Springs Global´s net revenue increases 10.0% in the 3Q15 when
Transcrição
Springs Global´s net revenue increases 10.0% in the 3Q15 when
Springs Global´s net revenue increases 10.0% in the 3Q15 when compared to the 3Q14. São Paulo, November 16, 2015 - Springs Global presents the results for the third quarter of 2015 (3Q15). The financial information is presented in Reais (R$) and in a consolidated form under the IFRS. Springs is the leading company in bedding, tabletop and bath products in the Americas, with traditional and leading brands in the segments in which they compete, strategically positioned to target customers of different socioeconomic profiles. Springs has vertically integrated operations and state-of-the-art facilities located in Brazil, United States and Argentina. Bovespa: SGPS3 Share price on 11/16/15: R$2.81 Number of shares: 50 million Market cap: R$140.5 million APIMEC public meeting with investors, analysts, and other professionals of the capital markets will be held as shown below and broadcasted live over the Internet on www.springs.com/ir (in Portuguese only). 11/18/2015 - Time: Welcome Coffee at 3:30 p.m. (Brasília). Presentation starts at 4:00 p.m. (Brasília) / 1:00 p.m. (New York) / 6:00 p.m. (London) Espaço Alves Guimarâes Garden – Rua Alves Guimarâes 85 – Jardins – São Paulo, SP. Brazil RSVP: To confirm your attendance, please send an e-mail to [email protected] or call to +55(11) 3107-1571. Investor Relations: Gustavo Kawassaki Investor Relations Officer Phone: +55 (11) 2145-4476 [email protected] www.springs.com/ir 1. Highlights of the 3Q15: • Net revenue reached R$601 million in the 3Q15, an increase of 10.0% when compared to the 3Q14. • 10.8% increase in the consolidated gross profit when compared to the 3Q14, reaching R$162 million. • Increase of 2.5 percentage points and 3.3 percentage points in gross margin of the wholesale segment in South America and North America, respectively. • 4.6 percentage point increase in EBITDA margin in North America. • EBITDA of the nine-month period ended September 30 increased by 24.3% when compared to the same period of last year, reaching R$178 million. • 15.4% growth in operating income in the 3Q15 versus 3Q14. • Operating cash flow measured by EBITDA increased by 6.6% when compared to the 3Q14, reaching R$61 million in the 3Q15. • During the 3Q15, the Company converted 6 ARTEX owned stores and 2 mmartan owned stores into franchises. Summary Information for Springs Global: Summary of results (R$ million) Gros s revenue Net revenue Gros s profi t Margin % EBITDA 3Q15 707.5 601.0 161.6 26.9% 61.4 3Q14 674.9 546.5 145.8 26.7% 57.6 var % 15-14 4.8% 10.0% 10.8% 0.2 p.p. 6.6% 9M15 1,991.8 1,657.9 439.7 26.5% 177.7 9M14 1,880.4 1,525.8 405.6 26.6% 143.0 var % 15-14 5.9% 8.7% 8.4% (0.1 p.p.) 24.3% Margin % Net income (loss) 10.2% 13.4 10.5% 4.8 (0.3 p.p.) 179.2% 10.7% 22.5 9.4% (29.6) 1.3 p.p. - var % 15-14 Net revenue (R$ million) 3Q15 3Q14 var % 15-14 9M15 9M14 South America 357.3 385.9 (7.4%) 1,043.7 1,081.4 (3.5%) 293.7 63.6 313.3 72.6 (6.3%) (12.4%) 853.6 190.1 875.4 206.0 (2.5%) (7.7%) 260.4 601.0 179.9 546.5 44.7% 10.0% 660.4 1,657.9 499.3 1,525.8 32.3% 8.7% Whol es a l e* Retai l North America Total net revenue *Excluding the intercompany sales, net revenue of the wholesale segment in South America was R$277 in the 3Q15 and R$807 million in the 9M15. Net Revenue (R$ million) Product Lines Beddi ng, ta bletop and ba th 3Q15 282.8 3Q14 var % 15-14 290.8 (2.8%) Uti li ty beddi ng Intermedi ate products 198.0 56.6 120.8 62.2 63.9% (9.0%) Volume (tons) 3Q15 8,523 10,824 7,029 3Q14 var % 15-14 10,976 (22.3%) 10,107 7,859 Reta il 63.6 72.7 (12.5%) Total 601.0 546.5 10.0% Product Lines Beddi ng, ta bletop and ba th 9M15 805.3 9M14 var % 15-14 798.0 0.9% Uti li ty beddi ng Intermedi ate products 506.2 156.3 347.7 174.1 45.6% (10.2%) 190.1 206.0 (7.7%) - - 1,657.9 1,525.8 8.7% 77,468 82,443 Net Revenue (R$ million) Reta il Total - Average price (R$)/Kg - 7.1% (10.6%) 18.3 8.1 3Q14 var % 15-14 26.5 25.3% 12.0 7.9 - - (8.9%) 22.8 18.9 9M15 26,426 9M14 var % 15-14 31,021 (14.8%) 9M15 30.5 31,674 19,368 29,423 21,999 26,376 - 3Q15 33.2 28,942 Volume (tons) 52.5% 2.5% 20.6% Average price (R$)/Kg 7.7% (12.0%) (6.0%) 16.0 8.1 9M14 var % 15-14 25.7 18.7% 11.8 7.9 35.6% 2.5% - - - 21.4 18.5 15.7% 2 2. Our Business Model: Springs is structured in 3 business segments: Wholesale South America, Wholesale North America and Retail. Net revenue by business segment and its share in the total consolidated net revenue is shown below: 2.1. OUR OPERATIONS AND OUR BRANDS Springs operates state-of-the-art industrial facilities of home textile products with nine plants in Brazil, five in the United States, and one in Argentina. In Brazil, Springs operates vertically integrated plants, from spinning, through weaving, preparation, dyeing, printing, finishing and sewing of home textile products. The Company’s manufacturing activities are focused in three product lines: Bedding, Tabletop and Bath (“CAMEBA”), Utility Bedding and Intermediate Products. Bedding, Tabletop and Bath (CAMEBA): The Company designs, manufactures and markets a complete line of coordinated products using its portfolio of brands and licenses in addition to private labels, which are distributed through major retailers in their market and through owned and franchised monobrand stores. The products line includes bed sheets and pillowcases, tablecloths, towels, rugs and bath accessories. Utility Bedding: This product category includes pillows, mattress pads, and quilts. The manufacturing facilities of these products are located in the United States and Brazil. Intermediate Products: The Company manufactures and sells yarns and fabrics to clients represented mainly by small and medium garment, knitwear and weaving companies. The fabrics are sold in their natural state or dyed and printed. Springs distributes its products through wholesale and retail as discussed below. 3 2.1.1. WHOLESALE SOUTH AMERICA The Company's CAMEBA and Intermediate Products are sold to multibrand clients in South America under a portfolio of traditional and leading brands, including: Artex and Santista (Brazil), Arco-Íris, Fantasia, and Palette (Argentina). The main customers in this segment are department stores, mass retailers, as well as small and medium sized shops specialized in CAMEBA products. Our brands represent an important competitive advantage. All Springs´ brands are traditional and leaders in the segments in which they compete. Our brands and products are strategically positioned to target customers of different socioeconomic profiles, while reducing the risk of overlap and competition among them. The brands are: Artex (Brazil): Quality products under the concept of affordable luxury, updated with the latest fashion trends. There are four different Home Life Styles: Actual, Relax, Trend, and Elegance. Santista (Brazil): Traditional brand of bedding, tabletop and bath products and bedding accessories with significant penetration in the “budget consumer” and institutional markets. Palette (Argentina): Brand for quality products under the concept of affordable luxury. Market leading brand with over 30 years of presence in the Argentinean market. Arco-Íris (Argentina): Brand offering traditional design and style, focusing on different tastes and trends, and with major market penetration. Fantasia (Argentina): Bedding and bath textile products for clients in the “budget consumer” segment. 2.1.2 RETAIL In Brazil, the Company operates owned and/or franchised monobrand stores under the Artex, MMartan and Casa Moysés brands that, combined, ensure a presence and coverage throughout its domestic market. Each of its store brands operates specific and well defined store formats, including a portfolio of proprietary products and a set of marketing and merchandising strategies aimed at serving targeted consumer groups. Artex: Artex stores are focused on serving customers interested in good quality products which are offered in a wide range of styles and colors, as well as competitive prices and efficient customer service. Artex´s products are manufactured by the Company. MMartan: Desired brand in the bedding, tabletop and bath category. It is synonymous with quality, sophisticated and contemporary products, representing a major brand in the domestic bedding, tabletop and bath market. MMartan’s products are manufactured by the Company using high quality fabrics and imported products. Casa Moysés: Aimed at consumers who seek the highest standard of quality and with expectation of differentiated service. It is a reference brand in the high-end luxury market, with presence and tradition since 1930. Casa Moysés’ products are manufactured by the Company using high quality fabric imported from third parties and are sold exclusively through MMartan and Casa Moysés stores. 2.1.3 NORTH AMERICA The Company's CAMEBA and Utility Bedding are sold to multibrand clients in North America under a portfolio of traditional and leading brands, including: Springmaid, Wabasso and Texmade (North America). The main Springs customers in this segment are department stores, mass retailers, as well as small and medium sized shops specialized in CAMEBA products. Springmaid (USA and Canada): Brand positioned in the affordable luxury segment. Primarily marketed through large retailers in North America. 4 Wabasso (Canada): Established in 1907 as a national brand of textile products in Canada. Wabasso is synonymous with quality, taste, style and comfort. Texmade (Canada): Traditional brand of bedding and bath products focusing on institutional clients in Canada. 3. Financial Performance Springs reports its results, segregated between Wholesale South America (Brazil and Argentina), Retail (Brazil) and North America (United States and Canada); its business units. In the 3Q15, net revenue in South America presented a 7.4% decrease, from R$386 million in the 3Q14 to R$357 million in the 3Q15, representing 61% of the total revenue of the Company. 3.1. South America - Wholesale: 3.1.1 Net Revenue Net revenue of the wholesale segment in South America reached R$294 million in the 3Q15, a 6.3% decrease when compared to the 3Q14. This decrease is due, mainly, to the revenue decrease of intermediate products. The Company projects a lower contribution of intermediate products to its total revenue, due to production growth of finished products, which have higher added value. Net Revenue (R$ million) Wholesale South America (2%) (6%) 313 294 3Q14 3Q15 875 854 9M14 9M15 3.1.2 Gross Profit In the 3Q15, gross profit of the wholesale segment in South America was R$92 million, an increase of 1.7% when compared to the 3Q14. Gross margin increased 2.5 percentage points, from 28.9% in the 3Q14 to 31.4% in the 3Q15. Sales of higher added value products contributed to the gross margin growth. Gross Profit (R$ million) and Margin % Wholesale South America 28.9% 31.4% 28.5% 29.6% 1% 2% 91 92 3Q14 3Q15 250 252 9M14 9M15 5 3.1.3 SG&A There was an increase of 7.8% in SG&A in the 3Q15 when compared to the 3Q14, from R$50 million in the 3Q14 to R$54 million in the 3Q15. SG&A Expenses (R$ million) Wholesale South America 4% 8% 50 54 3Q14 3Q15 149 155 9M14 9M15 3.1.4 EBITDA EBITDA of the wholesale segment in South America was R$49 million in the 3Q15, representing a decrease of 16.7% when compared to the 3Q14, which totaled R$59 million. EBITDA margin decreased 2.1 percentage points, from 18.8% in the 3Q14 to 16.7% in the 3Q15. The decrease in EBITDA of approximately R$5 million in the quarter is due, mainly, to nonrecurring expenses to adjust production to match the market. EBITDA (R$ million) and Margin % Wholesale South America 18.8% 16.7% 17.2% 19.2% 9% (17%) 59 49 3Q14 3Q15 150 164 9M14 9M15 3.2 South America - Retail: 3.2.1 Net Revenue Net revenue for the Company´s retail operation reached R$64 million in the 3Q15, a 12.4% decrease when compared to the 3Q14. Sell-out revenue of all AMMO retail stores was R$110 million in the 3Q15. 6 Net Revenue (R$ million) Retail (8%) (12%) Number of Stores Owned MMa rtan Fra nchi s e MMartan Owned Artex Fra nchi s ed Artex Net revenue (R$ mi lli on) Gros s revenue s ell -out (R$ mil lion) 206 73 64 3Q14 3Q15 3Q15 234 43 131 54 6 63.6 110.0 9M14 2Q15 233 45 128 60 63.2 107.5 190 9M15 3Q14 % var 15-14 237 (1.3%) 49 (12.2%) 123 6.5% 65 (16.9%) 72.6 (12.4%) 124.6 (11.7%) 9M15 234 43 131 54 6 190.1 328.2 9M14 237 49 123 65 206.0 347.7 % var 15-14 (1.3%) (12.2%) 6.5% (16.9%) (7.7%) (5.6%) Realigning the number of stores in the retail operation, ending operations of unprofitable stores, and increasing the number of franchised stores versus owned stores. Springs ended the 3Q15 with 234 owned and franchised stores. At the end of the 3Q15, 20% of the Company stores were between 0 and 3 years and 34% between 3 and 5 years. In the third quarter, the Company converted 6 ARTEX owned stores and 2 mmartan owned stores into franchises. Number of Stores- 3Q15 Age of the Stores - 3Q15 231 193 242 239 234 6 54 67 65 54 115 128 124 127 131 31 46% 137 More than 5 years From 3 to 5 years 103 90 From 2 to 3 years 58 34% From 1 to 2 years 11% 6% 3% 45 47 47 49 51 47 43 2009 2010 2011 2012 2013 2014 3Q15 Less than 1 year Owned MMartan Franchise MMartan Owned Artex Franchise Artex 3.2.2 Gross Profit Gross profit of the retail segment in South America reached R$29 million in the 3Q15. Gross margin remained practically stable when compared to the 3Q14, reaching 45.9%, despite a higher contribution of sell-in revenue in the total revenue. The focus of the retail operation continues on optimizing the use of existing assets and expanding the number of franchised stores versus owned stores. 7 Gross Profit (R$ million) and Margin % Retail 45.9% 45.9% 47.2% 47.2% (8%) (12%) 33 29 3Q14 3Q15 97 90 9M14 9M15 3.2.3 SG&A In the retail segment, SG&A expenses decreased by 14.2% in the 3Q15 when compared to the 3Q14, from R$41 million in the 3Q14 to R$35 million in the 3Q15, due, mainly, to the conversion of owned stores into franchise. SG&A Expenses (R$ million) Retail (5%) (14%) 41 35 3Q14 3Q15 118 112 9M14 9M15 3.2.4 EBITDA EBITDA of the retail segment was a loss of R$5 million in the 3Q15 compared to a loss of R$6 million in the 3Q14. EBITDA (R$ million) and Margin % Retail 3Q14 3Q15 (6) (5) 9M14 9M15 (13) (18) (7.9%) (7.4%) (6.4%) (9.7%) 3.3 North America: 3.3.1 Net Revenue Net revenue in North America increased by 44.7% when compared to the 3Q14, reaching R$260 million in the 3Q15, due, mainly, to the conversion of foreign revenue into Reais. 8 Net Revenue (R$ million) North America 32% 660 45% 499 260 180 3Q14 3Q15 9M14 9M15 3.3.2 Gross Profit Gross profit in North America was R$40 million in the 3Q15, representing an 84.0% increase when compared to the 3Q14, which totaled R$22 million. Gross margin in the 3Q15 was 15.5%, a 3.3 percentage points increase when compared to the margin of the same period of the previous year. Gross Profit (R$ million) and Margin % North America 12.2% 15.5% 11.8% 14.8% 66% 98 84% 59 40 22 3Q14 3Q15 9M14 9M15 3.3.3 SG&A SG&A in North America was R$20 million in the 3Q15, a 26% increase when compared to the 3Q14, due, mainly, to the impact of the exchange rate depreciation on the conversion of the U.S. Dollar denominated expenses into Reais. SG&A Expenses (R$ million) North America 16% 56 26% 49 15 19 3Q14 3Q15 9M14 9M15 3.3.4 EBITDA EBITDA in North America increased from R$4 million in the 3Q14 to R$18 million in the 3Q15. EBITDA margin increased by 4.6 percentage points, from 2.3% in the 3Q14 to 6.9% in the 3Q15. 9 EBITDA (R$ million) and Margin % North America 2.3% 6.9% 5.2% 1.5% 374% 326% 18 7 3Q15 9M14 4 3Q14 35 9M15 3.4 Consolidated: 3.4.1 Net Revenue Consolidated gross revenue reached R$707 million in the 3Q15. Consolidated net revenue increased by 10% when compared to the 3Q14, reaching R$601 million in the 3Q15. In the first nine months of the year, net revenue reached R$1,658 million. Net Revenue (R$ million) Consolidated 9% 10% 1,526 547 601 3Q14 3Q15 9M14 1,658 9M15 3.4.2 Cost of Goods Sold (COGS) Cost of goods sold (COGS) was R$439 million, representing an increase of 9.7% when compared to the 3Q14, which totaled R$401 million. As a percentage of net revenue, COGS remained practically stable at 73%. The table below presents, for the periods indicated, materials costs, conversion and others, as well as depreciation costs for the production and distribution assets: Cost of goods sold (R$ million) 3Q15 % NR 3Q14 % NR var % 15-14 Ma teri a l s Convers i on costs a nd Others Depreci ati on Total 284.2 137.3 17.9 439.4 47.3% 22.8% 3.0% 73.1% 246.1 134.5 20.1 400.7 45.0% 24.6% 3.7% 73.3% 15.5% 2.1% (10.9%) 9.7% 9M15 % NR 9M14 765.4 397.9 54.9 1,218.2 46.2% 24.0% 3.3% 73.5% 688.1 372.5 59.6 1,120.2 % NR var % 15-14 45.1% 24.4% 3.9% 73.4% 11.2% 6.8% (7.9%) 8.7% 10 COGS was distributed as follows: 3Q14 3Q15 Depreciation; 5% Depreciation; 4% Conversion Costs and others; 31% Conversion Costs and others; 34% Materials; 65% Materials; 61% 3.4.2.1 Materials: Materials costs, which include mainly raw materials (cotton and polyester) and chemicals, increased by 15.5% in the period, from R$246 million in the 3Q14 to R$284 million in the 3Q15. As a percentage of net revenue, material costs were 47.3% in the 3Q15. 3.4.2.2 Conversion costs and Others: Conversion costs and others, which include mainly labor, energy, and other utilities were R$137 million, representing an increase of 2.1% when compared to the 3Q14, when totaled R$135 million. Conversion costs as a percentage of net revenue decreased from 24.6% in the 3Q14 to 22.8% in the 3Q15. 3.4.2.3 Depreciation: Depreciation costs of production and distribution assets totaled R$18 million in the 3Q15 and R$20 million in the 3Q14. 3.4.3 Gross Profit Gross profit increased by 10.8%, from R$146 million in the 3Q14 to R$162 million in the 3Q15. Gross margin increased by 0.2 percentage point when compared to the 3Q14, reaching 26.9% in the 3Q15. The graph below presents, for the periods indicated, gross profit: Gross Profit (R$ million) and Margin % Consolidated 26.7% 26.9% 26.6% 26.5% 8% 11% 406 146 162 3Q14 3Q15 9M14 440 9M15 11 The table below presents, for the periods and segments indicated, gross profit: South America Wholesale* Retail 3Q15 3Q14 var % 15-14 North America Total Wholesale Consolidated Gross Profit (R$ million) 3Q15 3Q14 var % 15-14 3Q15 3Q14 var % 15-14 3Q15 3Q14 var % 15-14 Net revenue 293.7 313.3 (6.3%) 63.6 72.6 (12.4%) 260.4 179.9 44.7% 601.0 546.5 10.0% (-) COGS Gros s Profi t (201.6) 92.1 (222.7) 90.6 (9.5%) 1.7% (34.4) 29.2 (39.3) 33.3 (12.5%) (12.3%) (220.1) 40.3 (158.0) 21.9 39.3% 84.0% (439.4) 161.6 (400.7) 145.8 9.7% 10.8% Margin % 31.4% 28.9% 2.5 p.p. 45.9% 45.9% - 15.5% 12.2% 3.3 p.p. 26.9% 26.7% 0.2 p.p. *Excluding the intercompany sales, net revenue of the wholesale segment in South America was R$277 in the 3Q15. South America Wholesale* Gross Profit (R$ million) Net revenue (-) COGS Gros s Profi t Margin % 9M15 853.6 (601.2) 252.4 29.6% North America Wholesale Retail 9M14 var % 15-14 875.4 (2.5%) (625.8) (3.9%) 249.6 1.1% 28.5% 1.1 p.p. 9M15 190.1 (100.3) 89.8 47.2% 9M14 var % 15-14 206.0 (7.7%) (108.7) (7.7%) 97.3 (7.7%) 47.2% - 9M15 660.4 (562.9) 97.5 14.8% Total Consolidated 9M14 var % 15-14 9M15 9M14 var % 15-14 499.3 32.3% 1,657.9 1,525.8 8.7% (440.6) 27.8% (1,218.2) (1,120.2) 8.7% 58.7 66.1% 439.7 405.6 8.4% 11.8% 3.0 p.p. 26.5% 26.6% (0.1 p.p.) *Excluding the intercompany sales, net revenue of the wholesale segment in South America was R$807 in the 9M15. 3.4.4 SG&A SG&A (R$ million) 3Q15 3Q14 var % 15-14 9M15 SG&A South America 89.9 91.9 (2.2%) 269.7 270.3 Sel l i ng - whol es a l e 35.2 32.9 7.0% 104.4 100.5 3.9% Sel l i ng - reta i l 29.8 35.4 (15.8%) 95.9 101.9 (5.9%) General a nd a dmi ni s trati ve 24.9 23.6 5.5% 69.4 67.9 2.2% SG&A North America 19.5 15.5 25.8% 56.4 48.5 16.3% 109.4 107.4 1.9% 326.1 318.8 2.3% SG&A Total 9M14 var % 15-14 (0.2%) SG&A expenses increased by 1.9% in the 3Q15 when compared to the 3Q14, reaching R$109 million in the 3Q15. As a percentage of net revenue, SG&A expenses decreased from 19.7% in the 3Q14 to 18.2% in the 3Q15. SG&A Expenses (R$ million) Consolidated 2% 2% 107 109 15 92 19 90 3Q14 3Q15 South America 319 326 49 56 270 270 9M14 9M15 North America 3.4.5 EBITDA EBITDA totaled R$61 million in the 3Q15, representing an increase of 6.6% when compared to the 3Q14. EBITDA margin in the 3Q15 reached 10.2%, practically stable when compared to the 3Q14. 12 EBITDA (R$ million) 3Q15 3Q14 var % 15-14 9M15 9M14 13.4 4.8 179.2% 22.5 (29.6) - 0.5 (1.4) (135.7%) (2.2) (2.5) (12.0%) (+) Fi na nci a l res ul ts 28.1 32.9 (14.6%) 97.9 110.2 (11.2%) (+) Depreci ati on a nd amorti za ti on EBITDA 19.4 61.4 21.3 57.6 (8.9%) 6.6% 59.5 177.7 64.9 143.0 (8.3%) 24.3% 10.2% 10.5% (0.3 p.p.) 10.7% 9.4% 1.3 p.p. Income (Los s ) for the year (+) Income and s oci a l contri buti on ta xes Margin % var % 15-14 The graph below presents the EBITDA breakdown for the indicated periods: EBITDA (R$ million) and Margin % Consolidated 10.5% 10.2% 10.7% 9.4% 24% 178 7% 143 58 61 3Q14 3Q15 9M14 9M15 3.5 Financial Results Net financial expenses in the 3Q15 totaled R$28 million, compared to the R$33 million of the same period of the previous year. The main factors that contributed to this result are discussed below. Financial results (R$ million) Fi na nci a l i ncome 3Q15 3Q14 var % 15-14 9M15 9M14 var % 15-14 7.0 6.4 9.4% 18.0 10.8 66.7% Fi na nci a l expens es - i nteres ts Fi na nci a l expens es - ba nk cha rges a nd others (40.4) (16.3) (28.8) (17.2) 40.3% (5.2%) (109.3) (45.7) (78.3) (43.6) 39.6% 4.8% Excha nge ra te vari a ti ons , net Financial results 21.6 (28.1) 6.7 (32.9) 222.4% (14.6%) 39.1 (97.9) 0.9 (110.2) 4,244.4% (11.2%) Financial income increased from R$6 million in the 3Q14 to R$7 million in the 3Q15 and interest expenses increased from R$29 million in the 3Q14 to R$40 million in the 3Q15, due, mainly, to the SELIC rate (Brazilian interest rate) increase in the 3Q15 when compared to the 3Q14. Bank charges and others decreased from R$17 million in the 3Q14 to R$16 million in the 3Q15. The balance of net exchange rate variations reached an income of R$22 million in the 3Q15, reflecting the current exposure to the U.S. Dollar. 3.6 Net Income As a result of what was previously discussed, the Company reported net income of R$13 million in the 3Q15 and R$22 million in the 9M15. 13 4. Capital Expenditures (CAPEX) Our CAPEX reached R$13 million in the 3Q15 and R$19 million in the 3Q14. During the 3Q15, investments in manufacturing facilities mainly reflected asset modernization. In retail, investments are associated with restructurings and improvements of our owned stores. Investment (R$ million) Ma nufa cturing fa cil ities 3Q15 3Q14 var % 15-14 9M15 9M14 var % 15-14 10.4 17.1 (39.2%) 31.1 33.9 (8.3%) Reta i l 2.4 1.6 50.0% 4.5 7.2 (37.5%) Total 12.8 18.7 (31.6%) 35.6 41.1 (13.4%) 3Q15 625.0 2Q15 622.9 var % 3Q-2Q 0.3% 547.8 77.2 277.9 (130.3) 772.6 561.6 61.3 267.0 (110.2) 779.7 (2.5%) 25.9% 4.1% 18.2% (0.9%) 5. Indebtedness and Working Capital Indebtedness (R$ million) Loa ns a nd fina ncing - Domes tic currency - Foreign currency Debentures Cas h and marketable s ecuriti es Net debt Debt Index (3Q15) Fixed; 3% Debt Amortization Schedule (R$ million) Libor; 12% CDI; 85% 378 72 2015 63 2016 2017 112 2018-23 In financial terms, the working capital needs were R$1,088 million in the 3Q15. Working capital (R$ million) 3Q15 2Q15 var % 3Q-2Q Accounts receiva ble 561.1 516.5 8.6% Inventories 724.8 675.3 7.3% 40.8 37.0 10.3% (238.8) 1,087.9 (202.3) 1,026.5 18.0% 6.0% Adva nces to s uppl iers Suppliers Working capital 6. Investor Relations and Capital Market Springs Global's shares, traded on the BM&FBovespa under the ticker SGPS3, over performed the Bovespa Index (Ibovespa) and the Small Cap Index in the 3Q15, as shown in the graph below. Concerning its liquidity, the daily average financial volume on the BM&FBovespa was R$102 thousand in the 3Q15, an increase of 3% when compared to the 3Q14, which was R$99 thousand. 14 110 105 SGPS3 x Ibovespa x Small Cap Index 3Q15 (100 Base) 100 95 90 89 85 85 85 80 75 70 65 60 SGPS3 Ibovespa Small Cap Index 7. Outlook Springs confirms its focus on improving the profitability of its businesses, which will be obtained (1) by higher capacity utilization of the plants in Brazil, resulting in higher fixed costs absorption, (2) by higher conversion of intermediate products (yarns and fabrics) into finished products with higher added value, and (3) by the execution of the monobrand retail growth plan, especially with the Artex brand, focusing on the franchise model, which leverages growth with low capital demand. In this context, we provide the guidance for 2015, in line with the Company´s budget. Business Units Amount (R$ million) Wholes a le - South America Reta il Wholes a le - North America 1,150 - 1,260 260 - 300 740 - 790 Total Net Revenue EBIT EBITDA 2,150 - 2,350 110 - 140 200 - 230 CAPEX 40 - 50 Springs, therefore, continues to focus on growth with improved profitability and capital discipline, from a solid platform in the wholesale segment in South America and the potential for expansion and consolidation of its monobrand retail operations. 15 Appendix I. Balance Sheet II. Income Statement III. Cash Flow 16 Balance Sheet Assets (R$ million) Current asset Cash and cash equivalents Marketable securities Financial instruments Accounts receivable Inventories Advances to suppliers Recoverable taxes Receivable - sale of property Other receivables Noncurrent assets Receivable - sale of property Related parties Recoverable taxes Deferred income and social contribution taxes Property, plant and equipment held for sale Escrow deposits Others Permanent Other investments Property, plant and equipment Intangible assets Total assets Liabilities and Equity (R$ million) Current liabilities Loans and financing Debenture Financial instruments Suppliers Taxes Payroll and related charges Government concessions Noneconomic leases Other payables Noncurrent liabilities Loans and financing Debenture Noneconomic leases Related parties Government concessions Employee benefit plans Miscellaneous accruals Other obligations Equity Capital Capital reserves Assets and liabilities valuation adjustment Cumulative translation adjustment Income reserves Retained deficit Noncontrolling interest Total liabilities and equity 3Q15 1,513.1 128.3 2.0 1.7 561.1 724.8 40.8 29.8 5.0 19.6 221.7 42.1 23.5 4.6 67.8 58.6 20.5 4.6 944.1 2.7 811.3 130.1 2,678.9 2Q15 1,391.2 108.6 1.6 516.5 675.3 37.0 28.5 1.9 21.8 214.9 43.7 28.8 4.3 65.7 46.7 19.2 6.5 936.6 2.2 811.7 122.7 2,542.7 3Q15 2Q15 994.3 439.6 144.7 3.2 236.3 19.3 71.4 17.2 5.7 56.9 574.6 185.4 133.2 22.0 0.1 47.9 141.4 24.6 20.0 1,110.0 1,860.3 79.4 (40.2) (210.7) 25.2 (614.9) 10.9 2,678.9 876.1 402.8 134.4 202.3 10.4 55.9 17.3 4.3 48.7 575.3 220.1 132.6 16.9 48.0 113.5 23.3 20.9 1,091.3 1,860.3 79.4 (40.3) (213.7) 25.2 (628.3) 8.7 2,542.7 17 Income Statement Consolidated Income Statement ($ milllion) Gross revenues Net revenues Cost of goods sold % of net sales Materials Conversion costs and others Depreciation Gross profit % of net sales SG&A % of net sales Selling expenses % of net sales General and administrative expenses % of net sales Others, net % of net sales Income from operations % of net sales Financial result Loss from operations before taxes Income and social contribution taxes Net income for the period 3Q15 707.5 601.0 (439.4) 73.1% (284.2) (137.3) (17.9) 161.6 26.9% (109.4) 18.2% (72.7) 12.1% (36.7) 6.1% (10.3) (1.7%) 41.9 7.0% (28.0) 13.9 (0.5) 13.4 3Q14 var % 15-14 674.9 4.8% 546.5 10.0% (400.7) 9.7% 73.3% (0.2 p.p.) (246.1) 15.5% (134.5) 2.1% (20.1) (10.9%) 145.8 10.8% 26.7% 0.2 p.p. (107.4) 1.9% 19.7% (1.5 p.p.) (74.9) (2.9%) 13.7% (1.6 p.p.) (32.5) 12.9% 5.9% 0.2 p.p. (2.1) 390.5% (0.4%) (1.3 p.p.) 36.3 15.4% 6.6% 0.4 p.p. (32.9) (14.9%) 3.4 308.8% 1.4 (135.7%) 4.8 179.2% 18 Cash Flow Consolidated Statements of Cash Flow (R$ million) Net income (loss) for the period Depreciation and amortization Income and social contribution taxes (Gain) loss on disposal of property, plant and equipment Reversal of impairment losses of property, plant and equipment Exchange rate variations Bank charges and interests Cash flows from operating activities 9M15 22.5 59.5 (2.2) (26.9) (37.4) 83.9 99.4 9M14 (29.6) 64.9 (2.5) 21.5 (9.8) 2.3 47.1 93.9 (0.7) (38.6) (135.2) 5.9 69.3 65.8 (0.1) 16.6 (51.7) 0.3 (12.4) (31.0) Net cash provided in operating activities 65.9 15.6 Interest paid Income and social contribution taxes paid (107.2) 1.5 (45.2) 1.2 Net cash used in operating activities after interest and taxes (I) (39.8) (28.4) Cash flows from investing activities In acquisition of property, plant and equipment In intangible assets Disposal of property, plant and equipment Loans between related parties (35.6) 6.9 16.4 (40.9) (0.2) 35.3 2.8 Net cash used in investing activities (II) (12.3) (3.0) 495.5 (453.4) 261.2 270.0 (430.7) 42.1 100.5 8.7 0.1 (1.3) 69.2 129.6 128.3 81.6 150.8 (1.3) 69.2 Changes in assets and liabilities Marketable securities Accounts receivable Inventories Advances to suppliers Suppliers Others Cash flows from financing activities Proceeds from new loans Issuance of debenture Repayment of loans Net cash provided in financing activities (III) Effect of exchange rate changes on cash and cash equivalents in foreign currencies (IV) Increase (decrease) in cash and cash equivalents (I+II+III+IV) Cash and cash equivalents: At the beginning of the period At the end of the period Increase (decrease) in cash and cash equivalents 19 (Convenience Translation into English from the Original Previously Issued in Portuguese) Springs Global Participações S.A. Individual and Consolidated Financial Statements on Review of Interim Financial Information Third Quarter - 2015 BDO RCS Auditores Independentes Tel.: +55 11 3848 5880 Fax: + 55 11 3045 7363 www.bdobrazil.com.br Rua Major Quedinho 90 Consolação – São Paulo, SP - Brasil 01050-030 (Convenience Translation into English from the Original Previously Issued in Portuguese) REVIEW REPORT INFORMATION OF INDEPENDENT AUDITORS ON INTERIM FINANCIAL ToThe Board of Directors, Management and Shareholders of Springs Global Participações S.A. Montes Claros - MG Introduction We have reviewed the individual and consolidated interim financial statements of Springs Global Participações S.A. (“Company”), included in the Quarterly Information (ITR) related to the quarter ended September 30, 2015, which consist of the balance sheet at September 30, 2015 and the related statements of income and comprehensive income for the three and nine months then ended and the changes in equity and cash flows for the nine month period then ended including a summary of significant accounting policies and other explanatory notes. The Management is responsible for the preparation of the individual interim financial information in accordance with CPC 21 (R1) - Interim Financial Reporting and IAS 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB), as well as the presentation of information in accordance with the standards issued by the Brazilian Securities Commission (CVM) applicable to the preparation of the Quarterly Information - ITR. Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of the review Our review was conducted according to the Brazilian and international standards for reviewing interim financial statements (NBC TR 2410 and ISRE 2410 – Review of Interim Financial Information performed by the Independent Auditor of the Entity). An interim review consists principally of applying analytical and other review procedures, and making enquiries of and having discussions with persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards. An interim review does not provide assurance that we would become aware of any or all significant matters that might be identified in an audit. Therefore, we do not express such an opinion. 2 Conclusion on the individual and consolidated interim financial information Based on our review, we are not aware of any facts that would lead us to believe that the individual interim financial information included in the Quarterly Information - ITR referred to above were not prepared, in all material respects, in accordance with CPC 21 (R1) applicable to the preparation of Quarterly Information - ITR and presented in accordance with the standards issued by the Brazilian Securities Commission (CVM). Other issues Interim statements of value added We have also reviewed the individual and consolidated interim statements of value added (DVA), individual and consolidated, prepared under the responsibility of the Company’s management, for the Company for the nine months ended September 30, 2015, for which presentation in the interim financial statements is required according to the standards issued by CVM applicable to the preparation of Quarterly Information (ITR), and considered as supplementary information by IFRS, which do not require the presentation of DVA. These statements were submitted to the same review procedures described before and, based on our review, we are not aware of any fact that leads us to believe that they have not been fairly stated, in all material respects, regarding the individual and consolidated interim financial statements taken as a whole. São Paulo, November 10, 2015. BDO RCS Auditores Independentes CRC 2SP 013846/O-1-S-MG Paulo Sérgio Tufani Accountant CRC 1SP 124504/O-9 S-MG 3 (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. BALANCE SHEETS AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014 (In thousands of Brazilian Reais) A S S E T S Note CURRENT: Cash and cash equivalents Marketable securities Financial instruments Accounts receivable Inventories Advances to suppliers Recoverable taxes Receivable – sale of property Other receivables 3 4 22.d.3 5 6 17.d 16 Total current assets NONCURRENT: Long-term assets: Receivable – sale of property Related parties Recoverable taxes Deferred income and social contribution taxes Property, plant and equipment held for sale Escrow deposits Others Investments in subsidiaries Other investments Property, plant and equipment Intangible assets Total noncurrent assets Total assets 16 15 17.d Company 09.30.2015 12.31.2014 Consolidated 09.30.2015 12.31.2014 114 1,189 136 8,076 128,303 2,035 1,681 561,127 724,768 40,797 29,777 129,570 1,360 522,489 589,566 46,667 47,355 985 -------------2,288 -------------- 992 -------------9,204 -------------- 5,014 19,633 -------------1,513,135 -------------- 23,248 -------------1,360,255 -------------- 42,101 23,455 4,580 7,535 4,595 23 - - 17.c 3,325 1,905 67,761 62,512 8.b 18 4,221 -------------7,569 4,221 -------------6,126 58,592 20,464 4,732 -------------221,685 40,527 17,495 6,850 -------------139,514 7.a 1,157.345 27,303 -------------1,192,217 -------------1,194,505 ======== 1,119,462 27,303 -------------1,152,891 -------------1,162,095 ======== 2,672 811,316 130,094 -------------1,165,767 -------------2,678,902 ======== 1,968 847,260 119,574 -------------1,108,316 -------------2,468,571 ======== 8.a 9 The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. BALANCE SHEETS AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014 (In thousands of Brazilian Reais) LIABILITIES AND EQUITY Note LIABILITIES CURRENT: Loans and financing Debenture Financial instruments Suppliers Taxes Payroll and related charges Government concessions Noneconomic leases Other payables 12 13 22.d.3 11 20 10 ------------50 ------------- 39 ------------42 ------------- 12 13 10 15 20 19 18 7.a 13,989 4,317 75,097 2,056 ------------95,459 ------------- 16,714 4,317 60,879 2,056 ------------83,966 ------------- 185,401 133,205 22,026 8 47,884 141,391 24,649 19,993 ------------574,557 ------------- 191,458 263,748 12,822 7,969 47,875 101,102 21,962 19,691 ------------666,627 ------------- 1.860,265 79,381 1,860,265 79,381 1.860,265 79,381 1,860,265 79,381 (40,205) (210,698) 25,170 (614,917) ------------- (40,369) (209,176) 25,170 (637,184) ------------- (40,205) (210,698) 25,170 (614,917) ------------- (40,369) (209,176) 25,170 (637,184) ------------- 1,098,996 1,078,087 1,098,996 1,078,087 ------------1,098,996 ------------1,194,505 ======== ------------1,078,087 ------------1,162,095 ======== 11,017 ------------1,110,013 ------------2,678,902 ======== 7,684 ------------1,085,771 ------------2,468,571 ======== Total noncurrent liabilities EQUITY: Capital Capital reserves Assets and liabilities valuation adjustment Cumulative translation adjustments Earnings reserves Accumulated deficit Total equity attributable to the owners of the Company NON-CONTROLLING INTERESTS Total equity Total liabilities and equity - - Consolidated 09.30.2015 12.31.2014 439,587 144,692 3,152 236,346 19,307 71,446 17,240 5,568 56,994 ------------994,332 ------------- Total current liabilities NONCURRENT: Loans and financing Debenture Noneconomic leases Related parties Government concessions Employee benefit plans Miscellaneous accruals Subsidiaries obligations Other obligations Company 09.30.2015 12.31.2014 4 1 45 3 - 403,748 1,685 167,095 12,089 51,559 16,556 4,286 59,155 ------------716,173 ------------- 14 The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (In thousands of Brazilian Reais) Note OPERATING INCOME (EXPENSES): General and administrative expenses Management fees Equity in subsidiaries 7.a INCOME (LOSS) FROM OPERATIONS Financial expenses – interests Financial expenses – bank charges and others Financial income Exchange rate variations, net INCOME (LOSS) FROM OPERATIONS BEFORE TAXES Income and social contribution taxes: Current Deferred 17.b 17.b NET INCOME (LOSS) FOR THE PERIOD BASIC AND DILUTED INCOME (LOSS) PER SHARE – R$ 26 07.01.2015 to 09.30.2015 Company 01.01.2015 07.01.2014 to to 09.30.2015 09.30.2014 (733) (106) 14,219 ------------13,380 (2,345) (316) 25,022 ------------22,361 (758) (108) 3,587 ------------2,721 (2,422) (324) (25,764) ------------(28,510) (516) (80) 30 30 ------------12,844 (1,568) (260) 285 30 ------------20,848 (454) (151) 697 1,099 ------------3,912 (930) (381) 2,645 (3,021) ------------(30,197) 468 -----------13,312 ======= 1,419 -----------22,267 ======= 967 -----------4,879 ======= 967 -----------(29,230) ======= 0.0661 ====== 0.1113 ====== 0.0244 ====== (0.1462) ====== The accompanying notes are an integral part of these interim financial statements. 01.01.2014 to 09.30.2014 (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (In thousands of Brazilian Reais) Consolidated 01.01.2015 07.01.2014 to to 09.30.2015 09.30.2014 01.01.2014 to 09.30.2014 Note 07.01.2015 to 09.30.2015 NET REVENUES 25 601,025 1,657,893 546,513 1,525,816 COST OF GOODS SOLD 24 (439,417) ------------161,608 (1,218,226) ------------439,667 (400,702) ------------145,811 (1,120,194) ------------405,622 24 24 24 21 (72,652) (34,821) (1,933) (10,283) ------------41,919 (220,833) (99,956) (5,359) 4,712 ------------118,231 (74,874) (29,949) (2,612) (2,066) ------------36,310 (221,909) (90,562) (6,363) (8,721) ------------78,067 (40,406) (16,292) 7,007 21,632 ------------13,860 (109,316) (45,731) 17,974 39,094 ------------20,252 (28,765) (17,211) 6,361 6,707 ------------3,402 (78,261) (43,620) 10,831 906 ------------(32,077) (924) 468 -----------13,404 ======= (874) 3,075 -----------22,453 ======= 1,444 -----------4,846 ======= 2,477 -----------(29,600) ======= 13,312 92 ---------13,404 ======= 22,267 186 ---------22,453 ======= 4,879 (33) ---------4,846 ======= (29,230) (370) ---------(29,600) ======= GROSS PROFIT OPERATING INCOME (EXPENSES): Selling expenses General and administrative expenses Management fees Others, net INCOME FROM OPERATIONS Financial expenses – interests Financial expenses – bank charges and others Financial income Exchange rate variations, net INCOME (LOSS) FROM OPERATIONS BEFORE TAXES Income and social contribution taxes: Current Deferred NET INCOME (LOSS) FOR THE PERIOD ATTRIBUTABLE TO: Owners of the Company Non-controlling interests 17.b 17.b The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (In thousands of Brazilian Reais) 07.01.2015 to 09.30.2015 NET INCOME (LOSS) FOR THE PERIOD Other comprehensive income (loss): - Items that will impact the statements of operations: Exchange rate variations on foreign investments - Items that will not impact the statements of operations: Actuarial gain on pension plans COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD NET INCOME (LOSS) FOR THE PERIOD Other comprehensive income (loss): - Items that will impact the statements of operations: Exchange rate variations on foreign investments - Items that will not impact the statements of operations: Actuarial gain on pension plans COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD ATTRIBUTABLE TO: Owners of the Company Non-controlling interests Company 01.01.2015 07.01.2014 to to 09.30.2015 09.30.2014 01.01.2014 to 09.30.2014 13,312 22,267 4,879 (29,230) 3,010 (1,522) 395 (19,196) 81 ------------16,403 ======= 164 ------------20,909 ======= 566 ------------5,840 ======= 1,575 ------------(46,851) ======= 07.01.2015 to 09.30.2015 Consolidated 01.01.2015 07.01.2014 to to 09.30.2015 09.30.2014 01.01.2014 to 09.30.2014 13,404 22,453 4,846 (29,600) 5,200 1,625 983 (19,056) 81 ------------18,685 ======= 164 ------------24,242 ======= 566 ------------6,395 ======= 1,575 ------------(47,081) ======= 16,403 2,282 -----------18,685 ======= 20,909 3,333 -----------24,242 ======= 5,840 555 -----------6,395 ======= (46,851) (230) -----------(47,081) ======= The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF CHANGES IN EQUITY FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2014 (In thousands of Brazilian Reais) Assets and liabilities Note BALANCES AS OF DECEMBER 31, 2013 Total equity Cumulative Capital valuation translation Capital reserve adjustment adjustment 1,860,265 79,381 (21,929) (190,005) Earnings reserves Legal 1,842 attributable to Retained Accumulated the owners of Non-controlling income deficit the Company interests Total equity 23,328 (608,785) 1,144,097 7,866 1,151,963 - - (29,230) (29,230) (370) (29,600) - - - (3,015) 140 (2,875) - - - - 1,575 - 1,575 (16,181) - - - (16,181) - (16,181) ------------ ------------ ------------ ------------- ------------ ------------- - - (29,230) (46,851) (230) (47,081) Comprehensive income (loss): Net loss for the period - - - Exchange rate variations on foreign - - - - - - - - ---------- ---------- -------------- 1,575 (19,196) investments (3,015) 2.1.b Actuarial gain on pension plans 1,575 Impact of subsidiariesExchange rate variations on foreign investments 2.1.b ------------- Total comprehensive income (loss) BALANCES AS OF SEPTEMBER 30, 2014 - - ------------- ---------- ---------- -------------- ------------ ------------ ------------ ------------- ------------ ------------- 1,860,265 79,381 (20,354) (209,201) 1,842 23,328 (638,015) 1,097,246 7,636 1,104,882 ======== ====== ====== ======== ======= ======= ======= ======== ======== ======== The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF CHANGES IN EQUITY FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2015 (In thousands of Brazilian Reais) Assets and liabilities Note BALANCES AS OF DECEMBER 31, 2014 Total equity Cumulative Capital valuation translation Capital reserve adjustments adjustment 1,860,265 79,381 (40,369) (209,176) Earnings reserves Legal 1,842 attributable to Retained Accumulated the owners of Non-controlling income deficit the Company interests 23,328 (637,184) 1,078,087 7,684 Total equity 1,085,771 Comprehensive income (loss): Net income for the period - - - - - - 22,267 22,267 186 22,453 Exchange rate variations on foreign - - - (31,994) - - - (31,994) 3,147 (28,847) - - - - - - 164 - 164 - - - - - - 30,472 - 30,472 ---------- ---------- -------------- ------------ ------------ ------------ ------------- ------------ ------------- 164 (1,522) - - 22,267 20,909 3,333 24,242 investments 2.1.b Actuarial gain on pension plans 164 Impact of subsidiariesExchange rate variations on foreign investments ------------Total comprehensive income (loss) BALANCES AS OF SEPTEMBER 30, 2015 30,472 2.1.b - - ------------- ---------- ---------- -------------- ------------ ------------ ------------ ------------- ------------ ------------- 1,860,265 79,381 (40,205) (210,698) 1,842 23,328 (614,917) 1,098,996 11,017 1,110,013 ======== ====== ====== ======== ======= ======= ======= ======== ======== ======== The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (In thousands of Brazilian Reais) Company 01.01.2014 01.01.2015 to to 09.30.2014 09.30.2015 Cash flows from operating activities Net income (loss) for the period Adjustments to reconcile net income (loss) for the period to net cash provided by (used in) operating activities: Depreciation and amortization Equity in subsidiaries Income and social contribution taxes (Gain) loss on disposal of property, plant and equipment (Reversal of) Impairment losses of property, plant and equipment Exchange rate variations Bank charges and interests Changes in assets and liabilities Marketable securities Accounts receivable Inventories Advances to suppliers Suppliers Others Net cash provided by (used in) operating activities Interest paid Income and social contribution taxes received (paid) Net cash provided by (used in) operating activities after interest and taxes Cash flows from investing activities In acquisition of property, plant and equipment In intangible assets Disposal of property, plant and equipment Loans between related parties Net cash provided by (used in) investing activities Consolidated 01.01.2015 01.01.2014 to to 09.30.2015 09.30.2014 22,267 (29,230) 22,453 (29,600) (25,022) (1,419) - 25,764 (967) - 59,498 (2,201) (26,917) 64,865 (2,477) 21,541 (30) 1,568 -----------(2,636) ------------ 3,021 (1,304) -----------(2,716) ------------ (37,404) 83,947 -----------99,376 ------------ (9,827) 2,324 47,049 -----------93,875 ------------ 1 6,900 -----------4,265 ------------ 229 -----------(2,487) ------------ (675) (38,638) (135,202) 5,870 69,251 65,848 -----------65,830 ------------ (55) 16,627 (51,720) 312 (12,403) (31,031) -----------15,605 ------------ ------------ (411) ------------ (107,226) 1,535 ------------ (45,168) 1,119 ------------ 4,265 ------------ (2,898) ------------ (39,861) ------------ (28,444) ------------ (4,287) -----------(4,287) 5,939 -----------5,939 (35,566) 6,964 16,388 -----------(12,214) (40,907) (204) 35,299 2,783 -----------(3,029) ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (In thousands of Brazilian Reais) Company 01.01.2014 01.01.2015 to to 09.30.2014 09.30.2015 Cash flows from financing activities Proceeds from new loans Issuance of debenture Repayment of loans Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents in foreign currency Increase (decrease) in cash and cash equivalents Cash and cash equivalents: At the beginning of the period At the end of the period Increase (decrease) in cash and cash equivalents Consolidated 01.01.2015 01.01.2014 to to 09.30.2015 09.30.2014 ----------------------- 19,130 (22,043) -----------(2,913) ------------ 495,453 (453,355) -----------42,098 ------------ 261,187 270,000 (430,668) -----------100,519 ------------ -----------(22) ------------ -----------128 ------------ 8,710 -----------(1,267) ------------ 172 -----------69,218 ------------ 136 114 -----------(22) 46 174 -----------128 129,570 128,303 -----------(1,267) 81,591 150,809 -----------69,218 ======= ======= ======= ======= The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. STATEMENTS OF VALUE ADDED FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (In thousands of Brazilian Reais) Company 01.01.2014 01.01.2015 to to 09.30.2014 09.30.2015 REVENUES Sales of products, goods and services Allowance for doubtful accounts Gain (loss) on disposal of property, plant and equipment MATERIALS ACQUIRED FROM THIRD PARTIES Cost of goods and services sold Materials, energy, third party services, and others Impairment reversals of property, plant and equipment GROSS VALUE ADDED RETENTIONS Depreciation and amortization NET VALUE ADDED PRODUCED BY THE COMPANY VALUE ADDED RECEIVED BY TRANSFER Equity in subsidiaries Financial income Exchange rate variation Royalties TOTAL VALUE ADDED FOR DISTRIBUTION (RETENTION) DISTRIBUTION OF VALUE ADDED Salary, wages and compensation Taxes, duties and contributions Payments to third parties Equity – Net loss VALUE ADDED DISTRIBUTED (RETAINED) Consolidated 01.01.2015 01.01.2014 to to 09.30.2015 09.30.2014 ----------- ----------- 1,854,922 (523) 26,917 -------------1,881,316 1,751,397 (998) (21,541) -------------1,728,858 (2,555) ----------(2,555) ----------(2,555) (2,667) ----------(2,667) ----------(2,667) (879,764) (271,304) ----------(1,151,068) ----------730,248 (806,270) (266,464) 9,827 ----------(1,062,907) ----------665,951 ----------(2,555) ----------(2,667) (59,498) ----------670,750 (64,865) ----------601,086 25,022 285 30 ----------25,337 ----------22,782 ====== (25,764) 2,645 4,444 ----------(18,675) ----------(21,342) ====== 17,974 44,420 9,832 ----------72,226 ----------742,976 ====== 10,831 21,098 9,290 ----------41,219 ----------642,305 ====== (1,053) 1,568 22,267 ----------22,782 ====== (507) 8,395 (29,230) ----------(21,342) ====== 328,688 160,634 231,201 22,453 ----------742,976 ====== 308,860 167,536 195,509 (29,600) ----------642,305 ====== The accompanying notes are an integral part of these interim financial statements. (Convenience Translation into English from the Original Previously Issued in Portuguese) SPRINGS GLOBAL PARTICIPAÇÕES S.A. NOTES TO THE INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2015 (Amounts in thousands of Brazilian Reais) 1. OPERATIONS Springs Global Participações S.A. (“Company”), domiciled in Montes Claros – MG, Brazil, was incorporated on November 24, 2005 and, on January 24, 2006 received as capital contribution 100% of the shares of Coteminas S.A. (“CSA”) and Springs Global US, Inc. (“SGUS”), privately-held companies headquartered in Brazil and in the United States, respectively, whose shareholders were Companhia de Tecidos Norte de Minas - Coteminas (“CTNM”) and the former shareholders of Springs Industries, Inc. (“SI”), respectively. On April 30, 2009, the Company acquired a controlling interest in Springs e Rossini Participações S.A. (“SRPSA”), the parent of MMartan Têxtil Ltda (“MMartan”). On July 27, 2007, the Company’s stock began trading on the “Bolsa de Valores, Mercadorias e Futuros” – BM&FBOVESPA S.A., in the “Novo Mercado” segment, under the code “SGPS3”. The Company functions as the holding company of CSA and SGUS, companies that focus their manufacturing and distribution operations on bed and bath linens, previously carried out by CTNM and SI. This joint venture created a textile industrial complex of bed linens and bath products, with production units in Brazil, Argentina, the United States, and Mexico. The Company also manufactures products with strong brand names, such as MMartan, Casas Moysés, Artex, Santista, Paládio, Calfat, Garcia, Arco Íris, Magicolor, among others. The Company’s products have a privileged market standing on the shelves of the largest and most demanding retail channels of the world. The Company’s products are sold in the United States and Canada by SGUS through its vast distribution chain that is close to the largest retailers in those markets. In Brazil and Argentina, its products are sold by CSA and its subsidiary Coteminas Argentina S.A. In April 2009, the Company started its bed, tabletop and bath retail operations, under the brand MMartan and later, in August 2011, with the brand Artex. The retail operation of these two brands is run by subsidiary AMMO Varejo Ltda. (“AMMO”). 2. PRESENTATION OF INTERIM FINANCIAL STATEMENTS The interim financial statements were approved by the Company’s Board of Directors on November 10, 2015. The Company presents its individual (“Company”) and consolidated (“Consolidated”) interim financial statements prepared simultaneously in accordance with technical pronouncement CPC 21 (R1) - Interim Financial Statements and in accordance with international standard IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board – IASB, as well as the standards issues by CVM (Brazilian Securities and Exchange Commission), applicable to the preparation of the Interim Financial Information. The Company adopted all standards, review of standards and interpretations issued by the IASB and the CPC which were effective on September 30, 2015. 1 2.1 – Translation of balances in foreign currency a) Functional and presentation currency The interim financial statements of each subsidiary included in the consolidation of the Company and used as a basis for valuation of investments through the equity method are prepared using the functional currency of each entity. The functional currency of an entity is the currency of the primary economic environment in which it operates. By defining the functional currency of each of its subsidiaries, Management considered which currency significantly influences the selling price of their products and services, and the currency in which most of the production cost inputs are paid or incurred. The consolidated interim financial statements are presented in Reais (R$), which is the functional and presentation currency of the Company. b) Conversion of balances The results and financial position of all subsidiaries included in the consolidation that have functional currencies different from the presentation currency are translated to the presentation currency as follows: i) assets and liabilities are translated at the exchange rate prevailing on the date of the interim financial statements; ii) income and expenses are translated at the monthly rate of exchange, and iii) all differences resulting from the translation are recognized in equity under the caption "Cumulative translation adjustment" and are presented as other comprehensive income in the statement of comprehensive income. 2.2 – Accounting policies The significant accounting policies used in the preparation of the interim financial statements are as follows: (a) Results of operations--Results of operations are calculated in accordance with the accrual basis of accounting. Revenue is not recognized if there is significant uncertainty regarding its realization. Interest income and expense are recognized using the effective interest rate as financial income and expenses in the statements of operations. The extraordinary gains and losses and the transactions and provisions involving property, plant and equipment are recorded in the statements of operations as "Others, net ". (b) Non-derivatives financial instruments--Non-derivative financial instruments include cash and cash equivalents, accounts receivable and other current and noncurrent receivables, loans and financing, suppliers, other accounts payable and other equity and debt instruments. The nonderivative financial instruments are initially recognized at fair value plus costs directly attributable to their acquisition or issuance. Subsequent to the initial recognition, non-derivative financial instruments are measured at each balance sheet date, according to their classification, which is defined in the initial recognition based on the purposes for which they were acquired or issued. The financial instruments classified as assets fall into the category of "Loans and receivables" and together with the financial liabilities, after the initial recognition at fair value, are valued based on amortized cost using the effective interest rate method. Interest, monetary and exchange rate variations, less impairment losses, if any, are recognized as revenue or expense in the statements of operations as incurred. 2 The Company does not have any non-derivative financial assets classified in the following categories: (i) held for trading, (ii) held to maturity, and (iii) available for sale, and also does not have any non-derivative financial liabilities classified as "Fair value through profit or loss”. (c) Derivative financial instruments--Derivative financial instruments are initially recognized at fair value and, subsequently, the change in fair value is recorded in the statements of operations, unless the derivative is designated as a cash flow hedge, which should follow the method of accounting for cash flow hedges. A derivative financial instrument is classified as a cash flow hedge when its purpose is to protect against exposure to cash flow variability that is attributable both to a particular risk associated with a recognized asset or liability, as well as to a transaction that is probable to occur, or to exchange rate risk related to an unrecognized firm commitment. When initiating a derivative transaction intended to hedge a risk, the Company formally designates and documents the hedged item, as well as the objective of the risk policy and strategy of the hedge transaction. The documentation includes identification of the hedging instrument, the item or transaction being hedged, the nature of the risk to be protected and how the entity will assess the effectiveness of the hedging instrument in offsetting the exposure to changes in fair value of the hedged item or cash flows attributable to the hedged risk. The purpose is that these hedging instruments are effective to offset changes in fair value or cash flows and are assessed on an ongoing basis to determine if they have been actually effective throughout the period for which they were designated. The effective portion of gain or loss on change in fair value of the hedging instrument is recognized directly in equity in the caption “Assets and liabilities valuation adjustments”, while any ineffective portion is recognized immediately as income or expense in the statements of operations. The amounts classified in equity as asset and liability valuation adjustment are reflected in the statements of operations in the period in which the hedged item affects the results, adjusting the value of the hedged expense. If the firm commitment is no longer expected to occur, amounts previously recognized in equity are reflected in the statements of operations. If the hedged instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, the amounts previously recognized in equity are reflected in the statements of operations. (d) Cash and cash equivalents--Includes cash, deposits, cash in transit and short-term investments with immediate liquidity and original maturities of 90 days or less (or without fixed maturity), which are subject to an insignificant risk of change in its value. Cash and cash equivalents are classified as non-derivative financial asset, measured at amortized cost, and its earned income is recognized in the statements of operations for the period. (e) Marketable securities--Represented by amounts of immediate liquidity with maturities of more than 90 days and are subject to an insignificant risk of change in their value. Marketable securities are classified as non-derivative financial assets measured at amortized cost and interest earned is recognized in the statements of operations for the period. (f) Accounts receivable and allowance for doubtful accounts--Accounts receivable from customers are presented net of the allowance for doubtful accounts, which is determined based on a credit risk analysis, in an amount considered sufficient by Management to cover possible losses on receivables. Accounts receivable arising from retail sales are adjusted at present value, based on the market interest rates or the transaction interest 3 rate. Current accounts receivable are adjusted whenever effects are significant. Accounts receivable from customers are classified as non-derivative financial assets measured at amortized cost. (g) Inventories--Stated at average acquisition or production cost, which is lower than net realizable value and are stated net of provision for losses on discontinued and / or obsolete items. The net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion of manufacturing and directly related selling expenses. (h) Property, plant and equipment held for sale--Includes out-of-use machinery and equipment measured at fair value less selling expenses, when this amount is lower than net book value. (i) Investments--Investments in subsidiaries are accounted for using the equity method based on the balance sheet of the subsidiaries as of the same date as the Company’s balance sheet. The value of the equity of foreign subsidiaries is converted into Reais based on the current rate of its functional currency and the foreign exchange rate variation is recorded in "Cumulative translation adjustment" in equity and presented as other comprehensive income. (j) Business combinations--The cost of the acquired entity is allocated to the acquired assets and liabilities, based on their estimated fair value at the acquisition date. Any difference between the entity’s cost and the fair value of the acquired assets and liabilities is recognized as goodwill. (k) Research and development expenses--Are recognized as expenses when incurred. (l) Lease--Operating leases are recognized as expense on a straight-line basis over the lease term, except when another systematic basis is more representative of the future economic benefits. Contingent leases, related to either capital or operating leases, are recognized in the statements of operations when incurred. Subsidiary SGUS records an accrual for unrecoverable lease costs based on the estimated present value of future lease obligations (whose contracts are still valid after the closing of the leased facilities), net of existing sublease income and estimated sublease income for closed facilities which were not yet subleased. (m) Property, plant and equipment--Stated at acquisition or construction cost. Depreciation is calculated using the straight-line method based on the estimated useful lives of the assets. Costs incurred that increase the value and extend the estimated useful lives of the assets are capitalized; maintenance and repairs are recorded as expenses when incurred. The estimated useful life of property, plant and equipment is as follows: Useful life Buildings Installations Equipment Hydroelectric Plant - Porto Estrela Furniture and fixtures Vehicles Computers and peripherals 40 years 15 years 15 years 35 years 10 years 5 years 5 years The residual value and useful life of the assets are assessed by management on an annual basis. 4 (n) Intangible assets--Represented by trademarks acquired, and goodwill on companies acquired. Intangible assets with finite useful lives are amortized using the straight line method, over their estimated useful lives. Intangible assets with indefinite useful lives are tested for impairment annually, or as deemed necessary, in order to determine the recoverability of their net book values. (o) Valuation of recoverable assets--Assets included in property, plant and equipment, intangible assets, and other noncurrent assets are tested for impairment annually, or when circumstances indicate that the net book value may not be recoverable. When impairment is required, it is recognized in the statements of operations. Previous period impairment losses on fixed assets may be reversed whenever there is an assessment or reliable evidence that the value of the asset has recovered. The reversal is recognized in the statement of operations to the extent it does not exceed the previously recognized impairment losses. (p) Income and social contribution taxes--The provision for income and social contribution taxes is calculated at the rate of approximately 34% on taxable income and is recognized net of the portion related to the income tax exemption. The accrual balance is net of prepayments made during the year, if applicable. For foreign subsidiaries, the tax rate ranges from 35% to 38%, according to the tax legislation of each country. (q) Deferred income and social contribution taxes--Deferred income and social contribution taxes are recognized on net operating losses and temporary differences arising from provisions stated in the accounting records, which, according to the tax rules, will only be considered deductible or taxable when realized. A deferred tax asset is recognized only when there is an expectation of future taxable income. (r) Miscellaneous accruals--Recorded at an amount considered sufficient by Management to cover probable losses. The escrow deposits related to the accruals are presented in noncurrent assets. (s) Employee benefit plans--Pension plans and postretirement benefit costs are recognized on an accrual basis, based on actuarial calculations. Actuarial gains and losses are recognized in the statements of operations when incurred. (t) Basic and diluted earnings (loss) per share--Basic earnings (loss) per share is calculated by dividing the income or loss for the year attributable to the Company’s shareholders by the weighted average number of shares outstanding. Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of potential shares to be issued. The Company did not identify any potential issuance of new shares and, therefore, a potential dilution in earnings per share. (u) Monetary and exchange rate variations--Assets and liabilities subject to monetary or exchange rate variations are restated on the balance sheet dates, in accordance with the Brazilian Central Bank (BACEN) published rates or other contractual indices. Exchange gains and losses and monetary variations are recognized in the statements of operations for the year, except for the exchange gains and losses on investments in foreign subsidiaries, which are recognized in “Cumulative translation adjustment” in equity. (v) Revenue recognition--Revenue is measured at fair value of the consideration received or receivable, less any estimates of returns, cash discounts and/or unconditional trade discounts given to the buyer and other similar deductions. Revenue from product sales is recognized when all the following conditions are met: (i) the Company transferred to the buyer the significant risks and rewards related to ownership of the products, (ii) the Company does not maintain continuing involvement in the management of goods sold in a degree usually associated with ownership or effective control over such products, (iii) the amount of revenue can be reliably measured, (iv) it 5 is probable that the economic benefits associated with the transaction will flow to the Company and (v) costs incurred or to be incurred related to the transaction can be measured reliably. (w) Statement of Value Added ("DVA")--The purpose of these statements is to highlight the wealth created by the Company and its distribution over a given period. They are presented by the Company as required by the Brazilian Corporate Law, as part of its individual interim financial statements and as supplemental information for the consolidated interim financial statements, since it is not a statement provided nor required by IFRS standards. The DVAs have been prepared based on information obtained from accounting records that are the basis for the preparation of the interim financial statements. (x) Owners of the Company and non-controlling interests--In the interim financial statements, "owners of the Company" represents all the shareholders of the Company and “non-controlling interests" represents the minority interest of the Company’s subsidiaries. 2.3 – Accounting estimates The preparation of interim financial statements makes use of estimates in order to record certain assets, liabilities and other transactions. To make these estimates, Management used the best information available at the time of preparation of the interim financial statements, as well as the experience of past and/or current events, also considering estimates regarding future events. Therefore, the interim financial statements include estimates related mainly to the useful lives of property, plant and equipment, estimated recoverable value of noncurrent assets, provisions necessary for tax, civil and labor liabilities, determination of provisions for income tax, determination of fair value of financial instruments (assets and liabilities) and others, estimates related to the selection of interest rate, expected return on assets and the choice of mortality table and expected wage increases applied to the actuarial calculations. Actual results of transactions and information could differ from the estimates. 2.4 – Consolidation criteria The consolidated interim financial statements include the accounts of the Company and its whollyowned subsidiaries CSA, AMMO and SGUS. The subsidiary CSA, parent company of Coteminas Argentina S.A. with 100% of its capital, was included in consolidation based on its consolidated interim financial statements. The subsidiary SGUS, parent company of (i) Warbird Corporation (Delaware, US); (ii) Springs Home Textiles Reynosa, S.A. de C.V. (Mexico); (iii) Casa Springs S.A. de C. V. (Mexico); (iv) Charles D. Owen Mfg. Co. (Delaware, US); (v) Springmaid International, Inc. (India); (vi) Springs International Services Inc. (South Carolina, US); (vii) Sabre US, Inc. (Delaware, US), (viii) Espacio LLC (Delaware, US) all wholly-owned and (ix) Springs Canada Holdings, LLC (Delaware, US); (x) Springs Canada, Inc. (Ontario, Canada); (xi) Springs Brands, LLC (Delaware, US); (xii) Springs Cayman Holding Ltd. (Cayman Islands); (xiii) Springs Shanghai Trading Co., Ltd. (China) all with 87.5% ownership; was included in consolidation based on its consolidated interim financial statements. The consolidation of the balance sheets and statement of operations accounts corresponds to the sum of assets, liabilities, revenues and expenses, according to their nature, after eliminating investments in subsidiaries, unrealized profits or losses and intercompany balances. The effect of the exchange rate variations on foreign investments is disclosed in a separate caption in the statement of changes in equity, “Cumulative translation adjustment”. The accounting practices of the foreign subsidiaries were adjusted to conform to accounting practices of the parent company. Non-controlling interests is presented separately in the statements of operations and equity. 6 The interim financial statements of the foreign subsidiaries have been translated into Brazilian Reais based on the US Dollar exchange rate as of September 30, 2015 and December 31, 2014, for balance sheet accounts and the average monthly exchange rate for statement of operations accounts, as follows: 2015 2014 Variance Exchange rate as of: December 31 September 30 3.9729 2.6562 2.4510 62.09% Average exchange rate: September 30 (3 months) September 30 (9 months) 3.6712 3.2263 2.3193 2.2954 58.29% 40.56% 2.5 – New IFRS, revised IFRS and IFRIC interpretations (IASB International Financial Reporting Interpretations Committee) a) Certain new IASB accounting pronouncements and IFRIC interpretations were published and/or revised and have their mandatory adoption for the periods beginning after January 1, 2015. These new pronouncements did not generate significant impact on the interim financial statements. Standard Main requirements Annual Improvements to IFRSs: 2010 – 2012 Cycle (*) Amendments to several standards. Annual Improvements to IFRSs: 2011 – 2013 Cycle (*) Amendments to several standards. Amendments to IAS 19 — Employee contributions to defined benefit plans and revision to CPC technical pronouncements no. 06 (CVM resolution no. 728/14) (*) Change the requirements for the recognition of the contributions made by employees or third parties that are linked to the services. b) Certain new IASB accounting pronouncements and IFRIC interpretations were published and/or revised and have their mandatory adoption for the periods beginning after December 31, 2015. However, the early adoption of these new and revised standards was not allowed: Standard Main requirements Effective date IFRS 9 - Financial instruments (issued on July 24, 2014) (*) IFRS 9 (2014) was issued in a finalized version including the requirements previously issued and additional amendments, which introduce a new model of expected losses on impairment and limited changes in classification and measurement requirements for financial assets. With those amendments, the IASB completed the project for financial instruments. Effective for annual periods beginning on or after January 1, 2018. Agriculture: Bearer Plants amendments to IAS 16 and 41 (issued June 30, 2014) (*) Amendments to the guidance on bearer plants which are now included within the scope of IAS 16 rather than IAS 41 because the IASB has determined that they “should be accounted for in the same way as property, plant and equipment”. Effective for annual periods beginning on or after January 1, 2016. 7 Standard Main requirements Effective date IFRS 15, Revenue From Contracts With Customers (issued May 28, 2014) (*) The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The standard specifies how and when an entity will recognize revenue through a single, principles based five-step model to be applied to all contracts with customers, and requires such entities to provide users of interim financial statements with more informative, relevant disclosures. Effective for annual periods beginning on or after January 1, 2018. Clarification of Acceptable Methods of Depreciation and Amortization — Amendments to IAS 16 and IAS 38 (issued May 12, 2014) (*) The amendments clarify that a depreciation and/or an amortization method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate, except in some limited circumstances for intangible assets. Effective for annual periods beginning on or after January 1, 2016. Accounting for Acquisitions of Interests in Joint Operations — Amendments to IFRS 11 (issued May 6, 2014) (*) The amendments determine that the acquirer of an interest in a joint operation in which the activity constitutes a business is required to apply all of the principles on business combinations accounting under IFRS 3. Effective for annual periods beginning on or after January 1, 2016. IFRS 14, Regulatory Deferral Accounts (issued January 30, 2014) (*) The standard permits an entity which is a firsttime adopter of IFRS to continue to account for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Effective for annual periods beginning on or after January 1, 2016. Amendments to several standards. Annual Improvements to IFRSs: 2012–2014 Cycle (issued September 25, 2014) (*) Effective for annual periods beginning on or after January 1, 2016. Sale or Contribution of Assets Amendments to IAS 28 and IFRS 10 to resolve an inconsistency between the guidance in Between an Investor and Its Associate or Joint Venture — IFRS 10 and that in IAS 28 with respect to amendments to IFRS 10 and “the sale or contribution of assets between an investor and its associate or joint venture”. IAS 28 (issued September Under the amendments, an entity would 11, 2014) (*) recognize a full gain or loss “when a transaction involves a business” and would recognize a partial gain or loss “when a transaction involves assets that do not constitute a business”. Effective prospectively for sales or contributions of assets occurring in annual periods beginning on or after January 1, 2016. 8 Standard Main requirements Effective date Investment Entities: Applying Amendments to IFRS 10, 12 and IAS 28 to the Consolidation Exception - confirm that (1) the exemption from preparing consolidated interim financial statements is amendments to IFRS 10, available for a subsidiary of an investment IFRS 12 and IAS 28 (issued entity, even if the investment entity measures on December 18, 2014) (*) all of its subsidiaries at fair value; (2) a subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity; (3) associates and joint ventures accounted for using the equity method in the interim financial statements of a non-investment entity investor in an investment entity may retain the fair value measurement applied to its subsidiaries when they qualify as investment entities; and (4) investment entities measuring all of their subsidiaries at fair value must provide the disclosures relating to investment entities required by IFRS 12. Effective for annual periods beginning on or after January 1, 2016. (*) The CPC has not yet issued the statements and changes corresponding to the new and revised IFRS and the IFRIC discussed earlier. Due to the commitment of the CPC and the CVM to maintain an updated set of standards issued based on the updates made by the IASB, it is expected that these pronouncements and changes will be edited by the CPC and approved by the CVM before the date of its mandatory application. 3. CASH AND CASH EQUIVALENTS Company 09.30.2015 12.31.2014 Repurchase transactions (*) Foreign exchange funds (US$) Foreign deposits Checking accounts deposits - 114 ----------114 ====== - 136 ----------136 ====== Consolidated 09.30.2015 12.31.2014 40,110 1,834 79,952 67,158 954 46,914 6,407 -----------128,303 ======= 14,544 -----------129,570 ======= (*) Income from financial investments ranges from 90% to 100% of the rates earned on Interbank Deposit Certificate – CDI. 9 4. MARKETABLE SECURITIES Consolidated 12.31.2014 09.30.2015 Restricted cash (*) 2,035 --------2,035 ===== 1,360 --------1,360 ===== (*) On September 30, 2015, the subsidiary SGUS had restricted cash in financial institutions in the amount of US$512 thousand (US$512 thousand as of December 31, 2014) related to a compensating balance arrangement. 5. ACCOUNTS RECEIVABLE Consolidated 12.31.2014 09.30.2015 Domestic customers Foreign customers Credit card companies Related parties – domestic market Related parties – foreign market Allowance for doubtful accounts 368,179 187,836 7,060 22,665 1,146 ----------586,886 (25,759) ----------561,127 ====== 405,139 103,193 18,221 12,745 7,272 ----------546,570 (24,081) ----------522,489 ====== The credit sales made by MMartan and Artex stores are made directly to the consumer that can pay in up to 10 installments by instruments of credit granted by credit card companies. Present value adjustments on these amounts are made considering the market rates, since cash sales prices do not differ from installment sales prices. On September 30, 2015, the installment receivables under this type of sale were R$9,692 (R$20,856 as of December 31, 2014), with an average collection period of 90 days, totaling to an adjustment in the amount of R$2,632 (R$2,635 as of December 31, 2014), using 100% of the CDI as the interest rate. Accounts receivable from customers consist of receivables with an average collection period of approximately 81 days (78 days as of December 31, 2014). The past due amounts are not significant and the allowance for doubtful accounts is considered by Management sufficient to cover expected losses. The Company's Management believes that the risk related to accounts receivable is minimized because the composition of the company's customer portfolio is diluted. The Company has over 10,000 active clients as of September 30, 2015 and only one customer accounts for approximately 10% of sales. The aging list of the consolidated accounts receivable was presented in the annual financial statements for the year ended December 31, 2014. There was no significant change in the composition of the aging list during the nine-month period ended September 30, 2015. 10 The changes in the consolidated allowance for doubtful accounts are as follows: 12.31.2014 09.30.2015 (24,081) (523) (1,155) (18,375) (6,133) 543 (116) ------------- ------------- (25,759) ======= (24,081) ======= Balance at the beginning of the period Additions Write-offs Exchange rate variations - Balance at the end of the period 6. INVENTORIES Consolidated 12.31.2014 09.30.2015 Raw materials and supplies Work in process Finished products Repair parts 204,906 155,814 310,885 53,163 -----------724,768 ======= 175,357 125,709 235,499 53,001 -----------589,566 ======= Inventories are presented net of the provision for losses, which, based on Management’s assessment, is sufficient to cover losses related to obsolete and/or discontinued inventories. The changes in the provision are as follows: Raw materials and supplies Finished products Repair parts 12.31.2014 Additions Reductions Exchange rate variations (1,313) (1,101) (1,099) ------------(3,513) ======= (1,443) -----------(1,443) ======= 229 ------------229 ======= (752) (10) ------------(762) ====== 09.30.2015 (1,313) (3,067) (1,109) ------------(5,489) ====== 11 7. INVESTMENTS IN SUBSIDIARIES a) Direct investments: Subsidiaries SGUS (1) CSA AMMO (2) Equity (deficit) Ownership interest % (75,097) 1,081,628 107,141 100.00 100.00 70.67 Net income (loss) for the period 17,611 31,899 (34,651) Total investment 09.30.2015 12.31.2014 Equity in subsidiaries (Company) 09.30.2015 09.30.2014 1,081,628 75,717 ------------1,157,345 ======= 17,611 31,899 (24,488) ------------25,022 ======= 1,019,258 100,204 ------------1,119,462 ======= (3,853) 9,008 (30,919) ------------(25,764) ======= (1) As of September 30, 2015, the investment in subsidiary SGUS is a deficit of R$75,097 (R$60,879 as of December 31, 2014) and it is presented in noncurrent liabilities under “Subsidiaries obligations”. (2) On August 31, 2014, subsidiary CSA made a capital investment in the amount of R$47,153 using a portion of its outstanding credits with subsidiary AMMO on that date, in exchange to 29.33% of its capital. AMMO is a subsidiary of the Company, which owns, as of September 30, 2015 and December 31, 2014, directly and indirectly, 100% of its capital. b) Indirect investments: SGUS’ investments Equity (deficit) Warbird Corporation (Delaware, US) Springs Home Textiles Reynosa, S.A. de C.V. (Mexico) (1) Casa Springs S.A. de C.V. (Mexico) (1) Charles D. Owen Mfg. Co. (Delaware, US) Springmaid International, Inc. (India) Springs International Services Inc. (South Carolina, US) Sabre US, Inc. (Delaware, US) Espacio LLC (Delaware, US) Springs Canada Holdings, LLC (Delaware, US) Springs Canada, Inc. (Ontario, Canada) (2) Springs Brands, LLC (Delaware, US) (2) Springs Cayman Holding Ltd. (Cayman Islands) (2) Springs Shanghai Trading Co., Ltd. (China) (3) Ownership interest % Total investment Equity in subsidiaries 09.30.2015 12.31.2014 09.30.2015 09.30.2014 11 100.0 11 44 (55) (29) 2,221 1,843 (1,025) 211 100.0 100.0 100.0 100.0 2,221 1,843 (1,025) 211 1,435 1,395 (693) 142 75 (20) 12 - 133 (124) (1,813) - (1,128) 36,164 (910) 39,729 46,715 (1,295) 4,429 (1,432) 100.0 100.0 100.0 87.5 87.5 87.5 87.5 87.5 (1,128) 36,164 (910) 34,763 40,876 (1,133) 3,875 (1,253) (754) 25,281 (608) 23,242 30,483 (2,474) 2,599 (59) (1,619) 95 2,566 (12) (1,085) (854) (4,269) 2,601 (822) (1) Warbird Corporation’s (Delaware, US) wholly-owned subsidiaries. (2) Springs Canada Holdings, LLC’s (Delaware, US) wholly-owned subsidiaries. (3) Springs Cayman Holding Ltd.’s (Cayman Islands) wholly-owned subsidiary. 12 CSA’s investments Net income Equity Ownership (loss) for the interest % period Total investment Equity in subsidiaries 09.30.2015 12.31.2014 09.30.2015 09.30.2014 Subsidiary Coteminas Argentina S.A. 123,813 100.00 15,997 123,813 ====== 77,344 ====== 15,997 ---------- (1,108) ---------- 107,141 29.33 (34,651) 31,424 ====== 41,588 ====== (10,163) ---------5,834 (1,228) ---------(2,336) ====== ====== Affiliated AMMO Varejo Ltda. 8. PROPERTY, PLANT AND EQUIPMENT AND PROPERTY, PLANT AND EQUIPMENT HELD FOR SALE a. Property, plant and equipment Consolidated 09.30.2015 Rate (*)% Land and improvements Buildings Cost Accumulated depreciation 12.31.2014 Net book value Net book value 10.5 63,167 (22,573) 40,594 46,833 2.3 431,737 (179,650) 252,087 257,453 Installations 5.2 232,298 (144,538) 87,760 94,489 Machinery and equipment 6.1 1,145,297 (827,674) 317,623 333,111 Hydroelectric Plant - Porto Estrela (**) 3.8 37,537 (13,363) 24,174 25,247 Furniture and fixtures 9.8 49,508 (32,553) 16,955 18,142 Vehicles 19.3 17,725 (15,341) 2,384 2,516 Computers and peripherals 16.5 63,492 (59,553) 3,939 4,292 - 56,913 56,913 55,630 Construction in progress Others 10.0 - 171,330 --------------- (162,443) --------------- 8,887 --------------- 9,547 --------------- 2,269,004 ========= (1,457,688) ========= 811,316 ========= 847,260 ========= (*) Weighted average annual depreciation rate. (**) See note 20. Considering its operating profitability and cash generation, the Company and its subsidiaries have not found evidence of deterioration or failure to recover the balances held as property, plant and equipment. 13 The changes in consolidated property, plant and equipment are as follows: Cost: 12.31.2014 Land and improvements 69,228 Additions Disposals Transfers from/to held for sale Transfers Exchange rate variations 09.30.2015 2,775 (11,162) - - 2,326 63,167 431,737 Buildings 420,969 5 (11,442) - 8,555 13,650 Installations 233,539 2,575 (8,403) - 1,855 2,732 232,298 1,094,065 7,374 (7,291) 2,188 6,345 42,616 1,145,297 - - Machinery and equipment Hydroelectric Plant - Porto Estrela 37,534 3 Furniture and fixtures 45,742 1,116 (1,713) (1) 344 - 37,537 4,020 49,508 Vehicles 15,456 466 (464) 69 55 2,143 17,725 Computers and peripherals 49,286 980 (765) (1,222) 68 15,145 63,492 Construction in progress 55,630 20,267 (2,402) (17,236) 654 56,913 119,022 --------------- 5 --------------- (6) --------------- (67) --------------- 14 --------------- 52,362 --------------- 171,330 --------------- 2,140,471 ========= 35,566 ======== (43,648) ========= 967 ========= ======== 135,648 ========= 2,269,004 ========= Transfers Exchange rate variations 09.30.2015 Others - Accumulated depreciation: 12.31.2014 Land and improvements Buildings Additions Disposals Transfers from/to held for sale (22,395) (5,840) 5,757 - - (95) (22,573) (163,516) (7,569) 3,221 - - (11,786) (179,650) Installations (139,050) (7,160) 2,935 - Machinery and equipment (760,954) (31,534) 3,571 (2,157) Hydroelectric Plant - Porto Estrela (12,287) (1,076) - - Furniture and fixtures (27,600) (2,181) 804 Vehicles (12,940) (757) Computers and peripherals (44,994) (1,544) (109,475) --------------(1,293,211) ========= Others (365) - (898) (144,538) (36,600) (827,674) - - (13,363) 1 - (3,577) (32,553) 464 (68) - (2,040) (15,341) 732 1,224 - (14,971) (59,553) (1,108) ------------- 6 ------------- 67 --------------- 365 --------------- (52,298) --------------- (162,443) --------------- (58,769) ======== 17,490 ========= (933) ========= ========= (122,265) ========= (1,457,688) ========= b. Property, plant and equipment held for sale The Company’s subsidiaries identified assets that were removed from operations and considered held for sale. These assets include machinery and equipment removed as a result of the modernization of the Brazilian subsidiary’s manufacturing facilities and machinery and equipment from the American subsidiary’s manufacturing facilities that were shutdown. Additionally, the equipment available for sale from the readjustment of productive capacities was also included in this category. These assets were measured at the lower of the net book value or market value, resulting in the recognition of probable impairment. As a result of this analysis, the recoverable value of R$58,592 (R$40,527 as of December 31, 2014) was presented in noncurrent assets under “Property, plant and equipment held for sale”, and, consequently, removed from the table above based on its net book value. 14 The changes in the property, plant and equipment held for sale are as follows: Transfers 12.31.2014 Cost Depreciation Provision for losses Additions 361,459 (283,066) (37,866) ---------40,527 ====== Disposals 260 (743) (53) ---------(536) ====== (15,575) 12,487 2,617 ---------(471) ====== from/to property Exchange rate variations (967) 933 ---------(34) 09.30.2015 164,672 (130,266) (15,300) ---------19,106 ====== ======= 509,849 (400,655) (50,602) ---------58,592 ====== 9. INTANGIBLE ASSETS Consolidated 12.31.2014 09.30.2015 Goodwill from the acquisition of North American companies Goodwill from the acquisition of AMMO (parent company) Trademarks Store locations (real estate intangible) Total 45,013 30,616 27,303 16,307 41,471 ----------130,094 ====== 27,303 16,307 45,348 ----------119,574 ====== The Company evaluates the recoverability of goodwill on investments annually and uses accepted market practices, such as discounted cash flow for business units that have goodwill. Recoverability of goodwill is evaluated based on analysis and identification of facts and circumstances that could require the tests to be performed at an earlier date. If some fact or circumstance indicates that the recoverability of goodwill is affected, then the test is anticipated. The projection period for the December 2014 cash flows was three years. The assumptions used to determine the fair value through the discounted cash flow method include: cost of capital, growth rate and adjustments used for perpetual cash flows, methodology for determining working capital, investment plans, and long-term economic-financial forecasts. Additionally, the perpetuity has been calculated considering the stabilization of the operating margins, working capital and investments. The annual discount rate used was 13.6% and the perpetuity growth rate considered was 3% per year, for both SGUS goodwill, the acquisition of North American companies and the Company’s goodwill in the acquisition of SRPSA. The discount rates used were determined taking into consideration market information available on the test date. Changes in consolidated intangible assets for the period were as follows: 12.31.2014 Goodwill from the acquisition of North American companies Goodwill from the acquisition of AMMO Trademarks Store locations (real estate intangible) Total 30,616 27,303 16,307 45,348 ----------119,574 ====== Disposals (3,877) --------(3,877) ===== Exchange rate variations 09.30.2015 14,397 --------14,397 ===== 45,013 27,303 16,307 41,471 ----------130,094 ====== 15 The intangible assets presented above have indefinite useful lives, and therefore are not amortized, but their recoverable values are tested for impairment annually. Trademarks are recorded at their acquisition cost. The amounts related to the store locations (real estate intangible) are recorded at acquisition cost. 10. LEASES Subsidiary SGUS leases properties and equipment under operating leases. Total leasing expense in the nine-month period ended September 30, 2015 was R$29,190 (R$23,826 in the nine-month period ended September 30, 2014). Subsidiary SGUS contractually agreed with third-parties to sublease certain vacant facilities that no longer provide economic benefit. Total sublease income in nine-month period ended September 30, 2015 was R$9,156 (R$5,006 in the nine-month period ended September 30, 2014). Lease payments scheduled for the future years are estimated as follows: Year 2015 (*) 2016 2017 2018 2019 2015 10,206 38,581 35,871 35,617 31,291 (*) 3 months Beginning in 2019, lease payments continue to decrease until the contracts terminate on several dates through 2030, totaling R$303,990. For the years between 2015 and 2019, subsidiary SGUS is scheduled to receive sublease lease payments of R$63,527. Subsidiary SGUS has short- and long-term accruals totaling R$27,594 (R$17,108 as of December 31, 2014), which consists of the present value of estimated future lease obligations that are expected to be incurred after the closing of the leased facilities, net of existing sublease income and estimated sublease income of closed facilities, which were not yet subleased. This potential sublease income would result in a reduction of the obligations stated in the table above by R$228,102. 11. SUPPLIERS Consolidated 12.31.2014 09.30.2015 Domestic market Foreign market 87,590 148,756 ---------236,346 ====== 82,848 84,247 ---------167,095 ====== Accounts payable to suppliers consist of amounts with an average maturity term of approximately 40 days (27 days as of December 31, 2014). Domestic suppliers include credits to purchase raw material (cotton) amounting to R$59,903 (R$54,011 as of December 31, 2014). 16 12. LOANS AND FINANCING Consolidated Annual interest rate - % Maturity 09.30.2015 12.31.2014 R$ R$ R$ R$ R$ R$ R$ R$ R$ R$ R$ R$ 4.5 to 9.0 4.5 to 9.0 3.0 to 9.5 130.0 of CDI 118.5 and120.0 of CDI 116.6 of CDI 111.5 of CDI 113.6 of CDI 117.8 and 121.0 of CDI 120.0 and 123.5 of CDI TJLP+3.3 109.0 and 110.7 of CDI - 2016 2016 2023 2015 2015 2015 2016 2016 2016 2017 2015 2019 2023 6,912 6,912 4,993 14,439 37,141 25,044 48,279 101,246 57,653 245,146 67 ----------547,832 13,136 13,136 5,210 13,023 30,401 27,320 279,686 104,684 37,648 17,407 83 ----------541,734 US$ and CAD$ $ARG Libor+2.25 15.3 2016 2016 74,876 2,280 ----------77,156 ----------624,988 (439,587) ----------185,401 ======= 50,104 3,368 ----------53,472 ----------595,206 (403,748) ----------191,458 ======= Currency Local currency: Banco do Brasil S.A. (Revitaliza) BNDES (Revitaliza) BNDES (Finame) Banco Bradesco S.A. (Overdraft account) Banco do Brasil S.A. (Overdraft account) Banco do Brasil S.A. (Giroflex) Banco do Brasil S.A. (Credit Note) Banco do Brasil S.A. (NCI) Banco Itaú BBA S.A. (a) Banco Santander S.A. Banco Votorantim S.A. Banco do Brasil S.A. (NCE) Other Foreign currency: Deutsche Bank (Securitization) Banco Patagonia Total Current liabilities Noncurrent liabilities (a) Original loan contract in US Dollars plus 2.466% per annum with a swap for approximately 117.8% and 121.0% of CDI with the same counterparty. Loans are collateralized by: (i) registered security interest in real estate, machinery and equipment located in Montes Claros, as well as a guarantee from CTNM for the “Revitaliza” loans; and (ii) by sureties and bank guarantees for the remaining financing. Maturities are as follows: 2016 2015 Local currency: Banco do Brasil S.A. (Revitaliza) BNDES (Revitaliza) BNDES (Finame) Banco Bradesco S.A. (Overdraft account) Banco do Brasil S.A. (Overdraft account) Banco do Brasil S.A. (Credit Note) Banco do Brasil S.A. (NCI) Banco Itaú BBA S.A. Banco Santander S.A. Banco do Brasil S.A. (NCE) Other Foreign currency: Deutsche Bank (Securitization) Banco Patagonia Short term Long Term 2017 2018 to 2023 Total 2,090 2,090 281 14,439 37,141 1,580 13,016 826 36 ----------71,499 4,822 4,822 856 25,044 48,279 99,666 29,657 80,032 3 ----------293,181 303 7,492 6 ----------7,801 1,211 7,488 54,651 7 ----------63,357 2,342 109,637 15 ----------111,994 6,912 6,912 4,993 14,439 37,141 25,044 48,279 101,246 57,653 245,146 67 ----------547,832 31 ----------31 ----------71,530 ======= 74,876 ----------74,876 ----------368,057 ======= 2,249 ----------2,249 ----------10,050 ======= --------------------63,357 ======= --------------------111,994 ======= 74,876 2,280 ----------77,156 ----------624,988 ======= 17 13. DEBENTURE Through a privately-negotiated debenture agreement, on May 30, 2014, subsidiary CSA issued a non-convertible debenture with the following characteristics, which, on July 7, 2014, was fully subscribed by Banco Votorantim. Subsequently, Banco Votorantim sold the Debenture to Gaia Securitizadora Agro SA ("Gaia"), which became entitled to receive the full amount of the subsidiary CSA’s debt represented by the Debenture, plus the Debenture’s return and applicable default charges, as well as other financial obligations under the Indenture, which are as follows: Debenture Characteristics -----------------------------------------------------------------------------------------------Quantity of issued Debentures 1 Debenture unit price (amount in Brazilian Reais) R$270,000,000 Amortization 2 equal installments Maturity of 1st installment 06/13/2016 Maturity of 2nd installment 06/13/2017 Return 110% of CDI Interest amortization Semiannual Guarantees (1) Covenants (2) The Debenture was subject to public distribution with restricted placement efforts, pursuant to CVM Instruction 476, subscribed by Banco Votorantim. On June 11, 2014, it was signed with Gaia the Agribusiness Credit Rights Securitization Term Sheet, for the 1st Series of the 3rd Issue of Agribusiness Receivables Certificates ("CRA"), binding the Debenture to the issuance of the CRA. On July 3 and 7, 2014, announcements of opening and closing of the distribution of the CRA were published, respectively, and all 864 CRA were issued and subscribed with a unit price of R$312.5, bringing the total amount of the offer to R$270,000, with the same return and guarantees as the backing Debenture. The funds were available to subsidiary CSA on date of the subscription of the CRA. The issuance costs of the Debenture and the CRA, in the amount of approximately R$7,700, equivalent to 2.85% of the total issuance amount, will be amortized as transaction cost, along with the Debenture charges, prorated to the outstanding debt balance. Balances on September 30, 2015 were as follows: Original amount updated Current Noncurrent Total 135,000 135,000 ----------270,000 ======= Prepaid interest (2,550) (1,795) ----------(4,345) ======= Accrued interest 12,242 ----------12,242 ======= Balances on 09.30.2015 Balances on 12.31.2014 144,692 133,205 ----------277,897 ======= 1,685 263,748 ----------265,433 ======= (1) Guarantees: Secured guarantee: Real estate of subsidiary CSA which fair market valuation is greater than 120% of the CRA issuance value. At any time, one or more real estate may be disposed at the discretion of subsidiary CSA and without consent of the CRA holders, provided that: (i) such sale shall not 18 decrease the rate of 120% guarantee of the secured obligations to the CRA holders; and (ii) the subsidiary CSA uses the net proceeds of the disposed assets for repayment of bank loans. Fidejussory guarantee: Surety given by the Company. (2) Covenants: In addition to the usual covenants, the subsidiary CSA has agreed to comply with the following financial ratios: (i) Net Debt to Adjusted EBITDA ratio, equal to or less than 4.25 (four and twentyfive hundredths) during the year 2014; (ii) Net Debt to Adjusted EBITDA ratio, equal to or less than 4.10 (four and ten hundredths) during the year 2015; (iii) Net Debt to Adjusted EBITDA ratio, equal to or less than 4.00 (four) during the year 2016; (iv) Net Debt to Shareholders' Equity ratio, equal to or less than 0.7 (seven tenths); and (v) Adjusted EBITDA to Interest ratio, less than 2 (two). The ratios set forth in items (iv) and (v) are planned for the entire contract period. The terms used to describe the ratios have their particular definition set forth in the contract and may differ from the financial statement lines. On September 30, 2015, the subsidiary CSA complied with all the ratios above. 14. EQUITY a. Capital The subscribed and paid in capital is represented by 200,000,000 common shares with voting rights. There was no change in the number of shares subscribed and paid for the period between January 1, 2014 and September 30, 2015. The Extraordinary General Meeting held on October 21, 2015 approved the reverse split of the Company's shares in accordance with Article 12 of Law No. 6,404 / 76, totaling 200,000,000 registered common shares, without par value, representing the capital at a ratio of 4 shares for one, without changing the amount of the capital, so that the capital as of that date is represented by 50,000,000 registered common shares, with no par value. b. Dividends and realizable earnings reserve Shareholders are entitled to dividends equivalent to 1/3 of the period net income, adjusted as per Company’s bylaws and the Brazilian Corporate Law. c. Retained earnings reserve The retained earnings reserve is determined in compliance with article 196 of law 6,404/76. 15. RELATED-PARTY TRANSACTIONS Receivables 09.30.2015 12.31.2014 Company: Coteminas S.A. Companhia de Tecidos Norte de Minas - Coteminas AMMO Varejo Ltda. 23 ---------23 ====== ---------====== Payables 09.30.2015 12.31.2014 13,981 8 ---------13,989 ====== 16,714 ---------16,714 ====== 19 Receivables 09.30.2015 12.31.2014 Consolidated: Companhia de Tecidos Norte de Minas - Coteminas Coteminas International Ltd. Companhia Tecidos Santanense Encorpar – Empresa Nacional de Comércio, Redito e Participações S.A. Fazenda do Cantagalo Ltda. Argentina Branch 23,284 19 7,451 11 81 11 60 ---------23,455 ====== 73 ---------7,535 ====== Payables 09.30.2015 12.31.2014 8 7,969 - ---------8 ====== ---------7,969 ====== - Finance charges 09.30.2014 09.30.2015 Company: Coteminas S.A. Springs Global US, Inc. Ammo Varejo Ltda. Consolidated: Companhia de Tecidos Norte de Minas Coteminas Encorpar – Empresa Nacional de Comércio, Redito e Participações S.A. Companhia Tecidos Santanense Coteminas International, Ltd. (1,578) 30 ---------(1,548) (319) 2,035 ---------1,716 3,195 1,413 8 1 (4) ---------3,200 ====== 2 (35) (91) ---------1,289 ====== The balances held with related parties have long-term maturities, and charges are calculated according to the rates equivalent to those in effect in the financial market, namely, 115% to 120% of the Certificate of Interbank Deposit – CDI variance and Libor plus 3% per year for foreign companies (115% to 120% of the Certificate of Interbank Deposit – CDI variance and Libor plus 3% per year for foreign companies in 2014). The related party balances with direct subsidiary SGUS refer to a revolving loan agreement with a limit of US$30 million, with projected six-month maturities that are renewable until January 2016. The finance charges include the exchange rate variation plus interest calculated based on onemonth LIBOR plus 3% per year. On August 30, 2014, these loans were transferred to subsidiary CSA. As stated in the Company’s shareholders’ agreement, the subsidiary SGUS must pay annually US$1,429 thousand for services provided; net of expenses, to the shareholder Heartland Industrial Partners, L.P. and the subsidiary CSA must pay US$3,500 thousand to the controlling shareholder CTNM. In the nine-month period ended September 30, 2015, the total amount of R$11,501 (R$8,479 in the nine-month period ended September 30, 2014) was accrued for services provided and R$4,249 (R$8,445 in December 31, 2014) is accrued under the caption “Other payables,” in current liabilities. 20 In the nine-month period ended September 30, 2015, CSA supplied intermediate products to a related party, Companhia Tecidos Santanense, in the amount of R$22,459 (R$37,440 in the ninemonth period ended September 30, 2014). The transactions are conducted at market prices. Rossini Administradora de Bens Ltda. and subsidiary AMMO entered into a real estate lease agreement for AMMO’s manufacturing facility and its offices. In the nine-month period ended September 30, 2015, R$2,467 was accrued under this lease (R$2,467 in the nine-month period ended September 30, 2014). The valuation of the property and its lease were conducted by a specialized company and represent market prices. The amounts paid to key Management personnel are disclosed in the statements of operations, under caption “Management fees” and include existing long-term and post-employment benefits. 16. RECEIVABLE – SALE OF PROPERTY In May 2015, the subsidiary CSA sold real estate located in the city of Montes Claros - MG, to the municipality, for R$48,000, to be received in 12 monthly installments of R$1,000 each, plus 24 monthly installments of R$1,500 each, adjusted for inflation using the “IGP-M” from the date the agreement was signed and including a grace period of 12 months before the first payment. The subsidiary CSA has a guarantee for the installments, through revenue and quotas of the Municipality Participation Fund – “FPM”. 17. INCOME TAX AND OTHER TAXES a. Tax incentives All manufacturing units of the subsidiary CSA in Brazil, except for the Blumenau-SC and AcreúnaGO facilities, are located in the area of the Northeast Development Superintendence (SUDENE), which provides federal and state tax incentives. Federal and state tax incentives of the Company and its plants are scheduled to expire on different dates, depending on the manufacturing facility’s location. Federal tax incentives are valid until December 31, 2016 and state incentives are valid until December 31, 2021. Federal tax incentives are calculated based on income tax generated by the manufacturing and commercial operations, recorded as a reduction of the income tax payable and income tax expense. 21 b. Income taxes reconciliation (income and social contribution taxes) Company 09.30.2015 Income (loss) before taxes Permanent differences: Equity in subsidiaries Investment grant Permanent differences from foreign subsidiary Other Income tax basis 34% tax rate Unrecognized tax credits Foreign subsidiary tax credits Others Total income taxes Income taxes – current Income taxes – deferred 09.30.2014 Consolidated 09.30.2015 09.30.2014 20,848 (30,197) 20,252 (32,077) (25,022) - 25,764 - (25,208) (26,222) --------(4,174) --------(4,433) (1,797) 494 --------(6,259) (1,366) 710 --------(58,955) 1,419 --------1,419 ===== 1,419 ===== 1,507 (1,507) 967 --------967 ===== 967 ===== 2,128 (1,382) 1,655 (200) --------2,201 ===== (874) 3,075 ===== 20,045 (18,740) 1,172 --------2,477 ===== 2,477 ===== As a holding Company, the Company’s operations consist of equity in subsidiaries and income from investment activities. Foreign subsidiaries’ income is taxed as an addition to the taxable income and they receive tax credits for taxes paid in their respective countries, which is up to 25% of its income tax base. If there are tax losses, tax credits are not considered in Brazil, but they are offset with future income generated by the foreign subsidiary. Therefore, as a holding Company, tax credit recognition is allowed in specific situations. CSA’s Management, in prior periods, based on a business plan and future projections, partially recognized deferred tax assets arising from accumulated net operating losses. As of September 30, 2015, indirect subsidiary CSA had net operating losses of R$527,268 (R$507,750 as of December 31, 2014) and social contribution tax losses of R$532,867 (R$513,281 as of December 31, 2014), whose tax assets were not recognized. The tax assets recognized by this subsidiary are net of its tax benefits. CSA’s future projections consider a greater concentration on the domestic market since these sales are more profitable, a greater profit margin due to the sales of higher value-added products, among others. Based on these actions and the business plan assumptions, CSA’s Management expects future taxable income that will allow the realization of the subsidiary’s deferred tax assets. 22 c. Deferred income and social contribution taxes Deferred income and social contribution taxes recorded in the consolidated interim financial statements arise from subsidiaries’ temporarily nondeductible provisions, transferred tax credit, and subsidiaries’ net operating losses. Deferred income and social contribution taxes are composed as follows: Balances on 12.31.2014 Assets: Provisions deductible upon settlement: Miscellaneous provisions Net operating losses Tax credits from foreign subsidiaries Recognized in statement of operations 19,466 30,720 12,326 ---------62,512 ====== Noncurrent assets 3,313 (1,387) 1,149 ---------3,075 ====== Others 519 1,655 ---------2,174 ====== Balances on 09.30.2015 23,298 29,333 15,130 ---------67,761 ====== Based on business plan and future projections, Management estimates that the deferred taxes will be realized in the following years, as follows: Consolidated 09.30.2015 Year 2016 2017 2018 2019 2020 and thereafter 5,427 6,506 9,736 13,373 32,719 ---------67,761 ====== d. Recoverable taxes Company 09.30.2015 12.31.2014 ICMS (state VAT) Income and social contribution taxes prepayments Recoverable PIS and COFINS IVA – Argentina VAT – China and Mexico Recoverable IPI Reintegra Other recoverable taxes Current Noncurrent - - 1,189 ----------1,189 (1,189) ----------======= 8,076 ----------8,076 (8,076) ----------======= Consolidated 09.30.2015 12.31.2014 4,648 4,428 21,280 871 1,664 25 4,788 1,081 ----------34,357 (29,777) ----------4,580 ======= 26,773 7,434 6,597 1,329 22 4,070 1,297 ----------51,950 (47,355) ----------4,595 ======= 23 18. MISCELLANEOUS ACCRUALS The Company and its subsidiaries are challenging in court the legality of certain taxes and labor claims. The accrual was recognized based on the risk assessment made by Management and its legal counsel for all lawsuits in which losses are considered probable. The Company and its subsidiaries have tax and civil claims, whose loss was estimated as possible in the amount of R$16,261 and R$363, respectively. The claims for which losses are considered probable are summarized as follows: Company 09.30.2015 12.31.2014 Tax litigation claims: -Temporary contribution over financial transactions (CPMF) -INSS -Reintegro -Others Labor Civil and others Total Escrow deposits Consolidated 09.30.2015 12.31.2014 4,317 ----------4,317 ===== 4,317 ----------4,317 ===== 4,317 1,998 762 63 13,506 4,003 ----------24,649 ===== 4,317 1,998 561 13 11,337 3,736 ----------21,962 ===== 4,221 ===== 4,221 ===== 20,464 ===== 17,495 ===== CPMF – The Company is a plaintiff in a lawsuit to avoid the application of CPMF on the “symbolic” exchange rate contracts incurred during the process of issuing stock to a foreign investor. INSS – The subsidiary CSA is a plaintiff in a lawsuit against the Brazilian Treasury Department, disputing the INSS tax assessment on amounts considered to be employee termination costs. Labor – The subsidiary CSA is the defendant in lawsuits from former employees and third parties. Civil – The subsidiary CSA is a plaintiff in a lawsuit against the Federal Government disputing the legality of the collection of “RTE – Recomposição Tarifária Extraordinária” and “COFURH – Compensação Financeira pela Utilização de Recursos Hídricos”. Changes in the consolidated accrual are as follows: Tax litigation claims: -Temporary contribution over financial transactions (CPMF) -INSS -Reintegro -Others Labor Civil and others Balances on 12.31.2014 Additions Reductions Balances on 09.30.2015 4,317 1,998 561 13 11,337 3,736 ----------21,962 ===== 201 50 2,874 425 --------3,550 ===== (705) (158) --------(863) ===== 4,317 1,998 762 63 13,506 4,003 ----------24,649 ===== 24 19. EMPLOYEE BENEFIT PLANS Substantially, employees of the subsidiary SGUS are covered by defined-contribution plans. Some executives of subsidiary SGUS are covered by a defined-benefit plan. Subsidiary SGUS may make contributions to the defined-contribution plan at its discretion, and these contributions are considered by means of a percentage of each participant’s eligible compensation. In addition, should eligible participants contribute a percentage of their compensation to some defined-contribution plans, subsidiary SGUS may, at its discretion, make a contribution in the proportion of the amounts contributed by the participants. Subsidiary SGUS sponsors a defined-benefit pension plan for some of its employees, whose expected pension costs are accrued based on actuarial studies. Contributions of retired employees and subsidiary SGUS are adjusted periodically. Subsidiary SGUS’ contributions to the definedbenefit plans are made pursuant to the “US Employee Retirement Income Security Act”, and benefits are generally based on years of service and salary (compensation) levels. The defined-benefit plan’s assets are invested in diversified equity securities and fixed-income funds (including US government debt). Subsidiary SGUS also provides retirement benefits to eligible executives under nonqualified supplemental executive retirement plans. The table below includes summarized information on the pension and postretirement plans as of September 30, 2015 and 2014. 09.30.2015 Components of net periodic benefit cost: Service cost Interest cost and others, net Net periodic benefit cost 796 3,247 ----------4,043 ====== 09.30.2014 655 3,599 ----------4,254 ====== Subsidiary SGUS’ investment strategy is to invest in a diversified portfolio that will maximize returns, considering an acceptable risk level. Pension plan assets are invested in mutual funds which have a target allocation of 45% to 54% in domestic equity securities and 55% to 46% in fixed income funds. The expected returns on plan assets were developed in conjunction with external advisors and take into account long-term expectations for future returns based on subsidiary SGUS’ current investment strategy. The balances of employee benefit plans and deferred compensation are as follows: 09.30.2015 Pension plan obligations Pension plan obligations (multi-employer) (a) Other employee benefit obligations Total employee benefit plans Current (b) Noncurrent 12.31.2014 147,187 203 7,063 -----------154,453 102,386 179 7,270 -----------109,835 (13,062) -----------141,391 ======= (8,733) -----------101,102 ======= (a) Until December 30, 2010, subsidiary SGUS was one of the plan sponsors of the South Jersey Labor and Management Pension Fund, a multiemployer defined benefit pension plan. On December 30, 2010, the Company withdrew from the Plan and recorded a liability corresponding to the estimated cost of withdrawal. (b) Presented on caption “Payroll and related charges”. 25 20. GOVERNMENT CONCESSIONS The subsidiary CSA has equity interest in a consortium for an electric power generation concession with the companies CEMIG Geração e Transmissão S.A. and Vale (formerly known as Companhia Vale do Rio Doce), in equal percentages of 33.33%. No legally independent entity was established for the management of this consortium. Accounting records, equivalent to its interest, are maintained under the Company’s control. In compensation for the concession granted, Company, together with the other consortium members, will pay installments over the concession period to the Federal Government, as presented below: Beginning of concession period: Concession period: Total concession amount: Monetary adjustment: July 10, 1997 35 years R$333,310 IGPM (general market price index) Total annual installments of the concession: Years 5 to 15 2002 to 2012 -------------------Historical amounts: Minimum installment Additional installment Annual installment Total installments Monetarily adjusted installments Years 16 to 25 2013 to 2022 -------------------- Years 26 to 35 2023 to 2032 -------------------- 120 ---------120 120 12,510 ---------12,630 120 20,449 ---------20,569 1,320 5,506 126,300 526,802 205,690 857,931 ===== ====== ====== For accounting purposes, CSA recognizes expenses incurred on an accrual basis, as a contra entry to noncurrent liabilities, on a straight-line basis, based on its share in the total concession amount, 33.33%, at present value, considering a basic interest rate, monetarily adjusted based on the IGPM. As of September 30, 2015, this amount represents R$65,124, of which, R$17,240 is classified as “other payables” in current liabilities and R$48,006 is classified as noncurrent liabilities (R$64,431 as of December 31, 2014, of which, R$16,556 is classified as “other payables” in current liabilities and R$47,875 is classified as noncurrent liabilities). As of September 30, 2015, the net book value of the property, plant and equipment related to the current concession is R$24,174 (R$25,247 as of December 31, 2014) (see note 8), considering the Company’s equity interest in the investments for the construction of the Porto Estrela Hydroelectric Plant, located on the Santo Antônio River, 270 km from Belo Horizonte, with installed capacity of 112 MW. The plant began generation activities at the end of 2001. 21. OTHER INCOME AND EXPENSES, NET Consolidated 09.30.2015 09.30.2014 Gain on the sale of assets, net of provision for losses (*) Non-operating lease expense Others, net 21,746 (9,006) (8,028) ---------4,712 ====== (8,721) ---------(8,721) ====== 26 (*) See Note 16 of the interim financial statements. 22. FINANCIAL INSTRUMENTS a) General--The Company and its subsidiaries maintain derivatives and non-derivatives financial instruments transactions, whose risks are managed through strategic financial positions and controls to limit exposure to such risks. All transactions are fully recorded in the Company’s books and described in the tables below. The main risk factors to which the Company and its subsidiaries are exposed reflect strategicoperational and economic-financial matters. The strategic-operational risks (such as, demand trend, competition, technological innovation, significant changes in the industry structure, among others) are inherent to the Company’s operating activities and are addressed by its Management. The economic-financial risks mainly reflect customers’ delinquency, macro-economic trends, such as, currency exchange and interest rates, as well as the nature of the derivative instruments used by the Company, its subsidiaries, and its counter-parties. These risks are managed through internal control policies, specific strategies and establishment of approval authorities. b) Fair value--The fair value of the financial instruments previously mentioned are as follows: Company 12.31.2014 09.30.2015 Book Fair Book Fair value value value value ASSETS -CURRENT: Cash and cash equivalents Marketable securities Financial instruments Accounts receivable Receivable – sale of property Other receivables 114 985 114 985 136 992 136 992 NONCURRENT: Long-term assets: Related parties Receivable – sale of property 23 - 23 - - - - - LIABILITIES -CURRENT: Loans and financing (*) Debenture (*) Financial instruments Suppliers Government concessions Noneconomic lease Other accounts payable 4 - 4 - 128,303 2,035 1,681 561,127 5,014 19,633 128,303 2,035 1,681 561,127 5,014 19,633 129,570 1,360 522,489 23,248 129,570 1,360 522,489 23,248 - 23,455 42,101 23,455 42,101 7,535 - 7,535 - - 439,587 144,692 3,152 236,346 17,240 5,568 56,994 439,587 144,692 3,152 236,346 17,240 5,568 56,994 403,748 1,685 167,095 16,556 4,286 59,155 403,748 1,685 167,095 16,556 4,286 59,155 3 - Consolidated 09.30.2015 12.31.2014 Book Fair Book Fair value value value value 3 - 27 Company NONCURRENT: Loans and financing (*) Debenture (*) Noneconomic lease Related parties Government concessions Other obligations 09.30.2015 Book Fair value value 12.31.2014 Book Fair value value 13,989 2,056 16,714 2,056 13,989 2,056 16,714 2,056 Consolidated 09.30.2015 12.31.2014 Book Fair Book Fair value value value value 185,401 133,205 22,026 8 47,884 19,993 185,401 133,205 22,026 8 47,884 19,993 191,458 263,748 12,822 7,969 47,875 19,691 191,458 263,748 12,822 7,969 47,875 19,691 (*) The fair values of loans and financing and debentures are similar to their amortized cost recorded in the interim financial statements because they are indexed to floating interest rates (TJLP, CDI and LIBOR), which accompany market rates. Considering that the maturities of other financial instruments are short-term, the Company estimates that the fair value approximates its carrying book value. The fair values of the financial instruments listed above are determined based on unobservable inputs and are, therefore, classified as Level III information. c) Classification of financial instruments--Except derivatives, all financial instruments listed above are classified as “Loans and receivables”, in the case of assets, and as “Other financial liabilities”, in the case of liabilities, initially measured at fair value and restated at amortized cost. The derivative financial instruments are “Measured at fair value through profit or loss” and the portion related to the cash flow hedge, for which its effectiveness can be measured, has its gains and losses recognized directly in equity as assets and liabilities valuation adjustment and presented in the statements of comprehensive income. d) Risk management and derivative and non-derivative financial instruments: d.1 - Objectives and risk management strategies--The Company believes that risk management is important in driving its strategy of profitable growth. The Company is exposed to market risks, mainly related to changes in exchange rates, commodity prices (cotton) and volatility of interest rates. The goal of managing these risks is to eliminate possible unexpected variations in the results of the group’s companies, arising from these variations. The purpose of derivative transactions is always related to the elimination of market risks, identified in our policies and guidelines and, also, to the management of the volatility of financial flows. The measurement of efficiency and evaluation of results occurs during the term of the contracts. The monitoring of the impact of these transactions is analyzed quarterly by the Cash and Debt Management Committee, when the mark-to-market of these transactions is discussed and validated. All derivative financial instruments are recorded at fair value in the Company’s interim financial statements. d.2 – Derivatives use policy--According to internal policies, the Company’s financial results should be related to cash provided by its business and not by gains in the financial market. Therefore, it considers the use of derivatives as a tool to protect eventual exposures related to risks arising from such exposures, and not for speculative purposes. The derivative transactions goal is to reduce Company’s market risks exposures. d.3 – Exchange rate risk--This risk arises from the possibility that the Company and its subsidiaries may incur losses due to exchange rate fluctuations that would reduce the nominal billed amounts or increase funds raised in the market. 28 d.3.1) Exchange rate risk on foreign investments: The Company has foreign investments that increase its foreign currency exchange exposure, as follows: Total of foreign investments 09.30.2015 12.31.2014 Investments Subsidiaries’ obligations 123,813 (75,097) ----------48,716 ====== 77,344 (60,879) ----------16,465 ====== In equivalent thousands of US Dollars 12,262 ====== 6,199 ====== d.3.2) Exchange rate risks on the Company and on subsidiary CSA’s non-derivative financial instruments: The non-derivative financial instruments exposure of the Company and its Brazilian subsidiaries is as follows: Financial instruments Cash and cash equivalents Accounts receivable Suppliers, net Related parties (SGUS) Total exposure in Brazilian Reais Total exposure in equivalent thousands of US Dollars 09.30.2015 12.31.2014 1.834 47,271 (1,052) 110,530 ----------158,583 ====== 39,916 ====== 954 40,457 (2,216) 80,654 ----------119,849 ====== 45,120 ====== The sensitivity analysis of non-derivative financial instruments, considering the US Dollar denominated cash flows, as of September 30, 2015, is shown below: Scenarios Maturity Risk 2015 2018 US Dollar depreciation US Dollar depreciation Exposure value US$ thousands 12,095 27,821 ---------39,916 ====== Probable 878 40,091 ---------40,969 ====== II (11,355) 2,436 ---------(8,919) ====== III (23,588) (35,219) ----------(58,807) ====== Amounts in parenthesis (negative numbers) stated in the scenarios above refer to exchange rate variance losses. The positive amounts relate to exchange rate variations gains. The “Probable” scenario represents the result of the probable exchange rate variation, considering the cash flow of the assets and liabilities presented above, applying US Dollar forward exchange rates and comparing to the US Dollar exchange rate at the end of the current period. Scenarios II and III reflect 25% and 50% deterioration of US Dollar forward exchange rates, respectively. The US Dollar forward exchange rates were obtained from BM&FBOVESPA – “Bolsa de Valores, Mercadorias e Futuros” (Brazilian Commodities and Futures Exchange). 29 d.3.3) Exchange rate risk on derivative instruments transactions of the Company and its subsidiaries: Consolidated information for derivative instruments with exchange rate risk is shown below: Description Notional Value – US$ thousands 09.30.2015 12.30.2014 Fair Value – Asset (Liability) 09.30.2015 12.31.2014 Forward Contract (NDF) (1) -Position: Buy Currency: US$ Dollar settlement: R$3.0448 Counterpart: Itaú BBA Other information: 1 contract of US$1,300 thousands, maturing on 10.30.2015 1,300 - 585 - 1,300 - 561 - Forward Contract (NDF) (1) -Position: Buy Currency: US$ Dollar settlement: R$3.0583 Counterpart: Itaú BBA Other information: 1 contract of US$1,300 thousands, maturing on 11.30.2015 Forward Contract (NDF) (1) -Position: Buy Currency: US$ Dollar settlement: R$3.0726 Counterpart: Itaú BBA Other information: 1 contract of US $1,300 thousands, maturing on 12.30.2015 Total current assets 1,300 ----------3,900 ======= ----------======= 15,000 - 15,000 ----------30,000 ======= ----------======= 535 ----------1,681 ======= ----------======= Forward Contract (NDF) (1) -Position: Buy Currency: US$/Pesos Argentinos Dollar settlement: $10.03 Counterpart: Banco da Patagonia Other information: 1 contract of US $15.000 thousands, maturing on 12.30.2015 (979) - Forward Contract (NDF) (1) -Position: Buy Currency: US$/Pesos Argentinos Dollar settlement: $11.72 Counterpart: Banco da Patagonia Other information: 1 contract of US $15.000 thousands, expiring on 06.30.2016 Total current liabilities (2,173) ----------(3,152) ======= ----------======= (1) Forward contracts (NDF - "Non Deliverable Forward") raw materials-- are presented and measured at fair value through the statement of operations, and aim to protect the foreign exchange risk on purchases of raw materials at each contract’s settlement date. Although the Company uses 30 these derivatives for hedging purposes, it did not adopt the hedge accounting practice for these transactions. The balance corresponds to the financial instruments’ fair values which were calculated based on data obtained from BM&FBOVESPA - “Bolsa de Valores, Mercadorias e Futuros” for operations in Brazil and the Central Bank of Argentina for operations in Argentina, such as the future Dollar exchange rate at the settlement dates, interest rates and algorithms, and compared to data obtained directly from the counterparty financial institutions, which evaluate those instruments. The derivatives are traded in the over-the-counter market, registered at the competent agencies, and are not subject to margin deposits. In the nine months ended September 30, 2014, a loss of R$3,152 was recorded from derivatives related to foreign exchange risk included in “Exchange rate variations, net”. Except for the swap contract mentioned in note 12.a, and the forward contracts shown above, there were no other exchange rate derivatives in 2015 and 2014. The sensitivity analysis of the above derivative financial instruments, considering the flows of receipts and payments in US Dollars already contracted on September 30, 2015 is as follows: Scenarios Maturity 2015 2015 2016 Risk US Dollar depreciation US Dollar depreciation US Dollar depreciation Exposure value US$ thousands 3,900 15,000 15,000 ---------33,900 ====== Probable II III 1,681 (979) (2,173) ---------(1,471) ====== (41) (15,769) (17,399) ---------(33,209) ====== (3,909) (30,558) (32,626) ---------(67,093) ====== Amounts in parenthesis (negative numbers) stated in the scenarios above refer to exchange rate variance losses. The positive amounts relate to exchange rate variations gains. The “Probable” scenario represents the result of the probable exchange rate variation, considering the cash flow of the assets and liabilities presented above, applying US Dollar forward exchange rates and comparing to the US Dollar exchange rate at the end of the current period. Scenarios II and III reflect 25% and 50% deterioration of US Dollar forward exchange rates, respectively. The US Dollar forward exchange rates were obtained from BM&FBOVESPA – “Bolsa de Valores, Mercadorias e Futuros” (Brazilian Commodities and Futures Exchange). d.4 – Commodities price risk (cotton)--This risk arises from the possibility of the Company and its subsidiaries may incur losses due to fluctuations in the price of cotton, its main raw material. A significant increase in price of cotton may cause an increase in the cost of its products in an amount that the Company may be unable to pass such increases to its customers, reducing its margins. In 2015 and 2014, the Company had no results with this type of derivatives. d.5 - Interest rates risk--Cash and cash equivalents and marketable securities yield, approximately, the equivalent to CDI (Certificate of Interbank Deposit) rates. Interest-bearing liabilities (except as described in d.5.1 and d.5.2 below), which reflect rates equivalent to LIBOR, TR and IRP, are disclosed in notes 12 and 15. Considering the cash flows of these liabilities and the contracted interest rates, Management determined that the exposure to market changes on the contracted interest rates is not significant. Therefore, the sensitivity analysis is deemed unnecessary. d.5.1) Variable interest rate risks on derivative financial instruments: Interest rates swap contracts--Are presented and measured at fair value and their effectiveness is measured based on the cash flow of the loans denominated in foreign currency. Gains or losses were recorded under the “Financial expenses – interests” caption in the statements of operations. 31 Except for the swap contract mentioned in note 12.a, there were no interest rate derivatives in 2015 and 2014. d.5.2) Variable interest rate risk on non-derivatives financial instruments: The amounts related to the Company’s non-derivatives financial instruments subject to variable interest rate exposure are as follows: 09.30.2015 Description Loan Agreement -Interest: 108.5% of CDI Counterpart: Banco do Brasil S.A. Maturity: May/2015 Loan Agreement -Interest: 113.6% of CDI Counterpart: Banco do Brasil S.A.-NCI Maturity: April/2016 Principal amount R$ thousands - Accrued interest - 12.31.2014 Prepaid interest Payable Payable - - 236,157 40,000 8,279 - 48,279 --------48,279 --------- 43,529 --------279,686 --------- Loan and Swap Agreement-Interest: 121.0% of CDI Counterpart: Banco Itaú BBA S.A. Maturity: August/2016 66,667 1,066 - 67,733 104,684 Loan and Swap Agreement -Interest: 117.8% of CDI Counterpart: Banco Itaú BBA S.A.. Maturity: February/2016 33,000 513 - 33,513 --------101,246 --------- --------104,684 --------- Loan Agreement -Interest: 120.0% of CDI Counterpart: Banco Santander S.A. Maturity: May/2017 30,000 1,712 (194) 31,518 30,055 Loan Agreement -Interest: 123.5% of CDI Counterpart: Banco Santander S.A. Maturity: April/2016 5,000 370 (45) 5,325 7,593 Loan Agreement -Interest: 120.0% of CDI Counterpart: Banco Santander S.A. Maturity: May/2016 20,000 1,154 (344) 20,810 --------57,653 --------- --------37,648 --------- Loan Agreement -Interest: 110.7% of CDI Counterpart: Banco do Brasil S.A NCE Maturity: April/2019 220,000 896 (993) 219,903 - Loan Agreement -Interest: 109.0% of CDI Counterpart: Banco do Brasil S.A NCE Maturity: June/2016 25,000 259 (16) 25,243 ---------245,146 ---------- ----------------- - - - 27,320 (Refer to Note 12) (Refer to Note 12) (Refer to Note 12) (Refer to Note 12) Loan Agreement -Interest: 116.6% of CDI Counterpart: Banco do Brasil S.A. Maturity: April/2015 - 32 12.31.2014 09.30.2015 Principal amount R$ thousands Description Loan Agreement -Interest: 111.5% of CDI Counterpart: Banco do Brasil S.A - NC Maturity: March/2016 Debenture -Interest: 110.0% of CDI Counterpart: Gaia Agro Sec. S.A. Maturity: June/2017 Accrued interest 25,000 44 270,000 -----------734,667 ======= 12,242 ----------26,535 ======= Prepaid interest Payable - Payable 25,044 (4,345) -----------(5,937) ======= - 277,897 -----------755,265 ======= 265,433 -----------714,771 ======= The sensitivity analysis of the non-derivative financial instruments above, considering the scheduled payments of principal and interest as of September 30, 2015, is as follows: Maturity 2015 2016 2017 2018 2019 Risk CDI increase CDI increase CDI increase CDI increase CDI increase Principal average balance 762,504 618,946 276,853 74,281 55,669 Scenarios Probable II III 28,420 72,455 29,270 10,711 2,923 ====== 36,830 102,313 42,197 15,160 4,025 ====== 44,236 123,925 51,001 18,289 4,855 ====== Amounts shown in the scenarios above represent projected interest expense, in their respective years and scenarios, considering the average loan balances on each year. The “Probable” scenario represents the result of the probable CDI variations, considering the principal and interest maturity dates. Scenarios II and III reflect 25% and 50% increase in the CDI forward rates, respectively. The CDI forward rates were obtained from BM&FBOVESPA – “Bolsa de Valores, Mercadorias e Futuros”. d.6 - Credit risk--The Company is subject to credit risk on its cash and cash equivalents, marketable securities, and derivative instruments. This risk is mitigated by the policy of entering into transactions only with major financial institutions. The credit risk on accounts receivable is reduced due to the selectivity of customers and credit policy. The Company has a credit management system based on the combination of information originated by several departments of the Company, primarily sales, finance, accounting, legal and external sources that enable the credit and collection departments to establish credit limits for its customers that are approved by a credit committee. d.7 – Liquidity risk management--The Company presented its consolidated financial assets and liabilities, according to their cash flows, based on their approximate maturity date, and using nominal contractual interest rates in its annual financial statements for the year ended December 31, 2014. As of September 30, 2015, there was no significant change when compared to the published annual financial statements. 33 d.8 - Capital management risk--The Company manages its capital structure to ensure the continuity of its operational activities and, at the same time, to maximize the returns to its shareholders. The Company’s strategy remained unchanged in the period covered by these interim financial statements. The Company’s net debt is as follows: Consolidated 09.30.2015 12.31.2014 Loans and financing Debenture Cash and cash equivalents Marketable securities Financial instruments, net Total net debt Total equity Total net debt and equity 624,988 277,897 (128,303) (2,035) 1,471 ------------774,018 ------------1,110,013 ------------1,884,031 ======== 595,206 265,433 (129,570) (1,360) ------------729,709 ------------1,085,771 ------------1,815,480 ======== 23. SEGMENT INFORMATION Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the decision maker, with the purpose of determining the allocation of resources to an individual segment and evaluate its performance. Decisions on strategic planning, finance, purchasing, investment and application of resources, as well as evaluation of investment and key executives performance of the Company are made on a consolidated basis, the Company and its subsidiaries have concluded that they have two operating segments: “Wholesale" and "Retail". The Wholesale segment is subdivided into two sub-segments: South America, which includes operations in Brazil and Argentina; and North America, which includes operations in the United States of America and Canada. The Company owns several factories that supply each other so that, together, they form an integrated industry in spinning, weaving, finishing and manufacturing of home textile products. The Company does not have separate operating segments in its sales categories and the reports used for strategic and operational decision making are always consolidated. There are no specific operational units for each category of goods sold. Therefore, these operations are denominated “Wholesale” because its products are not sold to the final consumer. The subsidiary AMMO has a set of separate information and investment decisions, pricing, store expansion and others that are individually made, and are denominated “Retail” as its products are sold directly to the final consumer. 34 The financial information, segregated by the segments previously explained, is presented below (in millions of Reais): Wholesale Net revenues Cost of goods sold Gross profit Selling, general and administrative expenses Other Operating results Financial results Income (loss) before taxes Depreciation and amortization Gross profit Selling, general and administrative expenses Other Operating results Financial results Income (loss) before taxes Depreciation and amortization Others unallocated Total 853.6 (601.2) ---------252.4 190.1 (100.3) ---------89.8 1.043.7 (701.5) ---------342.2 660.4 (562.9) ---------97.5 (46.2) 46.2 ---------- 1.657.9 (1.218.2) ---------439.7 (155.1) 19.3 ---------116.6 ---------116.6 ====== (112.0) (4.9) ---------(27.1) ---------(27.1) ====== (267.1) 14.4 ---------89.5 ---------89.5 ====== (56.4) (9.7) ---------31.4 ---------31.4 ====== (2.6) ---------(2.6) (98.0) ---------(100.6) ====== (326.1) 4.7 ---------118.3 (98.0) ---------20.3 ====== 47.6 ====== 8.7 ====== 56.3 ====== 3.2 ====== ====== 59.5 ====== 09.30.2014 North America Total Wholesale Others unallocated Wholesale Net revenues Cost of goods sold South America Retail 09.30.2015 North America Total Wholesale South America Retail Total 875.4 (625.8) ---------249.6 206.0 (108.7) ---------97.3 1.081.4 (734.5) ---------346.9 499.3 (440.6) ---------58.7 (54.9) 54.9 ---------- 1.525.8 (1.120.2) ---------405.6 (149.4) (0.3) ---------99.9 ---------99.9 ====== (118.1) (2.3) ---------(23.1) ---------(23.1) ====== (267.5) (2.6) ---------76.8 ---------76.8 ====== (48.5) (7.4) ---------2.8 ---------2.8 ====== (2.8) 1.3 ---------(1.5) (110.2) ---------(111.7) ====== (318.8) (8.7) ---------78.1 (110.2) ---------(32.1) ====== 50.5 ====== 9.9 ====== 60.4 ====== 4.5 ====== ====== 64.9 ====== The Company, through the analysis of sales performance, classifies its products under the categories of sales (or product lines) such as: bedding, tabletop and bath, utility bedding, intermediate products, and retail. 35 Revenue information by category or product lines is as follows: Consolidated 09.30.2015 09.30.2014 Net revenues (in millions of Reais): Bedding, tabletop and bath Utility bedding Intermediate products Retail Volume (in thousands of tons): Bedding, tabletop and bath Utility bedding Intermediate products 805.3 506.2 156.3 190.1 ------------1.657.9 ======== 798.0 347.7 174.1 206.0 ------------1.525.8 ======== 26.4 31.7 19.4 ------------77.5 ======= 31.0 29.4 22.0 ------------82.4 ======== The Company has over 10,000 active clients as of September 30, 2015 and only one customer accounts for approximately 10% of sales. 24. EXPENSES BY NATURE The Company presents its consolidated statements of operations by function. The consolidated statements of operations by nature are as follows: By nature: Consolidated 09.30.2015 09.30.2014 Cost of raw materials, goods and services acquired from third parties Employee benefits INSS Depreciation and amortization Finished goods and work-in-process inventory variations Exchange rate variances in inventories from foreign subsidiaries Other costs and expenses Total by nature (1,202,404) (328,688) (27,656) (59,498) 107,456 49,959 (83,543) -------------(1,544,374) ======== (1,009,490) (308,861) (22,207) (64,865) 34,125 1,319 (69,049) -------------(1,439,028) ======== By function: Consolidated 09.30.2015 09.30.2014 Cost of goods sold Selling expenses General and administrative expenses Management fees Total by function (1,218,226) (220,833) (99,956) (5,359) ------------(1,544,374) ======== (1,120,194) (221,909) (90,562) (6,363) ------------(1,439,028) ======== 36 25. NET REVENUES See below the reconciliation between gross revenues and net revenues presented in the statements of operations: Consolidated 09.30.2015 09.30.2014 OPERATING REVENUES: Gross revenues Sales deductions NET REVENUES 1,991,828 (333,935) ------------1,657,893 1,880,418 (354,602) ------------1,525,816 ======== ======== 26. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share was calculated as follows: 09.30.2015 NET INCOME (LOSS) FOR THE PERIOD Weighted-average outstanding common shares 09.30.2014 22,267 (29,230) 200,000,000 200,000,000 0.1113 ====== (0.1462) ====== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (R$): The Company does not have shares with dilutive potential. Therefore, the basic earnings (loss) per share equals the diluted earnings (loss) per share. ************** 37
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