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8/14/2019 3Q13 Quarterly Financial Reports
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(Convenience Translation into English from theOriginal Previously Issued in Portuguese)
Mills Estruturas e Serviosde Engenharia S.A.
Presentation of Interim Financial Informationfor the Quarter Ended September 30, 2013 andReport on Review of Interim FinancialInformation
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION
To the Board of Directors and Shareholders ofMills Estruturas e Servios de Engenharia S.A.Rio de JaneiroRJ
Introduction
We have reviewed the accompanying interim financial information, of Mills Estruturas eServios de Engenharia S.A. (Company) included in the Interim Financial Information Form(ITR), for the nine month period ended September 30, 2013, which comprises the balance sheet
as of September 30, 2013 and the related statements of income and comprehensive income, forthe three and nine-month periods then ended and the statement of changes in equity andstatement of cash flows for the nine month period then ended, including the explanatory notes.
The companys management is responsible for the preparation of interim financial information inaccordance with technical pronouncement CPC 21 (R1) - Interim Financial Reporting and IAS34 - Interim Financial Reporting, issued by the International Accounting Standards Board(IASB), as well as for the presentation of such information in accordance with the standardsissued by the Brazilian Securities and Exchange Commission (CVM), applicable to the
preparation of Interim Financial Information (ITR). Our responsibility is to express a conclusionon this interim financial information based on our review.
Scope of review
We conducted our review in accordance with Brazilian and international standards on review ofinterim financial information (NBCTR 2410 and ISRE 2410 Review of Interim FinancialInformation Performed by the Independent Auditor of the Entity, respectively). A review ofinterim financial information consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other review procedures. A reviewis substantially less in scope than an audit conducted in accordance with the standards onauditing and consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly, we do not express anaudit opinion.
Conclusion on the interim financial information
Based on our review, nothing has come to our attention that causes us to believe that theaccompanying interim financial information included in the ITR referred to above was not
prepared, in all material respects, in accordance with technical pronouncement CPC 21(R1) andinternational standard IAS 34, applicable to the preparation of Interim Financial Information(ITR), and presented in accordance with the standards issued by the CVM.
Emphasis of Matter
Restatement of values corresponding to the three and nine months periods ended September 30,
2012
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Deloitte Touche Tohmatsu
2
As mentioned in Note 2.2, due to the adoption of the technical pronouncement CPC 31 - Non-current Assets Held For Sale and Discontinued Operations, the comparative values of the incomestatement, related to the periods of three and nine months ended September 30, 2012, have been
reclassified and are being restated as required by CPC 23 - Accounting Policies, changes inAccounting Estimates and Errors and CPC 26 (R1) - Presentation of Financial Statements. Ourconclusion does not contain changes related to this subject.
Other matters
Statements of value added
We have also reviewed the interim statement of value added (DVA), for the nine month periodended September 30, 2013, prepared under the responsibility of the Company's management, the
presentation of which is required by the standards issued by the CVM applicable to the
preparation of Interim Financial Information (ITR), and considered as supplemental informationfor IFRS, which do not require the presentation of DVA. This statement was subject to the samereview procedures described above, and, based on our review, nothing has come to our attentionthat causes us to believe that it was not prepared, in all material respects, consistently with theinterim financial information taken as a whole.
The accompanying interim financial information has been translated into English for the
convenience of readers outside Brazil.
Rio de Janeiro, November 6, 2013
DELOITTE TOUCHE TOHMATSU Antnio Carlos Brando de SousaAuditores Independentes Engagement Partner
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
BALANCE SHEETAS AT SEPTEMBER 30, 2013 AND DECEMBER 31, 2012(In thousands of Brazilian reais - R$) - Unaudited
Note 9/30/2013 12/31/2012ASSETS
CURRENT ASSETSCash and cash equivalents 3 45,735 44,200Marketable securities 4 - 159,606Trade receivables 5 174,125 194,778
Inventories 6 30,939 26,938Recoverable taxes 7 31,278 35,021Advances to suppliers 325 6,682Derivative financial instruments 25 438 -Assets held for sale 8 95,233 -Other assets 9,355 6,452
387,428 473,677NON-CURRENT ASSETS
Trade receivables 5 2,093 2,549Recoverable taxes 7 42,251 30,717Judicial deposits 17 9,672 11,853
54,016 45,119
Investments 9 87,392 87,392Property, plant and equipment 10 1,189,421 1,003,347Intangible assets 11 64,207 54,526
1,341,020 1,145,265
TOTAL ASSETS 1,782,464 1,664,061
(continues)
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
BALANCE SHEETAS AT SEPTEMBER 30, 2013 AND DECEMBER 31, 2012(In thousands of Brazilian reais - R$) - Unaudited
Note 9/30/2013 12/31/2012LIABILITIES AND EQUITY
CURRENT LIABILITIESTrade payables 61,100 47,784Borrowings, financing and finance leases 12 14,536 41,796Debentures 13 110,033 12,994
Payroll and related taxes 25,899 27,585Income tax and social contribution 16 9,761 -Tax debt refinancing program (REFIS) 945 907Taxes payable 7,085 18,597Profit sharing payable 15 15,007 20,142Dividends and interest on capital payable 20,421 36,170Derivative financial instruments 25 - 800Advance on assets held for sale 8 25,207 -Liabilities associated with assets held for sale 8 14,644 -Other liabilities 3,087 7,752
307,725 214,527NON-CURRENT LIABILITIESBorrowings, financing and finance leases 12 20,814 30,203Debentures 13 448,044 537,459Tax debt refinancing program (REFIS) 9,527 9,823Deferred taxes 16 962 2,381Provision for tax, civil and labor claims 17 10,441 9,919Other liabilities 42 423
489,830 590,208
TOTAL LIABILITIES 797,555 804,735
EQUTYIssued capital 18 551,915 537,625Capital reserves 18 7,178 233Earnings reserves 18 320,960 321,768Equity valuation adjustments 18 517 (300)Retained earnings 104,339 -Total equity 984,909 859,326
TOTAL LIABILITIES AND EQUITY 1,782,464 1,664,061
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
INCOME STATEMENTFOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013AND 2012(In thousands of Brazilian reais - R$) - Unaudited
Restated
Note 9/30/2013 9/30/2012
Three-monthperiod
Nine-monthperiod
Three-monthperiod
Nine-monthperiod
Net revenue from sales and services 21 222.006 622.208 173.407 477.958
Cost of sales andservices 22 (93.543) (249.233) (61.652) (164.517)
GROSS PROFIT 128.463 372.975 111.755 313.441General and administrative expenses 22 (56.042) (165.815) (40.270) (127.574)
OPERATING PROFIT 72.421 207.160 71.485 185.867
Finance income 23 2.485 9.641 963 2.960Finance costs 23 (14.809) (42.954) (9.809) (30.548)FINANCE COSTS, NET (12.324) (33.313) (8.846) (27.588)
PROFIT BEFORE INCOME TAXAND SOCIAL CONTRIBUTION 60.097 173.847 62.639 158.279
Income tax and social contribution 16 (21.456) (53.004) (22.244) (47.286)
PROFIT FROM CONTINUEDOPERATIONS 38.641 120.843 40.395 110.993
PROFIT (LOSS) FROM DISCONTINUEDOPERATIONS 8.2 1.004 6.136 (2.416) (1.105)
PROFIT FOR THE PERIOD 39.645 126.979 37.979 109.888Basic earnings per share - R$ 20 (a) 0.31 1.00 0.30 0.87
Diluted earnings per share - R$ 20 (b) 0.31 0.99 0.30 0.87
EARNINGS PER SHARE FROMCONTINUIED OPERATIONS
Basic earnings per share - R$ 20 (a) 0.30 0.95 0.32 0.88Diluted earnings per share - R$ 20 (b) 0.30 0.94 0.32 0.88
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
STATEMENT OF COMPREHENSIVE INCOMEFOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013AND 2012(In thousands of Brazilian reais - R$) - Unaudited
Note 9/30/2013 9/30/2012
Three-monthperiod
Nine-monthperiod
Three-monthperiod
Nine-monthperiod
PROFIT FOR THE PERIOD 39,645 126,979 37,979 109,888
OTHERCOMPREHENSIVE INCOME
Cash flow hedge 25 (2,368) 817 (847) (1,848)
TOTAL COMPREHENSIVE INCOMEFOR THE PERIOD 37,277 127,796 37,132 108,040
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
STATEMENT OF CHANGES IN EQUITYFOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2012(In thousands of Brazilian reais - R$) - Unaudited
Earnings reserves
Subscribedcapital
Capitalreserve Legal Expansion Special
Earningsretention
Equityvaluation
adjustments
Retainedearnings
(accumulatedlosses) Total
AT JANUARY 1, 2012 527,587 (5,581) 13,192 61,243 2,329 135,268 2,102 - 736,140
Capital contribution - share issue 8,592 - - - - - - - 8,592Purchase / cancelation of treasury
shares - (23) - - - - - - (23)Stock option plan - 3,752 - - - - - - 3,752Realization of special reserve - tax amortization
of Itapo merged goodwill - - - - (1,140) - - 1,140 -Comprehensive income for the period - cash flow
hedge - - - - - (1,848) - (1,848)Profit for the period - - - - - - - 109,888 109,888Interest on capital proposed - - - - - - - (21,780) (21,780)
AT SEPTEMBER 30, 2012 536,179 (1,852) 13,192 61,243 1,189 135,268 254 89,248 834,721
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
STATEMENT OF CHANGES IN EQUITYFOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013(In thousands of Brazilian reais - R$) - Unaudited
Earnings reserves Equity
Subscribed CapitalEarnings
valuationRetainedearnings
capital reserve Legal ExpansionSpecial retention
adjustmentsaccumulated
losses) Total
AT JANUARY 1, 2013 537,625 233 20,768 61,243 808 238,949 (300) - 859,326
Capital contribution - share issue 14,290 - - - - - - - 14,290Stock option plan - 6,945 - - - - - - 6,945Realization of special reserve - tax amortization of
Itapo merged goodwill - - - - (808) - - 808 -Comprehensive income for the period - cash flow
hedge - - - - - - 817 - 817Profit for the period - - - - - - 126,979 126,979Interest on capital proposed - - - - - - - (23,448) (23,448)
AT SEPTEMBER 30, 2013 551,915 7,178 20,768 61,243 - 238,949 517 104,339 984,909
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
STATEMENT OF CASH FLOWSFOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012(In thousands of Brazilian reais - R$) - Unaudited
9/30/2013 9/30/2012CASH FLOWS FROM OPERATING ACTIVITIES
PROFIT FROM CONTINUED AND DISCONTINUEDOPERATIONS BEFORE INCOME TAX AND
SOCIAL CONTRIBUTION 182,671 156,703
Adjustments:Depreciation and amortization 99,221 78,521Provision for tax, civil and labor claims 1,240 (2,844)Accrued expenses on stock options 6,945 3,752Profit sharing payable 15,007 11,787Gain on sale of property, plant and equipment and
intangible assets (38,149) (22,279)Interest, indexation and exchange differences on
borrowings,contingencies and judicial deposits 40,483 32,465
Allowance for doubtful debts 12,897 12,207
Changes in assets and liabilities:Trade receivables (31,245) (40,962)Inventories (4,001) (10,090)Recoverable taxes 27,728 12,922Judicial deposits 2,181 (565)Other assets 2,799 5,681Trade payables (276) (5,979)Payroll and related taxes 12,958 12,213Taxes payable (11,512) 1,830Other liabilities (6,104) 1,717
Lawsuits settled (718) (2,585)Interest paid (35,062) (24,514)Income tax and social contribution paid (36,203) (39,762)Profit sharing paid (20,102) (7,917)
NET CASH GENERATED BY OPERATING ACTIVITIES 220,758 172,301
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
STATEMENT OF CASH FLOWSFOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012(In thousands of Brazilian reais - R$) - Unaudited
9/30/2013 9/30/2012Cash flows from investing activities:
Marketable securities 159,606 -Advance on assets held for sale 25,207 -
Purchases of property, plant and equipment and intangibleassets (*) (395,738) (205,083)
Proceeds from sale of property, plant and equipment and
intangible assets 51,058 27,729
NET CASH USED IN INVESTINGACTIVITIES (159,867) (177,354)
Cash flows from financing activitiesCapital contributions 14,290 8,592Purchase of treasury shares - (23)Dividends and interest on capital paid (39,198) (21,892)Repayment of borrowings (35,486) (25,548)Borrowings raised 1,038 308,103
NET CASH GENERATED BY FINANCINGACTIVITIES (59,356) 269,232
INCREASE (DECREASE) IN CASH AND CASHEQUIVALENTS,
NET 1,535 264,179
CASH AND CASH EQUIVALENTS AT THEBEGINNING OF THE
PERIOD (NOTE 3) 44,200 35,179
CASH AND CASH EQUIVALENTS AT THE END OFTHE PERIOD
(NOTE 3) 45,735 299,358
(*) PIS and COFINS credits are included in total purchases of property, plant and equipmentand intangible assets.
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
STATEMENTS OF VALUE ADDEDFOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012(In thousands of Brazilian reais - R$) - Unaudited
9/30/2013 9/30/2012REVENUES:Sales of merchandise, products and services 993,868 737,273Cancelations, discounts and waiver of debt (118,797) (40,847)Other revenues (sale of assets) 4,781 2,675Allowance for doubtful debts - Recognition (12,897) (12,207)
866,955 686,894INPUTS PURCHASED FROM THIRD PARTIES
Cost of sales and services (38,996) (15,000)Materials, energy, outside services and other (151,917) (92,692)Write-off of leased assets (23,279) (14,288)
(214,192) (121,980)
Gross value added 652,763 564,914Depreciation, amortization and depletion (99,221) (78,521)
Wealth created by the Company 553,542 486,393
Wealth received in transfer:Finance income 10,510 3,466
Wealth for distribution 564,052 489,859DISTRIBUTION OF WEALTHPersonnel and payroll taxes 192,096 187,762
Salaries and wages 145,710 148,121Benefits 35,962 30,463Severance Pay Fund (FGTS) 10,424 9,178
Taxes and contributions 178,651 143,917Federal 164,131 132,797
State 6,268 3,174Municipal 8,252 7,946Lenders and lessors 66,326 48,292
Interest and exchange differences 47,404 35,037Leases 18,922 13,255
Shareholders 126,979 109,888Interest on capital and dividends 23,448 21,780Retained earnings/loss for the period 103,531 88,108
Wealth distributed 564,052 486,859
The accompanying notes are an integral part of this interim financial information.
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
MILLS ESTRUTURAS E SERVIOS DE ENGENHARIA S.A.
NOTES TO THE INTERIM FINANCIAL INFORMATION FOR THE QUARTER ENDEDSEPTEMBER 30, 2013(In thousands of Brazilian reais - R$, unless otherwise stated) - Unaudited
1. GENERAL INFORMATION
Mills Estruturas e Servios de Engenharia S.A. ("Mills" or "Company") is a publicly-tradedcorporation with registered offices in the City of Rio de Janeiro, Brazil. The Company
basically operates in the construction and industrial maintenance markets, engaging in thefollowing principal activities:
(a) Rental and sale, including export, of steel and aluminum structures for constructionworks, as well as reusable concrete forms, along with optional supply of relatedengineering projects, supervisory and assembly services.
(b) Rental, assembly, and dismantling of access tubular scaffolding in industrial areas.
(c) Performance of industrial painting, sand-blasting, heat insulation, boilermaker andrefractory services, as well as other services inherent in such activities.
(d) Sale, lease and distribution of aerial work platforms and telescopic manipulators, aswell as parts and components, and technical assistance and maintenance services forsuch equipment.
(e) Holding of interests in other companies, as partner of shareholder.
The accounting information contained in this interim financial information was approved bythe Companys Board of Directors and authorized for issue on October 30, 2013.
2. PRESENTATION OF INTERIM FINANCIAL INFORMATION
2.1. Basis of presentation
The Companys interim financial information comprises the interim financialstatements and has been prepared in accordance with Accounting Pronouncement CPC21 (R1), which addresses interim financial reporting, and in accordance withInternational Accounting Standard (IAS) 34.
This interim financial information does not include all the information and disclosuresrequired in annual financial statements and should, therefore, be read in conjunctionwith the financial statements of Mills for the year ended December 31, 2012, whichhave been prepared in accordance with accounting practices adopted in Brazil andInternational Financial Reporting Standards (IFRSs) issued by the InternationalAccounting Standards Boards (IASB).
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In compliance with Brazilian Securities Commission (CVM) Circular 003/2011, ofApril 28, 2011, we present below the notes to the most recent annual financialstatements (for the year ended December 31, 2012), which, in view of the lack ofsignificant changes this quarter, are not being reproduced in full in this interim
financial information:
The notes not included in the nine-month period ended September 30, 2013 are theSummary of significant accounting policies, Critical accounting judgments and keyestimates and assumptions, Financial risk management, Capital management andTax debt refinancing program (REFIS), represented, in the financial statements for2012, by notes 2, 3, 4, 5 and 19, respectively.
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2.2. Restatement of the income statement for the period ended September 30, 2012
In conformity with CPC 31, the Company is restating the income statement for the three-month and nine-month periods ended June 30,2012 to classify separately the profit (loss) from discontinued operations.
9/30/2012
Three-month period Nine-month periodOriginalBalance Reclassifications
ReclassifiedBalance
OriginalBalance Reclassifications
ReclassifiedBalance
Net revenue from sales and services 222,227 48,820 173,407 632,465 154,507 477,958
Cost of sales and
services (105,181) (43,529) (61,652) (290,758) (126,241) (164,517)GROSS PROFIT 117,046 5,291 111,755 341,707 28,266 313,441
General and administrative expenses (48,301) (8,031) (40,270) (153,385) (25,811) (127,574)
OPERATING PROFIT68,745 (2,740) 71,485 188,322 2,455 185,867
Finance income 1,056 93 963 3,466 506 2,960
Finance costs (11,179) (1,370) (9,809) (35,085) (4,537) (30,548)
FINANCE COSTS, NET (10,123) (1,277) (8,846) (31,619) (4,031) (27,588)
PROFIT BEFORE INCOME TAX
AND SOCIAL CONTRIBUTION 58,622 (4,017) 62,639 156,703 (1,576) 158,279
Income tax and social contribution (20,643) 1,601 (22,244) (46,815) 471 (47,286)
PROFIT FOR THE PERIOD FROM CONTINUINGOPERATIONS 37,979 (2,416) 40,395 109,888 (1,105) 110,993
PROFIT (LOSS) FOR THE PERIOD FROMDISCONTINUED OPERATIONS
- 2,416 (2,416) -1,105 (1,105)
PROFIT FOR THE PERIOD 37,979 - 37,979 109,888 - 109,888
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2.3. Basis of preparation
The accounting policies, calculation methods, significant accounting judgments,estimates and assumptions used in this interim financial information are the same used
in the financial statements for the year ended December 31, 2012, disclosed in Notes 2and 3. These financial statements were published on March 13, 2013 on the newspaperValor Econmico and the Official Gazette of the State of Rio de Janeiro.
Adoption of the new and revised International Financial Reporting Standards (IFRSs)without material impacts on the interim financial information
The information related to the Accounting Pronouncements and InterpretationsRecently Issued did not suffer significant changes in relation to that disclosed in Note2.4 to the Financial Statements for the Year Ended December 31, 2012. Below is thelist of new and revised standards and interpretations already issued but not yet
adopted:
Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities (1);IFRS 9 Financial Instruments (2);
(1) Effective for annual periods beginning on or after January 1, 2014.(2) Effective for annual periods beginning on or after January 1, 2015.
3. CASH AND CASH EQUIVALENTS
9/30/2013 12/31/2012
Cash and banks 7,679 6,682Short-term investments 38,056 37,518
45,735 44,200
The balances recorded as cash and cash equivalents refer to deposits and highly liquid short-term investments, readily convertible into a known amount of cash and subject to aninsignificant risk of change in value. As at September 30, 2013, short-term investments referto bank deposit certificates (CDBs) issued by Banco Santander and Banco do Brasil, withrepurchase agreement and bearing interest at the average rate of 102.7% of the interbank
deposit certificate (CDI) (103.5% as at December 31, 2012).
4. MARKETABLE SECURITIES
The balance held as marketable securities refers to short-term investments with BancoSantander, through bank deposits, yielding 103.5% of the interbank deposit certificate (CDI)at December 31, 2012.
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5. TRADE RECEIVABLES
9/30/2013 12/31/2012
Construction Division 59,470 52,867
Jahu Division 93,688 66,585Industrial Services Division (*) 4,728 59,041Mills Rental Division 63,989 51,290Events Division (**) 3,943 4,247
225,818 234,030
Allowance for doubtful debts (***) (49,600) (36,703)
176,218 197,327Current 174,125 194,778
Non-current 2,093 2,549
(*) As at September 30, 2013, the balance of R$39,457, of the Industrial ServicesDivision, was reclassified to available-for-sale assets (Note 8).
(**) Amount receivable from sale of property, plant and equipment of the Events Division,which was discontinued in 2008.
(***) The allowance for doubtful debts is calculated based on the amount consideredsufficient to cover potential losses on the realization of receivables, considering anindividual analysis of the Companys major customers.
The receivables of the Jahu Division as at September 30, 2013 include R$16,741 (R$ 10,228
as at December 31, 2012) related to sales of raw materials to manufacturers of the Easyset,whose collection term, due to their characteristics, is longer than 120 days, longer, therefore,than the average of the other customers of such Division.
As at September 30, 2013, trade receivables totaling R$49,600 (2012 - R$36,703) wereaccrued. The increase in the amount of this allowance refers basically to the accrual of the
balance receivable from specific customers that during the nine months of 2013 were havingdifficulties to discharge their obligations.
Mills holds receivables corresponding to assets of the Events Division, whose activities havebeen discontinued. Part of these assets was sold in the course of 2008 and 2009 under
agreements for sale of chattels with reserve of title entered into on May 20, 2008 and February18, 2009. The total amount will be received over a period not exceeding eight years, and theinstallments are adjusted using the percentage fluctuation of the Extended Consumer PriceIndex (IPCA). As at September 30, 2013, the asset is adjusted at present value andmanagement, based on the collaterals provided for in the agreement, believes that the amountwill be fully realized by the due date of the last installment.
To determine whether or not trade receivables are recoverable, the Company takes intoconsideration any change in the customers creditworthiness from the date the credit wasoriginally granted to the end of the reporting period. The credit risk concentration is limited
because the customer base is comprehensive and there is no relationship between customers.The Company does not have any customer concentration in its revenue or trade receivables asno single customer or corporate group represents 10% or more of its trade receivables in anyof its segments.
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The aging list of the Companys trade receivables is as follows:
9/30/2013 12/31/2012
Current 106,064 130,420Current (bills with original due dates extended) 10,346 11,6881 to 60 days past due (*) 39,213 40,57761 to 120 days past due (*) 16,160 15,359More than 120 days past due (*) 54,035 35,986Total 225,818 234,030
(*) The analysis above was conducted considering the extended due dates of the bills.
6. INVENTORIES
Inventories of raw materials, finished goods and advances for inventories are linked to made-to-order manufacturing processes to meet the demand of the Company and its customers.Inventories of spare parts are intended mainly for the access equipment. All inventories arestated at average cost.
7. RECOVERABLE TAXES
9/30/2013 12/31/2012
Taxes on revenue (PIS and COFINS) (*) 71,452 54,724Income tax (IRPJ) and social contribution (CSLL) 1,070 6,453State VAT (ICMS) 110 3,618Other 897 943
73,529 65,738
9/30/2013 12/31/2012
Raw materials 6,983 7,327Finished goods 12,413 8,170Replacement parts and supplies 8,866 7,763Advances for inventories 2,070 3,202
Other 607 476Total 30,939 26,938
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Current 31,278 35,021Non-current 42,251 30,717
(*) PIS and COFINS credits refer basically to the amounts recoverable on purchases of
property, plant and equipment and that will be offset against non-cumulative PIS andCOFINS federal tax obligations. Mills expects that these credits will be realized by2016.
8. ASSETS AND LIABILITIES HELD FOR SALE
On July 10, 2013, the Company entered into an agreement for the sale of assets andliabilities of its Industrial Services business unit to FIP Leblon Equities Partners V, a fundmanaged by Leblon Equities Gesto de Recursos Ltda. through its subsidiary Albuquerque
Participaes Ltda. The sales price, defined based as at May 31, 2013, negotiation base date,was R$102,000. This price shall be adjusted for inflation based on the CDI variation,adjusted by the partial performance and settled, after adjustments, in local currency. On thesame date, the net assets to be transferred totaled R$88,449.
The purchase price is being paid in six (6) installments, all restated by the CDI from May31, 2013, asfollows:
1. The first of R$25,000 (R$25.207, considering the adjustment of the CDI until the date ofpayment) was paid on the date of signing the contract;
2. The second, of R$ 17,000 (R$17.463, considering the adjustment of the CDI untilSeptember 30, 2013) , is being paid by the partial performance of the business between June1, 2013 and the closing date, as this represents cash generation from the business which isincluded in the Mills cash flow. If until the closing date, the partial performance of the
business is less than the R$ 17,000 adjusted by CDI, the buyer will pay the difference, and ifhigher, the value will be offset from the other installments due. The accumulated value ofthe partial performance of the business between June 1 and September 30, 2013 was R$15.529. Thus, on September 30, the outstanding balance of the second tranche was thereforeof R$ 1.934;
3. Four installments of $ 15,000 each, annually, from the date of signing the contract.
The sale is subject to compliance with certain conditions precedent, among them theobtainment of governmental approvals. During the period of three years started on theclosing date, the parties entered into a mutual non-compete agreement.
Based on technical pronouncement CPC 31, on June 30, 2013, the Company reclassifiedthese assets and liabilities that were held for sale, without any impact on profit as at thatdate.
On July 12, 2013, pursuant to the agreement for sale of assets and liabilities, the company
Mills SI Servios Industriais Ltda (Company) wasestablished with subscribed and unpaidcapital of R$1,000.
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8.1 Assets and liabilities held for sale
Industrial Services Division 9/30/2013
Current assetsTrade receivables 39,457Other 217
39,674Non-current assets
Property, plant and equipment 55,484Intangible assets 75
55,559Total available-for-sale assets 95,233
Current liabilitiesAccrued vacation (9,949)Accrued 13th month salary (4,695)
Total liabilities associated with available-for-sale assets (14,644)
8.2 Income statement of the discontinued operations
Pursuant to the agreement signed between the parties, the (loss) profit from discontinuedoperations, of R$6,136, was adjusted by the exclusion of R$4,223 relating to certainexpenses linked to the sale of the IS - Industrial Services segment.
9/30/2013
Net revenue 168,430(-) Costs and expenses (145,579)
(-) Depreciation and amortization (5,671)
Operating profit 17,180Finance income 687
Finance costs (2,965)
Profit before IRPJ/CSL 14,902(-) IRPJ/CSL (4,543)
Profit for the period 10,359
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8.3 Statement of cash flows of the discontinued operations
Industrial Services Division 9/30/2013
Net cash generated by operating activities 37,462Net cash generated by investing activities 7,361
9. INVESTMENTS
On February 8, 2011, the Company acquired 25% of the capital of Rohr S.A. EstruturasTubulares (Rohr) for R$ 90,000. Rohr is a privately-held company specialized in accessengineering and supplying construction solutions, which operates mainly in the heavyconstruction and industrial maintenance sectors.
In 2011, the Company received R$2,608 in interest on capital related to prior years. Thisamount was recognized reducing the amount of the investment, as it referred to dividendsderived from profits or reserves already existing at the time the shares were purchased.
In the fourth quarter of 2011, there was an increase in the stake in Rohr S.A. EstruturaTubulares (Rohr) from 25% to 27.47%, resulting from a buyback by Rohr of 9% of itsshares, which are currently in its treasury and will be cancelled or proportionally distributed
to its shareholders.
The Company assessed its influence over the management of Rohr and concluded that, eventhough it holds 27.47% of the investees capital, such investment should be carried atacquisition cost, due to the following facts: Mills does not have power to influence Rohrsfinancial, operational and strategic policies, it does not control, either individually or jointly,such policies, and it is not represented in the investees management.
Furthermore, there is no shareholders agreement that might give Mills the right to haveinfluence over the investees management.Based on these factors, the Company concludedthat it does not have significant influence in the investee and will keep the investment
carried at acquisition cost.
In December 2012 the Company recognized finance income of R$3,214 related to intereston capital of Rohr for the years 2011 and 2012.
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10. PROPERTY, PLANT AND EQUIPMENT
Equipment forrental and
Rentalequipment
Totalleased Leasehold Buildings Computers
Furnitureand
Constructionin Total assets Total
operational use Leasing in progress equipment improvements and land and peripherals Vehicles Facilities fixtures progress in use PP&EGross cost of PP&EBalances at December 31, 2012 1,123,154 96,182 46,566 1,265,902 12,767 25,156 9,501 4,274 1,457 7,174 1,691 62,020 1,327,922
Purchases 293,522 - 90,025 383,547 5,338 - 4,523 554 1,004 2,072 1,129 14,620 398,167Write-offs/ disposals (32,837) (10,350) - (43,187) - (21) (5) (110) - (5) - (141) (43,328)Adjustment for PIS and COFINScredit s (35,519) - - (35,519) - - - - - - - - (35,519)
Reclassification toassets held for sale (102,164) - - (102,164) (648) (1,005) (1,165) (853) (186) (734) - (4,591) (106,755)
Transfers 98,003 - (97,395) 608 (882) - - - 882 - (608) (608) -
Balances at September 30, 2013 1,344,159 85,832 39,196 1,469,187 16,575 24,130 12,854 3,865 3,157 8,507 2,212 71,300 1,540,487
Accumulated depreciationBalances at December 31, 2012 (295,534) (12,890) - (308,424) (3,104) (1,080) (5,718) (2,522) (654) (3,073) - (16,151) (324,575)
Deprecia tion (89,044) (4,712) - (93,756) (1,106) (530) (1,232) (380) (115) (420) - (3,783) (97,539)Write-offs/disposals 14,716 5,050 - 19,766 - - 3 7 - - - 10 19,776Reclassification to
assets held for sale 49,076 - - 49,076 213 307 858 496 57 265 - 2,196 51,272Reclassification 30,735 (30,735) - - - - - - - - - - -
Balances at September 30, 2013 (290,051) (43,287) - (333,338) (3,997) (1,303) (6,089) (2,399) (712) (3,228) - (17,728) (351,066)
Annual depreciation rates - % 10 10 - - 20 4 20 20 10 10 - - -
Property, plant and equipment, netBalance at December 31, 2012 827,620 83,292 46,566 957,478 9,663 24,076 3,783 1,752 803 4,101 1,691 45,869 1,003,347Balance at September 30, 2013 1,054,108 42,545 39,196 1,135,849 12,578 22,827 6,765 1,466 2,445 5,279 2,212 53,572 1,189,421
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Rental equipment can be summarized as follows: access scaffolding (Mills and Elite tubularscaffolding), forms (Noe and Aluma forms), props (MillsTour and Aluma), aerial platforms(JLG and Genie) and telescopic manipulators.
We highlight below the main purchases up to September 2013, by group of assets:
Props 86,127Platforms 218,727Reusable concrete forms 32,128Suspended scaffolding and access structures 37,604Other 23,581Total purchases 398,167
As at September 30, 2013, depreciation for the period, allocated to direct costs ofconstruction works and rentals and to general and administrative expenses, amounts to
R$87,792 and R$5,755 (R$75,446 and R$2,347 as at September 30, 2012), respectively.
Certain items of the Companys property, plant and equipment are pledged as collateral ofborrowing and financing transactions (Note 12).
Property, plant and equipment are measured at historical cost, less accumulateddepreciation. Historical cost includes costs directly attributable to the acquisition of itemsand may also include transfers from equity of any gains/losses on cash flow hedgesqualifying as referring to the purchase of property, plant and equipment in foreign currency.
Review of estimated useful life
Based on a valuation conducted by technical experts, the Company issued an internal reporton the estimated useful life, dated December 31, 2012, which was approved at an executive
boards meeting. In order to prepare the report, the technical experts also considered theCompanys operational planning for the coming fiscal years, past experience, such as thelevel of maintenance and use of the items, external elements for benchmarking, such asavailable technologies, manufacturers recommendations and technical manuals, and theasset useful life rates.
There was no change in the remaining estimated useful lives of property, plant and
equipment items for 2012 and there were no events during the period ended September 30,2013 that would affect the valuation undertaken in 2012.
The Company concluded that there were no events or changes in circumstances that wouldindicate that such assets may be impaired.
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11. INTANGIBLE ASSETS
Total
Software
Trademarks
and patents
Goodwill on
investments
intangible
assetsGross cost of intangible assetsBalances at December 31, 2012 17,465 932 44,294 62,691
Purchases 11,438 - - 11,438
Reclassification to
assets held for sale (236) (37) - (273)
Balances at September 30, 2013 28,667 895 44,294 73,856
Accumulated amortizationBalances at December 31, 2012 (3,811) (122) (4,232) (8,165)
Amortization (1,552) (130) - (1,682)Reclassification to
assets held for sale 198 - - 198
Balances at September 30, 2013 (5,165) (252) (4,232) (9,649)Annual amortization rates - % 20 10 - -
Intangible assets, netBalance at December 31, 2012 13,654 810 40,062 54,526Balance at September 30, 2013 23,502 643 40,062 64,207
Allowance for impairment of goodwill
Goodwill arose on the acquisition of Jahu in 2008 and the acquisition of GP Sul in 2011,these are considered business segments and cash-generating units (CGU) to which the entiregoodwill is allocated.
The recoverable amount of the Jahu CGU was determined based on the actual cash flow ofthis segment in 2011, before income tax and social contribution, projected for a ten-year
period by the Company according to financial forecasts approved by management, at adiscount rate of around 12% per year and without taking into consideration any growth rate.
The recoverable amount of the GP Sul CGU was determined based on a report at marketvalue issued by a specialized firm in August 2011.
The recoverable amount of this asset was determined based on economic projections todetermine the market value of GP Sul using the income approach by projecting discountedcash flows, in order to support the amount paid. The discount rate used to measure therecoverable amount was around 12% per year.
Both projections were updated in 2012 and no need to recognize an allowance forimpairment losses of this goodwill was identified. Management understands that any type ofchange reasonably possible in key assumptions, on which the recoverable amount is based,
would not lead the total carrying amount to exceed the total recoverable amount of the cash-generating unit.
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12. BORROWINGS, FINANCING AND FINANCE LEASES
Borrowings were contracted by Mills for purchase of equipment and are being indexed tothe Interbank Deposit Certificate (CDI) rate or at the Long-term Interest Rate (TJLP).
Borrowings indexed to the CDI rate bear interest of 1.70% to 4.5% per year, and principaland interest are amortized on a monthly basis.
The financing agreements for rental equipment have been contracted at TJLP charges plusinterest of 0.2% to 0.9% per year, with amortization on a monthly basis through June 2021.
Borrowings, financing and finance leases are as follows:
9/30/2013 12/31/2012Current:
Borrowings and financing 4,935 31,672Finance leases 9,601 10,124
14,536 41,796Non-current:Borrowings and financing 19,679 22,314Finance leases 1,135 7,889Total 20,814 30,203
Borrowings and financing
Current liabilities
9/30/2013 12/31/2012Financing from financial institutions:Indexed to CDI plus interest of 1.70% to 4.5% per year - 27,323Indexed to TJLP plus interest of 0.2% to 3.3% per year 4,935 4,349
4,935 31,672
Non-current liabilities
9/30/2013 12/31/2012Financing from financial institutions:
Indexed to TJLP plus interest of 0.2% to 0.90% per year 19,679 22,314
The financial institutions with which the Company has borrowing and financing transactionsas at September 30, 2013 are as follows:
Santander
Banco do Brasil
Ita BBA
HSBC
Banco Alfa
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On May 27, 2011 the Company entered into a borrowing agreement with the Nassau Branchof Banco Ita BBA S.A. totaling US$15.8 million (equivalent to R$25.4 million). The
borrowing was settled in a bullet payment on May 28, 2013 and interest was paidsemiannually. In order to eliminate the foreign exchange risk on this borrowing, on the same
date a swap was contracted with Banco Ita BBA S.A. in the amount of R$25.4 million sothat the obligations (principal and interest) are fully converted into local currency andcarried out on the same maturity dates. This instrument was also settled in May 2013.
The table below shows a breakdown of the contractual guarantees outstanding on theindicated dates:
9/30/2013 12/31/2012Guarantees provided:
Receivables - 904Collateral sale (*) 66,385 66,775
Total collaterals 66,385 67,679
Promissory notes 20,777 20,777
(*) Refer to equipment acquired under the Federal Equipment Financing Program(FINAME) and leases.
The promissory notes are enforceable guarantees and serve as additional guarantees inrelation to the borrowings and financing.
The maturities of the non-current portions at September 30, 2013 are as follows:
2014 1,0692015 3,5412016 3,1382017 3,1382018 to 2021 8,793
19,679
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The Company's borrowings do not have covenants related to financial indices.
Finance leases
Refer basically to agreements for purchase of property, plant and equipment for rental forperiods between 36 and 60 months, with maturities through 2015 and indexed to the CDIplus interest of 2.5% to 3.80% per year. These obligations are collateralized by the leasedassets. The Company is not presenting the undiscounted debt payment cash outflows since
payments are calculated at a floating rate basis according to CDI fluctuation.
9/30/2013 12/31/2012
2013 5,504 10,1242014 4,947 6,773
2015 285 1,116Present value of minimum lease payments 10,736 18,013
10,736 18,013Current portion 9,601 10,124
Non-current portion 1,135 7,889
There are no significant differences between the present value of minimum lease paymentsand the market value of such financial liabilities. Interest charges are at floating rates and arerecognized on a prorated basis.
The Company has finance lease agreements with purchase option at the end of thecontractual term. The purchase option is based on the guaranteed residual value that can be
paid at the beginning of, end of or during the contractual term. There is also an option torenew the lease agreement for the period and under the terms agreed by the parties.
The Company's current leases do not have covenants related to financial indices.
13. DEBENTURES
1st issue of debentures
The first issue by the Company of a total of 27,000 unsecure, nonconvertible registereddebentures in single series was approved on April 8, 2011, totaling R$270,000 and unit facevalue of R$10.00. These debentures mature on April 18, 2016 and pay interest equivalent to112.5% of the CDI, payable semiannually, and will be amortized in three annual,consecutive installments, commencing on April 18, 2014. The transaction costs associatedwith this issue, in the amount of R$2,358, are being recognized as borrowing costs, inaccordance with the contractual terms of the issue.
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2nd issue of debentures
The second issue by the Company of a total of 27,000 unsecure, nonconvertible registereddebentures in two series was approved on August 3, 2012, totaling R$270,000 and unit face
value of R$10.00. The transaction costs associated with this issue, in the amount of R$1,810,are being recognized as borrowing costs, in accordance with the contractual terms of theissue. The debentures have their maturities according to the issue of each series, as follows:
1st series - 16,094 debentures of the first series, totaling R$160,940, with maturity onAugust 15, 2017, not subject to adjustment for inflation. The nominal amount of thedebentures of the first series will be amortized in two annual installments as from thefourth year of their issue and interest paid semiannually will correspond to a surcharge of0.88% p.a. levied on 100% of the accumulated variation of the DI rate;
2nd series - 10,906 debentures of the second series, totaling R$109,060, with maturity on
August 15, 2017, subject to adjustment for inflation based on the accumulated variationof the IPCA index. The nominal amount of the debentures of the second series will beamortized in three annual installments as from the sixth year of their issue and interest
paid semiannually will correspond to 5.50% p.a. of the amount adjusted for inflation asindicated above.
As at September 30, 2013 the balance of debentures including transaction costs isR$110,773 in current liabilities and R$450,000 in non-current liabilities, and R$110,033 andR$448,044, net of transaction costs, respectively. (As at December 31, 2012 the balance ofdebentures is R$13,733 in current liabilities and R$540,000 in non-current liabilities, andR$12,994 and R$537,459, net of transaction costs, respectively.)
Covenants
The indentures of the debentures require the compliance of debt and interest coverage ratiosunder preset parameters, as follows:
(1) Net debt-to-EBITDA ratio equal to three (3) or less; and
(2) EBITDA-to-net financial expenses equal to two (2) or higher.
On the closing of the interim financial information for the quarter ended September 30, 2013
the Company was compliant with all ratios.
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14. RELATED PARTIES
a) Transactions and balances
There were no loans between the Company and any of its officers during the period.
As at September 30, 2013 the Company had no service agreements with members of itsBoard of Directors.
b) Management compensation
The amounts relating to compensation paid to the members of the Companysmanagement are as follows:
9/30/2013 9/30/2012Three-month
period
Nine-month
period
Three-month
period
Nine-month
period
Salaries and payroll charges - officers 1,289 4,266 1,168 3,255Profit sharing 348 984 365 1,077Directors'
fees 471 1,359 285 868Share-based payments 657 1,848 479 1,133Total 2,765 8,457 2,297 6,333
15. EMPLOYEE BENEFITS
a) Employee profit sharing
The provision for profit sharing of employees and executives is set up on an accrualbasis and is accounted for as an expense. The determination of the amount, which ispaid in the year following the year the provision is set up, takes into consideration thetargets established together with the employees union under a collective labor
agreement, in accordance with Law 10,101/00 and the Companys Bylaws.
The Companys Board of Directors decided on March 27, 2012 that the amount of theprofit sharing will no longer be set at 25% of profit and can vary between 20% and 30%(*) of the economic value added (EVA), which is calculated based on operating profitdeducted from or added to non-recurring profits, less taxes and weighted average cost ofcapital. The metrics for this calculation is approved by the Companys management.
The profit sharing is recognized over the year and paid in the following year. Theamount recorded in current liabilities and profit as at September 30, 2013 is R$15,007(December 2012 - R$20,142 in current liabilities and September 2012 - R$11,787 in
profit).
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(*) The precise percentage within this band will be set by the last business day on therelevant year to generate the basis for the payment in the following year. The
provision has been set up based on 25% of the EVA.
b) Stock option plan
The Company has stock option plans approved by the shareholders meeting aimed atintegrating its executives in the Company development process over the medium andlong terms. These plans are managed by the Company and the options granted areapproved by the board of directors.
The information related to the Company's stock option programs is summarized below:
Plan pricing and accounting
In order to price the cost of the portions of the plans relating to their equity component, thevolatilities applicable to each one were determined at the risk-free rates and stock prices
based on valuations of 6.6 times the EBITDA, less the net debt in the period of each plan,and the Company used the Black-Sholes model to calculate the fair values.
The plans granted as from 2010 were classified as equity instruments and the weightedaverage fair value of the options granted was determined based on the Black-Scholes
valuation model, considering the following assumptions:
Program Grant
Weightedaverage
fair valueby option -
R$
Weightedaverage
fair valueof the
share atthe grantdate - R$
Exerciseprice - R$ Volatility
Dividendyield
Annualrisk-freeinterest
rate
Maximumexerciseperiod
2010 First 3.86 11.95 11.50 31.00% 1.52% 6.60% 6 years
2010 Second 5.49 14.10 11.50 31.00% 1.28% 6.37% 6 years
2011 Single 6.57 19.15 19.28 35.79% 1.08% 6.53% 6 years
2012 Basic 21.75 27.60 5.86 37.41% 0.81% 3.92% 6 years
2012 Discretionary 12.57 27.60 19.22 37.41% 0.81% 3.92% 6 years
2013 Basic 24.78 31.72 6.81 35.34% 0.82% 3.37% 6 years
Shares in thousands
PlansGrant date
Finalexercise
dateShares
grantedShares
exercisedOutstanding
shares
Top Mills Special Plan 1/01/2008 7/10/2015 782 (782) -2010 Plan
2010 Program 5/31/2010 5/31/2016 1,475 (1,043) 4322011 Program 4/16/2011 4/16/2017 1,184 (456) 7282012 Program 6/30/2012 5/31/2018 1,258 (214) 1,044
2013 Program 4/30/2013 4/30/2019 352 - 352
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The table below shows the accumulated balances of the plans in balance sheet accounts andthe effects on profit for the period.
9/30/2013 12/31/20122002 Plan
Capital reserve 1,446 1,446Number of shares exercised (thousands) 3,920 3,920
Top Mills, Special CEO and EX-CEO plansCapital reserve 1,148 1,148
Number of exercisable options (thousands) - 95Number of shares exercised (thousands) 1,055 960
Mills Rental Executives PlanCapital reserve 4,007 4,007
Number of shares exercised (thousands) 391 391
2010 PlanCapital reserve 5,026 3,825
Number of exercisable options (thousands) 432 768Number of shares exercised (thousands) 1,043 670
2011 Program (2010 Plan)Capital reserve 4,719 3,280
Number of exercisable options (thousands) 728 1,011Number of shares exercised (thousands) 456 125
2012 Program (2010 Plan)Capital reserve 5,384 2,153
Number of exercisable options (thousands) 1,044 1,258Number of shares exercised (thousands) 214 -
2013 Program (2010 Plan)Capital reserve 1,074 -
Number of exercisable options (thousands) 352 -
Total recognized as equity (accumulated) 22,804 15,859
Effect on profit (6,945) (5,837)
(*) In the nine-month period ended September 30, 2012, the effect on profit was an expenseof R$3,752.
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16. INCOME TAX AND SOCIAL CONTRIBUTION
a) Reconciliation of the income tax and social contribution expense
Reconciliation between the income tax and social contribution expense at the statutoryand effective rates is as follows:
Restated9/30/2013 9/30/2012
Three-month
period
Nine-month
period
Three-month
period
Nine-month
periodProfit before income tax
and social contribution 60,097 173,847 62,639 158,279Statutory income tax and
social contribution 34% 34% 34% 34%
Income tax and social contribution atstatutory rate (20,433) (59,108) (21,297) (53,815)
Non-deductible provisions (*) and permanentdifferences (1,854) (3,874) (1,076) (1,764)
Interest on capital - declared - 7,503 - 7,479Other 831 2,475 129 814Total current and deferred income tax and
social contribution (21,456) (53,004) (22,244) (47,286)Effective tax rate 36% 30% 18% 27%Current income tax (24,761) (54,797) (17,122) (44,197)Deferred income tax 3,305 1,793 (5,122) (3,089)
(*) Non-deductible provisions consist of stock option expenses, gifts, debt waivers, andfines for tax infractions.
b) Income tax and social contribution recognized in other comprehensive income
The deferred tax recognized in other comprehensive income is a result of the provisionfor gains/losses on cash flow hedging instruments transferred to the opening carryingamounts of the hedged items. The total income tax and social contribution recognized incomprehensive income as at September 30, 2013 is R$266.
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c) Breakdown of deferred income tax and social contribution
Deferred income tax and social contribution is broken down as follows:
Description
December
Additions Write-offs
September
31 30
2012 2013
Itapo goodwill 681 - -681 -
Discount to present value 129 - -52 77
Hedge on property, plant andequipment
1,252 -1,764 -1,252 -1,764
Other provisions 470 411 - 881
Allowance for doubtful debts 6,059 1,240 - 7,299
Finance leases -745 547 745 547Profit sharing - 5,102 - 5,102
Provision for tax, civil and3,415 178 - 3,593
labor claims
Swap derivatives 155 -266 -155 -266
Accelerated depreciation - -565 - -565
Depreciation Discontinued Division(IS)
- -829 - -829
GP Andaimes Sul Locadora -190 -101 - -291
Jahu goodwill -11,510 -1,439 - -12,949
Adjustment for inflation of judicialdeposits
-987 - 108 -879
Debentures -1,110 - 192 -918
-2,381 2,514 -1,095 -962
The rationale and expectations for realization of the deferred income tax and socialcontribution are shown below:
Nature Realization rationale
Provision for tax, civil andlabor claims
Tax realization of loss
Allowance for receivablesimpairment losses
Filing of lawsuits and past-duecredits
Finance leases Realization over straight-line depreciationperiod
of assetsProfit sharing PaymentDiscount to present value Tax realization of loss/gain
Other provisions PaymentAccelerated depreciation Tax amortization over 5 yearsDepreciationDiscontinued Division (IS) Transfer of control/ownershipItapo goodwill Tax amortization
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Jahu goodwill/GP Sul goodwill Asset disposal/impairmentAdjustment for inflation of judicial deposits Deposit withdrawalDebentures Amortization of borrowing costDerivativesCash flow hedge Depreciation
The table below shows the expected realization of deferred income tax and socialcontribution as at September 30, 2013:
DeferredIR andCSLL
DeferredIR andCSLL
assets liabilities
2013 5,766 (942)
2014 2,479 (455)2015 2,479 (630)2016 2,479 (630)2017 2,479 (1,195)Beginning 2018 1,816 (14,608)Total 17,498 (18,460)
17. PROVISION FOR TAX, CIVIL AND LABOR CLAIMS AND JUDICIAL DEPOSITS
The Company is a party to tax, civil and labor lawsuits that have arisen in the normal courseof business, and is discussing these matters in both the administrative and legal spheres,which, when applicable, are backed by judicial deposits.
Based on the opinion of its outside legal counsel, management understands that the properlegal steps and measures already taken in each situation are sufficient to cover potentiallosses and preserve the Companys net assets, being reassessed periodically.
9/30/2013 12/31/2012
Tax (i) 3,711 4,425Civil (ii) 456 444Labor (iii) 3,611 2,462Success fees (iv) 2,663 2,588Total 10,441 9,919
a) Breakdown of the provision for tax, civil and labor claims:
(i) Refers basically to a writ of mandamus filed by the Company when challengingthe increase in the PIS and COFINS rates (established by the non-cumulativeregime of these contributions, with the enactment of Laws 10,637/2002 and
10,833/2003). The Company maintains a judicial deposit for this provision,related to the differences in rates.
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(ii) The Company is a party to lawsuits filed against it relating to civil liability andcompensation claims.
(iii) The Company is a defendant in several labor lawsuits. Most of the lawsuitsinvolve claims for compensation due to occupational diseases, overtime,hazardous duty premium and salary equalization.
(iv) The success fees are generally set in up to 10% of the amount pledged in eachclaim, payable to outside legal counsel depending on the success of the demand ofeach case. Payment is contingent upon favorable outcome in the lawsuits.
(v) The Company does not have any contingent assets recorded.
(vi) There was no significant change in the balance of tax, civil and labor risks as
compared to the balance as at December 31, 2012.
b) Breakdown of judicial deposits:
9/30/2013 12/31/2012
Tax (i) 6,687 8,440Labor (ii) 2,707 2,858Civil 278 555Total 9,672 11,853
(i) In October 2001 the Company filed a lawsuit in the different cities where itoperates aimed at recovering the ISS paid since 1991 on the rental of its chattels.The lawsuits are in progress, awaiting court decisions. After the enactment ofSupplementary Law 116/2003 in August 2003, Mills discontinued the payment ofISS on such rentals, although it continues taxing the assignment of its scaffoldingand other structures for temporary use.
(ii) The judicial deposits are linked to various labor lawsuits in which the Company isthe defendant. Most of the lawsuits involve claims for compensation due tooccupational diseases, overtime, hazardous duty premium and salary equalization.
The Company is a party to tax, civil and labor lawsuits involving risks of loss classified bymanagement as possible based on the assessment of its legal counsel, for which no provisionwas recognized as estimated below:
9/30/2013 12/31/2012
Tax 22,771 13,218Labor 10,515 6,791Civil 4,389 596
Other - 5,000Total 37,675 25,605
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EQUTIY
a) Subscribed capital
The Companys fully subscribed and paid-in capital stock as at September 30, 2013 isR$551,915 (December 31, 2012 - R$537,625) represented by 127,314,000 registeredcommon shares without par value (December 31, 2012 - 126,399,000). Each commonshare corresponds to the right to one vote in decisions made by the shareholders.
Under the Companys bylaws, the Board of Directors may increase the capital up to aceiling of 200,000,000 shares, regardless of amendment to the bylaws or approval bythe shareholders, as well as stipulate the terms, issue price and form of payment of newshares to be issued.
(a.2) Share issue
The Company's share issue has occurred as approved by the Companys Board ofDirectors due to the exercise of stock options by beneficiaries. The shares issuedin the period were fully subscribed and paid up by their respective beneficiariesand are as follows:
Stock option plan
Approval by
the Board ofDirectors
Number of
sharesissued
Issueprice
Capitalincrease
(inthousands)
2010 Program 2/08/2013 600 12.49 8
2010 Program 2/08/2013 3,050 12.40 38
2011 Program 2/08/2013 88,574 20.54 1,819
Top Mills Plan 4/10/2013 66,903 2.53 169
2010 Program 5/09/2013 230,481 12.90 2,973
2011 Program 5/09/2013 138,185 21.13 2,920
2012 Program 5/09/2013 24,372 5.88 143
2012 Program 5/09/2013 153,265 20.05 3,073
Top Mills Plan 5/22/2013 15,512 2.55 40
2010 Program 8/15/2013 101,395 12.81 1,299
2011 Program 8/15/2013 55,952 21.10 1,180
2012 Program 8/15/2013 7,148 5.74 41
2012 Program 8/15/2013 29,335 20.00 587
914,772 14,290
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The table below shows the shareholding structure at the reporting dates:
(*) On October 2, 2012, started to hold a relevant interest according to informationofficially received by the Company and disclosed to CVM.
(**) On July 15, 2013, started to hold a relevant interest according to informationofficially received by the Company and disclosed to CVM.
(***) The other signatories of the Company's Shareholders' Agreement, all holders of
individual interests of less than 5% of the Company's capital, are represented in thecapacity as shareholders, including for voting right exercise purposes, by AndresCristian Nacht.
b) Earnings reserves
(b.1) Legal reserve
The legal reserve is set up annually by allocating 5% of profit for the year until itreaches a ceiling of 20% of the share capital. The purpose of the legal reserve is to
ensure the integrity of share capital and it can only be used to offset losses andincrease capital.
(b.2) Expansion reserve
The purpose of the expansion reserve is to provide funding to finance additionalinvestments in fixed and working capital and expand corporate activities. Underthe Companys bylaws, the ceiling of the expansion reserve is 80% of totalsubscribed capital.
(b.3) Special reserve
The Companys special reserve refers to the tax benefit generated by the corporaterestructuring undertaken in 2009.
9/30/2013 12/31/2012
Number of shares(in thousands) %
Number of shares(in thousands) %
Shareholders
Andres Cristian Nacht 15,596 12.25% 15,596 12.34%
Snow Petrel S.L. 17,728 13.92% 17,728 14.03%
HSBC Bank Brasil S.A. (*) 6,445 5.07% 6,323 5.00%
Capital Group International, Inc (**)6,323 5.01% - -
Other signatories of the Company's
Shareholders' Agreement (***) 11,826 9.29% 11,826 9.36%
Other 69,396 54.46% 74,926 59.27%
127,314 100.00% 126,399 100.00%
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c) Capital reserve
The capital reserve incorporates the transaction costs incurred in capital funding,amounting to R$15,068, net of taxes, related to the distribution of shares under the IPO,
the premium reserve of the stock options amounting to R$22,804 related to theemployees stock option plans, and the cost of the cancelled shares amounting toR$558, totaling R$7,178 as capital reserve as at September 30, 2013 (December 31,2012 - R$233).
d) Earnings retention
This earnings retention reserve refers to the remaining balance of retained earnings usedto fund the business growth project set out in the Companys investment plan, accordingto the capital budget proposed by management, to be submitted to and approved at aShareholders Meeting, pursuant to Article 196 of the Brazilian Corporate Law.
e) Equity valuation adjustmentcash flow hedge
The cash flow hedge reserve incorporates the effective portion of the cash flow hedgesthrough September 30, 2013, amounting to R$517, net of taxes (December 31, 2012 -R$300).
f) Mandatory minimum dividends
The Company's bylaws provide for the payment of mandatory minimum dividendsequivalent to 25% of the profit for the year, after the respective allocations, pursuant to
article 202 of the Brazilian Corporation Law (Law 6,404).
18. DIVIDENDS AND INTEREST ON CAPITAL PROPOSED
The Board of Directors' meeting of June 21, 2013 approved the declared interest on capitalas part of the minimum mandatory dividend in the amount of R$23,448 (R$20,421 net oftaxes), equivalent to R$0.18 per share. The interest on capital proposed will be part of thecompensation to be distributed at the end of 2013.
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19. EARNINGS PER SHARE
a) Basic
Basic earnings per share are calculated by dividing the profit attributable to owners ofthe Company by the weighted average number of common shares issued during the
period.Restated
9/30/2013 9/30/2012
Three-monthperiod
Nine-month
period
Three-monthperiod
Nine-month
period
Profit attributable to owners of theCompany 39,645 126,979 37,979 109,888
Weighted average number of commonshares issued (thousands) 127,249 126,833 126,235 125,997
Basic earnings per share fromcontinuing and discontinuedoperations 0.31 1.00 0.30 0.87
Basic earnings per share fromcontinuing operations 0.30 0.95 0.32 0.88
b) Diluted
Diluted earnings per share are calculated by adjusting the weighted average number ofcommon shares outstanding to assume conversion of all dilutive potential commonshares. The Company has one category of dilutive potential common shares: stockoptions. A calculation is made for the stock options to determine the number of sharesthat would be acquired at fair value (determined as the annual average market price ofthe Companys share), based on the monetary amount of the subscription rights linkedto the outstanding stock options. The number of shares calculated as described above iscompared with the number of shares issued, assuming exercise of the stock options.
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Restated
9/30/2013 9/30/2012
Three-monthperiod
Nine-month
period
Three-monthperiod
Nine-month
periodProfit
Profit used to determinediluted earnings per share 39,645 126,979 37,979 109,888
Weighted average number of commonshares issued (thousands) 127,249 126,833 126,235 125,997
Adjustments for:Stock options (thousands) 1,017 1,141 1,332 828
Weighted average number of common
shares for diluted earnings per share(thousands) 128,266 127,974 127,567 126,825
Basic earnings per share fromcontinuing and discontinuedoperations 0.31 0.99 0.30 0.87
Basic earnings per share fromcontinuing operations 0.30 0.94 0.32 0.88
20.NET REVENUE FROM SALES AND SERVICES
The information on net revenue from sales and services below refers only to the nature ofthe revenue per type of service:
Restated
9/30/2013 9/30/2012
Three-
monthperiod
Nine-
monthperiod
Three-
monthperiod
Nine-
monthperiod
Rentals 216,755 613,839 171,859 475,909Sales 29,544 66,907 13,346 32,824Technical assistance 6,480 22,609 7,303 14,835Indemnities and recoveries 30,507 67,479 14,814 34,184Total gross revenue 283,286 770,834 207,322 557,752Taxes on sales and services (21,859) (61,634) (16,516) (45,695)Cancelations and discounts (39,421) (86,992) (17,399) (34,099)Total net revenue 222,006 622,208 173,407 477,958
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21. COST OF SALES AND SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES (BY NATURE)
The costs refer mainly to personnel expenses for assembly and dismantling of Company-owned leased assets, when such assembly is carriedout by Mills itself, the equipment sublet from third parties when the Companys inventory is insufficient to meet demand, freight fortransportation of equipment between branches and occasionally to customers, and expenses on supplies consumed in the projects, frompersonal protective equipment (PPE) to wood, paint and thermal insulation.
General and administrative expenses refer to the management of each Company contract, encompassing the project teams and sales functionengineers, which correspond basically to salaries, payroll taxes and benefits, and other expenses on travel, representations andcommunications, as well as the administrative function overheads.
Restated Restated
September 30, 2013 - Three-monthperiod September 30, 2013 - Nine-month period
September 30, 2012 - Three-monthperiod September 30, 2012 - Nine-month period
Nature
Directproject andrental costs
General andadministrative
expenses Total
Directproject andrental costs
General andadministrative
expenses Total
Directproject andrental costs
General andadministrative
expenses Total
Directproject andrental costs
General andadministrative
expenses Total
Personnel (15,697) (27,540) (43,237) (42,525) (79,554) (122,079) (11,730) (23,155) (34,885) (31,649) (64,140) (95,789)Third parties (1,174) (5,153) (6,327) (3,600) (15,016) (18,616) (1,189) (4,482) (5,671) (2,655) (12,109) (14,764)Freight (4,108) (199) (4,307) (11,012) (465) (11,477) (3,115) (142) (3,257) (8,506) (595) (9,101)Construction/maintenance material
and repair (11,978) (1,736) (13,714) (33,087) (4,681) (37,768) (7,537) (978) (8,515) (19,703) (2,584) (22,287)Equipment and other rentals (1,503) (4,050) (5,553) (4,356) (10,859) (15,215) (650) (2,178) (2,828) (2,570) (7,066) (9,936)Travel (1,216) (3,002) (4,218) (3,912) (8,691) (12,603) (840) (2,416) (3,256) (2,233) (6,884) (9,117)Cost of
sales (22,080) - (22,080) (55,035) - (55,035) (10,936) - (10,936) (24,185) - (24,185)Depreciation and amortization (31,509) (2,186) (33,695) (87,792) (5,755) (93,547) (23,745) (832) (24,577) (67,743) (2,249) (69,992)Write-off of assets (3,419) - (3,419) (6,544) - (6,544) (1,658) - (1,658) (4,568) - (4,568)Allowance for doubtful debts - (5,222) (5,222) - (12,319) (12,319) - (538) (538) - (9,331) (9,331)Stock option plan - (2,214) (2,214) - (6,022) (6,022) - (1,570) (1,570) - (3,011) (3,011)Adjustment of provisions - 388 388 - 228 228 - 5,050 5,050 - 3 ,990 3,990
Profit sharing - (4,486) (4,486) - (15,007) (15,007) - (5,563) (5,563) - (14,600) (14,600)Other (859) (642) (1,501) (1,370) (7,674) (9,044) (252) (3,466) (3,718) (705) (8,995) (9,700)Total (93,543) (56,042) (149,585) (249,233) (165,815) (415,048) (61,652) (40,270) (101,922) (164,517) (127,574) (292,091)
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23. FINANCE INCOME (COSTS)
a) Finance income
Restated9/30/2013 9/30/2012
Three-monthperiod
Nine-month
period
Three-monthperiod
Nine-month
period
Interest income onpast-due bills 620 2,538 408 919
Income from short-term investments 874 5,311 536 1,774Discounts obtained 102 188 14 260Foreign exchange and inflation gains 886 1,461 5 5
Other 3 143 - 22,485 9,641 963 2,960
b) Finance costs
Restated
9/30/2013 9/30/2012
Three-monthperiod
Nine-month
period
Three-monthperiod
Nine-month
period
Borrowing costs (1,264) (3,983) (1,703) (5,728)Inflation losses (710) (1,484) (174) (622)Interest on finance leases (337) (1,068) (918) (3,446)Interest - debentures (11,410) (33,304) (6,846) (19,081)Bank fees (121) (261) (105) (212)Tax on financial transactions
(IOF) (6) (14) (1) (13)Other (961) (2,840) (62) (1,446)
(14,809) (42,954) (9,809) (30,548)
24. SEGMENT REPORTING
Information by operating segment is being presented in accordance with CPC 22 OperatingSegments (IFRS 8).
The Companys reportable segments are business units that offer different products andservices and are managed separately since each business requires different technologies andmarket strategies. The main information used by management to assess the performance ofeach segment is as follows: total property, plant and equipment since these are the assets thatgenerate the Companys revenue and the profit of each segment to evaluate the return on
these investments. The information on liabilities by segment is not being reported since it isnot used by the Companys chief decision makers to manage the segments. Managementdoes not use analyses by geographic area to manage its businesses.
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The Companys segments involve completely different activities, as described below, andthus their assets are specific for each segment. The assets have been allocated into eachreportable segment according to the nature of each item.
The Companys operations are segmented according to the organization and managementmodel approved by the Board of Directors, containing the following divisions:
Construction Division
This division provides specific engineering and equipment solutions, specifically in relationto concrete forms and props used in the construction of large structures, planning, design,technical supervision, equipment and related services.
Jahu Division
This division supplies forms and concrete, props and scaffolding in the context of theservices performed, involving specialized engineering construction solutions, with emphasison the residential and commercial construction sector, by supplying planning, design,technical supervision, equipment and related services.
Industrial Services Division
This division supplies structures developed to permit access of personnel and suppliesduring the equipment and tubular scaffolding assembling phases, as well as for preventiveand corrective maintenance in large plants, including industrial painting, surface treatmentand insulation services.
On July 10, 2013 the Company entered into an agreement for sale of assets and liabilities ofthis business unit (see note 8).
Rental Division
This division supplies motorized access equipment (aerial working platforms) and telescopicmanipulators for lifting personnel and carrying loads at considerable heights.
The accounting policies for the operating segments are the same described in the summaryof significant accounting policies. The Company assesses the performance by segment basedon pretax profit or loss as well as on other operating and financial indicators.
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Income statement by business segment - Nine-month period
Construction Jahu Industrial Services Rental Total
9/30/2013 9/30/2012 9/30/2013 9/30/2012 9/30/2013 9/30/2012 9/30/2013 9/30/2012 9/30/2013 9/30/2012
Net revenue 158,307 126,761 203,722 171,940 168,430 154,507 260,179 179,257 790,638 632,465
(-) Costs and expenses (79,466) (62,568) (127,031) (84,606) (150,330) (143,523) (115,001) (74,925) (471,828) (365,622)
(-) Depreciat ion and amortizat ion (21,968) (18,116) (28,739) (22,285) (5,671) (8,529) (42,843) (29,591) (99,221) (78,521)
Operating profit 56,873 46,077 47,952 65,049 12,429 2,455 102,335 74,741 219,589 188,322Finance income 2,441 619 3,411 1,023 869 506 3,789 1,318 10,510 3,466
Finance costs (9,846) (7,661) (15,585) (11,124) (4,474) (4,537) (17,523) (11,763) (47,428) (35,085)
Profit before IRPJ/CSL 49,468 39,035 35,778 54,948 8,824 (1,576) 88,601 64,296 182,671 156,703
(-) IRPJ/CSL (15,082) (11,661) (10,909) (16,415)(2,688) 471 (27,013) (19,210) (55,692) (46,815)
Profit for the period 34,386 27,374 24,869 38,533 6,136 (1,105) 61,588 45,086 126,979 109,888
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Income statement by business segment - Three-month period
Construction Jahu Industrial Services Rental Total
9/30/2013 9/30/2012 9/30/2013 9/30/2012 9/30/2013 9/30/2012 9/30/2013 9/30/2012 9/30/2013 9/30/2012
Net revenue 55,704 45,503 72,374 60,536 57,200 48,820 93,928 67,368 279,206 222,227
(-) Costs and expenses (26,279) (21,416) (48,006) (26,715) (53,941) (48,707) (41,606) (29,212) (169,832) (126,050)
(-) Depreciat ion and amortizat ion (7,670) (6,647) (10,205) (7,379) (210) (2,853) (15,819) (10,555) (33,904) (27,432)
Operating profit 21,755 17,440 14,163 26,442 3,049 (2,740) 36,503 27,603 75,470 68,745
Finance income 850 182 642 330 182 93 993 451 2,667 1,056
Finance costs (3,527) (2,355) (4,965) (3,603) (1,509) (1,370) (6,317) (3,851)(16,318) (11,179)
Profit before IRPJ/CSL 19,078 15,267 9,840 23,169 1,722 (4,017) 31,179 24,203 61,819 58,622
(-) IRPJ/CSL (6,653) (5,927) (3,716) (7,807) (718) 1,601 (11,087) (8,510) (22,174) (20,643)
Profit for the period 12,425 9,340 6,124 15,362 1,004 (2,416) 20,092 15,693 39,645 37,979
Assets by business segment
Construction Jahu Industrial Services Rental Other Total
9/30/2013 12/31/2012 9/30/2013 12/31/2012 9/30/2013 12/31/2012 9/30/2013 12/31/2012 9/30/2013 12/31/2012 9/30/2013 12/31/2012
PP&E 258,999 214,221 366,823 309,293 - 73,162 563,599 406,671 - - 1,189,421 1,003,347Other assets 87,289 117,365 193,576 195,548 95,233 133,393 129,553 127,016 87,392 87,392 593,043 660,714Total assets 346,288 331,586 560,399 504,841 95,233 206,555 693,152 533,687 87,392 87,392 1,782,464 1,664,061
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25. FINANCIAL INSTRUMENTS
25.1. Category of financial instruments
The classification of financial instruments, by category, can be summarized as shownin the table below:
Carrying amount
9/30/2013 12/31/2012
Cash and cash equivalents 45,735 44,200Loans and receivables:
Trade receivables 176,218 197,327Judicial deposits 9,672 11,853
Financial liabilities measured at amortized costBorrowings and financing 24,614 53,986Finance leases 10,736 18,013Debentures 558,077 550,453Trade payables 61,100 47,784
Financial liabilities at fair valueDerivatives - 800
Financial assets at fair valueMarketable securities - 159,606
Derivatives 438 -
Equity financial instrumentsStock option plans 22,804 15,859
25.2. Fair value of financial instruments
Several Company policies and accounting disclosures require the determination of thefair value both for financial assets and liabilities and for non-financial assets andliabilities. The fair values have been determined for the purpose of measurementand/or disclosure based on the methods below. When applicable, additional
information on the assumptions used in calculating the fair values are disclosed inspecific notes applicable to such asset or liability.
The Company applies CPC 40/IFRS 7 for financial instruments measured in thebalance sheet at fair value, which requires disclosure of fair value measurements at thelevel of the following fair value measurement hierarchy:
Quoted (unadjusted) prices on active markets for identical assets and liabilities(Level 1).
In addition to the quoted prices, included in Level 1, inputs used by the market for
assets or liabilities, whether directly (e.g. prices) or indirectly (e.g., derived fromprices) (Level 2).
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The Company does not have financial instruments measured at fair value that areclassified as Level 3, i.e., obtained based on valuation techniques that includevariables for the asset or liability, but which are not based on observable marketinputs.
The table below shows the Companys assets and liabilities measured at their fairvalues as at September 30, 2013.
Level 2 balances
9/30/2013 12/31/2012AssetsMarketable securities - 159,606Derivatives used for hedging 438 -
Financial liabilities
Derivatives used for hedging - 800
(a) Fair value of securities
Available-for-sale securities consist of short-term investments made with primefinancial institutions that are indexed to the CDI fluctuation. Considering thatthe CDI rate already reflects the interbank market position, it is assumed that thecarrying amounts of securities approximate their fair values.
(b) Fair value of trade receivables and payables
The fair value of trade and other receivables is estimated according to thepresent value of future cash flows, discounted at the market interest ratedetermined at the end of the reporting period.
The fair values of trade receivables and trade payables, considering as thecriterion for calculation the discounted cash flow method, are substantiallysimilar to their carrying amounts.
(c) Fair value of borrowings and financing
Fair value determined for disclosure purposes is calculated based on the present
value of principal and future cash flows, discounted at the market interest ratedetermined at the end of the reporting period. For finance leases, the interest rateis determined by reference to similar lease agreements.
The table below shows the Company's borrowings and financing at their fairvalue and carrying amount:
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Borrowings and financing
Fair value Carrying amount
Debt Indicator 9/30/2013 12/31/2012 9/30/2013 12/31/2012BNDES TJLP 24,306 26,211 24,614 26,664Working capital CDI - 27,134 - 27,322Leasing CDI 10,479 17,796 10,436 18,0131st issue of debentures CDI 280,752 275,283 280,799 274,0672nd issue of debentures
1st series CDI 162,023 162,395 162,809 165,6742nd series IPCA 117,751 113,783 117,165 113,992
(d) Fair value of share-based payments
The fair values of the employees stock options and rights to Company shareappreciation are measured using the Black-Scholes approach. Changes in
measurement include share prices on measurement date, the strike price of therelated instrument, the expected volatility (based on the historical weightedaverage volatility adjusted for expected changes based on publicly availableinformation), the average weighted life of the instruments (based on historicalexperience and the overall behavior of option holders), expected dividends andrisk-free interest rate (based on government bonds). Non-market serviceconditions and performance conditions inherent to the transactions are not takeninto account in determining the fair value.
(e) Derivatives
The fair value of exchange forwards is calculated at present value, using marketrates that are accrued on each measurement date.
The fair value of interest rate swaps is based on quotations obtained withbrokers. These quotations are tested as to their reasonableness by discounting theestimated future cash flows based on the terms and maturity of each contract andusing market interest rates for a similar instrument calculated on themeasurement date. The fair values reflect the credit risk of the instrument andinclude adjustments to consider the credit risk of the entity and the counterparty,when appropriate.
25.3. Derivative financial instruments - hedging
(a) Derivative policy
In order to protect its assets from the exposure to commitments assumeddenominated in a foreign currency, the Company has developed its own strategyto mitigate such market risk. When applied, the strategy is carried out to reducethe volatility of cash flows to the desirable level, i.e., to maintain the planneddisbursements.
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Mills believes that the management of such risks is key to support its growthstrategy without potential financial losses that reduce its operating profits, as theCompany does not aim at obtaining financial gains through the use ofderivatives. Foreign currency risks are managed by the Finance Manager and the
CFO, who evaluate possible exposures to risks and set guidelines to measure,monitor and manage the risk related to the Companys activities.
Based on this objective, the Company contracts derivative transactions, usuallyNDFs (non-deliverable forwards) with prime financial institutions (with creditratings of brAAA - national scale, Standard & Poors or similar), in order toguarantee the agreed trading value at the time the imported goods are ordered.Likewise, swaps or NDFs are entered into to guarantee the flow of payments(amortization of principal and interest) for foreign currency-denominatedfinancing. Pursuant to the Compa