Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.
Yes ______ No ___X___
Unaudited Condensed Consolidated Interim | |
Financial Statements under U.S. GAAP | |
GOL Linhas Aéreas Inteligentes S.A. | |
March 31, 2007 and December 31, 2006, with Report | |
of Independent Registered Public Accounting Firm |
GOL LINHAS AÉREAS INTELIGENTES S.A.
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
(In thousands of Brazilian Reais)
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Gol Linhas Aéreas Inteligentes S.A.
We have reviewed the condensed consolidated balance sheet of Gol Linhas Aéras Inteligentes S.A. and subsidiaries as of March 31, 2007 and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2007 and 2006 and the condensed consolidated statements of shareholders equity and comprehensive income for the three-month period ended March 31, 2007. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical review procedures to financial data, and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, cash flows, shareholders equity and comprehensive income for the year then ended not presented herein, and in our report dated January 29, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG
Auditores Independentes S.S.
Maria Helena Pettersson
Partner
São Paulo, Brazil
April 19, 2007
F - 3
GOL LINHAS AÉREAS INTELIGENTES S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of Brazilian Reais)
March 31, 2007 | December 31, 2006 | |||||
(Unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | R$ | 618,509 | R$ | 280,977 | ||
Short-term investments | 1,343,808 | 1,425,369 | ||||
Receivables, less allowance | ||||||
(2007 R$ 13,483; 2006 R$ 10,366) | 645,417 | 659,306 | ||||
Inventories | 123,262 | 75,165 | ||||
Deposits with lessors | 257,638 | 232,960 | ||||
Recoverable taxes | 57,721 | 60,396 | ||||
Prepaid expenses | 71,377 | 64,496 | ||||
Other | 10,066 | 12,654 | ||||
Total current assets | 3,127,798 | 2,811,323 | ||||
PROPERTY AND EQUIPMENT | ||||||
Pre-delivery deposits | 554,817 | 436,911 | ||||
Flight equipment | 729,043 | 660,861 | ||||
Other | 132,741 | 129,260 | ||||
1,416,601 | 1,227,032 | |||||
Accumulated depreciation | (165,945) | (147,809) | ||||
Property and equipment, net | 1,250,656 | 1,079,223 | ||||
OTHER ASSETS | ||||||
Deposits with lessors | 307,106 | 304,875 | ||||
Other | 72,731 | 63,033 | ||||
Total other assets | 379,837 | 367,908 | ||||
TOTAL ASSETS | R$ | 4,758,291 | R$ | 4,258,454 | ||
See accompanying notes to condensed consolidated financial statements
F - 4
GOL LINHAS AÉREAS INTELIGENTES S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of Brazilian Reais)
March 31, 2007 | December 31, 2006 | |||||
(Unaudited) | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Short-term borrowings | R$ | 176,120 | R$ | 128,304 | ||
Current portion of long-term debt | 43,775 | 41,298 | ||||
Accounts payable | 106,082 | 124,110 | ||||
Salaries, wages and benefits | 104,456 | 87,821 | ||||
Sales tax and landing fees | 106,254 | 139,394 | ||||
Air traffic liability | 243,884 | 335,268 | ||||
Dividends payable | 72,537 | 42,961 | ||||
Deferred gains on sale and leaseback transactions | 7,172 | 10,128 | ||||
Deferred income taxes, net | 8,355 | - | ||||
Other | 66,101 | 91,062 | ||||
Total current liabilities | 934,736 | 1,000,346 | ||||
NON-CURRENT LIABILITIES | ||||||
Long-term debt | 1,431,434 | 949,006 | ||||
Deferred income taxes, net | 34,349 | 28,064 | ||||
Deferred gains on sale and leaseback transactions | 49,375 | 48,219 | ||||
Other | 49,045 | 27,661 | ||||
1,564,203 | 1,052,950 | |||||
SHAREHOLDERS EQUITY | ||||||
Preferred shares, no par value; 88,621,497 and | ||||||
88,615,674 issued and outstanding in 2007 and | ||||||
2006, respectively | 848,536 | 846,125 | ||||
Common shares, no par value; 107,590,792 issued | ||||||
and outstanding in 2007 and 2006 | 41,500 | 41,500 | ||||
Additional paid-in capital | 35,844 | 35,430 | ||||
Appropriated retained earnings | 39,577 | 39,577 | ||||
Unappropriated retained earnings | 1,289,915 | 1,246,848 | ||||
Accumulated other comprehensive income | 3,980 | (4,322) | ||||
Total shareholders equity | 2,259,352 | 2,205,158 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS | ||||||
EQUITY | R$ | 4,758,291 | R$ | 4,258,454 | ||
See accompanying notes to condensed consolidated financial statements
F - 5
GOL LINHAS AÉREAS INTELIGENTES S.A.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of Brazilian Reais, except per share amounts)
Three-Months ended March 31, | ||||||
2007 | 2006 | |||||
NET OPERATING REVENUES | ||||||
Passenger | R$ | 975,361 | R$ | 829,858 | ||
Cargo and Other | 65,911 | 33,158 | ||||
Total net operating revenues | 1,041,272 | 863,016 | ||||
OPERATING EXPENSES | ||||||
Aircraft fuel | 361,298 | 254,306 | ||||
Salaries, wages and benefits | 132,065 | 81,484 | ||||
Aircraft rent | 95,331 | 66,487 | ||||
Sales and marketing | 76,555 | 99,330 | ||||
Landing fees | 54,972 | 30,341 | ||||
Aircraft and traffic servicing | 57,888 | 31,621 | ||||
Maintenance materials and repairs | 46,248 | 26,115 | ||||
Depreciation | 28,546 | 12,529 | ||||
Other | 63,309 | 36,968 | ||||
Total operating expenses | 916,212 | 639,181 | ||||
OPERATING INCOME | 125,060 | 223,835 | ||||
OTHER INCOME (EXPENSE) | ||||||
Interest expense | (27,024) | (3,263) | ||||
Capitalized interest | 4,617 | 3,350 | ||||
Interest and investment income | 88,606 | 33,972 | ||||
Other expenses, net | (31,558) | (9,264) | ||||
Total other income | 34,641 | 24,795 | ||||
INCOME BEFORE INCOME TAXES | 159,701 | 248,630 | ||||
Income taxes | (43,119) | (68,840) | ||||
NET INCOME | R$ | 116,582 | R$ | 179,790 | ||
EARNINGS PER COMMON AND PREFERRED SHARE: | ||||||
Basic | R$ | 0.59 | R$ | 0.92 | ||
Diluted | R$ | 0.59 | R$ | 0.92 |
See accompanying notes to condensed consolidated financial statements.
F - 6
GOL LINHAS AÉREAS INTELIGENTES S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of Brazilian Reais)
Three months ended March 31, | ||||||
2007 | 2006 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net income | R$ | 116,582 | R$ | 179,790 | ||
Adjustments to reconcile net income to net cash provided by | ||||||
operating activities: | ||||||
Depreciation | 28,546 | 12,529 | ||||
Deferred income taxes | (1,800) | (6,830) | ||||
Allowance for doubtful accounts receivable | 3,117 | 740 | ||||
Capitalized interest | (4,617) | 3,350 | ||||
Changes in operating assets and liabilities: | ||||||
Receivables | 10,772 | (15,005) | ||||
Inventories | (48,097) | 2,644 | ||||
Accounts payable and other accrued liabilities | (18,028) | - | ||||
Deposits with lessors | (33,730) | (22,658) | ||||
Air traffic liability | (91,384) | (32,258) | ||||
Dividends payable | 29,576 | (43,470) | ||||
Other, net | (16,758) | 14,967 | ||||
Net cash provided by (used in) operating activities | (25,821) | 93,799 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Deposits for aircraft leasing contracts | 6,821 | (6,207) | ||||
Acquisition of property and equipment | (82,073) | (40,047) | ||||
Pre-delivery deposits | (113,289) | (62,856) | ||||
Change in available-for-sale securities, net | 81,561 | (13,221) | ||||
Net cash used in investing activities | (106,980) | (122,331) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
Short-term borrowings | 6,518 | 50,443 | ||||
Proceeds from issuance of long-term debt | 526,203 | - | ||||
Dividends paid | (73,515) | - | ||||
Other, net | 11,127 | 8,638 | ||||
Net cash provided by financing activities | 470,333 | 59,081 | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 337,532 | 30,549 | ||||
Cash and cash equivalents at beginning of the period | 280,977 | 106,347 | ||||
Cash and cash equivalents at end of the period | R$ | 618,509 | R$ | 136,896 | ||
Supplemental disclosure of cash flow information | ||||||
Interest paid | R$ | 27,024 | R$ | 3,263 | ||
Income taxes paid | R$ | 28,630 | R$ | 76,809 | ||
Non cash investing activities | ||||||
Accrued capitalized interest | R$ | (4,617) | R$ | 3,350 |
See accompanying notes to condensed consolidated financial statements.
F - 7
GOL LINHAS AÉREAS INTELIGENTES S.A.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In thousands of Brazilian Reais, except for share
information)
Common Shares | Preferred Shares | Retained Earnings | Accumulated other comprehensive income |
|||||||
Additional paid in capital | ||||||||||
Deferred compensation |
||||||||||
Shares | Amount | Shares | Amount | Appropriated | Unapropriated | Total | ||||
Balance at December 31, 2006 | 107,590,792 | R$ 41,500 | 88,615,674 | R$ 846,125 | R$ 39,275 | R$ (3,845) | R$ 39,577 | R$ 1,246,848 | R$ (4,322) | R$ 2,205,158 |
Comprehensive income: | ||||||||||
Net income | - | - | - | - | - | - | - | 116,582 | - | 116,582 |
Changes in fair value of derivative instruments, net | ||||||||||
of taxes | - | - | - | - | - | - | - | - | 8,302 | 8,302 |
Total comprehensive income | - | - | - | - | - | - | - | - | - | 124,884 |
Paid-in subscribed capital | - | - | 5,823 | 2,411 | - | - | - | - | - | 2,411 |
Deferred compensation | - | - | - | - | (15) | 15 | - | - | - | - |
Amortization of deferred compensation | - | - | - | - | - | 414 | - | - | - | 414 |
Dividends payable and interest on shareholders equity | - | - | - | - | - | - | - | (73,515) | - | (73,515) |
Balance at March 31, 2007 (Unaudited) | 107,590,792 | R$ 41,500 | 88,621,497 | R$ 848,536 | R$ 39,260 | R$ (3,416) | R$ 39,577 | R$ 1,289,915 | R$ 3,980 | R$ 2,259,352 |
See accompanying notes to condensed consolidated financial statements.
F- 8
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
1. Business Overview
Acquisition. On March 28, 2007, the Company through GTI S.A., a wholly-owned subsidiary of Gol Linhas Aéreas Inteligentes, concluded an agreement for the acquisition of the total share capital of VRG Linhas Aéreas S.A. (VRG, airline that operates the VARIG brand) from VarigLog and Volo, the controlling shareholders of VRG. The total consideration for the shares of VRG is US$ 275 million, consisting of US$ 98 million of cash and 6,049,185 non-voting (PN) shares issued by the Company, with various sale restrictions for up to 30 months. The Company also assumed R$ 100 million (US$ 48 million) of debentures issued by VRG. Also on March 28, 2007, the Company increased the capital of GTI S.A. in the amount of R$62,148 (US$30,000), corresponding to 62,148,000 ordinary and preferred shares subscribed on October 26, 2004 at the price of R$ 1.00 per share, as part of the payment to VarigLog and Volo. The acquisition of VRG is conditioned on approvals from the Nacional Civil Aviation Agency (ANAC) and the Brazilian Antitrust Agency (CADE). See Note 13.
2. Summary of Significant Accounting Policies
Basis of presentation. These financial statements were prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting (USGAAP), using Brazilian Reais as the functional and reporting currency. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Companys results for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates.
Consolidated quarterly information includes accounts of Gol Linhas Aéreas Inteligentes S.A. and of its wholly-owned subsidiaries Gol Transportes Aéreos S.A. (GTA), GTI S.A., GAC Inc. and Gol Finance. All significant intercompany balances have been eliminated.
The exchange rates at March 31, 2007 and March 31, 2006 were R$ 2.0504 and R$ 2.1724, respectively per U.S. Dollar. The average exchange rates for the first quarter of 2007 and 2006 were R$ 2.1085 and R$ 2.1974 respectively (these rates provided for reference purposes). The accounting principles adopted under USGAAP differ in certain respects from accounting principles generally accepted in Brazil (Brazilian GAAP), which the Company uses to prepare its statutory financial statements.
The results of the three-month period ended March 31, 2007 are not necessarily indicative of the results that might be expected for the full year ending December 31, 2007. The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2006.
For further information, refer to the consolidated financial statements for the year ended December 31, 2006 and footnotes thereto included in the Companys financial statements filed with the SEC.
F - 9
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
3. Deposits with Lessors
Deposits with lessors include aircraft and engine maintenance deposits, security deposits for aircraft leasing contracts and other deposits which will be used to compensate the lessors for other lease related costs when due. Following is the composition of the balance:
December 31, | ||||
March 31, 2007 | 2006 | |||
Aircraft and engine maintenance deposits | 298,010 | 263,647 | ||
Security deposits | 33,963 | 40,787 | ||
Other deposits | 232,771 | 233,401 | ||
564,744 | 537,835 | |||
Short-term | (257,638) | (232,960) | ||
Long-term | 307,106 | 304,875 | ||
Maintenance deposits made in the first quarter of 2007 and 2006 were R$ 34,360 and R$ 30,118, respectively. There were no maintenance deposits reimbursed to the Company for maintenance events during the first quarters of 2007 and 2006.
4. Short-term Borrowings
At March 31, 2007, the Company had ten revolving lines of credit with five financial institutions allowing for combined borrowings up to R$ 432,000. One of the credit lines is secured by promissory notes and allows for borrowings up to R$ 300,000. At March 31, 2007 and December 31, 2006, there were R$176,120 (US$ 85,895) and R$ 128,304 (US$ 60,011) outstanding borrowings under these facilities, respectively.
The weighted average annual interest rate for these reais-based short-term borrowings at March 31, 2007 and December 31, 2006 was 11.6% and 15.5%, respectively.
5. Long-term Debt
March 31, 2007 | December 31, 2006 | |||
Foreign currency: | ||||
5.39 % Bank loan | 123,500 | 128,304 | ||
7.24 % IFC loan | 97,589 | 107,150 | ||
7.50 % Senior notes | 463,522 | - | ||
8.75 % Perpetual notes | 412,020 | 436,902 | ||
1,096,631 | 672,356 | |||
Local currency: | ||||
9.15 % BNDES loan | 61,449 | 54,626 | ||
Capital leases (note 8) | 273,354 | 222,024 | ||
Long-term debt | 1,431,434 | 949,006 | ||
In March 2007, the Companys wholly-owned subsidiary Gol Finance issued R$ 463,545 (US$ 225,000) 7.50% Senior Notes due 2017. At March 31, 2007, there was outstanding R$ 463,522 in the long-term and R$ 773 in the short-term under this facility.
The following table provides a summary of our principal payments of long-term debt obligations at March 31:
Beyond | ||||||||||||||
(in R$ 000) | 2009 | 2010 | 2011 | 2012 | 2013 | 2013 | Total | |||||||
Long-term debt | ||||||||||||||
obligations (1) | 145,881 | 31,318 | 30,626 | 30,687 | 26,225 | 481,323 | 746,060 |
F - 10
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
6. Transactions with Related Parties
The Company has an exclusive bus transportation agreement with related companies Breda Transportes e Serviços S.A. and Expresso União Ltda. During the first quarter of 2007 and 2006, the Company paid R$ 1,360 and R$ 104 (R$ 615 and R$ 91) to these companies, respectively.
The Company also has a five-year office space lease agreement with Áurea Administração e Participações S.A. (expiring on March 31, 2008) for the lease of headquarters located at Rua Tamoios, 246 in São Paulo. The lease agreement provides for monthly payments, adjusted by the IGP-M inflation index. During both the first quarters of 2007 and 2006, the Company paid R$ 88 to this company.
The payments to and from the related parties are in the normal course of business and were based on prevailing market rates.
7. Shareholders Equity
Brazilian corporations are allowed to attribute interest on shareholders equity. The calculation is based on the shareholders equity amounts as stated in the statutory accounting records and the interest rate applied may not exceed the long term interest rate (TJLP) determined by the Brazilian Central Bank (6.50% p.a. for the first quarter of 2007). For the quarter ended March 31, 2007, the Companys statutory consolidated financial statements presented a net profit of R$ 91,578 (R$160,678 in 2006). The Company accrued a total of R$ 73,716 of interim dividends payable represented by R$ 33,608 of interest on stockholders equity and R$ 40,108 of dividends for payment in the second quarter of 2007, which is included in current liabilities.
8. Leases
During the first quarter of 2007, the Company has entered into one lease agreement for one aircraft which is classified as capital leases under the provisions of SFAS No. 13, Accounting For Leases. The Company had six aircraft classified as capital leases at March 31, 2007. The capital lease agreements are typically for a term of twelve years and for two aircraft the present value of the minimum lease payments exceed 90% of their fair market value at the inception of the lease and for the remaining four aircraft, the Company has bargain purchase options to buy them at the end of the lease term. The carrying value of aircraft under capital lease arrangements included in property and equipment totaled R$ 306,180 as of March 31, 2007. Amortization of aircraft under capital lease arrangements is included in depreciation and amortization expense.
Future minimum lease payments under capital leases with initial or remaining terms in excess of one year at March 31, 2007 were as follows:
Thousands of R$ | Thousands of US$ | |||
2008 | 42,271 | 20,616 | ||
2009 | 42,271 | 20,616 | ||
2010 | 42,271 | 20,616 | ||
2011 | 42,271 | 20,616 | ||
2012 | 42,884 | 20,915 | ||
After 2012 | 217,783 | 106,215 | ||
Total minimum lease payments | 429,751 | 209,594 | ||
Less: Amount representing interest | 127,211 | 62,042 | ||
Present value of net minimum lease payments | 302,540 | 147,552 | ||
Less current portion | 29,186 | 14,234 | ||
Long-term portion | 273,354 | 133,318 | ||
F - 11
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
8. Leases (Continued)
The Company leases aircraft in operation, airport terminal space, other airport facilities, office space and other equipment. At March 31, 2007, the Company leased 61 aircraft under operating leases (as compared to 60 aircraft at December 31, 2006), with initial lease term expiration dates ranging from 2007 to 2018.
Future minimum lease payments under non-cancelable operating leases are denominated in US dollars. Such leases with initial or remaining terms in excess of one year at March 31, 2007 were as follows:
Thousands of R$ | Thousands of US$ | |||||||||||
Aircraft | Other | Total | Aircraft | Other | Total | |||||||
2008 | 386,351 | 13,137 | 399,488 | 188,427 | 6,407 | 194,834 | ||||||
2009 | 325,944 | 9,163 | 335,107 | 158,966 | 4,469 | 163,435 | ||||||
2010 | 275,609 | 4,790 | 280,399 | 134,417 | 2,336 | 136,753 | ||||||
2011 | 191,772 | 2,110 | 193,882 | 93,529 | 1,029 | 94,558 | ||||||
2012 | 178,863 | - | 178,863 | 87,233 | - | 87,233 | ||||||
After 2012 | 506,455 | - | 506,455 | 247,003 | - | 247,003 | ||||||
Total minimum | ||||||||||||
Lease | ||||||||||||
payments | 1,864,994 | 29,200 | 1,894,194 | 909,575 | 14,241 | 923,816 | ||||||
During the first quarter of 2007 the Company received two Boeing 737-800 aircraft.
9. Other Commitments
The following table provides a summary of our principal payments under aircraft purchase commitments and other obligations at March 31:
Beyond | ||||||||||||||
(in R$ 000) | 2008 | 2009 | 2010 | 2011 | 2012 | 2012 | Total | |||||||
Pre-delivery deposits (1) | 221,704 | 297,973 | 346,345 | 281,053 | 67,163 | - | 1,214,238 | |||||||
Aircraft purchase | ||||||||||||||
commitments (2) | 2,044,610 | 1,546,451 | 1,886,268 | 2,374,736 | 1,990,118 | 1,096,361 | 10,938,544 | |||||||
Total | 2,266,314 | 1,844,424 | 2,232,613 | 2,655,789 | 2,057,281 | 1,096,361 | 12,152,782 | |||||||
(1) |
The Company makes payments for aircraft acquisitions utilizing the proceeds from equity and debt financings, cash flow from operations, short and medium-term credit lines and supplier financing. Pre- delivery deposits refer to prepayments made based
on the agreements entered into with Boeing Company for the purchase of Boeing 737-800 Next Generation aircraft. |
(2) |
The Company has a purchase contract with Boeing for 109 Boeing 737-800 Next Generation aircraft, under which the Company currently has 75 firm orders and 34 purchase options. The firm orders have an approximate value of R$ 10,939 million
(corresponding to approximately US$ 5,335 million) based on the aircraft list price (excluding contractual manufacturers discounts), including estimated amounts for contractual price escalations and pre-delivery deposits. Aircraft purchase
commitments can be financed with long-term financing guaranteed by the U.S. Exim Bank (for approximately 85% of the total acquisition cost). |
10. Financial Instruments and Concentration of Risk
At March 31, 2007 and December 31, 2006, the Companys primary monetary assets were cash equivalents, short-term investments and assets related to aircraft leasing operations. The Companys primary monetary liabilities are related to aircraft leasing operations. All monetary assets other than those related to aircraft leasing operations included in the balance sheet are stated at amounts that approximate their fair values.
F - 12
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
10. Financial Instruments and Concentration of Risk (Continued)
Financial instruments that expose the Company to credit risk involve mainly cash equivalents, short-term investments and accounts receivable. Credit risk on cash equivalents and short term investments related to amounts invested with major financial institutions. Credit risk on accounts receivable relates to amounts receivable from the major international credit card companies. These receivables are short-term and the majority of them settle within 30 days.
The Companys revenue is generated in Brazilian Reais (except for a small portion in Argentine Pesos, Bolivian Bolivianos, Chilean Pesos, Paraguay Guaranis, Peru Nuevos Soles and Uruguay Pesos from flights between Brazil, Argentina, Bolivia, Chile, Paraguay, Peru and Uruguay). However, its liabilities, particularly those related to aircraft leasing and acquisition, are US dollar-denominated. The Companys currency exchange exposure at March 31, 2007 is as set forth below:
March 31, 2007 | December 31, 2006 | |||
Assets | ||||
Cash and cash equivalents | 1,260,264 | 788,136 | ||
Deposits with lessors | 266,224 | 273,031 | ||
Aircraft and engine maintenance deposits | 21,271 | 20,223 | ||
Other | 46,197 | 15,405 | ||
Total assets | 1,593,956 | 1,096,795 | ||
Liabilities | ||||
Foreign suppliers | 23,306 | 25,249 | ||
Others | 33,636 | 63,167 | ||
Total liabilities | 56,942 | 88,416 | ||
Exchange exposure | 1,537,041 | 1,008,379 | ||
Exchange exposure in thousands of U.S. dollars | 749,617 | 471,645 | ||
Off-balance sheet transactions exposure | ||||
Operating Leases | 1,894,194 | 1,948,607 | ||
Aircraft commitments | 10,938,544 | 11,549,004 | ||
Total exchange exposure | 14,369,752 | 14,505,990 | ||
Total exchange exposure in thousands of U.S. | ||||
dollars | 7,008,268 | 6,784,841 | ||
The Companys off-balance sheet exposure represents the future obligations related to operating lease contracts and aircraft purchase contracts.
The Company utilizes financial derivative instruments with first-tier banks for cash management purposes. The Company currently has synthetic fixed income options and swap agreements to obtain the Brazilian overnight deposit rate from fixed-rate or dollar-denominated investments.
a) Fuel
Airline operations are exposed to the effects of changes in the price of aircraft fuel. Aircraft fuel consumed in the first quarter of 2007 and 2006 represented approximately 39.5% and 39.8% of the Companys operating expenses, respectively. To manage this risk, the Company periodically enters into crude oil option contracts and swap agreements. Because jet fuel is not traded on an organized futures exchange, liquidity for hedging is limited. However, the Company has found commodities for effective hedging of jet fuel costs. Historically, prices for crude oil are highly correlated to Brazilian jet fuel, making crude oil derivatives effective at offsetting jet fuel prices to provide short-term protection against a sharp increase in average fuel prices.
F - 13
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
10. Financial Instruments and Concentration of Risk (Continued)
The following is a summary of the companys fuel derivative contracts (in thousands, except as otherwise indicated):
March 31, | December 31, | |||||
2007 | 2006 | |||||
Fair value of derivative instruments at the end of the quarter | R$ | 18,756 | R$ | (4,573) | ||
Average remaining term (months) | 3 | 3 | ||||
Hedged volume (barrels) | 2,366,462 | 1,804,000 | ||||
Quarter ended March 31: | 2007 | 2006 | ||||
Hedge effectiveness gains recognized in aircraft fuel expense | - | R$ | 628 | |||
Hedge ineffectiveness net gains recognized in other income | R$ | 5,325 | - | |||
Percentage of actual consumption hedged (during quarter) | 87% | 55% |
The Company utilizes financial derivative instruments as hedges to decrease its exposure to jet fuel price increases for short-term time frames. The Company currently has a combination of purchased call options, collar structures, and fixed price swap agreements in place to hedge approximately 60%, 25%, 25%, 10% and 10% of its jet fuel requirements for the second, third and fourth quarters 2007, and the first and second quarters of 2008, respectively, at average crude equivalent prices of approximately US$ 68.3, US$ 69.5, US$ 72.3, US$ 62.6 and US$ 62.9 per barrel, respectively.
The Company accounts for its fuel hedge derivative instruments as cash flow hedges under SFAS 133. Under SFAS 133, all derivatives designated as hedges that meet certain requirements are granted special hedge accounting treatment. Generally, utilizing the special hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective, as defined, are recorded in Accumulated other comprehensive income until the underlying jet fuel is consumed. When aircraft fuel is consumed and the related derivative contract settles, any gains or losses previously deferred in other comprehensive income are recognized as aircraft fuel expense. The Company is exposed to the risk that periodic changes will not be effective, as defined, or that the derivatives will no longer qualify for special hedge accounting. Ineffectiveness, as defined, results when the change in the total fair value of the derivative instrument does not equal 80-125% of the change in the value of the aircraft fuel being hedged or the change in value of the Companys expected future cash outlay to purchase and consume jet fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to Other gains and losses in the income statement. Likewise, if a hedge ceases to qualify for hedge accounting, those periodic changes in the fair value of derivative instruments are recorded to Other gains and losses in the income statement in the period of the change.
Ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil related commodities, especially given the recent volatility in the prices of refined products. Due to the volatility in markets for crude oil and related products, the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which could be determined on a derivative by derivative basis or in the aggregate. In specific instances, the Company has determined that specific hedges will not regain effectiveness in the time period remaining until settlement and therefore must discontinue special hedge accounting, as defined by SFAS 133. When this happens, any changes in fair value of the derivative instruments are marked to market through earnings in the period of change.
F - 14
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
10. Financial Instruments and Concentration of Risk (Continued)
a) Fuel (Continued)
The Company continually looks for better and more accurate methodologies in forecasting future cash flows relating to its jet fuel hedging program. These estimates are used in the measurement of effectiveness for the Companys fuel hedges, as required by SFAS 133. During second quarter 2006, the Company revised its method for forecasting future cash flows. Previously, the Company had estimated future cash flows using actual market forward prices of like commodities and adjusting for historical differences from the Companys actual jet fuel purchase prices. The Companys new methodology utilizes a statistical-based regression equation with data from market forward prices of like commodities, and will not have a material impact on the financial statements.
During the three months ended March 31, 2007, the Company recognized approximately R$2,730 (US$ 1,331) of additional net gains in Other (gains) losses, related to the ineffectiveness of its hedges and the loss of hedge accounting for certain hedges. Of this net total, approximately R$ 61 (US$ 30) was ineffectiveness expense and mark-to-market losses related to contracts that settled during first quarter of 2007. As of March 31, 2007 there was R$ 6,020 (US$2,936), net of taxes, on unrealized gains with jet fuel hedges recorded in comprehensive income. Also, there were derivative transactions not designated as hedges for which the change in fair value during the period was R$2,945 which was recorded in other expenses.
Outstanding financial derivative instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not expect any of its six counterparties to fail to meet their obligations. The amount of such credit exposure is generally the unrealized gain, if any, in such contracts. To manage credit risk, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty and monitors the market position with each counterparty. The Company does not purchase or hold financial derivative instruments for trading purposes.
b) Exchange rates
The Company is exposed to the effects of changes in the USD exchange rate. Exchange exposure relates to amounts payable arising from USD-denominated and USD-linked expenses and payments. To manage this risk, the Company uses USD options and futures contracts.
The following is a summary of our foreign currency derivative contracts (in thousands, except as otherwise indicated):
March 31, | December 31, | |||||
2007 | 2006 | |||||
Fair value of derivative instruments at the end of period | R$ | 4,310 | R$ | (275) | ||
Longest remaining term (months) | 2 | 2 | ||||
Hedged volume | 261,500 | R$ | 180,127 | |||
Quarter ended March 31: | 2007 | 2006 | ||||
Hedge effectiveness losses recognized in operating expenses | - | R$ | (5.383) | |||
Hedge ineffectiveness losses recognized in other expenses | R$ | (6,596) | R$ | (227) | ||
Percentage of expenses hedged (during quarter) | 50% | 65% |
F - 15
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
10. Financial Instruments and Concentration of Risk (Continued)
The Company utilizes financial derivative instruments as hedges to decrease its exposure to increases in the USD exchange rate. The Company has utilized financial derivative instruments for short-term time frames. The Company accounts for its foreign currency futures derivative instruments as cash flow hedges under SFAS 133. As of March 31, 2007 the unrealized loss with exchange rates recorded in comprehensive income was R$ 2,040, net of taxes.
While outstanding, these contracts are recorded at fair value on the balance sheet with the effective portion of the change in their fair value being reflected in other comprehensive income. Ineffectiveness, the extent to which the change in fair value of the financial derivatives exceeds the change in the fair value of the operating expenses being hedged, is recognized in other income (expense) immediately. When operating expenses are incurred and the related derivative contract settles, any gain or loss previously deferred in other comprehensive income is recognized in operating expenses.
c) Cash management
The Company utilizes financial derivative instruments for cash management purposes. The Company utilizes synthetic fixed income options and swaps to obtain the Brazilian overnight deposit rate from fixed-rate or dollar-denominated investments. The Company enters into synthetic fixed income option contracts with first-tier banks registered in the Brazilian CETIP clearing house. As of March 31, 2007, the total amount invested in synthetic fixed-income option contracts was R$ 78,982 with average term of 241 days. The Company utilizes swap agreements to change the remuneration of a portion of its short term investments to the Brazilian overnight deposit rate (CDI). As of March 31, 2006, the notional amount of fixed-rate swaps to CDI was R$ 75,000 with a fair value of R$ (520), and the notional amount of dollar-denominated swaps to CDI was R$ 183,667 with a fair value or R$ 5,636. The change in fair value of these swaps is recognized in interest income in the period of change.
11. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, there has been no impact on the liability for unrecognized tax benefits. Accordingly, there are no interest and penalties accrued related to unrecognized tax benefits. The Company will recognize interest in interest expense and penalties in operating expenses for future unrecognized tax benefits.
The reconciliation of the reported income tax and social contribution and the amount determined by applying the composite fiscal rate at March 31, 2007 and March 31, 2006, is as follows:
Three-month period ended | ||||
March 31, | ||||
2007 | 2006 | |||
Income before income taxes | 159,701 | 248,630 | ||
Nominal composite rate | 34.0% | 34.0% | ||
Income tax by the nominal rate | 54,298 | 84,534 | ||
Interest on stockholders equity | (11,427) | (12,033) | ||
Other permanent differences | 248 | (3,661) | ||
Income tax expense | 43,119 | 68,840 | ||
Effective rate | 27.0% | 27.7% | ||
F - 16
GOL LINHAS AÉREAS INTELIGENTES S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Brazilian Reais)
12. Earnings per Share
The Companys preferred shares are not entitled to receive any fixed dividends. Rather, the preferred shareholders are entitled to receive dividends per share in the same amount of the dividends per share paid to holders of the common shares. However, our preferred shares are entitled to receive distributions prior to holders of the common shares. Consequently, basic earnings per share are computed by dividing income by the weighted average number of all classes of shares outstanding during the year. Preferred shares are excluded during any loss period. The diluted preferred shares are computed including the executive employee stock options calculated using the treasury-stock method as they were granted at an exercise price less that the market price of the shares.
Three-month period ended | ||||
March 31, | ||||
2007 | 2006 | |||
Numerator | ||||
Net income applicable to common and preferred shareholders for | ||||
basic and diluted earnings per share | 116,582 | 179,790 | ||
Denominator | ||||
Weighted-average shares outstanding for basic earnings per share | ||||
(in thousands) | 196,211 | 195,960 | ||
Effect of dilutive securities: | ||||
Executive stock options (in thousands) | 60 | 200 | ||
Adjusted weighted-average shares outstanding and assumed | ||||
conversions for diluted earnings per shares (in thousands) | 196,271 | 196,160 | ||
13. Subsequent Events
On April 4, 2007, the Company received approval from the National Civil Aviation Agency (ANAC) to complete the transfer of VRG to GTI S.A., a wholly-owned subsidiary of Gol Linhas Aéreas Inteligentes. With this authorization, the Company initiated execution of the plan developed for VRG, which will operate with its own brand (VARIG) and differentiated services, incorporating the low-cost business model of Gol Transportes Aéreos S.A.
On April 9, 2007, the Companys Board of Directors approved a capital increase amounting to R$518,100 by means of the issuance of 8,519,979 preferred shares in order to meet the obligations assumed by its subsidiary GTI S.A. in connection with its acquisition of VRGs capital ownership. When the Company agreed to acquire the capital stock of VRG, it agreed to pay a portion of the acquisition price with 6,049,185 preferred shares (representing approximately 3.1% of its total shares outstanding). According to Brazilian law, the issuance and transfer of preferred shares to Varig Logística S.A, the seller of VRG, triggers preemptive rights of the companys existing shareholders. Of the total authorized issuance of 8,519,979 preferred shares, the company will transfer 6,049,185 preferred shares to Varig Logística S.A. The Companys shareholders (other than Fundo de Investimento em Participações Asas, the Companys principal shareholder) have the right to subscribe for 2,470,794 preferred shares (representing approximately 1.3% of the Companys total shares outstanding). The Company voluntarily elected to register this rights offering with the Securities and Exchange Commission (SEC), in order to enable U.S. holders of its preferred shares and ADRs to participate in the rights offering.
On April 12, 2007, the Company increased the capital of GTI S.A. in the amount of R$138,264 (US$68,000), corresponding to 138,264,400 ordinary and preferred shares subscribed on October 26, 2004 at the price of R$ 1.00 per share, as part of the payment to VarigLog.
F - 17
GOL LINHAS AÉREAS INTELIGENTES S.A. |
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By: |
/S/ Richard F. Lark, Jr.
|
|
Name: Richard F. Lark, Jr.
Title: Executive Vice President Finance, Chief Financial Officer |
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will a ctually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.