meritor_10ka.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-K/A (Amendment no. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 3, 2010
Commission file number 1-15983
____________________
 
MERITOR, INC. 
 
(Formerly ARVINMERITOR, INC.)
(Exact name of registrant as specified in its charter)
 
Indiana            38-3354643
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
 
2135 West Maple Road    
Troy, Michigan   48084-7186
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (248) 435-1000
  
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of each class       Name of each exchange on which registered
Common Stock, $1 Par Value (including the   New York Stock Exchange
associated Preferred Share Purchase Rights)    

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
     Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
     Yes [ X ]       No [   ]
 
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
     Yes [   ]       No [ X ]
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     Yes [ X ]       No [   ]
 
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
     Yes [ X ]       No [   ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]
 
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer        x   Accelerated filer             
Non-accelerated filer   o      (Do not check if a smaller reporting company) Smaller reporting company   o


 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     Yes [   ]       No [ X ]
 
     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on April 1, 2011 (the last business day of the most recently completed second fiscal quarter) was approximately $1,542,572,181.
 
     94,448,940 shares of the registrant’s Common Stock, par value $1 per share, were outstanding on April 3, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE
     Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant held on January 20, 2011 is incorporated by reference into Part III of the Annual Report on Form 10-K for the fiscal year ended October 3, 2010.
 
2
 

 

EXPLANATORY NOTE - AMENDMENT
  
     Meritor, Inc. (the “company” or “Meritor), formerly known as ArvinMeritor, Inc., is filing this Form 10-K/A to include in its Annual Report on Form 10-K for the fiscal year ended October 3, 2010 (the “Annual Report”), pursuant to Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934, financial statements and related notes of Master Sistemas Automotivos Ltda. (“MSA”) and Suspensys Sistemas Automotivos Ltda. (“SSA”), unconsolidated joint ventures incorporated in Brazil in which the company owns an interest. Meritor owns a 49% interest in MSA (directly) and a 50% interest in SSA (through both direct and indirect interests).
 
     Rule 3-09 of Regulation S-X provides that if a 50% or less owned person accounted for by the equity method meets the first or third condition of the significant subsidiary tests set forth in Rule 1-02(w), substituting 20% for 10%, separate financial statements for such 50% or less owned person shall be filed. Such statements are required to be audited only in the years in which such person met such test.
 
     Both MSA and SSA met such test for Meritor’s fiscal years 2010 and 2008 and did not meet such test for Meritor’s fiscal year 2009. Normally, therefore, under Rule 3-09 of Regulation S-X, the company would be required to file MSA’s and SSA’s audited financial statements for the fiscal years ended December 31, 2010 and 2008 (“2010” and “2008”) and to file unaudited financial statements for the fiscal year ended December 31, 2009 (“2009”).
 
     Effective January 1, 2009, however, Brazil has adopted International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The financial statements of MSA and SSA for 2010 and 2009 have been prepared in accordance with IFRS as issued by the IASB. These financial statements are the first presented in accordance with IFRS.
 
     As permitted by General Instruction G to Form 20-F (as well as Securities and Exchange Commission (“SEC”) interpretations applying such instruction to foreign businesses whose financial statements are required to be filed under Rule 3-09 of Regulation S-X), the company has availed itself of the one-time accommodation for first-time IFRS implementers to file two years rather than three years of statements of income, changes in shareholders equity and cash flows prepared in accordance with IFRS as issued by the IASB, with appropriate related disclosure in the financial statements. As required, the company has included balance sheets as of three periods. Consequently, the company has included in this Form 10-K/A the following audited financial statements of MSA and SSA:
     In reliance on the one-time accommodation noted above, MSA and SSA financial statements for 2008 are not included in this Form 10-K/A.
 
     Since the financial statement of MSA and SSA are presented in accordance with IFRS as issued by the IASB, reconciliations between local GAAP and U.S. GAAP are not required pursuant to SEC Release numbers 33-8879 and 34-57026 and have been omitted.
 
     Item 15 is the only portion of the Annual Report being supplemented or amended by this Form 10-K/A. Additionally, in connection with the filing of this Form 10-K/A and pursuant to SEC rules, Meritor is including currently dated certifications. This Form 10-K/A does not otherwise update any exhibits as originally filed and does not otherwise reflect events occurring after the original filing date of the Annual Report. Accordingly, this Form 10-K/A should be read in conjunction with Meritor’s filings with the SEC subsequent to the filing of the Annual Report.
 
3
 

 

PART IV
 
Item 15. Exhibits and Financial Statement Schedules.
 
     (a) Financial Statements, Financial Statement Schedules and Exhibits.
 
     (1) Financial Statements.
 
Meritor
 
          The following financial statements and related notes were filed as part of the Annual Report filed with the SEC on November 24, 2010 (all financial statements listed below are those of the company and its consolidated subsidiaries):
 
     Consolidated Statement of Operations, years ended September 30, 2010, 2009 and 2008.
 
     Consolidated Balance Sheet, September 30, 2010 and 2009.
 
     Consolidated Statement of Cash Flows, years ended September 30, 2010, 2009 and 2008.
 
     Consolidated Statement of Shareowners' Equity, years ended September 30, 2010, 2009 and 2008.
 
     Notes to Consolidated Financial Statements.
 
     Report of Independent Registered Public Accounting Firm.
 
Master Sistemas Automotivos Ltda.
 
          The following financial statements and related notes of Master Sistemas Automotivos Ltda. are included in this Amendment No. 1 on Form 10-K/A pursuant to Rule 3-09 of Regulation S-X:
 
          Balance Sheets, December 31, 2010 and 2009 and January 1, 2009
 
          Statements of Income, Changes in Shareholders’ Equity, and Cash Flows, years ended December 31, 2010 and 2009.
 
          Independent Auditors’ Report.
 
Suspensys Sistemas Automotivos Ltda.
 
          The following financial statements and related notes of Suspensys Sistemas Automotivos Ltda. are included in this Amendment No. 1 on Form 10-K/A pursuant to Rule 3-09 of Regulation S-X:
 
          Balance Sheets, December 31, 2010 and 2009 and January 1, 2009
 
          Statements of Income, Changes in Shareholders’ Equity, and Cash Flows, years ended December 31, 2010 and 2009.
 
          Independent Auditors’ Report.
 
4
 

 




 
 
Master Sistemas
Automotivos Ltda.
 
     Financial Statements as of December 31, 2010
     and 2009 And January 1, 2009 and for the
     Years Ended December 31, 2010 and 2009 and
     Independent Auditors’ Report
 
 
 
 
     Deloitte Touche Tohmatsu Auditores Independentes

 


5
 

 

INDEPENDENT AUDITORS’ REPORT
 
We have audited the accompanying balance sheets of Master Sistemas Automotivos Ltda. (the “Company”), a company incorporated in Brazil, as of December 31, 2010 and 2009 and January 1, 2009 and the related statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years ended December 31, 2010 and 2009, all expressed in Brazilian reais. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009 and January 1, 2009 and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009 in conformity with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
 
May 6, 2011
 
/s/ DELOITTE TOUCHE TOHMATSU Auditores Independentes
DELOITTE TOUCHE TOHMATSU Auditores Independentes
Porto Alegre, Brazil

6
 

 

MASTER SISTEMAS AUTOMOTIVOS LTDA.                
 
BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2009            
(In thousands of Brazilian reais - R$)                
                 
ASSETS       Note       12/31/2010       12/31/2009       1/1/2009
CURRENT ASSETS                
Cash and banks   5   105,273   58,080   12,986
Short-term investments   6   -   -   32,222
Trade receivables   7   38,306   30,820   34,362
Recoverable taxes   8   1,464   3,254   5,759
Inventories   9   30,368   24,130   29,715
Dividends and interest on capital receivable       14,437   2,219   11,789
Prepaid expenses       133   153   268
Other receivables       1,627   559   1,365
Total current assets       191,608   119,215   128,466
 
NON-CURRENT ASSETS                
Amounts due from parent company   14   96   354   597
Recoverable taxes   8   1,634   3,056   4,324
Deferred taxes   22   2,005   1,356   2,751
Retirement benefit plan   15   371   249   -
Escrow deposits       198   198   198
Investments:                
       Investment in associate   10   120,002   96,851   85,456
       Other investments       25   25   25
Total investments       120,027   96,876   85,481
Property, plant and equipment   11   84,146   83,785   84,561
Intangible assets   12   4,418   344   471
Total non-current assets       212,895   186,218   178,383
                 
TOTAL ASSETS       404,503   305,433   306,849
 
LIABILITIES AND SHAREHOLDERS' EQUITY   Note   12/31/2010   12/31/2009   1/1/2009
CURRENT LIABILITIES                
Trade payables       11,213   8,780   7,240
Borrowings and financing   13   8,600   10,793   28,803
Derivative transactions   17   -   -   4,385
Taxes and contributions payable       2,226   2,152   1,554
Salaries payable       1,113   874   452
Accrued vacation and related charges       3,671   2,513   2,214
Dividends and interest on capital payable   14   22,021   4,930   14,316
Employee and management profit sharing       3,888   2,781   2,253
Advances from customers       295   294   56
Amounts due to related parties   14   151   -   1,334
Other payables       1,009   761   843
Total current liabilities       54,187   33,878   63,450
 
NON-CURRENT LIABILITIES                
Borrowings and financing   13   74,444   51,308   29,938
Amounts due to parent company   14   -   -   864
Amounts due to related parties   14   1,205   1,043   2,845
Reserve for contingencies   16   443   -   -
Contributions payable       3,129   2,301   1,370
Deferred taxes   22   6,024   6,466   6,816
Other payables       520   594   516
 
SHAREHOLDERS' EQUITY                
Capital   18   105,000   105,000   105,000
Earnings reserve       139,805   83,787   73,921
Retained earnings       19,746   21,056   22,129
Total shareholders' equity       264,551   209,843   201,050
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       404,503   305,433   306,849
                 
The accompanying notes are an integral part of these financial statements.
 
7
 

 

MASTER SISTEMAS AUTOMOTIVOS LTDA.
 
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)

        Note       2010       2009
NET REVENUE   20   431,166     272,553  
 
COST OF SALES AND SERVICES   21   (347,602 )   (226,144 )
                 
GROSS PROFIT       83,564     46,409  
 
OPERATING INCOME (EXPENSES)                
Selling expenses   21   (14,520 )   (9,206 )
General and administrative expenses   21   (10,623 )   (7,677 )
Equity in associate   10   43,316     27,296  
Other operating expenses, net   21   (5,655 )   (4,256 )
        12,518     6,157  
                 
PROFIT FROM OPERATIONS BEFORE FINANCIAL INCOME (EXPENSES)       96,082     52,566  
 
FINANCIAL INCOME (EXPENSES)                
Financial income   23   11,282     6,922  
Financial expenses   23   (5,387 )   (4,556 )
Exchange gains (losses), net   23   96     4,069  
        5,991     6,435  
                 
PROFIT BEFORE INCOME TAX AND SOCIAL CONTRIBUTION       102,073     59,001  
 
INCOME TAX AND SOCIAL CONTRIBUTION                
Current   22   (16,467 )   (6,291 )
Deferred   22   1,107     (962 )
                 
NET PROFIT FOR THE YEAR       86,713     51,748  
                 

The accompanying notes are an integral part of these financial statements.
 
8
 

 

MASTER SISTEMAS AUTOMOTIVOS LTDA.
 
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)
 
        2010       2009
NET PROFIT FOR THE YEAR         86,713           51,748  
             
OTHER COMPREHENSIVE INCOME            
       Actuarial gains on retirement benefit plan   46     244  
       Deferred income tax and social contribution            
              on other comprehensive income   (16 )   (83 )
       Other comprehensive income of associate accounted for            
              under the equity method   32     149  
    62     310  
             
COMPREHENSIVE INCOME FOR THE YEAR   86,775     52,058  
             
The accompanying notes are an integral part of these financial statements.
 
9
 

 

MASTER SISTEMAS AUTOMOTIVOS LTDA.
 
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)
 
                        Earnings       Retained          
    Note   Capital   reserve   earnings   Total
BALANCES AT JANUARY 1, 2009             105,000         73,921           22,129           201,050  
                           
Net profit for the year       -   -     51,748     51,748  
Other comprehensive income       -   -     310     310  
Comprehensive income for the year       -    -     52,058     52,058  
Interest on capital         19   -   -     (10,358 )   (10,358 )
Payment of dividends   19   -   (21,107 )   (11,800 )   (32,907 )
Earnings reserve       -   30,973     (30,973 )   -  
                           
BALANCES AT DECEMBER 31, 2009       105,000   83,787     21,056     209,843  
                           
Net profit for the year       -   -     86,713     86,713  
Other comprehensive income       -   -     62     62  
Comprehensive income for the year       -    -     86,775     86,775  
Interest on capital   19   -   -     (10,990 )   (10,990 )
Payment of dividends   19   -   (8,400 )   (12,677 )   (21,077 )
Earnings reserve       -   64,418     (64,418 )   -  
                           
BALANCES AT DECEMBER 31, 2010       105,000   139,805     19,746     264,551  
                           
The accompanying notes are an integral part of these financial statements.
 
10
 

 

MASTER SISTEMAS AUTOMOTIVOS LTDA.
 
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)
 
        Note       2010       2009
CASH FLOWS FROM OPERATING ACTIVITIES                
Profit before income tax and social contribution             102,073           59,001  
Adjustments to reconcile profit before income tax and social contribution                
       to cash provided by operating activities:                
       Depreciation of property, plant and equipment         11   8,317     7,963  
       Amortization of intangible assets   12   135     157  
       Provisions       708     (5 )
       Profit on sale of property, plant and equipment       45     4  
       Exchange differences and interest on borrowings and derivatives       7,002     (4,896 )
       Equity in associate   10   (43,316 )   (27,296 )
Increase (decrease) in assets and liabilities                
       Decrease (increase) in trade receivables       (7,486 )   3,542  
       Decrease (increase) in inventories       (6,238 )   5,585  
       Decrease in other receivables       1,886     5,313  
       Decrease in trade payables       2,433     1,540  
       Increase in other payables and provisions       2,635     1,774  
Redemption of investments   6   -     32,222  
Dividends and interest on capital received       7,215     24,930  
Income tax and social contribution paid       (16,466 )   (6,291 )
Interest paid on borrowings       (3,552 )   (3,775 )
Net cash provided by operating activities       55,391     99,768  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
       Purchase of property, plant and equipment   11   (8,725 )   (7,190 )
       Purchase of intangible assets   12   (4,208 )   (30 )
Net cash used in investing activities       (12,933 )   (7,220 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
       Payment of dividends and interest on capital       (13,328 )   (51,099 )
       Borrowings from related parties       570     (864 )
       Borrowings from third parties       27,987     37,379  
       Repayment of borrowings and financing       (10,494 )   (32,870 )
Net cash provided by (used in) financing activities       4,735     (47,454 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS       47,193     45,094  
                 
Cash and cash equivalents at the beginning of the year   5   58,080     12,986  
                 
Cash and cash equivalents at the end of the year   5   105,273     58,080  
                 
The accompanying notes are an integral part of these financial statements.
 
11
 

 

MASTER SISTEMAS AUTOMOTIVOS LTDA.
 
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

1. OPERATIONS
 
Master Sistemas Automotivos Ltda. (the “Company”) is a limited liability company established in Brazil with its head office and principal place of business in Caxias do Sul – RS. The Company was incorporated on April 24, 1986, and is a jointly-controlled entity by Randon S.A. Implementos e Participações (“Randon”) and Meritor Inc. (“Meritor”), having started its operations in April 1987, and is engaged in the development, manufacture, sale, assembly, distribution, import and export of movement control systems for buses, trailers and trucks and their parts and components.
 
The Company holds a 53.177% interest in Suspensys Sistemas Automotivos Ltda. which has its registered office and principal place of business in Caxias do Sul – RS and is engaged in the manufacture and sale of air and mechanical suspension systems for trucks, buses and trailers, axles for trailers, third axles, hubs and drums for trucks, buses and trailers, and the provision of technical assistance services for its products.
 
Although the Company has a 53.177% equity interest in Suspensys, the Company does not have voting control due to the following factors:
 
2. PRESENTATION OF FINANCIAL STATEMENTS
 
The Company’s Financial Statements for the years ended on December 31, 2010 and 2009 have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). These Financial Statements are the first presented in accordance with IFRS.
 
The Financial Statements of the Company have been prepared in accordance with Brazilian accounting practices (BRGAAP) and provisions of the Brazilian corporate law until December 31, 2009 and these practices differ in some aspects from IFRS. When preparing the Financial Statements for 2010, the Company adjusted certain accounting, valuation and consolidation criteria used under BRGAAP in order to conform with IFRS. The 2009 comparative data were restated to reflect such adjustments, as explained in note 4.
 
The reconciliation and description of the effects of transition from accounting practices adopted in Brazil to IFRS, relating to shareholders' equity, net income and cash flow, are presented in Note 4.
 
The Company adopted all rules, revision of rules, and interpretations issued by IASB that are applicable for the year ended on December 31, 2010. The summary of the principal accounting policies adopted by the Company is detailed in note 3.
 
The financial statements were approved by the Company’s Board of Directors and authorized for issue on May 6, 2011.
 
3. PRINCIPAL ACCOUNTING POLICIES
 
      3.1.       Basis of preparation
       
      The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
       
  3.2   Functional currency and presentation currency
       
      The financial statements are presented in thousands of reais, which is the Company’s functional currency. All financial information presented in thousands of reais was rounded to the closest number.
 
12
 

 

  3.3   Accounting estimates
       
      In the application of accounting policies, Management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Significant assets and liabilities subject to these estimates and assumptions include the residual value of property, plant and equipment, allowance for doubtful debts, impairment of inventories, realization of deferred taxes, and reserve for contingencies. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Actual results may differ from these estimates due to uncertainties inherent in such estimates.
       
      3.4       Revenue recognition
       
      Revenue is recognized on an accrual basis.
       
      Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.
       
     
Revenue from the sale of goods is recognized when all the following conditions are satisfied:
       
     
  • the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
     
  • the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
     
  • the amount of revenue can be measured reliably;
     
  • it is probable that the economic benefits associated with the transaction will flow to the Company; and
     
  • the costs incurred or to be incurred in respect of the transaction can be measured reliably.
      Specifically, revenue from the sale of goods is recognized when goods are delivered and legal title is passed.
       
      Revenues from sales and services are subject to taxes and contributions at the following basic rates:
       
                         Rates
      State VAT (ICMS)   7% to 17%
      Federal VAT (IPI)   0% to 18%
      Tax on Revenue (PIS)   1.65% to 2.3%
      Tax on Revenue (COFINS)   7.6% to 10.8%
      Service Tax (ISSQN)   4%
 
      3.5       Foreign currencies
       
      In preparing the Company’s financial statements, transactions in currencies other than the Company’s functional currency are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date.
       
      Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.
 
13
 

 

      3.6       Current and non-current assets
       
     
  • Cash and banks balances
     
    Include cash on hand and in banks and temporary cash investments redeemable in up to 90 days from the investment date. Temporary cash investments are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These investments are carried at cost plus yield accrued through the end of the reporting period, which approximates their fair values.
     
  • Trade receivables
     
    Trade receivables are recognized at the billed amount, including the related taxes and reduced to their present value at the end of the reporting period.
     
    Allowances for doubtful debts are recognized based on estimated irrecoverable amounts determined by reference to the Company’s past default experience and an analysis of the debtor’s current financial position.
     
  • Inventories
     
    Inventories are stated at the lower of cost and net realizable value. Costs of inventories are determined under the weighted average cost method. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
     
  • Investments in associate
     
    The investment in associate is recognized under the equity method.
     
  • Property, plant and equipment
     
    Stated at cost of acquisition or construction. The Company elected to measure the main items included in the classes of land, buildings, machinery and equipment at deemed cost at the date of adoption of IFRS, that is, January 1, 2009. The effects of the deemed cost increased the property, plant and equipment balance, with a corresponding entry in retained earnings, net of tax effects (as mentioned in note 4.6.a).
     
    Properties in the course of construction are carried at cost. Cost includes professional fees and, for qualifying assets, borrowing costs capitalized in accordance with the Company's accounting policy (note 3.9). Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
     
    Land is not depreciated. For the other classes of property, plant and equipment, depreciation is calculated using the straight-line method at the rates mentioned in note 11, which take into consideration the estimated useful lives of assets. The estimated useful life and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
     
    An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.
     
  • Intangible assets
     
    Intangible assets with finite useful lives that are acquired separately are carried at cost, less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
     
    An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized.
14
 

 

      3.7.      
Impairment of tangible and intangible assets other than goodwill
       
     
At the end of each reporting period, the Company reviews the carrying amount of its tangible and intangible assets to determine where there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. When it is not possible to estimate the recoverable amount of an asset individually, the Company calculates the recoverable amount of the cash generating unit to which the asset belongs. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
 
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
 
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.
       
  3.8  
Discount to present value
       
     
Monetary assets and liabilities are discounted to present value when the effect is considered material in relation to the financial statements taken as a whole. The discount to present value is calculated based on an interest rate that reflects the timing and risk of each transaction. For term transactions, the Company uses the variation of the Interbank Certificate of Deposit (CDI).
 
Trade receivables are discounted to present value with a corresponding entry in sales revenue in the income statement, and the difference between the present value of a transaction and the face value of the billing is considered as financial income and will be recognized based on the amortized cost and the effective long-term rate of the transaction.
 
The discount to present value of purchases is recorded in “trade payables”, and its realization has a corresponding entry in line item “financial expenses” over the term of their suppliers.
       
  3.9  
Borrowing costs
       
     
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
 
All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
       
  3.10  
Retirement benefit plan
       
     
For defined benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each reporting period. Actuarial gains and losses are immediately recognized in equity according to the available option in paragraph 93A of IAS 19 – Employee Benefits.
 
The retirement benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to unrecognized actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan.

15
 

 

      3.11       Financial instruments
           
      (a)      
Classification and measurement
 
The classification depends on the purpose for which the financial assets and liabilities were acquired or contracted. The Company’s management classifies its financial assets and liabilities at the time of initial contracting.
 
Financial assets at fair value through profit or loss
 
Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss. Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset.
 
Loans and receivables measured at amortized cost
 
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade receivables, cash and cash equivalents and short-term investments) are measured at amortized cost using the effective interest method, less any impairment.
 
Financial liabilities measured at amortized cost
 
Borrowings are initially recognized at fair value, upon receipt of funds, net of transaction costs. They are subsequently measured at amortized cost. The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument.
 
Derivative financial instruments
 
Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss.
 
The fair value measurement of derivative financial instruments is normally made by the Company’s treasury department based on information on each contracted transaction and its related market information at the end of the reporting periods. The fair values of derivative financial instruments are disclosed in note 17.
           
  3.12.  
Provisions
           
     
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.
 
Provisions for the expected cost of warranty obligations are recognized at the date of sale of the relevant products, at Management's best estimate of the expenditure required to settle the Company's obligation.
           
 
3.13
 
Income Tax and Social Contribution
 
Current tax
 
The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit as reported in the income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated based on rates prevailing at the end of the reporting period (15% plus a 10% surtax on taxable profit exceeding R$20 per month for Income Tax and 9% on taxable profit for Social Contribution on Net Profit).
 
16
 

 

     
Deferred tax
 
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.
 
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
 
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
 
Current and deferred taxes for the period
 
Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, current and deferred taxes are also recognized in other comprehensive income or directly in equity, respectively.
           
      3.14.      
New and revised IFRSs in issue but not yet effective
       
      The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective:
               
      a)  
IFRS 9 Financial Instruments issued in November 2009 and amended in October 2010 introduces new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition.
 
IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.
 
The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under IFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognized in profit or loss.
 
IFRS 9 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.
 
This standard will be adopted in the Company’s financial statements for the annual period beginning January 1, 2013 and that the application of the new Standard will have a significant impact on amounts reported in respect of the Company financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.
 
17
 

 

                  b)      The amendments to IFRS 7 titled Disclosures – Transfers of Financial Assets increase the disclosure requirements for transactions involving transfers of financial assets. These amendments are intended to provide greater transparency around risk exposures when a financial asset is transferred but the transferor retains some level of continuing exposure in the asset. The amendments (effective for annual periods beginning on or after July 1, 2011) also require disclosures where transfers of financial assets are not evenly distributed throughout the period.
   
      The Company does not anticipate that these amendments to IFRS 7 will have a significant effect on the financial statements.
   
  c)   IAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party and simplifies disclosures for government-related entities.
   
      The Company does not anticipate that these amendments to IAS 24 (effective for annual periods beginning on or after January 1, 2011) will have a significant effect on the financial statements.
   
  d)   The amendments to IAS 32 titled Classification of Rights Issues address the classification of certain rights issues denominated in a foreign currency as either an equity instrument or as a financial liability.
   
      The Company does not anticipate that these amendments to IAS 32 (effective for annual periods beginning on or after February 1, 2010) will have a significant effect on the financial statements.
   
  e)   IFRIC 19 (effective for annual periods beginning on or after July 1, 2010) provides guidance regarding the accounting for the extinguishment of a financial liability by the issue of equity instruments. To date, the Company has not entered into transactions of this nature. However, if the Company does enter into any such transactions in the future, IFRIC 19 will affect the required accounting. In particular, under IFRIC 19, equity instruments issued under such arrangements will be measured at their fair value, and any difference between the carrying amount of the financial liability extinguished and the fair value of equity instruments issued will be recognized in profit or loss.
 
4. EFFECTS OF THE ADOPTION OF THE IFRS ON THE FINANCIAL STATEMENTS
 
 
In preparing its financial statements, the Company adopted for the first-time all International Financial Reporting Standards and related interpretations and guidance issued by the International Accounting Standards Board (IASB). The Company applied the accounting policies defined above in all reporting periods, which include the opening balance sheet as at January 1, 2009.
 
The Company adopted the following optional exemptions of full retrospective application:
       
      a)      Exemption for presenting the fair value of fixed assets as acquisition cost: The Company remeasured its fixed assets on the transition date at the fair value, as described in note 4.6.a.
   
  b)   Exemption for measuring employee benefits: The Company recognized all actuarial gains and losses arising from employee benefit plan on the transition date against retained earnings. From that date onward, the Company also recognizes all the actuarial gains and losses in equity according to the paragraph 93A of IAS 19.
   
  c)   Exemption related to the classification of financial instruments: The Company decided to classify and evaluate its financial instruments according to IAS 32 and IAS 39 on the transition date. Retroactive analyses to the original contracting date of the current financial instruments were not made on the transition date. All financial instruments contracted after the transition date were analyzed and classified on the contract date of the operations.
 
18
 

 

      4.1      
Effects of the adoption of the IFRS on the balance sheet
               
        January 1, 2009   December 31, 2009
            Effect of            Effect of    
            adoption           adoption    
        Brazilian   of       Brazilian   of    
                  GAAP        IFRS        IFRS        GAAP        IFRS        IFRS
CURRENT ASSETS                                
Cash and banks       12,986   -     12,986   58,080   -     58,080
Temporary cash investments       32,222   -     32,222   -   -     -
Trade receivables       34,362   -     34,362   30,820   -     30,820
Recoverable taxes       5,759   -     5,759   3,254   -     3,254
Inventories       29,715   -     29,715   24,130   -     24,130
Dividends and interest on                                
       capital receivable       11,789   -     11,789   2,219   -     2,219
Prepaid expenses       268   -     268   153   -     153
Deferred taxes   (g)   2,357   (2,357 )   -   1,074   (1,074 )   -
Other receivables       1,365   -     1,365   559   -     559
Total current assets       130,823   (2,357 )   128,466   120,289   (1,074 )   119,215
                                 
NON-CURRENT ASSETS                                
Amounts due from parent                                
       company       597   -     597   354   -     354
Recoverable taxes       4,324   -     4,324   3,056   -     3,056
Deferred taxes   (b)(d)(g)   -   2,751     2,751   -   1,356     1,356
Retirement benefit plan   (e)   -   -     -   -   249     249
Other receivables       198   -     198   198   -     198
Investment in associate   (f)   75,468   9,988     85,456   87,246   9,605     96,851
Other investments       25   -     25   25   -     25
Property, plant and equipment   (a)(c)   64,513   20,048     84,561   65,559   18,226     83,785
Intangible assets       471   -     471   344   -     344
Deferred charges   (b)   1,264   (1,264 )   -   933   (933 )   -
Total non-current assets       146,860   31,523     178,383   157,715   28,503     186,218
                                 
Total assets       277,683   29,166     306,849   278,004   27,429     305,433
                                 
CURRENT LIABILITIES                                
Trade payables       7,240   -     7,240   8,780   -     8,780
Borrowings and financing       28,803   -     28,803   10,793   -     10,793
Derivative transactions       4,385   -     4,385   -   -     -
Taxes and contributions                                
       payable       1,554   -     1,554   2,152   -     2,152
Salaries payable       452   -     452   874   -     874
Accrued vacation and related                                
       charges       2,214   -     2,214   2,513   -     2,513
Dividends and interest on                                
       capital payable       14,316   -     14,316   4,930   -     4,930
Employee and management                                
       profit sharing       2,253   -     2,253   2,781   -     2,781
Advances from customers       56   -     56   294   -     294
Amounts due to related                                
       parties       1,334   -     1,334   -   -     -
Other payables   (d)   825   18     843   743   18     761
Total current liabilities       63,431   18     63,450   33,860   18     33,878

19
 

 

        January 1, 2009   December 31, 2009
            Effect of           Effect of    
            adoption           adoption    
        Brazilian   of       Brazilian   of    
                  GAAP        IFRS        IFRS        GAAP        IFRS        IFRS
NON-CURRENT LIABILITIES                            
Borrowings and financing       29,938   -   29,938   51,308   -   51,308
Amounts due to parent                            
       company       864   -   864   -   -   -
Amounts due to related                            
       parties       2,845   -   2,845   1,043   -   1,043
Contributions payable       1,370   -   1,370   2,301   -   2,301
    (a)(c)                        
Deferred taxes   (e)(g)   -   6,816   6,816   314   6,152   6,466
Other payables   (d)   314   202   516   391   202   594
Total long-term liabilities       35,331   7,018   42,349   55,357   6,355   61,712
                             
SHAREHOLDERS’ EQUITY                            
Capital       105,000   -   105,000   105,000   -   105,000
Earnings reserve       73,921   -   73,921   83,787   -   83,787
    (a)(b)(c)                        
Retained earnings   (d)(e)(f)   -   22,129   22,129   -   21,056   21,056
Total shareholders’ equity       178,921   22,129   201,050   188,787   21,056   209,843
                             
Total liabilities and                            
       shareholders’ equity       277,683   29,166   306,849   278,004   27,429   305,433
                             
      4.2      
Reconciliation of shareholders' equity
               
      January 1,   December 31,
           2009        2009
Total shareholders’ equity in accordance with Brazilian GAAP         178,921                188,787  
Adoption of deemed cost (a)   13,231     11,786  
Derecognition of deferred charges (b)   (944 )   (726 )
Capitalization of interest (c)   -     368  
Employee termination plan (d)   (146 )   (146 )
Retirement benefit plan (e)   -     168  
Adoption of IFRS by associate Suspensys Sist. Autom. Ltda. (f)   9,988     9,605  
Total shareholders’ equity in accordance with IFRS     201,050     209,843  
               
20
 

 
 
      4.3      
Effects of the adoption of the IFRS on the income statement
               
      Year ended December 31, 2009
      Brazilian   Effect of transition      
           GAAP        of IFRS        IFRS
NET REVENUE     272,553     -     272,553
  (a)(b)                  
COST OF SALES AND SERVICES (e)   (224,289 )                                   (1,855 )   (226,144 )
                     
GROSS PROFIT     48,264     (1,855 )   46,409  
                     
OPERATING INCOME (EXPENSES)                    
Selling expenses     (9,206 )   -     (9,206 )
General and administrative expenses     (7,677 )   -     (7,677 )
Equity in associate (f)   27,827     (531 )   27,296  
Other operating (expenses) income, net     (4,256 )   -     (4,256 )
                     
PROFIT FROM OPERATIONS BEFORE                    
       FINANCIAL INCOME (EXPENSES)     54,952     (2,386 )   52,566  
                     
FINANCIAL INCOME (EXPENSES)                    
Financial income     6,922     -     6,922  
Financial expenses (c)   (4,924 )   368     (4,556 )
Exchange gains (losses), net     4,069     -     4,069  
                     
PROFIT BEFORE INCOME TAX AND SOCIAL                    
       CONTRIBUTION     61,019     (2,018 )   59,001  
                     
Income tax and social contribution                    
Current     (6,291 )   -     (6,291 )
Deferred (a)(b)                  
  (c)(e)   (1,596 )   634     (962 )
                     
NET PROFIT FOR THE YEAR     53,132     (1,384 )   51,748  
                     
      4.4      
Reconciliation of net profit
               
                 Year ended December 31,
        2009
  Net profit for the year in accordance with        
         Brazilian GAAP     53,132  
  Adoption of deemed cost (a)                                     (1,446 )
  Derecognition of deferred charges (b)   218  
  Capitalization of interest (c)   368  
  Retirement benefit plan (e)   7  
  Adoption of IFRS by associate Suspensys Sist. (f)      
         Autom. Ltda.     (531 )
  Net profit for the year in accordance with IFRS     51,748  
           
21
 

 
 
      4.5      
Effects of the adoption of the IFRS on the statement of cash flows
               
                Year ended December 31, 2009
        Brazilian   Effect of transition      
             GAAP        of IFRS        IFRS
  Cash flows from operating activities (c)   99,399     368     99,767  
  Cash flows from investing activities (c)   (6,852 )                             (368 )   (7,220 )
  Cash flows from financing activities        (47,454 )   -      (47,454 )
 
      4.6      
Notes to the reconciliation of the effects of the IFRS
               
  a)  
Deemed Cost
           
 
The Company elected to adopt the deemed cost, adjusting the opening balances at the transition date on January 1, 2009.
 
The fair values used in the adoption of the deemed cost were estimated by outside professionals (engineers) and, for this work, these professionals considered information about the use of the valued assets, technological changes occurred and in progress and the economic environment in which they operate, considering the planning and other business particularities of the Company. As part of the adoption of the deemed cost, the Company’s management conducted a valuation of the items included in the classes of land, buildings and machinery and equipment considered relevant, for purposes of adoption of the deemed cost at January 1, 2009. Additionally, the Company conducted a review of the estimated useful lives of these assets, with no changes in relation to the useful lives already used by the Company since 2009.
 
The effects of the adoption of the deemed cost at January 1, 2009 were:
 
                  Balance at   Adjustment due to   Balance at
  Class   12/31/2008        attribution of new cost        01/01/2009
  Land 2,745   1,655   4,400
  Buildings 9,693   2,169   11,862
  Machinery and equipment 35,665   16,224   51,889
  Total 48,103   20,048   68,151
             
     
With effects at January 1, 2009, property, plant and equipment increased by R$ 20,048, deferred income tax and social contribution in non-current liabilities increased by R$ 6,816, and retained earnings in shareholders’ equity increased by R$ 13,231 as a result of the adoption of the deemed cost. The decrease in net profit for 2009 was R$ 1,446.
 
The increases in depreciation expense in the income statements for the years ended December 31, 2010 and 2009 were R$ 2,176 and R$ 2,191, respectively, which caused a decrease in income tax and social contribution expense in those income statements by R$ 740 and R$ 745, respectively.
 
22
 

 
 
     
The Company estimated the effects of the adoption of the deemed cost on the depreciation expense for the current and future years as follows:
 
        Increase in
  Year   depreciation expense
  2009 2,191
  2010 2,176
  2011 2,123
  2012 2,018
  2013 1,877
  2014 1,782
  2015 1,312
  2016 and thereafter 4,914
  Total depreciable items 18,393
  Land (non-depreciable) 1,655
  Total increase due to deemed cost 20,048
     

      b)      
Deferred charges
       
 
In accordance with previous accounting practices, the Company recorded in line item “deferred charges” preoperating expenses and restructuring costs that will contribute to the increase in the result for more than one fiscal year, which are being derecognized at the date of adoption of the new accounting practices. The effect of this change is a decrease in shareholders' equity at December 31, 2009 by R$ 726 (R$ 944 at January 1, 2009) and an increase in profit for 2009 by R$ 218.
       
  c)   Capitalization of interest
       
  In accordance with previous accounting practices, borrowing costs related to the construction of qualifying assets were recorded as financial expense in the income statement. With the adoption of IAS 23 – Borrowing Costs, borrowing costs related to the construction of qualifying assets are capitalized to the cost of the asset, during the construction period. The effect of this change is an increase in shareholders’ equity at December 31, 2009 and in profit for 2009 by R$ 368.
       
  d)   Employee termination plan
       
  The Company has an employee termination plan, which consists in granting a bonus to the employee at the date of his/her retirement, calculated based on the payment of 1.5 nominal salary for the employee at that date. With the adoption of IAS 19 – Employee Benefits, the Company currently accrues the best estimate of the present value of the expected disbursements for this benefit. The effect of this change at January 1 and December 31, 2009 is an increase in deferred tax assets by R$ 74, an increase in current liabilities by R$ 18, an increase in non-current liabilities by R$ 202, and a decrease in shareholders’ equity by R$ 146.
       
  e)   Retirement benefit plan
       
 
The Company is the co-sponsor of the pension fund RANDONPREV, whose benefit plan is a defined contribution plan under the financial capitalization regime, with some benefit supplementations for employees, not covered by the defined contributions. With the adoption of IAS 19 – Employee Benefits, the Company currently recognizes this obligation as a defined benefit plan. Also, at the date of adoption of IFRS, the Company recognized all cumulative gains and losses in its opening balance sheet. The effect of this change is an increase in non-current assets by R$ 249, an increase in deferred tax liabilities by R$ 81, and an increase in shareholders’ equity at December 31, 2009 by R$ 168. In profit for 2009, the effect of this change was an increase by R$ 7 and an increase in other comprehensive income by R$ 161 (resulting in a total increase in comprehensive income by R$ 168).
 
23
 

 

      f)      
Adoption of IFRS by associate Suspensys Sistemas Automotivos Ltda. (“Suspensys”)
       
 
This investment in associate is accounted for under the equity method in the financial statements.
 
For the adoption of the IFRS, the amounts of the investment in Suspensys Sistemas Automotivos Ltda. were adjusted to reflect the adjustments made in the financial information on these investments due to the impacts of the new accounting standards. The new accounting practices that impacted the equity and profit of Suspensys Sistemas Automotivos Ltda. were the same that impacted the Company and are listed in items “a” to “e” above. The effect is an increase in the Company’s investments in associate and in retained earnings at December 31, 2009 by R$ 9,605 (R$ 9,988 at January 1, 2009), an increase in carrying value adjustments by R$ 10,315 (R$ 11,371 at January 1, 2009) and a decrease in retained earnings/accumulated losses by R$ 710 (R$ 1,383 at January 1, 2009).
 
The Company’s profit for 2009 was decreased by R$ 531 and other comprehensive income was increased by R$ 149 (resulting in a total increase in comprehensive income by R$ 382).
       
  g)   Deferred taxes
       
  In accordance with previous accounting practices, deferred taxes on temporary differences were recognized in the balance sheet over their expected period of realization. In accordance with the new accounting practices, these taxes are currently recognized as non-current assets or liabilities.
       
  h)   Presentation of the statement of comprehensive income
       
  In accordance with previous Brazilian GAAP, there was no requirement to present a statement of comprehensive income, which is required to be prepared since 2009.
 
5. CASH AND CASH EQUIVALENTS

Short-term investments refer to bank certificates of deposit (CDBs), linked to the variation of the interbank certificates of deposit (CDI). The yield on these short-term investments is as follows:
 
        12/31/2010      12/31/2009      01/01/2009
  Cash and banks 412   467   191
  Cash in transit 1,708   -   -
  Temporary cash investments:          
         CDB – 97.50% to 99.99% of CDI 87   33   19
         CDB – 100.00% to 100.99% of CDI 25,309   10,079   3,612
         CDB – 101.00% to 101.99% of CDI -   1,547   2,034
         CDB – 102.00% to 102.99% of CDI -   521   4,515
         CDB – 103.00% to 103.99% of CDI 6,413   9,475   2,615
         CDB – 104.00% to 104.99% of CDI 35,927   30,540   -
         CDB – 105.00% to 105.99% of CDI 35,417   5,418   -
    103,153   57,613   12,795
         Total 105,273   58,080   12,986
             
24
 

 

6. SHORT-TERM INVESTMENTS
 
At January 1, 2009, in addition to the investments linked to CDI stated in note 5, the Company had R$ 32,222 in investments with fixed rate, with restrictions on early redemption and yield from 14.38% to 15.23% per annum.
 
7. TRADE RECEIVABLES
 
Trade receivables are as follows:
 
        12/31/2010       12/31/2009       01/01/2009
Trade receivables from third parties – domestic   23,313   19,437   15,776
Trade receivables from third parties – foreign   49   748   2,648
Trade receivables from related parties – domestic   11,066   3,994   3,718
Trade receivables from related parties – foreign   3,878   6,641   12,220
Total   38,306   30,820   34,362
             
Trade receivables include amounts that are past due at the end of the reporting period for which the Company has not recognized an allowance for doubtful debts because there has not been a significant change in credit quality and the amounts are still considered recoverable, through negotiation with customers. The aging of past-due trade receivables for which an allowance for doubtful debts was not recorded is as follows:
 
        12/31/2010       12/31/2009       01/01/2009
1 to 30 days   4,231   6,157   7,807
31 to 60 days   1,400   455   2,167
61 to 90 days   281   617   894
91 to 180 days   477   345   740
Over 180 days   128   324   300
Past-due amounts   6,517   7,898   11,908
Falling due amounts   31,789   22,922   22,454
Total   38,306   30,820   34,362
             
8. RECOVERABLE TAXES
 
Recoverable taxes are as follows:
 
        12/31/2010       12/31/2009       01/01/2009
Tax on revenue (PIS)   59   66   49
State VAT (ICMS)   781   1,442   2,356
ICMS on purchases of property, plant and equipment   1,153   2,747   3,597
Tax on revenue (PIS)   -   21   70
PIS on purchases of property, plant and equipment   197   343   426
Tax on revenue (COFINS)   -   112   351
COFINS on purchases of property, plant and equipment   908   1,579   1,964
Social contribution   -   -   1,182
Other   -   -   88
Total   3,098   6,310   10,083
             
Current   1,464   3,254   5,759
Non-current   1,634   3,056   4,324

25
 

 

Recoverable taxes in non-current assets comprise ICMS, PIS and COFINS on purchases of property, plant and equipment for which the realization, pursuant to current applicable legislation, occurs in 48 monthly installments. Of the ICMS balance, R$ 699 at December 31, 2009 and R$ 1,211 at January 1, 2009 refers to the purchase of ICMS credit balance from Randon S/A and will be offset pursuant to the schedule prepared by the Rio Grande do Sul State Finance Department.
 
9. INVENTORIES
 
Inventories comprise:
 
        12/31/2010       12/31/2009       01/01/2009
Finished products   3,812   1,413   1,896  
Work in process   9,585   6,372   9,363  
Raw materials   13,673   13,677   17,964  
Inventories in transit   1,266   1,176   490  
Advances to suppliers   121   245   392  
Imports in transit   1,911   1,247   1,999  
Allowance for inventory losses   -   -   (2,389 )
Total   30,368   24,130          29,715  
               
10. INVESTMENTS – INVESTMENT IN ASSOCIATE
 
The movement in investment in associate Suspensys Sistemas Automotivos Ltda. is as follows:
 
Changes in the investment during the year       12/31/2010   12/31/2009      
Opening balance   96,851         85,456                       
Interest on capital receivable   (5,100 )   (4,592 )      
Reversal of dividends   -     1,216        
Dividends receivable         (10,102 )   -        
Dividends received   (4,995 )         (12,674 )      
Equity in associate (a)   43,316     27,296        
Other comprehensive income   32     149        
Closing balance   120,002     96,851        
                   
26
 

 

(a) As established in the joint venture agreement and ratified by the shareholders in the minutes of meeting for approval of the profit allocation, Randon S.A. – Implementos e Participações, also shareholder of Suspensys, is entitled to receive disproportionate dividends, in an amount corresponding to the Fundopem tax benefit received by Suspensys (which amounted R$ 11,763 in 2010 and R$ 13,013 in 2009), which was a VAT reduction received by Suspensys until October, 2010 (when the benefit expired). The Company adjusted net income of each year to eliminate the impact of the tax incentive as detailed below:
 
                   12/31/2010       12/31/2009
  Suspensys net income   93,218     64,345  
  (Less) Disproportional dividend to Randon related to tax incentive         (11,763 )        (13,013 )
  Basis for equity method   81,455     51,332  
  Master ownership on Suspensys   53.177%     53.177%  
  Equity in associate for the year   43,316     27,296  
 
Of the total dividends and interest on capital payable by Suspensys during the year, R$ 14,437 had not been paid up to December 31, 2010 (R$ 2,219 at December 31, 2009 and R$ 11,789 at January 1, 2009).
 
The summarized financial information on Suspensys Sistemas Automotivos is as follows:
 
        12/31/2010       12/31/2009       01/01/2009
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents   177,575   112,087   33,361
Trade receivables   90,027   71,776   66,973
Inventories   53,292   53,217   52,241
Other current assets   6,078   12,388   14,521
Total current assets   326,972   249,468   167,096
             
NON-CURRENT ASSETS            
Property, plant and equipment   124,714   121,405   118,292
Other non-current assets   12,788   7,057   11,529
Total non-current assets   137,502   128,462   129,821
             
Total assets   464,474   377,930   296,917
             
    12/31/2010   12/31/2009   01/01/2009
LIABILITIES            
CURRENT LIABILITIES            
Trade payables   35,654   48,915   19,000
Borrowings and financing   15,702   11,138   22,555
Dividends and interest on capital   37,022   4,174   22,170
Other current liabilities   26,042   18,355   19,221
Total current liabilities   114,420   82,582   82,946
             
NON-CURRENT LIABILITIES            
Borrowings and financing   105,985   89,360   34,846
Deferred taxes   11,639   11,613   11,015
Other non-current liabilities   6,765   5,382   3,722
Total non-current liabilities   124,389   106,355   49,583
             
SHAREHOLDERS’ EQUITY   225,665   188,993   164,388
             
Total liabilities and shareholders’ equity   464,474   377,930   296,917
             
27
 

 

        2010       2009
INCOME STATEMENT FOR THE YEAR            
Net revenue   1,011,273     643,835  
Cost of sales   (839,460 )   (539,112 )
GROSS PROFIT   171,813     104,723  
             
Operating expenses, net   (53,646 )   (25,858 )
Financial income, net   5,924     2,787  
             
PROFIT BEFORE TAXES   124,091     81,652  
             
Income tax and social contribution   (30,873 )   (17,307 )
             
NET PROFIT FOR THE YEAR   93,218     64,345  
             
11. PROPERTY, PLANT AND EQUIPMENT
 
a)       Analysis of balances
 
        12/31/2010       12/31/2009       01/01/2009
Cost   159,274     152,191     145,013  
Accumulated depreciation         (75,128 )        (68,406 )         (60,452 )
    84,146     83,785     84,561  
                   
    Annual       12/31/2010       12/31/2009   01/01/2009
    depreciation       Accumulated            
        rate (%)       Cost       depreciation       Net       Net       Net
Land   -   4,400   -     4,400   4,400   4,400
Buildings   1,69   26,481   (4,841 )   21,640   19,959   11,862
Machinery and equipment   10,47   100,949   (52,628 )   48,321   50,787   51,889
Molds and dies   13,16   17,362   (13,277 )   4,085   4,762   5,495
Furniture and fixtures   9,53   5,295   (2,260 )   3,035   1,562   1,540
Vehicles   16,23   1,913   (1,146 )   767   937   1,032
Computer equipment   19,75   1,334   (976 )   358   273   268
Advances to suppliers   -   21   -     21   137   614
Property, plant and equipment                          
       in progress   -   1,519   -     1,519   968   7,461
Total       159,274              (75,128 )   84,146   83,785   84,561
                           
28
 

 

b)       Movement in cost
        Balances at                                   Balances at
    01/01/2009   Additions   Disposals   Transfers   12/31/2009
Land   4,400   -   -     -     4,400
Buildings   16,026   456   -     7,910     24,392
Machinery and equipment   94,121   2,352   (12 )   2,340     98,801
Molds and dies   16,000   614   -     67     16,681
Furniture and fixtures   3,084   283   -     13     3,380
Vehicles   2,190   44   -     -     2,234
Computer equipment   1,117   81   -     -     1,198
Advances to suppliers   614   73   -     (550 )   137
Property, plant and equipment in                        
       progress   7,461   3,287   -     (9,780 )   968
Total   145,013   7,190   (12 )   -     152,191
                         
    Balances at                   Balances at
    01/01/2010   Additions   Disposals   Transfers   12/31/2010
Land   4,400   -   -     -     4,400
Buildings   24,392   667   -     1,422     26,481
Machinery and equipment   98,801   3,437          (1,367 )   78     100,949
Molds and dies   16,681   596   (3 )   88     17,362
Furniture and fixtures   3,380   1,735   (41 )   221     5,295
Vehicles   2,234   95   (185 )            (231 )   1,913
Computer equipment   1,198   182   (46 )   -     1,334
Advances to suppliers   137   -   -     (116 )   21
Property, plant and equipment                        
       in progress   968   2,013   -     (1,462 )   1,519
Total   152,191   8,725   (1,642 )   -     159,274
                         
c)       Movement in accumulated depreciation
    Balances at                   Balances at
        01/01/2009       Additions       Disposals       Transfers       12/31/2009
Buildings   (4,164 )   (269 )   -   -     (4,433 )
Machinery and equipment   (42,232 )   (5,791 )   9   -     (48,014 )
Molds and dies   (10,505 )   (1,414 )   -   -     (11,919 )
Furniture and fixtures   (1,544 )   (274 )   -   -     (1,818 )
Vehicles   (1,158 )   (139 )   -   -     (1,297 )
Computer equipment   (849 )   (76 )   -   -     (925 )
Total   (60,452 )            (7,963 )   9   -     (68,406 )
                           
    Balances at                   Balances at
    01/01/2010   Additions   Disposals   Transfers   12/31/2010
Buildings   (4,433 )   (408 )   -   -     (4,841 )
Machinery and equipment   (48,014 )   (5,966 )   1,352   -     (52,628 )
Molds and dies   (11,919 )   (1,358 )   -   -     (13,277 )
Furniture and fixtures   (1,818 )   (371 )   38            (109 )   (2,260 )
Vehicles   (1,297 )   (118 )   160   109     (1,146 )
Computer equipment   (925 )   (96 )   45   -     (976 )
Total           (68,406 )   (8,317 )   1,595   -            (75,128 )
                             
29
 

 

d)       Assets pledged as collateral
 
    Machinery and equipment with residual values of R$ 911 and R$ 1,048 were pledged as collateral for the financing from the National Bank for Economic and Social Development (BNDES), by the Company and its associate Suspensys Sistemas Automotivos Ltda., respectively.
 
12. INTANGIBLE ASSETS
 
                                   
    Annual   Balance at         Balance at         Balance at
        amortization rate       01/01/2009       Additions       12/31/2009       Additions       12/31/2010
Software:                                  
Cost   20%   1,263     30     1,293     54     1,347  
Accumulated
       amortization
                 (792 )             (157 )              (949 )             (135 )           (1,083 )
        471     (127 )   344     (81 )   264  
Intangible assets in                                  
       progress       -     -     -     4,154     4,154  
        471     (127 )   344     4,073     4,418  
                                   
Intangible Assets refer to software licenses and expenses on the implementation of the Company’s new integrated management system (ERP), for which the beginning of utilization is expected for 2011.
 
13. BORROWINGS AND FINANCING
 
The purpose of the financing was the installation of plants, development of quality processes, export and import financing, and financing of imported machines. The financing was obtained from several Financial Institutions by means of funds raised by these institutions with the BNDES.
 
Borrowings and financing are as follows:
 
Type:       Annual financial charges         12/31/2010       12/31/2009       01/01/2009
Working capital / exports                
Bank Credit Note - Exin   4.50%   60,580   32,595   -
Bank Credit Note - Exin   TJLP plus 2.70%   -   -   12,543
Financing ACC   US dollar plus 5.25% to 5.80%   -   -   5,018
Financing                
Financing BNDES   TJLP plus 2.5% to 5%   12,202   18,377   24,717
FINEP   4% plus the amount exceeding 6% of TJLP   1,919   4,413   6,899
FINAME   UMBNDES (foreign currencies) plus 4%   -   144   427
    4% to 5.5% plus the amount exceeding 6% of            
FINAME          TJLP   12   495   1,374
FININP   US dollar plus LIBOR + 1% to 4.4%   1,928   2,881   4,583
Financing BNDES   US dollar plus 2.5% p.a.   1,011   1,508   2,629
FUNDOPEM – ICMS   IPCA plus 3%   5,392   1,688   551
Total       83,044   62,101   58,741
Current       8,600   10,793   28,803
Non-current       74,444   51,308   29,938

30
 

 

The maturities of the long-term portions of the financing are as follows:
 
Maturity         12/31/2010       12/31/2009       01/01/2009
2010     -   -   11,110
2011     -   8,479   8,913
2012     38,844   38,910   6,910
2013     30,327   2,400   2,509
2014     283   225   73
2015     679   226   74
2016 and thereafter     4,311   1,068   349
Total     74,444   51,308   29,938
               
Financing from BNDES and Banco Votorantim are collateralized by sureties and letter of guarantee of the shareholder Randon S.A. Implementos e Participações.
 
FUNDOPEM – ICMS
 
Refers to ICMS tax incentives granted to the Company through financing of 60% of the ICMS due every month. This incentive is calculated monthly and is conditioned to the generation of direct and indirect jobs, the making of investments, and the fulfillment of contractual obligations with Banco do Estado do Rio Grande do Sul and Caixa Estadual S.A. – Agência de Fomento.
 
The incentive amounts are subject to the levy of charges at effective rates of 3.00% per annum or 0.246627% per month, plus adjustment for inflation calculated based on the monthly variation of the IPCA/IBGE or another index defined by the Managing Council of FUNDOPEM/RS.
 
The benefit period is for eight years, starting in December 2006 and ending in November 2014, with amount released for use corresponding to 1,479,042.54 FUNDOPEM-RS incentive units (equivalent to R$ 23,487 at December 31, 2010). The benefit has a grace period of 51 months and settlement scheduled to occur 90 months after the end of the grace period, with the last installment on December 21, 2018.
 
31
 

 

14. RELATED-PARTY TRANSACTIONS
 
The transactions and balances with related parties are as follows:
 
    Randon Group (*)   ArvinMeritor Group (**)   Total
       12/2010      12/2009      01/2009      12/2010      12/2009      01/2009      12/2010      12/2009      01/2009
Trade receivables – net   1,521   2,080   1,583   13,423   8,555   14,355   14,944   10,635   15,938
Interest on capital receivable   4,335   2,219   2,795   -   -   -   4,335   2,219   2,795
Dividends receivable   10,102   -   8,994   -   -   -   10,102   -   8,994
Amounts due from parent company   96   354   597   -   -   -   96   354   597
Other receivables   255   243   243   -   -   -   255   243   243
Trade payables   217   550   1,199   216   211   1,558   433   761   2,757
Interest on capital payable   4,765   2,515   3,827   4,579   2,415   3,677   9,344   4,930   7,504
Dividends payable   6,465   -   3,475   6,212   -   3,337   12,677   -   6,812
Amounts due to related parties - current   151   -   -   -   -   1,334   151   -   1,334
Amounts due to parent company   -   -   864   -   -   -   -   -   864
Amounts due to related parties – non-                                    
       current   1,205   1,043   -   -   -   2,845   1,205   1,043   2,845
                                     
    2010   2009       2010   2009       2010   2009    
Sales of goods – net   92,312   55,613       118,183   38,865       210,495   94,478    
Purchases of goods and services - net   29,231   18,541       3,708   3,889       32,939   22,430    
Financial income   -   1       -   -       -   1    
Financial expenses   -   55       -   -       -   55    
Commission expenses   291   262       -   -       291   262    
Administrative expenses   4,234   2,599       -   -       4,234   2,599    

(*) Includes:      
Randon S.A. Implementos e Participações (Parent Company), Fras-Le S.A., Fras-Le Argentina S.A., Fras-Le Andina Comercio y Representacion Ltda., Jost Brasil Sistemas Automotivos Ltda., Randon Implementos, Randon Argentina, Suspensys Sistemas Automotivos Ltda., and Castertech Fundição e Tecnologia Ltda.
     
(**) Includes:  
ArvinMeritor do Brasil Sistemas Automotivos Ltda., Meritor Automotive Inc., Meritor Heavy Vehicle Systems LLC., Meritor Hvs Ltd, ArvinMeritor Qri,, Arvin Meritor Inc. ArvinMeritor CVS, ArvinMeritor Frankfurt, and Sisamex Sistemas Automotrices.
 
Loans with directors and managers are presented under “other payables”, in the amount of R$ 384 (current) and R$ 256 (non-current) at December 31, 2010 (R$ 362 - current and R$ 390 non-current at December 31, 2009, and R$ 501 - current and R$ 313 - non-current at January 1, 2009). These balances are inflation-adjusted based on financial market rates (“DI-extra” published by the Brazilian Association of Financial Market Institutions - Andima). Interest expense on these transactions was R$ 57 in 2010 and R$ 85 in 2009.
 
Management compensation and profit sharing was R$ 1,116 in 2010 (R$ 834 in 2009).
 
Amounts due to (from) the parent company Randon S.A. Implementos e Participações are subject to financial market rates (“DI-extra” published by Andima).
 
Amounts due to related parties refer to accounts payable to Arvin Meritor Inc. for imports of machines by the Company.
 
Trading transactions
 
Trading transactions carried out with related parties follow specific prices and terms established in the joint venture agreement between the parties, which could be different if carried out with unrelated parties.
 
32
 

 

15. RETIREMENT BENEFIT PLAN
 
The Company is the co-sponsor of the pension fund RANDONPREV, together with other Random companies, whose benefit plan is a defined contribution plan under the financial capitalization regime, with some benefit supplementations for employees, not covered by the defined contributions. This minimum benefit is defined based on a percentage of the nominal salary per annum worked for the Company, credited in a lump sum at the beneficiary’s account with RANDONPREV. The latest valuation of the plan assets and of the present value of the minimum benefit was performed at December 31, 2010, using the projected unit credit method and the determined balance of R$ 371 at December 31, 2010 (R$ 249 at December 31, 2009), corresponding to the Company’s benefit, is recorded in assets.
 
16. RESERVE FOR CONTINGENCIES AND CONTINGENT LIABILITIES
 
The position of contingent liabilities at December 31, 2010 is as follows:
 
Nature of   Likelihood of loss
contingent liability         Probable       Possible
Tax   -   7,803
Social security   333   2,032
Labor   110   378
Total   443   10,213
         
The Company is also a party to administrative proceedings for which, based on the opinion of its legal counsel and in conformity with Brazilian accounting practices, no reserve for contingencies was recorded since they were classified as possible or remote likelihood of loss. The main lawsuits are as follows:
 
Tax
 
a)   IPI presumed credit – Refers to notices issued by the Federal Revenue Office in the total amount of R$ 1,475, through which the tax authorities denied the Company’s request for refund of presumed credit and required the payment of the corresponding tax. The amount includes principal, fine and interest; and
         
b)   Disallowance of ICMS presumed credit on purchase of steel – Refers to notices issued by the Rio Grande do Sul State Finance Department in the total amount of R$ 6,328, through which the tax authorities confirmed the award of the tax benefit in an amount higher than permitted by legislation. The amount includes principal, fine and interest.
     
Social security
         
a)   Refers to INSS delinquency notices totaling R$ 2,032, due to non-payment of payroll charges on the payment of employee profit sharing.
 
17. FINANCIAL INSTRUMENTS
 
The estimated fair values of the Company's financial assets and liabilities were determined based on available market information and appropriate valuation methodologies. However, considerable judgment was required in interpreting market data to produce the most adequate estimate of the fair value. As a consequence, the following estimates do not necessarily indicate the amounts that could be realized in a current exchange market. The use of different market methodologies may have a material effect on the estimated fair values.
 
These instruments are managed by means of operating strategies aimed at liquidity, profitability and security. The control policy consists in ongoing monitoring of contracted rates against market rates. The Company does not make speculative investments in derivatives or any other risk assets.
 
33
 

 

Analysis of balances
 
In compliance with CVM Instruction 235/95, the carrying amounts and fair values of financial instruments included in the balance sheet are identified below:
 
    12/31/2010   12/31/2009   01/01/2009
    Carrying   Fair   Carrying   Fair   Carrying   Fair
Description         amount       value       amount       value       amount       value
Cash equivalents   103,153   103,153   57,613   57,613   12,795   12,795
Short-term investments (2)   -   -   -   -   32,222   32,222
Trade receivables (2)   38,306   38,306   30,820   30,820   34,362   34,362
Borrowings and financing (3)                        
       In local currency   80,105   80,105   57,568   57,568   46,084   46,084
       In foreign currency   2,939   2,939   4,533   4,533   12,657   12,657
Derivative transactions ( non-                        
       deliverable forward ) (1)   -   -   -   -   4,385   4,385

(1)   Designated at fair value through profit or loss
         
(2)   Loans and receivables measured at amortized cost
 
(3)   Financial liabilities measured at amortized cost
     
Financial instruments that are recognized in the financial statements at their carrying amount are substantially similar to the amount that would be obtained if they were traded in the market. However, as they do not have an active market, there can be variations if the Company decides to settle them in advance.
 
The fair value measurement of the derivate transactions were derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (level 2 in fair value hierarchy).
The Company has as policy the elimination of market risks, avoiding assuming positions exposed to fluctuations in fair values and operating only with instruments that permit to control these risks. Derivative contracts comprise non-deliverable forward (NDF) transactions and are accounted for at their fair value.
The fair values were estimated at the end of the reporting period, based on “relevant market information”. Any changes in assumptions may significantly affect the presented estimates.
The Company is exposed to the following risks associated to the utilization of its financial instruments:
 
i.   credit risk
         
ii.   foreign exchange rate risk
 
iii.   interest rate risk
     
iv.   price risk
     
The Company, through its Parent Company, has a Currency Hedge Policy, prepared by the Planning and Finance Committee and approved by the Executive Officers. The purpose of the policy is to standardize the procedures of the group Companies, in order to define responsibilities and limits in transactions involving currency hedge, reducing the effects of foreign currency exchange rates on the inflows in foreign currency projected by the cash flow, without speculative purposes.
 
34
 

 

The basis used is the cash flow in foreign currency projected monthly for the following twelve months, based on the Strategic Plan projections or on the current expectation of each group company. The instruments used are conservative and previously approved by the same committee. In contracted transactions the instruments are Non Deliverable Forward” (NDF), the rate to be pursued should be equal to or higher than the one included in the Annual Business Plan of the companies. All transactions are controlled by the Parent Company’s Financial Officers and informed to the Executive Committee.
 
a. Credit risk
          
 
The Company's sales policies are contingent on the credit policies defined by Management and are intended to minimize eventual problems arising from the default of its customers. This objective is achieved by Management by means of a strict selection of the customer portfolio, which considers the ability to pay (credit analysis). The concentration of credit risk is limited due to the fact that the customer base is large and unrelated.

b. Foreign exchange rate risk
          
 
The Company’s results are subject to significant variations, due to the effects of the volatility of the exchange rate on assets and liabilities denominated in foreign currencies, mainly the US dollar, which closed the year with a negative variation of 4.31% (negative variation of 25.49% in 2009).
 
The Company is exposed to currency risk (foreign exchange risk) on sales, purchases and borrowings that are denominated in a currency different from the Company’s functional currency, the Real.
 
NDF - Non Deliverable Forward
 
In these transactions the Company has duties and obligations based on a quotation previously contracted upon their maturity. The changes in the fair value of these transactions are recognized in profit or loss. At December 31, 2010 and 2009, the Company had no outstanding NDF transaction.
 
The Company’s net exposure to foreign exchange rate risk is as follows:

          12/31/2010       12/31/2009       01/01/2009
         A. Borrowings/financing          (2,939 )          (4,533 )          (12,657 )
  B. Trade payables   (461 )   (1,148 )   (6,788 )
  C. Trade receivables   4,727     7,389     14,868  
  D. Non Deliverable Forward   -     -     (4,385 )
  E. Net exposure (A+B+C+D)   1,327     1,708     (8,962 )
                     
 
An eventual appreciation of the Real by 2% against the US dollar at December 31 would have increased the equity and profit by R$ 27. This analysis is based on the variation of the foreign currency exchange rate that the Company considered as reasonably possible at the end of the reporting period. The analysis considers that all other variables, especially interest rates, are kept constant.
 
An eventual depreciation of the Real against the US dollar at December 31 would have the same effect, although with an opposite result, considering that all other variables would remain constant.
   
c. Interest rate risk
          
 
The Company’s result is subject to significant variations due to borrowings and financing contracted at floating interest rates.
 
The Company does not have derivative financial instruments to manage its exposure to interest rates.
 
An increase of 1% in annual interest rates would have increased the Company’s borrowings and financing balance by R$ 830 at December 31, 2010 (R$ 621 at December 31, 2009 and R$ 587 at January 1, 2009).
 
35
 

 

d. Price risk
          
 
Arises from the possibility of fluctuations in the market prices of products sold or produced by the Company and of other inputs used in the production process. These price fluctuations may cause substantial changes in the Company’s revenues and costs. In order to mitigate these risks, the Company conducts an ongoing monitoring of local and foreign markets, seeking to anticipate price movements.

e. Estimated fair values
          
 
The fair values were estimated at the end of the reporting period, based on “relevant market information”. Any changes in assumptions and in financial market transactions may significantly affect the presented estimates. The methods and assumptions adopted by the Company to estimate the disclosure of the fair value of its derivatives are described below:
 
The fair value is generally based on market price quotations for assets or liabilities with similar features. Should these market prices not be available, the fair values are based on market operators’ quotations, pricing models, discounted cash flow or similar techniques, for which the fair value determination may require judgment or significant estimates by management. For derivative financial instruments, market price quotations are used to determine the fair value of these instruments. The Company does not intend to settle these contracts before their maturity.
 
The table below shows the carrying amounts and estimated fair values of the Company’s derivatives. The outstanding nominal amounts exposed to the variation of the US currency, as well as their related fair values, are as follows:
 
      01/01/2009   01/01/2009   01/01/2009   01/01/2009
                    Fair Value –
      Notional   Notional   Carrying   in thousands
      Amount – in   Amount – in   Amount– in   of R$ -
      thousands   thousands of   thousands of   (credit) /
  Description       of US$       R$       R$       debit
         NDF   8,400   14,455   (4,385 )   (4,385 )

      12/31/2009   12/31/2009   12/31/2009   12/31/2009   2009
                  Fair Value –   in thousands of R$
      Notional   Notional   Carrying   in thousands   (credit) / debit
      Amount – in   Amount – in   Amount – in   of R$ -        
      thousands   thousands of   thousands of   (credit) /   Amount   Amount
  Description       of US$       R$       R$       debit       received       paid
         NDF   -   -   -   -   1,446   579

        
The liability amounts presented at January 1, 2009 for NDF transactions are classified as derivative transactions. All these transactions were settled during 2009 and, therefore, there are no outstanding positions in the balance sheets as at December 31, 2010 and 2009.

36
 

 

        
The maturities of these transactions are summarized below, with their notional amounts, in thousands of dollars:

      01/01/2009
          From 31 to   From 181 to    
         Description         Up to 30 days       180 days       365 days       Total
  NDF   700   3,500   4,200   8,400

18. CAPITAL
 
Subscribed capital is represented by 105,000 shares with par value of R$ 1.00 each, and its composition by shareholder is as follows (for all reporting periods):
 
Shareholder         R$       %
Randon S.A. Implementos e Participações   53,550   51
Arvinmeritor do Brasil Sistemas Automotivos Ltda.   51,450   49
Total   105,000   100
         
19. DIVIDENDS AND INTEREST ON CAPITAL
 
Dividends
 
Of the profit for the year, the articles of association establish the distribution of 25% of such profit as mandatory dividend. After excluding the amounts already paid as interest on capital during the year, R$ 12,677 was accrued in 2010 (R$ 11,800 in 2009).
 
In addition to the mandatory minimum dividend (calculated considering the amounts already paid as interest on capital during the year), in 2010 the Company’s shareholders approved the distribution of R$ 8,400 as dividends from prior years (R$ 21,107 in 2009).
 
Interest on capital
 
For the year ended December 31, 2010, the Company recorded interest on capital of R$ 10,990 (R$ 10,358 in 2009), using as a basis the TJLP rate for the period from January to December of each year, applied to shareholders’ equity, considering the higher of 50% of the profit for the year before income tax or 50% of the retained earnings.
 
As provided for in the tax legislation, the amount recorded as interest on capital was fully deducted in the calculation of income tax and social contribution, and the tax benefit from this deduction was R$ 3,738 (R$ 3,522 in 2009). For purposes of conformity of the presentation of the financial statements, such interest was treated as distribution of profits and presented as reduction of retained earnings, in shareholders’ equity.
 
Additionally, the Company recognized financial income related to interest on capital receivable from the associate Suspensys Sistemas Automotivos Ltda. totaling R$ 5,100 (R$ 4,592 in 2009) which, for purposes of disclosure and conformity with accounting principles, was reclassified from line item “financial income” to “investments”, in assets.
 
37
 

 

20. SALES REVENUE
 
The reconciliation between the revenue recognized for tax purposes and the revenue presented in the income statement for the year is as follows:
 
        2010       2009
Gross revenue for tax purposes   559,762     356,736  
Less:            
       Taxes on sales   (123,614 )   (80,025 )
       Sales returns   (984 )   (872 )
       Discount to present value on installment sales   (3,744 )   (2,342 )
       Difference of criterion for accounting recognition (a)   (254 )   (944 )
Net revenue recognized in the income statement   431,166     272,553  
             
(a) Refers to the difference of criterion for recognition of sales of goods for tax purposes (based on invoice issuance) and the accounting policy for revenue recognition detailed in note 3.4.
          
21. EXPENSES BY NATURE
 
As required by corporate law, the Company is required to present the income statement by function. Therefore, the analysis of operating expenses by nature is as follows:
 
        2010       2009
Raw materials and auxiliary materials   274,454   177,796
Depreciation and amortization   8,452   8,120
Personnel   43,968   28,990
Production freight   1,559   525
Freight on sales   8,024   4,416
Costs of third-party services   11,307   7,702
Asset upkeep costs   8,419   3,848
Other expenses   22,217   15,886
Total   378,400   247,283
         
These expenses were classified as follows in the income statement (presented by function):
 
        2010       2009
Cost of sales and services   347,602   226,144
Selling expenses   14,520   9,206
General and administrative expenses   10,623   7,677
Other operating expenses, net   5,655   4,256
Total   378,400   247,283
         
38
 

 

22. INCOME TAX AND SOCIAL CONTRIBUTION
 
Income tax and social contribution expense
 
The income tax and social contribution expense for the years ended December 31 is reconciled at statutory rates, as follows:
 
    2010   2009
    Income   Social   Income   Social
        tax       contribution       tax       contribution
Profit before income tax                        
       and social contribution     102,073               102,073     59,001                59,001  
Applicable rate   25%     9%     25%     9%  
Income tax and social contribution                        
       at nominal rates   25,518     9,186     14,750     5,310  
Effect of taxes on:                        
       Interest on capital expense   (2,748 )   (989 )   (2,589 )   (932 )
       Interest on capital income   1,275     459     1,148     413  
       Equity in associates   (10,829 )   (3,898 )   (6,824 )   (2,457 )
       Other   (1,465 )   (547 )   (905 )   (354 )
    (13,767 )   (4,975 )      (9,170 )   (3,330 )
Income tax and social contribution                        
       before deductions   11,751     4,211     5,580     1,980  
Income tax deductions and other adjustments   (602 )   -     (248 )   (59 )
Income tax and social contribution expense   11,149     4,211     5,332     1,921  
                         
Current income tax and social contribution   11,896     4,571     4,540     1,751  
Deferred income tax and social contribution   (747 )   (360 )   792     170  

Analysis of deferred income tax and social contribution
 
    12/31/2010   12/31/2009   01/01/2009
    Temporary   Deferred   Temporary   Deferred   Temporary   Deferred
Temporary differences        difference      taxes      difference      taxes      difference      taxes
Allowance for inventory losses   -     -     -     -     2,389     812  
Accrued profit sharing   3,887     1,322     2,781     946     -     -  
Derivative transactions   -     -     -     -     4,385     1,491  
Provision for warranty claims   146     49     146     49     65     22  
Reserve for contingencies   443     151     -     -     -     -  
Provision for collective                                    
       bargaining   115     39     63     21     48     16  
Provision for employee                                    
       termination   282     96     220     75     220     75  
Deferred asset recorded for tax                                    
       purposes   609     207     609     207     941     320  
Other temporary additions   414     141     171     58           15  
Total Assets         2,005           1,356           2,751  
                                     
Incentive depreciation Law                                    
       11774   (2,279 )   (570 )   (1,256 )   (315 )   -     -  
Cost attributed to property,                                    
       plant and equipment   (15,681 )   (5,331 )   (17,857 )   (6,071 )   (20,048 )   (6,816 )
Retirement benefit plan   (361 )   (123 )   (238 )   (80 )   -     -  
Total Liabilities         (6,024 )         (6,466 )         (6,816 )
                                     
39
 

 

Movement in deferred income tax and social contribution
 
          Recognized   Recognized in      
          in   other      
    Balances at   income for   comprehensive   Balances at
Temporary differences         01/01/2009       the year       income       12/31/2009
Allowance for inventory losses   812     (812 )   -     -  
Accrued profit sharing   -     946     -     946  
Derivative transactions   1,491     (1,491 )   -     -  
Provision for warranty claims   22     27     -     49  
Provision for collective bargaining   15     6     -     21  
Provision for employee termination   75     -     -     75  
Deferred asset recorded for tax purposes   320     (113 )   -     207  
Other temporary additions   16     42     -     58  
    2,751                 1,356  
                         
Incentive depreciation Law 11774   -     (315 )   -     (315 )
Cost attributed to property, plant and                        
       equipment   (6,816 )   745     -     (6,071 )
Retirement benefit plan   -     3     (83 )   (80 )
                         
Total recognized in the year   (6,816 )   (962 )   (83 )   (6,466 )
                         
              Recognized in      
          Recognized in   other      
    Balances at   income for   comprehensive   Balances at
Temporary differences     01/01/2010   the year   income   12/31/2010
Accrued profit sharing   946     376     -     1,322  
Provision for warranty claims   49     -     -     49  
Reserve for contingencies   -     151     -     151  
Provision for collective bargaining   21     18     -     39  
Provision for employee termination   75     21     -     96  
Deferred asset recorded for tax purposes   207     -     -     207  
Other temporary additions   58     83     -     141  
    1,356                 2,005  
                         
Incentive depreciation Law 11774   (315 )   (255 )   -     (570 )
Cost attributed to property, plant and                        
       equipment   (6,071 )   740     -     (5,331 )
Retirement benefit plan   (80 )   (27 )   (16 )   (123 )
                         
Total recognized in the year   (6,466 )   1,107     (16 )   (6,024 )
                         
40
 

 

23. FINANCIAL INCOME (EXPENSES)
 
     Financial income (expenses), net for the years ended December 31 are as follows:
 
          2010       2009
      Financial income            
         Yield on short-term investments   7,211     4,374  
         Interest received and discounts obtained   409     168  
         Discount to present value of trade receivables   3,662     2,380  
      11,282     6,922  
  Financial expenses            
         Interest on borrowings and financing   (3,572 )   (3,320 )
         Bank expenses   (949 )   (760 )
         Discount to present value of trade payables   (866 )   (476 )
      (5,387 )   (4,556 )
  Exchange rate change            
         Exchange gains on items classified in liabilities   3,728     8,653  
         Exchange losses on items classified in assets   (3,632 )   (4,584 )
      96     4,069  
   
  Financial income (expenses), net   5,991     6,435  
               
41
 

 





Suspensys Sistemas
Automotivos Ltda.
 
Financial Statements as of December 31, 2010
And 2009 And January 1, 2009 and for the Years
Ended December 31, 2010 and 2009 and
Independent Auditors’ Report
 
Deloitte Touche Tohmatsu Auditores Independentes





42
 

 

INDEPENDENT AUDITORS’ REPORT
 
We have audited the accompanying balance sheets of Suspensys Sistemas Automotivos Ltda. (the “Company”), a company incorporated in Brazil, as of December 31, 2010 and 2009 and January 1, 2009 and the related statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years ended December 31, 2010 and 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009 and January 1, 2009 and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009 in conformity with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
 
May 6, 2011
 
/s/ DELOITTE TOUCHE TOHMATSU Auditores Independentes
DELOITTE TOUCHE TOHMATSU Auditores Independentes
Porto Alegre, Brazil

43
 

 

SUSPENSYS SISTEMAS AUTOMOTIVOS LTDA.
 
BALANCE SHEETS AS OF DECEMBER 31, 2010, 2009 AND JANUARY 1, 2009
(In thousands of Brazilian reais - R$)
 
ASSETS       Note       12/31/2010       12/31/2009       1/1/2009
CURRENT ASSETS                
Cash and cash equivalents   5   177,575   112,087   33,361
Trade receivables   6   90,027   71,776   66,973
Recoverable taxes   7   4,310   11,252   12,820
Inventories   8   53,292   53,217   52,241
Amounts due from parent company   12   369   368   -
Other receivables       1,399   768   1,701
Total current assets       326,972   249,468   167,096
 
NON-CURRENT ASSETS                
Amounts due from parent company   12   114   485   880
Recoverable taxes   7   1,046   2,302   5,814
Deferred taxes   21   4,523   3,008   3,650
Retirement benefit plan   13   657   435   -
Other receivables       56   58   185
Property, plant and equipment   9   124,714   121,405   118,292
Intangible assets   10   6,392   769   1,000
Total noncurrent assets       137,502   128,462   129,821
                 
TOTAL ASSETS       464,474   377,930   296,917
 
LIABILITIES AND SHAREHOLDERS' EQUITY   Note   12/31/2010   12/31/2009   1/1/2009
CURRENT LIABILITIES                
Trade payables       35,654   48,915   19,000
Borrowings and financing   11   15,702   11,138   22,555
Advances from customers       1,404   361   338
Taxes and contributions payable       6,622   3,183   2,650
Salaries payable       1,240   1,678   820
Accrued vacation and related charges       5,788   4,772   3,623
Dividends and interest on capital payable   18   37,022   4,174   22,170
Employee and management profit sharing       7,673   4,939   6,503
Other payables       3,315   3,422   5,287
Total current liabilities       114,420   82,582   82,946
 
NON-CURRENT LIABILITIES                
Borrowings and financing   11   105,985   89,360   34,846
Amounts due to parent company   12   -   -   2,388
Reserve for contingencies   14   150   141   136
Contributions payable       2,887   1,999   1,045
Deferred taxes   21   11,639   11,613   11,015
Other payables       3,728   3,242   153
 
SHAREHOLDERS' EQUITY                
Capital   16   71,291   71,291   71,291
Capital reserve       36,354   24,591   11,578
Earnings reserve       100,709   75,046   62,737
Retained earnings       17,311   18,065   18,782
Total shareholders' equity       225,665   188,993   164,388
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       464,474   377,930   296,917
                 
The accompanying notes are an integral part of these financial statements.
 
44
 

 

SUSPENSYS SISTEMAS AUTOMOTIVOS LTDA.
 
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)
 
        Note       2010       2009
NET REVENUE   19   1,011,273     643,835  
 
COST OF SALES AND SERVICES   20   (839,460 )   (539,112 )
                 
GROSS PROFIT       171,813     104,723  
 
OPERATING INCOME (EXPENSES)                
Selling expenses   20   (34,721 )   (20,944 )
General and administrative expenses   20   (19,498 )   (13,241 )
Tax incentive - Fundopem   17   11,763     13,013  
Other operating (expenses), net   20   (11,190 )   (4,686 )
        (53,646 )   (25,858 )
                 
PROFIT FROM OPERATIONS BEFORE FINANCIAL INCOME (EXPENSES)       118,167     78,865  
 
FINANCIAL INCOME (EXPENSES)                
Financial income   22   19,144     10,880  
Financial expenses   22   (12,835 )   (7,805 )
Exchange losses, net   22   (385 )   (288 )
        5,924     2,787  
 
PROFIT BEFORE INCOME TAX AND                
       SOCIAL CONTRIBUTION       124,091     81,652  
 
INCOME TAX AND SOCIAL CONTRIBUTION                
 
Current   21   (32,393 )   (16,212 )
Deferred   21   1,520     (1,095 )
                 
NET PROFIT FOR THE YEAR       93,218     64,345  
                 
The accompanying notes are an integral part of these financial statements.
 
45
 

 

SUSPENSYS SISTEMAS AUTOMOTIVOS LTDA.
 
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)
 
        2010       2009
NET PROFIT FOR THE YEAR   93,218     64,345  
 
OTHER COMPREHENSIVE INCOME            
       Actuarial gains (losses) on retirement benefit plan   92     426  
       Deferred income tax and social contribution            
              on other comprehensive income   (31 )   (145 )
    61     281  
             
COMPREHENSIVE INCOME FOR THE YEAR   93,279     64,626  
             
The accompanying notes are an integral part of these financial statements.
 
46
 

 

SUSPENSYS SISTEMAS AUTOMOTIVOS LTDA.
 
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)
 
            Capital                  
            reserve                  
            Tax incentive   Earnings   Retained      
        Note       Capital       reserve       reserve       earnings       Total
BALANCES AT JANUARY 1, 2009       71,291   11,578   62,737     18,782     164,388  
 
Net profit for the year       -   -   -     64,345     64,345  
Other comprehensive income       -   -   -     281     281  
Total comprehensive income       -   -   -     64,626     64,626  
Reversal of dividends proposed in 2008       -   -   2,289     -     2,289  
Tax incentive - Fundopem   17   -   13,013   -     (13,013 )   -  
Interest on capital   18   -   -   -     (8,635 )   (8,635 )
Dividends on earnings reserve   18   -   -      (10,300 )   -     (10,300 )
Disproportionate dividends for Randon   17   -   -   (2,183 )   (7,657 )   (9,840 )
Dividends paid on profit for the year   18   -   -   -        (13,535 )   (13,535 )
Earnings reserve       -   -   22,503     (22,503 )   -  
                               
BALANCES AT DECEMBER 31, 2009       71,291   24,591   75,046     18,065     188,993  
 
Net profit for the year       -   -   -     93,218     93,218  
Other comprehensive income       -   -   -     61     61  
Total comprehensive income       -   -   -     93,279     93,279  
Tax incentive - Fundopem   17   -   11,763   -     (11,763 )   -  
Interest on capital   18   -   -   -     (9,591 )   (9,591 )
Dividends on earnings reserve   18   -   -   (9,396 )   -     (9,396 )
Disproportionate dividends for Randon   17   -   -   (8,750 )   (9,874 )   (18,624 )
Dividends paid on profit for the year   18   -   -   -     (18,996 )   (18,996 )
Earnings reserve       -   -   43,809     (43,809 )   -  
                               
BALANCES AT DECEMBER 31, 2010       71,291   36,354   100,709     17,311     225,665  
                               
The accompanying notes are an integral part of these financial statements.
 
47
 

 

SUSPENSYS SISTEMAS AUTOMOTIVOS LTDA.
 
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands of Brazilian reais - R$)

        Note       2010       2009
CASH FLOWS FROM OPERATING ACTIVITIES                
Profit before income tax and social contribution       124,091     81,652  
Adjustments to reconcile profit before income tax and                
       social contribution to cash provided by operating activities:                
       Depreciation of property, plant and equipment   9   15,055     13,381  
       Amortization of intangible assets   10   294     284  
       Profit on sale of property, plant and equipment       27     8  
       Provisions       927     (358 )
       Exchange differences on borrowings and financing       (139 )   (1,755 )
       Interest and charges on borrowings and financing   22   7,239     4,653  
Increase (decrease) in assets and liabilities                
       (Increase) in trade receivables       (18,251 )   (4,803 )
       (Increase) in inventories       (75 )   (976 )
       Decrease in other receivables       7,438     5,602  
       (Decrease) increase in trade payables       (13,261 )   27,527  
       Increase in other payables       4,243     2,573  
Income tax and social contribution paid       (29,935 )   (11,408 )
Interest paid on financing       (6,830 )   (4,752 )
Net cash provided by operating activities       90,823     111,628  
 
CASH FLOWS FROM INVESTING ACTIVITIES                
       Purchase of property, plant and equipment   9   (18,391 )   (16,502 )
       Purchase of intangible assets   10   (5,917 )   (53 )
Net cash used in investing activities       (24,308 )   (16,555 )
 
CASH FLOWS FROM FINANCING ACTIVITIES                
Payment of dividends       (18,144 )   (52,877 )
Payment of interest on capital       (4,173 )   (8,421 )
Repayment of financing       (10,214 )   (24,443 )
Borrowings from third parties       31,133     69,000  
Borrowings from related parties       371     394  
Net cash used in financing activities       (1,027 )   (16,347 )
 
NET INCREASE IN CASH AND CASH EQUIVALENTS       65,488     78,726  
 
Cash and cash equivalents at the beginning of the year   5   112,087     33,361  
 
CASH AND CASH EQUIVALENTS AT THE                
       END OF THE YEAR   5   177,575     112,087  
                 
The accompanying notes are an integral part of these financial statements.
 
48
 

 

SUSPENSYS SISTEMAS AUTOMOTIVOS LTDA.
 
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

1. OPERATIONS
 
Suspensys Sistemas Automotivos Ltda. (the “Company”) is a limited liability company established in Brazil with its head office and principal place of business in Caxias do Sul – RS. The Company started its operations on October 1, 2002 and is primarily engaged in the manufacture and sale of air and mechanical suspension systems for trucks, buses and trailers, axles for trailers, third axles, hubs and drums for trucks, buses and trailers, and the provision of technical assistance services for its products.
 
2. PRESENTATION OF FINANCIAL STATEMENTS
 
The Company’s Financial Statements for the years ended on December 31, 2010 and 2009 have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). These Financial Statements are the first presented in accordance with IFRS.
 
The Financial Statements of the Company have been prepared in accordance with Brazilian accounting practices (BRGAAP) and provisions of the Brazilian corporate law until December 31, 2009 and these practices differ in some aspects from IFRS. When preparing the Financial Statements for 2010, the Company adjusted certain accounting, valuation and consolidation criteria used under BRGAAP in order to conform with IFRS. The 2009 comparative data were restated to reflect such adjustments, as explained in note 4.
 
The reconciliation and description of the effects of transition from accounting practices adopted in Brazil to IFRS, relating to shareholders' equity, net income and cash flow, are presented in Note 4.
 
The Company adopted all rules, revision of rules, and interpretations issued by IASB and that are applicable for the year ended on December 31, 2010.
 
The summary of the principal accounting policies adopted by the Company is detailed in note 3.
 
The financial statements were approved by the Company’s Board of Directors and authorized for issue on May 6, 2011.
 
3. PRINCIPAL ACCOUNTING POLICIES
 
      3.1.
Basis of preparation
 
The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
            
  3.2
Functional currency and presentation currency
 
The financial statements are presented in thousands of reais, which is the Company’s functional currency. All financial information presented in thousands of reais was rounded to the closest number.
     
 
3.3
Accounting estimates
 
In the application of accounting policies, Management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources.
 
The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Significant assets and liabilities subject to these estimates and assumptions include the residual value of property, plant and equipment, allowance for doubtful debts, impairment of inventories, realization of deferred taxes, and reserve for contingencies. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Actual results may differ from these estimates due to uncertainties inherent in such estimates.

49
 

 
 
     
3.4
Revenue recognition
 
Revenue is recognized on an accrual basis.
 
Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.
 
Revenue from the sale of goods is recognized when all the following conditions are satisfied:
  • the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
     
  • the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
     
  • the amount of revenue can be measured reliably;
     
  • it is probable that the economic benefits associated with the transaction will flow to the Company; and
     
  • the costs incurred or to be incurred in respect of the transaction can be measured reliably.
          
Specifically, revenue from the sale of goods is recognized when goods are delivered and legal title is passed.
 
Revenues from sales and services are subject to taxes and contributions at the following basic rates:

                       Rates
  State VAT (ICMS)   7% to 17%
  Federal VAT (IPI)   0% to 18%
  Tax on Revenue (PIS)   1.65% and 2.30%
  Tax on Revenue (COFINS)   7.60% and 10.80%
  Service Tax (ISSQN)   4%

      3.5
Foreign currencies
 
In preparing the Company’s financial statements, transactions in currencies other than the Company’s functional currency are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date.
 
Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.
            
  3.6
Current and non-current assets
  • Cash and cash equivalents
     
    Include cash on hand and in banks and short-term investments redeemable in up to 90 days from the investment date. Short-term investments are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These investments are carried at cost plus yield accrued through the end of the reporting period, which approximates their fair values.
     
  • Trade receivables
     
    Trade receivables are recognized at the billed amount, including the related taxes and reduced to their present value at the end of the reporting period.
     
    Allowances for doubtful debts are recognized based on estimated irrecoverable amounts determined by reference to the Company’s past default experience and an analysis of the debtor’s current financial position.
50
 

 
 
              
  • Inventories
     
    Inventories are stated at the lower of cost and net realizable value. Costs of inventories are determined under the weighted average cost method. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
     
  • Property, plant and equipment
     
    Stated at cost of acquisition or construction. The Company elected to measure the main items included in the classes of land, buildings, machinery and equipment at deemed cost at the date of adoption of IFRS, that is, January 1, 2009. The effects of the deemed cost increased the property, plant and equipment balance, with a corresponding entry in shareholders’ equity, in retained earnings, net of tax effects (as mentioned in note 4.6.a).
     
    Properties in the course of construction are carried at cost. Cost includes professional fees and, for qualifying assets, borrowing costs capitalized in accordance with the Company's accounting policy (note 3.9). Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
     
    Land is not depreciated. For the other classes of property, plant and equipment, depreciation is calculated using the straight-line method at the rates mentioned in note 9, which take into consideration the estimated useful lives of assets. The estimated useful life and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
     
    An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.
     
  • Intangible assets
     
    Intangible assets with finite useful lives that are acquired separately are carried at cost, less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
     
    An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized.
 
3.7.
Impairment of tangible and intangible assets other than goodwill
 
At the end of each reporting period, the Company reviews the carrying amount of its tangible and intangible assets to determine where there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.
 
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
 
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.
     
 
3.8
Discount to present value
 
Monetary assets and liabilities are discounted to present value when the effect is considered material in relation to the financial statements taken as a whole. The discount to present value is calculated based on an interest rate that reflects the timing and risk of each transaction.
 
Trade receivables are discounted to present value with a corresponding entry in sales revenue in the income statement, and the difference between the present value of a transaction and the face value of the billing is considered as financial income and will be recognized based on the amortized cost and the effective long-term rate of the transaction.
 
The discount to present value of purchases is recorded in “trade payables” and “inventories”, and its realization has a corresponding entry in line item “financial expenses” over the term of their suppliers.
 
51
 

 
 
 
3.9
Borrowing costs
 
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
 
All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
                
  3.10
Retirement benefit plan
 
For defined benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each reporting period. Actuarial gains and losses are immediately recognized in equity according to the available option in paragraph 93A of IAS 19 – Employee Benefits.
 
The retirement benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to unrecognized actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan.
     
  3.11
Financial instruments
 
Classification and measurement
 
The classification depends on the purpose for which the financial assets and liabilities were acquired or contracted. The Company’s management classifies its financial assets and liabilities at the time of initial contracting.
 
Financial assets at fair value through profit or loss
 
Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss. Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset.
 
Loans and receivables measured at amortized cost
 
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade receivables, cash and cash equivalents and short-term investments) are measured at amortized cost using the effective interest method, less any impairment.
 
Financial liabilities measured at amortized cost
 
Borrowings are initially recognized at fair value, upon receipt of funds, net of transaction costs. They are subsequently measured at amortized cost. The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument.
     
  3.12.
Provisions
 
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.
 
Provisions for the expected cost of warranty obligations are recognized at the date of sale of the respective products, at Management's best estimate of the expenditure required to settle the Company's obligation.
 
52
 

 
 
  3.13
Tax incentive (FUNDOPEM)
 
Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them and that the grants will be received.
 
Government grants are recognized in profit or loss on a systematic basis over the periods in which the Company recognizes as expenses the related costs for which the grants are intended to compensate (related to generation of jobs) and are recorded in a specific line item of the income statement.
                         
  3.14
Income Tax and Social Contribution
 
Current tax
 
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated based on rates prevailing at the end of the reporting period (15% plus a 10% surtax on taxable profit exceeding R$20 per month for Income Tax and 9% on taxable profit for Social Contribution on Net Profit).
 
Deferred tax
 
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.
 
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
 
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
 
Current and deferred taxes for the period
 
Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, current and deferred taxes are also recognized in other comprehensive income or directly in equity, respectively.
       
  3.15
New and revised IFRSs in issue but not yet effective
 
The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective:
       
    f)
IFRS 9 Financial Instruments issued in November 2009 and amended in October 2010 introduces new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition.
 
IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.
 
53
 

 
 
                       
The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under IFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognized in profit or loss.
 
IFRS 9 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.
 
This standard will be adopted in the Company’s financial statements for the annual period beginning January 1, 2013 and that the application of the new Standard will have a significant impact on amounts reported in respect of the Company financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.
       
   
g)
The amendments to IFRS 7 titled Disclosures – Transfers of Financial Assets increase the disclosure requirements for transactions involving transfers of financial assets. These amendments are intended to provide greater transparency around risk exposures when a financial asset is transferred but the transferor retains some level of continuing exposure in the asset. The amendments (effective for annual periods beginning on or after July 1, 2011) also require disclosures where transfers of financial assets are not evenly distributed throughout the period.
 
The Company does not anticipate that these amendments to IFRS 7 will have a significant effect on the financial statements.
       
    h)
IAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party and simplifies disclosures for government-related entities.
 
The Company does not anticipate that these amendments to IAS 24 (effective for annual periods beginning on or after January 1, 2011) will have a significant effect on the financial statements.
       
    i)
The amendments to IAS 32 titled Classification of Rights Issues address the classification of certain rights issues denominated in a foreign currency as either an equity instrument or as a financial liability.
 
The Company does not anticipate that these amendments to IAS 32 (effective for annual periods beginning on or after February 1, 2010) will have a significant effect on the financial statements.
       
    j)
IFRIC 19 (effective for annual periods beginning on or after July 1, 2010) provides guidance regarding the accounting for the extinguishment of a financial liability by the issue of equity instruments. To date, the Company has not entered into transactions of this nature. However, if the Company does enter into any such transactions in the future, IFRIC 19 will affect the required accounting. In particular, under IFRIC 19, equity instruments issued under such arrangements will be measured at their fair value, and any difference between the carrying amount of the financial liability extinguished and the fair value of equity instruments issued will be recognized in profit or loss.
       
4. EFFECTS OF THE ADOPTION OF THE IFRS ON THE FINANCIAL STATEMENTS
 
 
In preparing its financial statements, the Company adopted for the first-time all International Financial Reporting Standards and related interpretations and guidance issued by the International Accounting Standards Board (IASB). The Company applied the accounting policies defined above in all reporting periods, which include the opening balance sheet as at January 1, 2009.
 
The Company adopted the following optional exemptions of full retrospective application:
   
    a)
Exemption for presenting the fair value of fixed assets as acquisition cost: The Company remeasured its fixed assets on the transition date at the fair value, as described in note 4.6. a.
       
    b)
Exemption for measuring employee benefits: The Company recognized all actuarial gains and losses arising from employee benefit plan on the transition date against retained earnings. From that date onward, the Company also recognizes all the actuarial gains and losses in equity according to the paragraph 93A of IAS 19.
 
54
 

 
 
        c)
Exemption related to the classification of financial instruments: The Company decided to classify and evaluate its financial instruments according to IAS 32 and IAS 39 on the transition date. Retroactive analyses to the original contracting date of the current financial instruments were not made on the transition date. All financial instruments contracted after the transition date were analyzed and classified on the contract date of the operations.
                     
  4.1
Effects of the adoption of the IFRS on the balance sheet
 
                January 1, 2009   December 31, 2009
                Effect of                       Effect of        
        Brazilian   Adoption of       Brazilian   adoption of    
        GAAP   IFRS   IFRS   GAAP   IFRS   IFRS
CURRENT ASSETS                                
Cash and cash equivalents       33,361   -     33,361   112,087   -     112,087
Trade receivables       66,973   -     66,973   71,776   -     71,776
Recoverable taxes       12,820   -     12,820   11,252   -     11,252
Inventories       52,241   -     52,241   53,217   -     53,217
Amounts due from parent                                
       company       -   -     -   368   -     368
Deferred taxes   (f)   2,804   (2,804 )   -   2,534   (2,534 )   -
Other receivables       1,701   -     1,701   768   -     768
Total current assets             169,900         (2,804 )         167,096         252,002         (2,534 )         249,468
                                 
NON-CURRENT ASSETS                                
Amounts due from parent                                
       company       880   -     880   485   -     485
Recoverable taxes       5,814   -     5,814   2,302   -     2,302
Deferred taxes   (b)(d)(f)   -   3,650     3,650   -   3,008     3,008
Retirement benefit plan   (e)   -   -     -   -   435     435
Other receivables       185   -     185   58   -     58
Property, plant and                                
       equipment   (a)(c)   85,894   32,398     118,292   91,906   29,499     121,405
Intangible assets       1,000   -     1,000   769   -     769
Deferred charges   (b)   3,294   (3,294 )   -   2,201   (2,201 )   -
Total non-current assets       97,067   32,754     129,821   97,721   30,741     128,462
                                 
Total assets       266,967   29,950     296,917   349,723   28,207     377,930
                                 
CURRENT LIABILITIES                                
Trade payables       19,000   -     19,000   48,915   -     48,915
Borrowings and financing       22,555   -     22,555   11,138   -     11,138
Advances from customers       338   -     338   361   -     361
Taxes and contributions                                
       payable       2,650   -     2,650   3,183   -     3,183
Salaries payable       820   -     820   1,678   -     1,678
Accrued vacation and related                                
       charges       3,623   -     3,623   4,772   -     4,772
Dividends and interest on                                
       capital payable       22,170   -     22,170   4,174   -     4,174
Employee and management                                
       profit sharing       6,503   -     6,503   4,939   -     4,939
Deferred taxes   (f)   -   -     -   1,624   (1,624 )   -
Other payables       5,287   -     5,287   3,422   -     3,422
Total current liabilities       82,946   -     82,946   84,206   (1,624 )   82,582

55
 

 
 
NON-CURRENT LIABILITIES                                                        
Borrowings and financing       34,846   -   34,846   89,360   -   89,360
Amounts due to parent                            
       company       2,388   -   2,388   -   -   -
Reserve for contingencies       136   -   136   141   -   141
Sundry bank accounts       -   -   -   3,089   -   3,089
Contributions payable       1,045   -   1,045   1,999   -   1,999
Deferred taxes   (a)(c)(e)(f)   -   11,015   11,015   -   11,613   11,613
Other payables   (d)   -   153   153   -   153   153
Total long-term liabilities       38,415   11,168   49,583   94,589   11,766   106,355
                             
SHAREHOLDERS’ EQUITY                            
Capital       71,291   -   71,291   71,291   -   71,291
Capital reserve       11,578   -   11,578   24,591   -   24,591
Earnings reserve       62,737   -   62,737   75,046   -   75,046
Retained earnings   (a)(b)(c)(d)(e)   -   18,782   18,782   -   18,065   18,065
Total shareholders’ equity       145,606   18,782   164,388   170,928   18,065   188,993
                             
Total liabilities and                            
       shareholders’ equity             266,967         29,950         296,917         349,723         28,207         377,930
                             
      4.2      
Reconciliation of shareholders' equity
     
                January 1,          
        2009   December 31, 2009
Total shareholders’ equity in accordance with                
Brazilian GAAP            145,606                        170,928  
Adoption of deemed cost   (a)   21,383     19,116  
Derecognition of deferred charges   (b)   (2,500 )   (1,778 )
Capitalization of interest   (c)   -     535  
Employee termination plan   (d)   (101 )   (101 )
Retirement benefit plan   (e)   -     293  
Total shareholders’ equity in accordance with                
IFRS       164,388     188,993  
                 
56
 

 

       4.3       Effects of the adoption of the IFRS on the income statement
 
            Year ended December 31, 2009    
        Brazilian   Effect of transition of    
                GAAP       IFRS       IFRS
NET REVENUE       643,835     -     643,835  
                       
COST OF SALES AND SERVICES   (a)(b)(e)   (536,780 )                              (2,332 )   (539,112 )
                       
GROSS PROFIT       107,055     (2,332 )   104,723  
                       
OPERATING INCOME (EXPENSES)                      
Selling expenses       (20,944 )   -     (20,944 )
General and administrative expenses       (13,241 )   -     (13,241 )
Tax incentive – Fundopem       13,013     -     13,013  
Other operating (expenses) income, net       (4,686 )   -     (4,686 )
                       
PROFIT FROM OPERATIONS BEFORE                      
       FINANCIAL INCOME (EXPENSES)       81,197     (2,332 )   78,865  
                       
FINANCIAL INCOME (EXPENSES)                      
Financial income       10,880     -     10,880  
Financial expenses   (c)   (8,340 )   535     (7,805 )
Exchange gains (losses), net       (288 )   -     (288 )
                       
PROFIT BEFORE INCOME TAX AND SOCIAL                      
       CONTRIBUTION       83,449     (1,797 )   81,652  
                       
INCOME TAX AND SOCIAL CONTRIBUTION                      
Current       (16,213 )   -     (16,213 )
Deferred   (a)(b)(c)(e)   (1,893 )   799     (1,094 )
                       
NET PROFIT FOR THE YEAR       65,343     (998 )   64,345  
                       
       4.4       Reconciliation of net profit
 
          Year ended
      December 31, 2009
Net profit for the year in accordance with        
       Brazilian GAAP     65,343  
Adoption of deemed cost (a)   (2,267 )
Derecognition of deferred charges (b)   722  
Capitalization of interest (c)   535  
Retirement benefit plan (e)   12  
Net profit for the year in accordance with IFRS                             64,345  
         
57
 

 
 
  4.5 Effects of the adoption of the IFRS on the statement of cash flows
                         
            Year ended December 31, 2009    
                Brazilian       Effect of transition          
        GAAP   of IFRS   IFRS
Cash flows from operating activities   (c)   111,093       535     111,628  
Cash flows from investing activities   (c)   (16,020 )                            (535 )   (16,555 )
Cash flows from financing activities       (16,347 )     -     (16,347 )
 
  4.6 Notes to the reconciliation of the effects of the IFRS
              
      a) Deemed Cost
     
    The Company elected to adopt the deemed cost, adjusting the opening balances at the transition date on January 1, 2009. The fair values used in the adoption of the deemed cost were estimated by outside professionals (engineers) and, for this work, these professionals considered information about the use of the valued assets, technological changes occurred and in progress and the economic environment in which they operate, considering the planning and other business particularities of the Company. As part of the adoption of the deemed cost, the Company’s management conducted a valuation of the items included in the classes of land, buildings and machinery and equipment considered relevant, for purposes of adoption of the deemed cost at January 1, 2009. Additionally, the Company conducted a review of the estimated useful lives of these assets, with no changes in relation to the useful lives already used by the Company since 2009.
     
    The effects of the adoption of the deemed cost at January 1, 2009 were:
 
          Balance at   Adjustment due to attribution   Balance at
          12/31/2008       of new cost       01/01/2009
  Class              
               
  Land   1,648   6,423   8,071
  Buildings   13,916   5,577   19,493
  Machinery and equipment   46,140   20,398   66,538
  Total   61,704   32,398   94,102
               
      With effects at January 1, 2009, property, plant and equipment increased by R$ 32,398, deferred income tax and social contribution in non-current liabilities increased by R$ 11,015, and retained earnings in shareholders’ equity increased by R$ 21,383 as a result of the adoption of the deemed cost. The decrease in net profit for 2009 was R$ 2,267.
 
The increases in depreciation expense in the income statements for the years ended December 31, 2010 and 2009 were R$ 3,252 and R$ 3,434, respectively, which caused a decrease in income tax and social contribution expense in those income statements by R$ 1,105 and R$ 1,168, respectively.
 
58
 

 
 
      The Company estimated the effects of the adoption of the deemed cost on the depreciation expense for the current and future years as follows:
 
    Increase in
      Year   depreciation expense
  2009 3,434
  2010 3,252
  2011 2,686
  2012 2,396
  2013 2,172
  2014 2,067
  2015 1,552
  2016 and thereafter 8,416
  Total depreciable items 25,975
  Land (non-depreciable) 6,423
  Total increase due to deemed cost 32,398
     
      b) Deferred charges
   
            In accordance with previous accounting practices, the Company recorded in line item “deferred charges” preoperating expenses and restructuring costs that will contribute to the increase in the result for more than one fiscal year, which are being derecognized at the date of adoption of the new accounting practices. The effect of this change is a decrease in shareholders' equity at December 31, 2009 by R$ 1,778 (R$2,500 at January 1, 2009) and an increase in profit for 2009 by R$722.
   
  c) Capitalization of interest
   
    In accordance with previous accounting practices, borrowing costs related to the construction of qualifying assets were recorded as financial expense in the income statement. With the adoption of IAS 23 – Borrowing Costs, borrowing costs related to the construction of qualifying assets are capitalized to the cost of the asset, during the construction period. The effect of this change is an increase in shareholders’ equity at December 31, 2009 and in profit for 2009 by R$ 535.
   
  d) Employee termination plan
   
    The Company has an employee termination plan, which consists in granting a bonus to the employee at the date of his/her retirement, calculated based on the payment of 1.5 times the nominal salary for the employee at that date. With the adoption of IAS 19 – Employee Benefits, the Company currently accrues the best estimate of the present value of the expected disbursements for this benefit. The effect of this change at January 1 and December 31, 2009 is an increase in deferred tax assets by R$ 52, an increase in non-current liabilities by R$ 153, and a decrease in shareholders’ equity by R$ 101.
   
  e) Retirement benefit plan
   
    The Company is the co-sponsor of the pension fund RANDONPREV, whose benefit plan is a defined contribution plan under the financial capitalization regime, with some benefit supplementations for employees, not covered by the defined contributions. With the adoption of IAS 19 – Employee Benefits, the Company currently recognizes this obligation as a defined benefit plan. Also, at the date of adoption of IFRS, the Company recognized all cumulative gains and losses in its opening balance sheet. The effect of this change is an increase in non-current assets by R$ 435, an increase in deferred tax liabilities by R$ 142, and an increase in shareholders’ equity at December 31, 2009 by R$ 293. In profit for 2009, the effect of this change was an increase by R$ 12 and an increase in other comprehensive income by R$ 281 (resulting in a total increase in comprehensive income by R$ 293).

59
 

 

      f)      Deferred taxes
   
            In accordance with previous accounting practices, deferred taxes on temporary differences were recognized in the balance sheet over their expected period of realization. In accordance with the new accounting practices, these taxes are currently recognized as non-current assets or liabilities.
   
  g) Presentation of the statement of comprehensive income
   
    In accordance with previous accounting practices, there was no requirement to present a statement of comprehensive income, which is required to be prepared since 2009.

5. CASH AND CASH EQUIVALENTS
 
Short-term investments refer to bank certificates of deposit (CDBs), linked to the variation of the interbank certificates of deposit (CDI). The yield on these short-term investments is as follows:
 
    12/31/2010       12/31/2009       01/01/2009
  Cash and banks 1,814   14,205   1,578
  Short-term investments:          
             CDB –   99.50% CDI 5,739   8,528   -
         CDB – 100.00% CDI 126,971   51,151   12,957
         CDB – 100.50% CDI 15,122   10,448   -
         CDB – 100.55% CDI 12,992   27,755   -
         CDB – 101.00% CDI 3,146   -   12,109
         CDB – 102.50% CDI 6,270   -   6,717
         CDB – 104.00% CDI 5,521   -   -
    175,761   97,882   31,783
  Total 177,575   112,087   33,361
             
6. TRADE RECEIVABLES
 
Trade receivables are as follows:
 
          12/31/2010       12/31/2009       01/01/2009
      Trade receivables from third parties – domestic   75,224   64,465   60,470
  Trade receivables from third parties – foreign   274   651   2,772
  Trade receivables from related parties – domestic   11,335   3,226   915
  Trade receivables from related parties – foreign   3,194   3,434   2,816
  Total   90,027   71,776   66,973
               
Trade receivables include amounts that are past due at the end of the reporting period for which the Company has not recognized an allowance for doubtful debts because there has not been a significant change in credit quality and the amounts are still considered recoverable, through negotiation with customers. The aging of past-due trade receivables for which an allowance for doubtful debts was not recorded is as follows:
 
60
 

 

    12/31/2010       12/31/2009       01/01/2009
  1 to 30 days 12,130   7,288   6,098
           31 to 60 days 2,016   636   903
  61 to 90 days 844   1,892   43
  91 to 180 days 1,837   54   60
  Over 180 days 33   2   110
  Past-due amounts 16,860   9,872   7,214
  Falling due amounts 73,167   61,904   59,759
  Total 90,027   71,776   66,973
             
7.  RECOVERABLE TAXES
 
     Recoverable taxes are as follows:
 
    12/31/2010       12/31/2009       01/01/2009
  Federal VAT (IPI) 1,217   1,526   2,126
  State VAT (ICMS) 2,266   7,003   10,255
  Corporate income tax (IRPJ) and social contribution on net          
         profit (CSLL) -   188   767
      ICMS on purchases of property, plant and equipment 1,319   2,905   3,252
  PIS on purchases of property, plant and equipment 99   340   398
  COFINS on purchases of property, plant and equipment 455   1,592   1,836
  Total 5,356   13,554   18,634
             
  Current 4,310   11,252   12,820
  Non-current 1,046   2,302   5,814

Recoverable taxes in non-current assets comprise ICMS, PIS and COFINS on purchases of property, plant and equipment for which the realization, pursuant to current applicable legislation, occurs in 48 monthly installments. Of the ICMS balance, R$ 950 (R$5,423 at December 31, 2009 and R$ 8,456 at January 1, 2009) refers to the purchase of ICMS credit balance from Randon S.A. Implementos e Participações and will be offset pursuant to the schedule prepared by the Rio Grande do Sul State Finance Department.
 
8. INVENTORIES
 
     Inventories comprise:
 
    12/31/2010       12/31/2009       01/01/2009
  Finished products 2,608   4,216   1,998
  Work in process 21,364   18,612   15,944
      Raw materials 25,110   30,356   28,913
  Advances to suppliers 70   31   655
  Imports in transit 4,140   2   4,731
  Total 53,292   53,217   52,241
             
61
 

 

9. PROPERTY, PLANT AND EQUIPMENT
 
     a)       Analysis of balances
 
    12/31/2010       12/31/2009       01/01/2009
      Cost 226,117     207,805     191,742  
  Accumulated depreciation     (101,403 )    (86,400 )         (73,450 )
    124,714           121,405     118,292  
                   
    Annual   12/31/2010   12/31/2009   01/01/2009
    depreciation       Accumulated            
        rate       Cost       depreciation       Net       Net       Net
Land       8,071   -     8,071   8,071   8,071
Buildings   1.44%   39,260   (5,307 )   33,953   32,836   19,493
Machinery and equipment   9.90%   162,587   (88,100 )   74,487   71,385   66,538
Molds and dies   14.13%   11,591   (5,657 )   5,934   6,077   5,133
Furniture and fixtures   9.03%   1,414   (649 )   765   794   776
Vehicles   9.29%   641   (431 )   210   183   231
Computer equipment   24.80%   1,764                 (1,259 )   505   401   542
Advances to suppliers       -   -     -   97   -
Property, plant and equipment                          
       in progress       789   -     789   1,561   17,508
Total       226,117   (101,403 )   124,714   121,405   118,292
                           
     b)       Movement in cost
 
    Balances at                   Balances at
        01/01/2009       Additions       Disposals       Transfers       12/31/2009
Land   8,071   -   -     -     8,071
Buildings   23,323   1,415   -           12,490     37,228
Machinery and equipment   131,802   6,719             (439 )   9,199     147,281
Molds and dies   7,934   2,304   -     -     10,238
Furniture and fixtures   1,218   121   -     -     1,339
Vehicles   550   20   -     -     570
Computer equipment   1,336   84   -     -     1,420
Advances to suppliers   1,909   5   -     (1,817 )   97
Property, plant and equipment in                        
       progress   15,599   5,834   -     (19,872 )   1,561
Total   191,742   16,502   (439 )   -     207,805
                         
    Balances at                   Balances at
    01/01/2010   Additions   Disposals   Transfers   12/31/2010
Land   8,071   -   -     -     8,071
Buildings   37,228   807   -     1,225     39,260
Machinery and equipment   147,281   11,340   -     3,966     162,587
Molds and dies   10,238   1,240   (37 )   150     11,591
Furniture and fixtures   1,339   61   -     14     1,414
Vehicles   570   107   (36 )   -     641
Computer equipment   1,420   301   (6 )   49     1,764
Advances to suppliers   97   384   -     (32 )   449
Property, plant and equipment in                        
       progress   1,561   4,151   -     (5,372 )   340
Total   207,805   18,391   (79 )   -     226,117
                         
62
 

 

     c)       Movement in accumulated depreciation
 
        Balances at                         Balances at
    01/01/2009   Additions   Disposals   12/31/2009
Buildings   (3,831 )   (561 )   -   (4,392 )
Machinery and equipment          (65,263 )        (11,064 )   431          (75,896 )
Molds and dies   (2,801 )   (1,360 )   -   (4,161 )
Furniture and fixtures   (442 )   (103 )   -   (545 )
Vehicles   (319 )   (68 )   -   (387 )
Computer equipment   (794 )   (225 )   -   (1,019 )
Total   (73,450 )   (13,381 )   431   (86,400 )
                       
    Balances at             Balances at
    01/01/2010   Additions   Disposals   12/31/2010
Buildings   (4,392 )   (915 )   -   (5,307 )
Machinery and equipment   (75,896 )   (12,204 )   -   (88,100 )
Molds and dies   (4,161 )   (1,497 )   1   (5,657 )
Furniture and fixtures   (545 )   (104 )   -   (649 )
Vehicles   (387 )   (78 )   34   (431 )
Computer equipment   (1,019 )   (257 )   17   (1,259 )
Total   (86,400 )   (15,055 )   52   (101,403 )
                       
10. INTANGIBLE ASSETS
 
    Annual                              
    amortization   Balance at         Balance at         Balance at
        rate       01/01/2009       Additions       12/31/2009       Additions       12/31/2010
Software:                                    
Cost   15.40%   2,392     53     2,445     102     2,547  
Accumulated amortization               (1,392 )   (284 )           (1,676 )   (294 )          (1,970 )
        1,000              (231 )   769               (192 )   577  
Intangible assets in                                  
       progress       -     -     -     5,815     5,815  
        1,000     (231 )   769     5,623     6,392  
                                   
Intangible Assets refer to software licenses and expenses on the implementation of the Company’s new integrated management system (ERP), for which the beginning of utilization is expected for 2011.
 
63
 

 

11. BORROWINGS AND FINANCING
 
The purpose of the financing was the installation of plants, development of quality processes, export and import financing, and financing of imported machines. The financing was obtained from several Financial Institutions by means of funds raised by these institutions with the National Bank for Economic and Social Development (BNDES).
 
Type:            Financial charges            12/31/2010       12/31/2009       01/01/2009
Import/Export                
ACC – Advances on Exchange                
       Contracts   U.S. dollar (forex) + 5.2% p.a.   -   -   2,416
Financing                
Unibanco - FINAME       -   -   173
BNDES – subcredit A/C   U.S. dollar (forex) + 2.5% p.a.   616   920   1,605
BNDES – subcredit B   URTJLP + 4.5% p.a.   -   3,129   6,876
BNDES – subcredit B   URTJLP + 3% p.a.   7,005   10,007   12,986
BNDES – subcredit C   UMBND + 4.5% p.a.   -   509   1,507
BNDES – subcredit D   URTJLP + 2.5% p.a.   425   607   787
BNDES – subcredit A   URTJLP + 4.5% p.a.       4,595   -
BNDES – subcredit USD   U.S. dollar (forex) + 1.95%p.a.   4,396   -   -
BNDES – subcredit BCDEF   URTJLP + 4.5% p.a.   43,501   30,801   -
BRADESCO – FINEP   TJLP + 0.50 p.a.   9,453   12,018   11,893
BRADESCO – FINEP   5% p.a.   3,859   -   -
BRADESCO - EXIM   TJLP + 5% p.a.   33,260   33,208   12,410
BANCO DO BRASIL - EXIM   Spread 3% + 4.5% p.a.   9,384   -   -
FUNDOPEM – ICMS   IPCA +3% p.a.   9,237   3,367   3,120
Financing of imported machines                
FININP - Banco Bradesco   U.S. dollar (forex) + 7.38% p.a.   551   1,155   2,460
FININP – ABN   YEN (forex) + 2.9% p.a.   -   182   682
FININP – ABN   YEN (forex) + 2.5% p.a.   -   -   486
Total       121,687   100,498   57,401
                 
Current       15,702   11,138   22,555
Non-current       105,985   89,360   34,846

     The maturities of the long-term portions of the financing are as follows:
 
Maturity                 12/31/2010                 12/31/2009                  01/01/2009
2010   -   -   13,578
2011   -   11,895   6,150
2012   47,540   45,462   6,066
2013   23,523   11,265   4,716
2014   11,745   8,543   1,964
2015   10,321   6,843   1,964
2016 and            
thereafter   12,856   5,352   408
Total   105,985   89,360   34,846
             
Financing from BNDES and Banco Votorantim are collateralized by sureties and letter of guarantee of the shareholder Randon S.A. Implementos e Participações.
 
     FUNDOPEM – ICMS
 
Refers to ICMS tax incentives granted to the Company through financing of 60% of the ICMS due every month. This incentive is calculated monthly and is conditioned to the generation of direct and indirect jobs, the making of investments, and the fulfillment of contractual obligations with Banco do Estado do Rio Grande do Sul and Caixa Estadual S.A. – Agência de Fomento.
 
64
 

 

The incentive amounts are subject to the levy of charges at effective rates of 3.00% per annum or 0.246627% per month, plus adjustment for inflation calculated based on the monthly variation of the IPCA/IBGE or another index defined by the Managing Council of FUNDOPEM/RS.
 
The benefit period is for eight years, starting in December 2006 and ending in November 2014, with amount released for use corresponding to 1,946,307.15 FUNDOPEM-RS incentive units (equivalent to R$ 30,907 at December 31, 2010). The benefit has a grace period of 54 months and settlement scheduled to occur 96 months after the end of the grace period, with the last installment on May 21, 2019.
 
12. RELATED-PARTY TRANSACTIONS
 
The transactions and balances with related parties are as follows:
 
      Randon Companies (*)     ArvinMeritor (**)     Total
Balance sheets   12/2010     12/2009     01/2009     12/2010     12/2009     01/2009     12/2010     12/2009     01/2009
Trade receivables   3,385   2,522   1,254   11,144   4,138   2,477   14,529   6,660   3,731
Amounts due from parent company –                                    
       current   369   368   -   -   -   -   369   368   -
Amounts due from parent company – non-                                
       current   114   485   880   -   -   -   114   485   880
                                     
Amounts due to parent company   -   -   2,388   -   -   -   -   -   2,388
                                     
Commissions payable (other payables)   -   -   -   -   511   701   -   511   701
                                     
Trade payables   2,033   6,579   7,513   -   5       2,033   6,584   7,513
Dividends and interest on capital payable   28,158   3,175   17,409   8,864   999   4,761   37,022   4,174   22,170
                                     
Income statements for the year   2010   2009       2010   2009       2010   2009    
Sales of goods and services   203,214   138,637       83,854   13,999       287,068   152,636    
Purchases of goods and services   99,820   51,400       -   -       99,820   51,400    
Purchases of ICMS credits   5,304   3,035       -   -       5,304   3,035    
Financial expenses   -   7       -   -       -   7    
Financial Income   -   -       -   -       -   -    
Commission expenses   344   301       -   -       344   301    
General and administrative expenses   10,103   5,078       -   -       10,103   5,078    

(*) Includes:        Randon S.A. Implementos e Participações (Parent Company), Fras-Le S.A., Fras-Le Argentina S.A., Fras-Le Andina Comercio y Representacion Ltda., Jost Brasil Sistemas Automotivos Ltda., Randon Implementos, Randon Argentina, Suspensys Sistemas Automotivos Ltda., and Castertech Fundição e Tecnologia Ltda.
     
(**) Includes:   ArvinMeritor do Brasil Sistemas Automotivos Ltda., Meritor Automotive Inc., Meritor Heavy Vehicle Systems LLC., Meritor Hvs Ltd, ArvinMeritor Qri,, Arvin Meritor Inc. ArvinMeritor CVS, ArvinMeritor Frankfurt, and Sisamex Sistemas Automotrices.

Management compensation for the year ended December 31 is distributed as follows: nominal salary of R$ 1,068 in 2010 (R$ 910 in 2009) and profit sharing of R$ 959 in 2010 (R$ 1,164 in 2009).
 
Loans with directors and managers are presented under “other payables”, in the amount of R$ 3,707 at December 31, 2010 (R$ 3,379 at December 31, 2009 and R$ 2,585 at January 1, 2009). These balances are inflation-adjusted based on financial market rates (“DI-extra” published by the Brazilian Association of Financial Market Institutions - Andima). Interest expense on these transactions was R$ 344 in 2010 and R$ 301 in 2009.
 
Amounts due to (from) the parent company Randon S.A. Implementos e Participações are subject to financial market rates (“DI-extra” published by Andima).
 
65
 

 

General and administrative expenses refer to the apportionment of corporate costs and administrative assistance services incurred by the parent company Randon S.A. Implementos e Participações.
 
Trading transactions
 
Trading transactions carried out with related parties follow specific prices and terms established in the joint venture agreement between the parties. The trading agreement takes into consideration the term, volume and specificity of the products acquired by the related parties, which are not comparable to those sold to unrelated parties.
 
13. RETIREMENT BENEFIT PLAN
 
The Company is the co-sponsor of the pension fund RANDONPREV, together with other Random companies, whose benefit plan is a defined contribution plan under the financial capitalization regime, with some benefit supplementations for employees, not covered by the defined contributions. This minimum benefit is defined based on a percentage of the nominal salary per annum worked for the Company, credited in a lump sum at the beneficiary’s account with RANDONPREV. The latest valuation of the plan assets and of the present value of the minimum benefit was performed at December 31, 2010, using the projected unit credit method and the determined balance of R$ 657 at December 31, 2010 (R$ 435 at December 31, 2009), corresponding to the Company’s benefit, is recorded in non-current assets.
 
14. RESERVE FOR CONTINGENCIES AND CONTINGENT LIABILITIES
 
The Company, by means of its attorneys, has contested labor and civil lawsuits at the administrative and judicial levels. Based on the opinion of its attorneys, the Company recorded a reserve for contingencies of R$ 150 to cover any probable losses that might result from the outcome of these lawsuits.
 
The position of contingent liabilities at December 31, 2010 is as follows:
 
    Likelihood of loss
Nature of contingent liability       Probable       Possible
Tax   -   8,850
Labor   150   342
Social security   -   4,421
Total   150   13,613
         
The Company is also a party to administrative proceedings for which, based on the opinion of its legal counsel and in conformity with IFRS, no reserve for contingencies was recorded since they were classified as possible likelihood of loss, as follows:
 
Tax
 
a)       
State VAT (ICMS) – the Company received a tax deficiency notice from the Rio Grande do Sul State Finance Department in the original amount of R$ 7,801 for alleged irregularity in the calculation of the ICMS reduction benefit under the “FUNDOPEM/Nosso Emprego” program. The amount includes principal, fine and interest. On January 24, 2007, as a result of the motion to deny filed by the Company, the debt calculations were reperformed by the tax authorities. The value of the matter in controversy was reduced in 2008, due to the judgment of the annulment action filed by the Company, and a new value of R$ 2,277 was attributed, including fine and interest. On December 10, 2010, the authority converted the voluntary penalty, initially typified as basic, applied to the percentage of 60%, into qualified penalty at the percentage of 120%, thus generating a supplementary tax deficiency notice of R$ 415. The Company timely filed a motion to deny.
 
b)  
The Company received a deficiency notice in the inflation-adjusted amount of R$ 5,773, under the allegation of II and IPI debt, related to concession acts provided for in the Drawback special regime. Awaiting expert evidence.
 
66
 

 

Labor
 
Several labor claims mostly related to claims for indemnification.
 
Social security
 
The Company received delinquency notices, related to possible unpaid social security charges on profit sharing, which are in the judgment phase at the Federal Revenue Office, assessed as likelihood of possible loss, for which the inflation-adjusted amount is R$ 4,421.
 
15. FINANCIAL INSTRUMENTS
 
The estimated fair values of the Company's financial assets and liabilities were determined based on available market information and appropriate valuation methodologies. However, considerable judgment was required in interpreting market data to produce the most adequate estimate of the fair value. As a consequence, the following estimates do not necessarily indicate the amounts that could be realized in a current exchange market. The use of different market methodologies may have a material effect on the estimated fair values.
 
These instruments are managed by means of operating strategies aimed at liquidity, profitability and security. The control policy consists in ongoing monitoring of contracted rates against market rates. The Company does not make speculative investments in derivatives or any other risk assets.
 
Analysis of balances
 
The carrying amounts and fair values of financial instruments included in the balance sheet are identified below:
 
      12/31/2010   12/31/2009   01/01/2009
          Carrying   Fair   Carrying   Fair   Carrying   Fair
  Description         amount       value       amount       value       amount       value
  Cash equivalents (1)   175,761   175,761   97,882   97,882   31,783   31,783
  Trade receivables (2)   90,027   90,027   71,776   71,776   66,973   66,973
  Borrowings and financing: (3)                        
         In local currency   116,124   116,124   93,137   93,137   48,245   48,245
         In foreign currency   5,563   5,563   7,361   7,361   9,156   9,156

        (1)        Designated at fair value through profit or loss
   
  (2)   Loans and receivables measured at amortized cost
   
  (3)   Financial liabilities measured at amortized cost
 
Financial instruments that are recognized in the financial statements at their carrying amount are substantially similar to the amount that would be obtained if they were traded in the market. However, as they do not have an active market, there can be variations if the Company decides to settle them in advance.
 
The fair value measurement of the derivate transactions were derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
 
The Company is exposed to the following risks associated to its operating and financing activities, including the utilization of its financial instruments:
       
              i.        credit risk
   
         ii.   foreign exchange rate risk
   
         iii.   interest rate risk
   
         iv.   price risk
67
 

 

 
The Company, through its Parent Company, has a Currency Hedge Policy, prepared by the Planning and Finance Committee and approved by the Executive Officers. The purpose of the policy is to standardize the procedures of the group Companies, in order to define responsibilities and limits in transactions involving currency hedge, reducing the effects of foreign currency exchange rates on the inflows in foreign currency projected by the cash flow, without speculative purposes.
 
The basis used is the cash flow in foreign currency projected monthly for the following twelve months, based on the Strategic Plan projections or on the current expectation of each group Company. The instruments used are conservative and previously approved by the same committee. For the years ended December 31, 2010 and 2009, the Company did not enter into any transactions involving derivative financial instruments.
     
       a)      
Credit risk
     
   
The Company's sales policies are contingent on the credit policies defined by Management and are intended to minimize eventual problems arising from the default of its customers. This objective is achieved by Management by means of a strict selection of the customer portfolio, which considers the ability to pay (credit analysis). The concentration of credit risk is limited due to the fact that the customer base is large and unrelated.
     
       b)  
Foreign exchange rate risk
     
   
The Company’s results are subject to significant variations, due to the effects of the volatility of the exchange rate on assets and liabilities denominated in foreign currencies, mainly the US dollar, which closed the year with a negative variation of 4.31% (negative variation of 25.49% in 2009).
     
   
The Company is exposed to currency risk (foreign exchange risk) on sales, purchases and borrowings that are denominated in a currency different from the Company’s functional currency, the Real.
     
   
The Company’s net exposure to foreign exchange rate risk at the end of the reporting period is as follows:
 
        12/31/2010       12/31/2009       01/01/2009
A. Financing           (5,563 )           (7,361 )           (10,055 )
B. Trade and other receivables   7,993     4,527     12,234  
C. Net exposure (A+B)   2,430     (2,834 )   2,179  
                   
       
An eventual appreciation of the Real by 2% against the US dollar at December 31, 2011 would increase the profit by R$ 49. This analysis is based on the variation of the foreign currency exchange rate that the Company considered in its strategic planning. The analysis considers that all other variables, especially interest rates, are kept constant.
     
   
An eventual depreciation of the Real against the US dollar at December 31, 2011 would have the same effect, although with an opposite result, considering that all other variables would remain constant.
     
       c)  
Interest rate risk
     
   
The Company’s result is subject to significant variations due to borrowings and financing contracted at floating interest rates.
     
   
The Company does not have derivative financial instruments to manage its exposure to interest rates.
     
   
Pursuant to its financial policies, the Company has not entered into any transactions involving financial instruments for speculative purposes.
     
   
An increase of 1% in annual interest rates would have increased the Company’s borrowings and financing balance by R$ 1,225 at December 31, 2010 (R$ 626 at December 31, 2009 and R$ 408 at January 1, 2009).
 
68
 

 

       d)        Price risk
 
    Arises from the possibility of fluctuations in the market prices of products sold or produced by the Company and of other inputs used in the production process. These price fluctuations may cause substantial changes in the Company’s revenues and costs. In order to mitigate these risks, the Company conducts an ongoing monitoring of local and foreign markets, seeking to anticipate price movements.
 
16. CAPITAL
 
Subscribed capital is represented by 100,000 shares in the total amount of R$ 71,291, distributed among the shareholders as shown in the table below for 2010 and 2009.
 
Shareholder       Shares       R$       %
Master Sistemas Automotivos Ltda.   53,177   37,910   53.177
Meritor Heavy Vehicle Systems, LLC.   23,942   17,069   23.942
Randon S.A. Implementos e Participações   22,881   16,312   22.881
Total   100,000   71,291   100.00
             
17. TAX INCENTIVE RESERVE
 
Represents tax incentives received in 2010 (up to October) and 2009, respectively, in the amounts of R$ 11,763 and R$ 13,013, under the FUNDOPEM/NOSSO EMPREGO program. This ICMS reduction benefit granted to the Company is calculated monthly and is conditioned to the generation of direct and indirect jobs in the Rio Grande do Sul State. The tax incentives received were recognized in profit for the year as they were received. In October 2010 the benefit period ended and, therefore, in 2011 the Company will no longer have this tax reduction.
 
18. DIVIDENDS AND INTEREST ON CAPITAL
 
Dividends
 
As established in the joint venture agreement and ratified by the shareholders in the minutes of meeting for approval of the profit allocation, Randon S.A. is entitled to receive, through disproportionate dividend, the amount corresponding to the Fundopem tax benefit.
 
Of the remaining profit for the year, the articles of association establish the distribution of 33.3% of such profit as mandatory dividend. After excluding the amounts already paid as interest on capital during the year, R$ 18,996 was accrued in 2010 (R$13,535 in 2009).
 
In addition to the mandatory minimum dividend (calculated considering the amounts already paid as interest on capital during the year), in 2010 the Company’s shareholders approved the distribution of R$ 18,146 as dividends from prior years (R$ 10,300 in 2009).
 
Interest on capital
 
For the year ended December 31, 2010, the Company recorded interest on capital of R$ 9,591 (R$ 8,635 for the year ended December 31, 2009), using as a basis the TJLP rate for the period from January to December of each year, applied to shareholders’ equity, considering the higher of 50% of the profit for the year before income tax or 50% of the retained earnings.
 
As provided for in the tax legislation, the amount recorded as interest on capital was fully deducted in the calculation of income tax and social contribution, and the tax benefit from this deduction was R$ 3,261 (R$ 2,936 for the year ended December 31, 2009). For purposes of conformity of the presentation of the financial statements, such interest was treated as distribution of profits and presented as reduction of retained earnings, in shareholders’ equity.
 
69
 

 

19. SALES REVENUE
 
The reconciliation between the revenue recognized for tax purposes and the revenue presented in the income statement for the year is as follows:
 
        2010       2009
Gross revenue for tax purposes   1,329,645     864,899  
Less:            
      Taxes on sales   (303,666 )   (200,475 )
            Sales returns   (8,770 )   (13,263 )
            Discount to present value on installment sales   (7,919 )   (5,634 )
Difference of criterion for accounting recognition (a)   1,983     (1,692 )
Net revenue recognized in the income statement   1,011,273     643,835  
             
(b)       Refers to the difference of criterion for recognition of sales of goods for tax purposes (based on invoice issuance) and the accounting policy for revenue recognition detailed in note 3.4.
 
20. EXPENSES BY NATURE
 
As required by corporate law, the Company is required to present the income statement by function. Therefore, the analysis of operating expenses by nature is as follows:
 
        2010       2009
Raw materials and auxiliary materials   714,656   447,922
Depreciation and amortization   15,349   13,665
Personnel   69,763   50,449
Production freight   4,383   2,855
Freight on sales   23,347   12,904
Costs of third-party services   23,030   15,550
Other expenses   54,341   34,638
Total   904,869   577,983
     
These expenses were classified as follows in the income statement (presented by function):    
     
    2010   2009
Cost of sales and services   839,460   539,112
Selling expenses   34,721   20,944
General and administrative expenses   19,498   13,241
Other operating expenses, net   11,190   4,686
Total   904,869   577,983
         
70
 

 

21. INCOME TAX AND SOCIAL CONTRIBUTION
 
Income tax and social contribution expense
 
The income tax and social contribution expense for the years ended December 31 is reconciled at statutory rates, as follows:
 
    2010   2009
    Income   Social   Income   Social
        tax       contribution       tax       contribution
Profit before income tax                        
       and social contribution   124,091             124,091     81,652               81,652  
Applicable rate   25%     9%     25%     9%  
Income tax and social contribution                        
       at nominal rates   31,023     11,168     20,413     7,349  
Effect of taxes on:                        
       Interest on capital expense   (2,398 )   (863 )   (2,159 )   (777 )
       Industrial development program   (2,400 )   (864 )   (1,859 )   (670 )
       Tax incentive – Fundopem   (2,941 )   (1,059 )   (3,253 )   (1,171 )
       Other   301     9     (212 )   76  
    (7,438 )   (2,777 )     (7,483 )   (2,542 )
                         
Income tax and social contribution                        
       before deductions   23,585     8,391     12,930     4,807  
Income tax deductions and other                        
       adjustments   (1,103 )   -     (430 )   -  
Income tax and social contribution                        
       expense   22,482     8,391     12,500     4,807  
                         
Current income tax and social                        
       contribution   23,270     9,123     11,408     4,804  
Deferred income tax and social                        
       contribution   (788 )   (732 )   1,092     3  

Analysis of deferred income tax and social contribution
 
    12/31/2010   12/31/2009   01/01/2009
    Temporary   Deferred   Temporary   Deferred   Temporary   Deferred
Temporary differences         difference       taxes       difference       taxes       difference       taxes
Accrued profit sharing:                                    
       - Employees   2,988     1,016     2,384     811     3,353     1,140  
       - Directors   1,680     151     939     85     850     77  
       - Officers   3,005     1,022     1,784     606     2,450     833  
Reserve for contingencies   150     51     136     46     136     46  
Provision for warranty claims   2,135     726     1,689     574     1,274     433  
Provision for employee termination   203     69     152     52     152     52  
Deferred asset recorded for tax purposes   1,222     422     2,201     422     3,294     794  
Other temporary additions   3,133     1,066     1,211     412     810     275  
Total Assets         4,523           3,008           3,650  
                                     
Incentive depreciation Law 11774         (10,720 )         (2,680 )           (6,491 )         (1,623 )   -     -  
Cost attributed to property, plant and                                    
       equipment   (25,712 )   (8,742 )   (28,964 )   (9,848 )         (32,398 )        (11,015 )
Retirement benefit plan   (639 )   (217 )   (417 )   (142 )   -     -  
Total Liabilities         (11,639 )         (11,613 )         (11,015 )
                                     
71
 

 

Movement in deferred income tax and social contribution
 
                Recognized      
          Recognized   in other      
    Balances at   in profit   comprehensive   Balances at
Temporary differences         01/01/2009       for the year       income       12/31/2009
Accrued profit sharing:                        
       - Employees   1,140     (329 )   -     811  
       - Directors   77     8     -     85  
       - Officers   833     (227 )   -     606  
Reserve for contingencies   46     -     -     46  
Provision for warranty claims   433     141     -     574  
Provision for employee termination   52     -     -     52  
Deferred asset recorded for tax purposes   794     (372 )   -     422  
Other temporary additions   275     137     -     412  
    3,650                 3,008  
                         
Incentive depreciation Law 11774   -     (1,623 )         (1,623 )
Cost attributed to property, plant and                        
       equipment   (11,015 )   1,167     -     (9,848 )
Retirement benefit plan   -     3                        (145 )   (142 )
    (11,015 )                      (11,613 )
                         
Total recognized in the year         (1,095 )   (145 )      
                         
                Recognized      
          Recognized   in other      
    Balances at   in profit   comprehensive   Balances at
Temporary differences     01/01/2010   for the year   income   12/31/2010
Accrued profit sharing:                        
       - Employees   811     205     -     1,016  
       - Directors   85     66     -     151  
       - Officers   606     416     -     1,022  
Reserve for contingencies   46     5     -     51  
Provision for warranty claims   574     152     -     726  
Provision for employee termination   52     17     -     69  
Deferred asset recorded for tax purposes   422     -     -     422  
Other temporary additions   412     654     -     1,066  
    3,008                 4,523  
                         
Incentive depreciation Law 11774            (1,623 )            (1,057 )   -     (2,680 )
Cost attributed to property, plant and                        
       equipment   (9,848 )   1,106     -     (8,742 )
Retirement benefit plan   (142 )   (44 )   (31 )   (217 )
    (11,613 )               (11,639 )
                         
Total recognized in the year         (1,520 )   (31 )      
                         
72
 

 

22. FINANCIAL INCOME (EXPENSES)
 
Financial income (expenses), net for the years ended December 31 are as follows:
 
         2010      2009
  Financial income          
         Yield on short-term investments 10,982     5,010  
         Interest received and discounts obtained 243     157  
         Discount to present value of trade receivables 7,919     5,713  
    19,144     10,880  
             
  Financial expenses          
         Interest on borrowings and financing (8,340 )   (5,491 )
         Bank expenses (171 )   (124 )
         Other (253 )   (218 )
         Discount to present value of trade payables (4,071 )   (2,507 )
    (12,835 )   (8,340 )
         Less: Borrowing costs capitalized to qualifying assets -     535  
         Expense recognized in the income statement (12,835 )   (7,805 )
             
  Exchange rate change          
         Exchange gains 2,652     2,828  
         Exchange losses (3,037 )   (3,116 )
    (385 )   (288 )
             
  Financial income (expenses), net 5,924     2,787  
             
The weighted average interest rate on borrowings and financing obtained was approximately 5.5% for the year ended December 31, 2009.
 
73
 

 

(2)        Financial Statement Schedule for the years ended September 30, 2010, 2009 and 2008. The following schedule was filed as part of the Annual Report filed with the SEC on November 24, 2010:
     
   
Schedule II - Valuation and Qualifying Accounts
 
Schedules not filed with this Annual Report on Form 10-K/A are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or related notes.
 
(3)
      
Exhibits
 
3-a        Restated Articles of Incorporation of ArvinMeritor, filed as Exhibit 4.01 to ArvinMeritor’s Registration Statement on Form S-4, as amended (Registration Statement No. 333-36448) ("Form S-4"), is incorporated by reference.
     
3-b   By-laws of ArvinMeritor, filed as Exhibit 3 to ArvinMeritor's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2003 (File No. 1-15983), is incorporated by reference.
     
4-a   Indenture, dated as of April 1, 1998, between ArvinMeritor and The Bank of New York Mellon Trust Company (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4 to Meritor's Registration Statement on Form S-3 (Registration No. 333-49777), is incorporated by reference.
     
4-b   First Supplemental Indenture, dated as of July 7, 2000, to the Indenture, dated as of April 1, 1998, between ArvinMeritor and The Bank of New York Mellon Trust Company (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4-b-1 to ArvinMeritor's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 1-15983) (“2000 Form 10-K”), is incorporated herein by reference.
     
4-b-1   Third Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of April 1, 1998, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee (including Subsidiary Guaranty dated as of June 23, 2006), filed as Exhibit 4.2 to ArvinMeritor’s Current Report on Form 8-K, dated June 23, 2006 and filed on June 27, 2006 (File No. 1-15983)(“June 23, 2006 Form 8-K”), is incorporated herein by reference.
     
4-b-2   Fourth Supplemental Indenture, dated as of March 3, 2010, to the Indenture, dated as of April 1, 1998, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to The Chase Manhattan Bank), as trustee (including form of the Company’s 10.625% Notes due 2018 and form of subsidiary guaranty), filed as Exhibit 4 to ArvinMeritor’s Form 8-K filed on March 3, 2010 is incorporated herein by reference.
     
4-c   Indenture dated as of July 3, 1990, as supplemented by a First Supplemental Indenture dated as of March 31, 1994, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to Harris Trust and Savings Bank), as trustee, filed as Exhibit 4-4 to Arvin's Registration Statement on Form S-3 (Registration No. 33-53087), is incorporated herein by reference.
     
4-c-1   Second Supplemental Indenture, dated as of July 7, 2000, to the Indenture dated as of July 3, 1990, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to Harris Trust and Savings Bank), as trustee, filed as Exhibit 4-c-1 to the 2000 Form 10-K, is incorporated herein by reference.
     
4-c-2   Fourth Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of July 3, 1990, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company as successor to Harris Trust and Savings Bank), as trustee (including Subsidiary Guaranty dated as of June 23, 2006), filed as Exhibit 4.3 to the June 23, 2006 Form 8-K, is incorporated herein by reference.
     
4-d   Indenture, dated as of March 7, 2006, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company), as trustee, filed as Exhibit 4.1 to ArvinMeritor’s Current Report on Form 8-K, dated March 7, 2006 and filed on March 9, 2006 (File No. 1-15983), is incorporated herein by reference.
     
4-d-1  
First Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of March 7, 2006, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to BNY Midwest Trust Company), as trustee (including Subsidiary Guaranty dated as of June 23, 2006), filed as Exhibit 4.1 to the June 23, 2006 Form 8-K, is incorporated herein by reference.

74
 

 

4-e        Indenture, dated as of February 8, 2007, between ArvinMeritor and The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York Trust Company, N.A.), as trustee (including form of Subsidiary Guaranty dated as of February 8, 2007), filed as Exhibit 4-a to ArvinMeritor’s Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2007 (File No. 1-15983), is incorporated herein by reference.
     
10-a   Credit Agreement, dated as of June 23, 2006, by and among ArvinMeritor, ArvinMeritor Finance Ireland, the institutions from time to time parties thereto as lenders, JP Morgan Chase Bank, National Association, as Administrative Agent, Citicorp North America, Inc. and UBS Securities LLC, as Syndication Agents, ABN AMRO Bank N.V., BNP Paribas and Lehman Commercial Paper Inc., as Documentation Agents, and J.P. Morgan Securities Inc. and Citigroup Global Markets, as Joint Lead Arrangers and Joint Book Runners, filed as Exhibit 10.1 to the June 23, 2006 Form 8-K, is incorporated herein by reference.
     
10-a-1   Subsidiary Guaranty, dated as of June 23, 2006, by and among the subsidiary guarantors and JPMorgan Chase Bank, National Association, as Administrative Agent, for the benefit of itself, the lenders and other holders of guaranteed obligations, filed as Exhibit 10.2 to the June 23, 2006 Form 8-K, is incorporated herein by reference.
     
10-a-2   Pledge and Security Agreement, dated as of June 23, 2006, by and among ArvinMeritor, the subsidiaries named therein and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10.3 to the June 23, 2006 Form 8-K, is incorporated by reference.
     
10-a-3   Amendment No. 1 to Credit Agreement, dated as of February 23, 2007, among ArvinMeritor, the financial institutions party thereto and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10 to the Current Report on Form 8-K dated and filed on February 23, 2007 (File No. 1-15983), is incorporated herein by reference.
     
10-a-4   Amendment No. 2 to Credit Agreement, dated as of October 2, 2007, among ArvinMeritor, the financial institutions party thereto and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10 to the Current Report on Form 8-K dated October 2, 2007 and filed on October 3, 2007 (File No. 1-15983), is incorporated by reference.
     
10-a-5   Amendment No. 3 to Credit Agreement, dated as of October 26, 2007, among ArvinMeritor, the financial institutions party thereto and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10 to the Current Report on Form 8-K dated October 26, 2007 and filed on October 30, 2007 (File No. 1-15983), is incorporated herein by reference.
     
10-a-6   Amendment No. 4 to Credit Agreement, dated as of December 10, 2007, among ArvinMeritor, the financial institutions party thereto and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10 to the Current Report on Form 8-K filed on December 11, 2007 is incorporated herein by reference.
     
10-a-7   Amendment No. 5 to Credit Agreement, dated as of February 5, 2010, among ArvinMeritor, AFI, the financial institutions party thereto and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10a to ArvinMeritor’s Form 8-K filed on February 10, 2010 is incorporated herein by reference.
     
*10-b-1   1997 Long-Term Incentives Plan, as amended and restated, filed as Exhibit 10 to ArvinMeritor’s Current Report on Form 8-K dated and filed on April 20, 2005 (File No. 1-15983), is incorporated by reference.
     
*10-b-2   Form of Restricted Stock Agreement under the 1997 Long-Term Incentives Plan, filed as Exhibit 10-a-2 to Meritor’s Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 1-13093), is incorporated herein by reference.
     
*10-b-3   Form of Option Agreement under the 1997 Long-Term Incentives Plan, filed as Exhibit 10(a) to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (File No. 1-13093), is incorporated herein by reference.

75
 

 

*10-b-4        Form of Performance Share Agreement under the 1997 Long-Term Incentives Plan, filed as Exhibit 10-b to ArvinMeritor’s Current Report on Form 8-K, dated December 7, 2004 and filed on December 9, 2004 (File No. 1- 15983), is incorporated herein by reference.
     
*10-b-5   Description of Performance Goals Established in connection with 2009-2011 Cash Performance Plan under the 1997 Long-Term Incentives Plan, filed as Exhibit 10-a to ArvinMeritor’s Current Report on Form 8-K, dated December 9, 2008 (File No. 1-15983), is incorporated herein by reference.
     
*10-b-6   Description of Performance Goals for fiscal year 2011 Established in connection with Cash Performance Plans under Long Term Incentive Plans.
     
*10-b-7   Description of Annual Incentive Goals Established for Fiscal year 2011 under the Incentive Compensation Plan.
     
*10-b-7a
 
Description of Performance Goals established in connection with 2010-2012 Cash Performance Plan, filed as Exhibit 10-b to Current Report on Form 8-K filed on November 12, 2009 is incorporated herein by reference.
     
*10-c   2007 Long-Term Incentive Plan, as amended, filed as Exhibit 10-a to ArvinMeritor’s Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2007 (File No. 1-15983), is incorporated herein by reference.
     
*10-c-1   Form of Restricted Stock Agreement under the 2007 Long-Term Incentive Plan, filed as Exhibit 10-c-1 to ArvinMeritor’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 is incorporated herein by reference.
     
*10-d   Description of Compensation of Non-Employee Directors, filed as Exhibit 10-d to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
*10-e   2004 Directors Stock Plan, filed as Exhibit 10-a to ArvinMeritor’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2004 (File No. 1-15983), is incorporated herein by reference.
     
*10-e-1   Form of Restricted Share Unit Agreement under the 2004 Directors Stock Plan, filed as Exhibit 10-c-3 to ArvinMeritor’s Annual Report on Form 10-K for the fiscal year ended October 3, 2004 (File No. 1-15983), is incorporated herein by reference.
     
*10-e-2   Form of Restricted Stock Agreement under the 2004 Directors Stock Plan, filed as Exhibit 10-c-4 to ArvinMeritor’s Annual Report on Form 10-K for the fiscal year ended October 2, 2005 (Filed No. 1-15983), is incorporated herein by reference.
     
*10-e-3   Option Agreement under the 2007 Long-Term Incentive Plan between ArvinMeritor and Charles G. McClure filed as Exhibit 10-c to ArvinMeritor’s Quarterly report on Form 10-Q for the quarterly period ended June 30, 2008 is incorporated herein by reference.
     
*10-e-4   Restricted Stock Agreement under the 2007 Long-term Incentive Plan between ArvinMeritor and Charles G. McClure filed as Exhibit 10-d to ArvinMeritor’s Quarterly Report on form 10-Q for the quarterly period ended June 30, 2008 is incorporated herein by reference.
     
*10-e-5   Letter Agreement, dated January 15, 2010, with former executive officer filed as Exhibit 10.1 to ArvinMeritor’s Report on Form 10-Q for the fiscal quarter ended January 3, 2009 is incorporated herein by reference.
     
*10-e-6   Form of Restricted Stock Unit Agreement for Employees under 2010 Long-Term Incentive Plan filed as Exhibit 10.2 to ArvinMeritor’s Report on Form 10-Q for the fiscal quarter ended January 3, 2009 is incorporated herein by reference.
     
*10-e-7   Form of Restricted Stock Unit Agreement for Employees under 2010 Long-Term Incentive Plan filed as Exhibit 10.3 to ArvinMeritor’s Report on Form 10-Q for the fiscal quarter ended January 3, 2009 is incorporated herein by reference.
     
*10-e-8   Form of Restricted Stock Unit Agreement for Employees under 2010 Long-Term Incentive Plan filed as Exhibit 10.4 to ArvinMeritor’s Report on Form 10-Q for the fiscal quarter ended January 3, 2009 is incorporated herein by reference.

76
 

 

*10-e-9        2010 Long-Term Incentive Plan filed as Exhibit 10.5 to ArvinMeritor’s Report on Form 10-Q for the fiscal quarter ended January 3, 2009 is incorporated herein by reference.
     
*10-f   Incentive Compensation Plan, as amended and restated, filed as Exhibit 10.6 to ArvinMeritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2010, is incorporated herein by reference.
     
*10-f-1   Form of Deferred Share Agreement, filed as Exhibit 10-a to ArvinMeritor’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2005 (File No. 1-15983), is incorporated herein by reference.
     
*10-g   Copy of resolution of the Board of Directors of ArvinMeritor, adopted on July 6, 2000, providing for its Deferred Compensation Policy for Non-Employee Directors, filed as Exhibit 10-f to the 2000 Form 10-K, is incorporated herein by reference.
     
*10-h   Deferred Compensation Plan, filed as Exhibit 10-e-1 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 1-13093), is incorporated by reference.
     
*10-i   1998 Stock Benefit Plan, as amended, filed as Exhibit (d)(2) to ArvinMeritor's Schedule TO, Amendment No. 3 (File No. 5-61023), is incorporated herein by reference.
     
*10-j   Employee Stock Benefit Plan, as amended, filed as Exhibit (d)(3) to ArvinMeritor’s Schedule TO, Amendment No. 3 (File No. 5-61023), is incorporated herein by reference.
     
*10-k   1988 Stock Benefit Plan, as amended, filed as Exhibit 10 to Arvin's Quarterly Report on Form 10-Q for the quarterly period ended July 3, 1988, and as Exhibit 10(E) to Arvin's Quarterly Report on Form 10-Q for the quarterly period ended July 4, 1993 (File No. 1-302), is incorporated herein by reference.
     
10-l   Loan and Security Agreement dated as of September 8, 2009 among ArvinMeritor Receivables Corporation, ArvinMeritor, Inc., GMAC Commercial Finance LLC, and the Lenders from time to time party thereto (the "Loan Agreement"), dated September 8, 2009 and filed as exhibit 10a to ArvinMeritor’s Current Report on Form 8-K filed on September 10, 2009, is incorporated herein by reference.
     
10-l-1   First Amendment dated as of October 14, 2010 to the Loan Agreement dated as of September 8, 2009 by and among ArvinMeritor Receivables Corporation, ArvinMeritor, Inc., GMAC Commercial Finance LLC, and the Lenders from time to time party thereto filed as exhibit 10a to the Current Report on Form 8-K filed on October 18, 2010 is incorporated herein by reference.
     
10-m   Third Amended and Restated Purchase and Sale Agreement dated as of September 8, 2009 (the "Purchase Agreement") among ArvinMeritor Receivables Corporation and Meritor Heavy Vehicle Braking Systems (U.S.A.), Inc. and Meritor Heavy Vehicle Systems LLC, filed as exhibit 10b to ArvinMeritor’s Current Report on Form 8-K, dated September 8, 2009 and filed on September 10, 2009, is incorporated herein by reference.
     
10-m-1   Second Amendment dated as of October 29, 2010 to Loan Agreement dated as of September 8, 2009, as amended, by and among ArvinMeritor, Inc., ArvinMeritor Receivables Corporation, the Lenders from time to time party thereto and, GMAC Commercial Finance LLC, AS Administrative Agent filed as exhibit 10a to the Current Report on Form 8-K, dated October 29, 2010 and filed on November 2, 2010 is incorporated herein by reference.
     
10-m-2   First Amendment to Third Amended and Restated Purchase and Sale Agreement dated as of October 29, 2010 (the “Purchase Agreement”) among ArvinMeritor Receivables Corporation and Meritor Heavy Vehicle Braking Systems (U.S.A.), Inc. and Meritor Heavy Vehicles Systems LLC filed as exhibit 10b to the Current Report on Form 8-K, dated October 29, 2010 and filed on November 2, 2010 is incorporated herein by reference.
     
*10-n   Employment agreement between the company and Charles G. McClure, Jr., dated as of September 14, 2009, filed as Exhibit 10n to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009 is incorporated herein by reference.
     
*10-o   Employment agreement between the company and James D. Donlon, III, filed as Exhibit 10b to ArvinMeritor’s Current Report on Form 8-K, dated September 14, 2009 and filed on September 18, 2009 (File No. 1-15983), is incorporated by reference.

77
 

 

*10-q        Employment agreement, dated August 23, 2006, between ArvinMeritor and Carsten J. Reinhardt, dated as of September 14, 2009 filed as Exhibit 10-q to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009 is incorporated herein by reference.
     
*10-r   Employment agreement, dated as of September 14, 2009, between ArvinMeritor and Jeffrey A. Craig, filed as Exhibit 10-r to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009 is incorporated herein by reference.
     
*10-s   Employment agreement, dated as of September 14, 2009, between ArvinMeritor and Vernon Baker filed as Exhibit 10-s to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009 is incorporated herein by reference.
     
*10-t   Employment agreement, dated as of September 14, 2009, between ArvinMeritor and Mary Lehmann filed as Exhibit 10-t to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009, is incorporated herein by reference.
     
*10-u   Employment agreement, dated as of September 14, 2009, between ArvinMeritor and Lin Cummins filed as Exhibit 10-u to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009 is incorporated herein by reference.
     
*10-v   Employment agreement, dated as of September 14, 2009, between ArvinMeritor and Barbara Novak filed as Exhibit 10-v to ArvinMeritor’s Form 10-K for the fiscal year ended September 27, 2009 is incorporated herein by reference.
     
*10-w   Form of employment letter between ArvinMeritor and its executives, filed as Exhibit 10-a to ArvinMeritor’s Current Report on Form 8-K, dated September 14, 2009 and filed on September 18, 2009 (File No. 1-15983), is incorporated by reference.
     
*10-w-1   Letter Agreement dated as of July 1, 2010 between ArvinMeritor and Larry Ott filed as Exhibit 10 to ArvinMeritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2010 is incorporated herein by reference.
     
*10-w-2   Employment Agreement between ArvinMeritor and Larry Ott dated as of August 3, 2010 filed as Exhibit 10-1 to ArvinMeritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2010 is incorporated herein by reference.
     
*10-w-3   Employment Agreement between ArvinMeritor and Timothy Bowes dated as of April 28, 2010 filed as Exhibit 10-1 to ArvinMeritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2010 is incorporated herein by reference.
     
*10-w-4   Employment Agreement between ArvinMeritor, Inc. and Joseph Mejaly dated as of April 28, 2010 filed as Exhibit 10-2 to ArvinMeritor’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2010 is incorporated herein by reference.
     
10-x   Receivables Purchase Agreement dated November 19, 2007 between ArvinMeritor CVS Axles France and Viking Asset Purchaser and CitiCorp Trustee Company Limited, filed as Exhibit 10-t to ArvinMeritor’s Report on Form 10-K for the fiscal year ended September 30, 2008 is incorporated herein by reference.
     
10-y   Receivables Purchase Agreement dated March 13, 2006 between Meritor HVS AB and Nordic Finance Limited and CitiCorp Trustee Company Limited filed as Exhibit 10-u to ArvinMeritor’s Report on Form 10-K for the fiscal year ended September 30, 2008 is incorporated herein by reference.
     
10-z   Amendment, dated July 25, 2007, to Receivables Purchase Agreement dated March 13, 2006 between Meritor HVS AB and Nordic Finance Limited and CitiCorp Trustee Company Limited filed as Exhibit 10-v to ArvinMeritor’s Report on Form 10-K for the fiscal year ended September 30, 2008 is incorporated herein by reference.
     
10-zz   Purchase and Sale Agreement dated August 4, 2009 among ArvinMeritor, Iochpe-Maxion, S.A. and the other parties listed therein, filed as Exhibit 10 to ArvinMeritor’s Report on Form 10-Q for the Quarter ended June 28, 2009 is incorporated by reference.

78
 

 

12        Computation of ratio of earnings to fixed charges, filed as Exhibit 12 to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
21   List of subsidiaries of ArvinMeritor, Inc., filed as Exhibit 21 to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
23-a   Consent of Vernon G. Baker, II, Esq., Senior Vice President and General Counsel, filed as Exhibit 23-a to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
23-b   Consent of Deloitte & Touche LLP, independent registered public accounting firm, filed as Exhibit 23-b to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
23-c   Consent of Bates White LLC, filed as Exhibit 23-c to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
23-d   Consent of Deloitte Touche Tohmatsu Auditores Independentes relating to the financial statements of Master Sistemas Automotivos Ltda. #
     
23-e   Consent of Deloitte Touche Tohmatsu Auditores Independentes relating to the financial statements of Suspensys Sistemas Automotivos Ltda. #
     
24   Power of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of ArvinMeritor, filed as Exhibit 24 to ArvinMeritor’s 2010 Form 10-K for the fiscal year ended October 3, 2010, is incorporated herein by reference.
     
31-a   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act. #
     
31-b   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act. #
     
32-a   Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350. #
     
32-b   Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350. #

____________________
 
*        Management contract or compensatory plan or arrangement.
     
#   Filed herewith.

79
 

 

SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  MERITOR, INC.
   
  By:   /s/  Jeffrey A. Craig  
    Jeffrey A. Craig
    Senior Vice President and Chief Financial Officer

Date: June 28, 2011
 
80