)
3) Effect on deemed cost and goodwill on deferred income tax and social contribution			(4,986	)			(13,692	)			(18,678	)
Total tax effects on deferred income tax and social contribution assets (1+2+3)			48,529				(11,250	)			37,279
Current income tax and social contribution							(2,189	)
Temporary and permanent differences – subsidiaries (liabilities)							(1,173	)
Total income tax and social contribution recorded in profit or loss							(14,612	)

 

25	PRIVATE PENSION PLAN

In December 2009, the Company contracted with Banco Itaú a defined contribution private pension plan called ProvidenciaPrev, whose contributions are made monthly and voluntarily by the participants and also by the Company, in accordance with two groups of salary ranges, based on the maximum contribution required by the Government Social Security System.

The Company, as the sponsor, does not assume any financial obligation for the cost of past services.

The first group includes all employees whose base salary exceeds the ceiling for the social security contribution. The Company’s contributions are equal to 100% of the employees’ basic contributions.

 

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The second group is comprised of the other employees and the Company’s contributions, corresponding to three times the salary of an employee, will be made on the date of eligibility to the benefit, which is related to employee contract termination on entity’s decision.

The amount of the contribution made by the Company for the period ended December 31, 2013 was R$521 (R$355 in the same period of 2012), recorded in profit or loss under “Personnel expenses”.

 

26

INSURANCE

The Company takes insurance for assets at amounts considered sufficient by management to cover probable losses, taking into account the nature of their activities. The insurance policies are quoted with several insurance companies, are effective and the premiums were duly paid. The Company manage risks with the objective of minimizing probable risks and claims.

As of December 31, 2013 and December 31, 2012, the Company had the following insurance policies:

 

		Insured amounts
		2013				2012
Line
Property
Named perils and operational risks and loss of profits			929,136				647,892
Comprehensive civil liability
Commercial establishments			105,264				82,864
Civil liability
D&O			35,227				33,199
International transportation
Import and export			13,275				6,831
Total			1,082,902				770,786

The insurance coverage can be summarized as follows:

 

•

Property (plants) - guarantees indemnity for electrical damages, fire, loss of profits, machinery shutdown, robbery/theft of assets, twist, hurricane, cyclones, tornadoes, collision of land vehicles and aircraft crashes. Includes insurance of forklift trucks and vehicles that guarantees indemnity for losses on, and property damages to, the assets;

 

•

comprehensive civil liability insurance for manufactured products and internal operations, as well as employer risks and contingent risks of motor vehicles;

 

•

civil liability insurance for Directors and/or Officers (D&O);

 

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•

transport insurance - insures any and all assets and/or goods/raw materials inherent in the line of activity and transported under the companies’ responsibility; and,

 

•

warranty insurance - insures, if necessary, obligations undertaken by the Company to various public or private agencies, related to prepayments, performance of contractors, suppliers or service providers, bids, proper operation and payment retention.

The increases in the insured amounts refer basically to the inclusion of a new machinery in Statesville, United States, plant and also arises out of the work performed by Management to increase the insured amounts without increasing the cost of insurance.

 

27	MANAGEMENT COMPENSATION

The Extraordinary and General Shareholders Meeting of April 01, 2013 approved the new management compensation proposal for the current year, in the annual amount of up to R$7,050, which will be allocated to management members as set forth in article 10, paragraph 1, of the Company’s bylaws.

As required by IAS 24 - Related Parties Disclosures, in the year ended December 31, 2013, key management personnel’s compensation was as follows:

 

		2013				2012
Compensation			5,066				6,700
Share-based compensation			547				814
			5,613				7,514

 

28	NON-CASH TRANSACTIONS

Through December 31, 2013, the Company borrowed R$7,707 (R$96,408 as of December 31, 2012), which was used to purchase property, plant and equipment items, and as such this transaction is not reflected in the consolidated statement of cash flows.

 

29	COMMITMENTS

The Company has a property lease agreement, classified as operational leasing, maturing on May 31, 2015, which entails a monthly commitment of R$100.

 

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30	EVENT AFTER THE REPORTING PERIOD

On January 27, 2014, the Company disclosed a Material Event Notice about the execution of a purchase and sale agreement between PGI Polímeros do Brasil S.A. and Polymer Group, Inc., and some specific Selling Shareholders which hold 57,013,069 common shares issued by the Company, corresponding to approximately 71.25% of the total shares issued, less treasury shares, and, therefore, the Company’s shareholding control. The purchase price of all Shares Sold is R$555,877,422.75 (five hundred and fifty five million, eight hundred and seventy seven thousand, and seventy five cents).

PGI Brasil is a holding Company, subsidiary of PGI, a North American Company, engaged in the manufacture and sale of nonwoven.

The closing of the transaction will occur after the verification and satisfaction of specific suspensive conditions that are usual in similar transactions, including the prior approval by the antitrust authorities in Brazil and the United States.

After the closing of the transaction, the new controlling shareholder will perform a public offering of shares, as requested by the Company’s bylaws and by regulation applicable to the Company.

 

 

 

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