TAM S.A. 6-K 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
THROUGH November, 2009(Commission File No. 1-32826)
(Exact name of Registrant as specified in its Charter)
Av. Jurandir, 856 Lote 4, 1° andar
04072-000 São Paulo, São Paulo
Federative Republic of Brazil
(Address of Regristrant's principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the
If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
REPORT OF INDEPENDENT ACCOUNTANTS ON LIMITED REVIEWS
To the Board of Directors and Stockholders
São Paulo, November 11, 2009
Carlos Alberto de Sousa
The accompanying notes are an integral part of this condensed consolidated interim financial information.
The accompanying notes are an integral part of this condensed consolidated interim financial information.
The accompanying notes are an integral part of this condensed consolidated interim financial information.
TAM S.A. ("TAM" or the "Company") was incorporated on May 12, 1997, to invest in companies which carry out air transportation activities. The Company wholly owns TAM Linhas Aéreas S.A. ("TLA"), a company that operates in the transportation of passengers and cargo in Brazil and on international routes, and 94.98% of Transportes Aéreos del Mercosur S.A. ("Mercosur"), an airline headquartered in Assunción, Paraguay, which operates in Paraguay, Argentina, Brazil, Chile, Uruguay and Bolivia. TAM S.A. is incorporated and domiciled in Brazil.
On July 15, 2005, the Company concluded a Public Offering of shares on the São Paulo Stock Exchange - BOVESPA. On March 10, 2006 the Company made an additional Public Offering - this time on the BOVESPA and the New York Stock Exchange NYSE (in the form of American Depositary Shares ADS), which was concluded on April 6, 2006.
In April 2007, two wholly-owned finance subsidiaries of TLA were constituted, namely TAM Capital Inc. ("TAM Capital") and TAM Financial Services 1 Limited ("TAM Financial 1").In October 2007 TAM Financial Services 2 Limited ("TAM Financial 2") was constituted. These subsidiaries are headquartered in the Cayman Islands. Their main activities involve aircraft acquisition and financing and issuance of debit. Debt issued by these wholly-owned companies is wholly and unconditionally guaranteed by TAM.
The Company also controls TP Participações Ltda. ("TP Participações"), which on July 20, 2009, changed its name to TP Franchising Ltda. and modified its corporate purpose to the development of franchises. This company did not record any transaction since October 23, 2004, when it was established.
TAM controls 99.99% of Fidelidade Viagens e Turismo Ltda. ("Fidelidade"), whose corporate purpose is to carry out the activities of a travel and tourism agency, under the name TAM Viagens.
This consolidated interim financial information were approved by the Board of Directors on November 11, 2009.
As disclosed in Note 19, in October 12, 2009 the Company issued Bonds in the amount of US$ 300 million for reinforcement of ours working capital and compliance of its obligations of short term.
2 Basis of preparation
This condensed consolidated interim financial information for the three and nine months ended September 30, 2009 has been prepared in accordance with IAS 34, Interim financial reporting.
The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended December 31, 2008, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the International Accounting Standards Board (IASB).
3 Accounting policies
Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended December 31, 2008, as described in those annual financial statements.
In interim periods management assess whether the carrying amount of flight equipment at each interim reporting date materially differs from the amount which would be determined using fair value. When it is concluded that the carrying amount may be materially different, management estimates fair value on interim periods, as opposed to using independent appraisers reports. During the periods presented the most significant change in fair value as compared to the prior year-end has resulted from the changes in the exchange rate between the United States dollar (the currency in which flight equipment is commonly traded) and the Brazilian real.
The following new standards and amendments to standards are mandatory for the first time for the financial year beginning January 1, 2009.
IFRIC 13 - Customer loyalty programmes. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is relevant to the groups operations but TAM previously deferred revenue in a manner consistent with IFRIC 13, and as a result its adoption did not have any significant impact.
IAS 1 (revised) Presentation of financial statements. IAS 1 (revised) Presentation of financial statements. The revised standard prohibits the presentation of items of income and expenses (that is non-owner changes in equity) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity. All non-owner changes in equity are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and the statement of comprehensive income).TAM has elected to present two statements.
IFRS 2 (amendment) Share-based payment, provides guideline regarding non-vesting conditions and cancelations. The standard did not have any significant impact.
Amendment to IFRS 7 Financial instruments Disclosures. The amendment increases the level of required disclosure in respect of liquidity and valuation of financial instruments. The Amendment is applicable for annual financial statements and the Company is assessing the additional disclosures required.
The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning January 1, 2009 but are not currently relevant for the group:
IAS 23 (amendment) Borrowing costs. TAM capitalized borrowing costs under the previous version of IAS 23, and so there is no significant impact.
IAS 20 (amendment) Accounting for government grants and disclosure of government assistance. The benefit of a below-market rate government loan is measured as the difference between the carrying amount in accordance with IAS 39 Financial instruments: Recognition and measurement and the proceeds received with the benefit accounted for in accordance with IAS 20.
IAS 36 (amendment) Impairment of assets. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculations should be made.
IFRS 8 Operating segments. IFRS 8 replaces IAS 14 Segment reporting. It requires a management approach under which segment information is presented on the same basis as that used for internal reporting purposes. TAM already presented segment information under IFRS 8, and so there is no significant impact.
IAS 32 (amendment) Financial instruments: Presentation.
IFRIC 15 Agreements for the construction of real estate.
IFRIC 16 Hedges of a net investment in a foreign operation.
IAS 39 (amendment) Financial instruments: Recognition and measurement.
The following new standards have been issued but are not effective for the financial year beginning January 1, 2009 and have not been early adopted:
IFRS 3 (revised) Business combinations and consequential amendments to IAS 27 - Consolidated and separate financial statements, IAS 28 Investments in associates and IAS 31 - Interests in joint ventures, effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after July 1, 2009. Management is assessing the impact of the new requirements regarding acquisition accounting, consolidation and associates on the group. The group does not currently have any joint ventures.
The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the minority interest in the acquiree either at fair value or at the minority interests proportionate share of the acquirers net assets. All acquisition-related costs should be expensed. The Company will apply IFRS 3 (revised) to all business combinations from July 1, 2009.
IFRIC 17 Distributions of non-cash assets to owners, effective for annual periods beginning on or after July 1, 2009. This is not currently applicable to the group, as it has not made any non-cash distributions.
IFRIC 18 Transfers of assets from customers, effective for transfers of assets received on or after July 1, 2009. This is not currently relevant to the group, as it has not received any assets from customers.
4 Property, plant and equipment
"Flight equipment" includes aircraft, engines and spare parts. At September 30, 2009, includes 66 aircrafts under finance leases.
Flight equipment is recorded at revalued amounts. If the flight equipment had been recorded at historical cost, the carrying value at September 30, 2009 would have been R$ 7,221,776 (December 31, 2008 R$ 7,092,539). The revaluation resulted in a recognition of a decrease in the carrying amount against reserves in the nine months ended September 30, 2009 of R$ 1,141,212 (year ended December 31, 2008 an increase of R$ 1,421,930) by flight equipments. During the three and nine months period ended September, 30 2009, the revaluations resulted in an expense of R$ 183,279 and R$ 484,514; respectively for aircraft whose revalued amount was lower than their cost (three and nine months period ended September 30, 2008 gains of R$ 297,912 and R$ 177,199 for aircrafts where a revaluation decrease had previously been recognized in the income statement).
Construction in progress is mainly composed of improvements carried out at the São Carlos Technology Center. Other is mainly composed of furniture and vehicles.
The properties and improvements of TAM's subsidiary TLA have been mortgaged as guarantee for loans in the total amount of R$ 110,499 (December 31, 2008 - R$ 110,499).
Other than aircrafts, no significant amounts of PPE are located outside Brazil. Aircrafts are based in Brazil but fly both domestically and internationally.
5 Trade and other receivables
Trade and other receivables are composed of:
Financial assets included above are classified as receivables measured at amortized cost. Their carrying value approximates to their fair value due to their nature and short term maturity.
(a) Trade receivables
(*) As of September 30, 2009 includes R$ 26,715 denominated in US Dollars, R$ 29,005 denominated in Euros, R$ 2,918 denominated in Sterling Pounds, and the remaining balance is composed of various currencies.
(b) Trade receivables by due date
(c) Provision for impairment of trade receivables
Movements on the provision for impairment of trade receivables are as follows:
The establishment and release of provisions for impaired receivables have been included in "selling expenses" in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. None of the items for which an impairment provision has been recognized is individually significant.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above.
6 Financial risk management
TAM's activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.
The Company has a risk management program which allows its Treasury Department to enter into derivative financial instruments in order to reduce the volatility of its expected cash flows.
These derivatives are used in line with TAM's policies, considering liquidity, impact on TAM's results and cost/benefit analysis of each position taken. Control over the use of derivatives includes ensuring that the derivatives contracted are in line with market rates. This is verified by an independent party. All of the derivatives entered into are to mitigate TAM's risk exposures and are not used for speculation.
(a) Market risks
TAM is exposed to market risks from our normal commercial activities. These market risks principally relate to changes in interest rates, exchange rates or jet fuel prices. Any such changes may adversely affect the value of our financial assets and liabilities or our future cash flows and expenses. Market risk is the possible loss derived from variations in market prices. TAM has entered into derivative contracts and other financial instruments with the purpose of mitigating the risks arising from variations in these factors. TAM has also implemented policies and procedures in order to evaluate such risks and approve and monitor its derivative transactions.
(i) Risks relating to variations in the price of jet fuel
(i.1) General policy
One of the most important financial risks of airline companies is the volatility in fuel prices. Fuel represented respectively 30.2% and 27.9% of operating costs for the three and nine months period ended September 30, 2009 (40.8% and 40.4% - September 30, 2008 respectively).
The Company has entered into derivative transactions in order to economically hedge itself against this risk. TAM's Risk Committee has established policies for achieving this. TAMs policy is to enter into derivative transactions covering a period of up to two years, allowing to hedge up to 80% of forecast fuel consumption for the next year decreasing to a maximum of 30% of forecasted consumption for the second year. Swaps, options, forwards or a combination of these, using market prices for crude oil, heating oil or jet fuel as the underlying may be used to achieve TAMs aims.
(i.2) Characteristics of the derivatives instruments used
In Brazil the price of jet kerosene is determined by the state-controlled oil company, Petrobras, based on international jet fuel prices. TAM aims to reduce the volatility in its kerosene price by using derivatives based on crude oil (West Texas Intermediate "WTI"). WTI is highly correlated with TAMs average Jet Fuel Price. This strong fundamental and statistical relationship, coupled with the fact that crude oil is arguably the most actively traded commodity, led TAM to elect WTI as the main underlying for its fuel hedging program.
All of the crude oil derivatives that TAM entered into are "over the counter", and none requires margin calls. Due to the rescheduling of its hedging derivatives maturities, which took place in the first quarter of 2009, TAM has agreed to deposit a portion of its fair value as collateral to some of those restructured operations. Financial instruments posted as collateral are included in the statement of financial position under Non-current assets Other financial assets and its carrying amount is R$ 207,791 at September 30, 2009 (December 31, 2008 none)
As TAM does not hedge 100% of its expected fuel needs with derivatives, any increase in kerosene prices will not be completely offset; similarly decreases in kerosene prices will have a net benefit to TAM, despite the negative cash flows from settling its derivative contracts.
(i.3) Restructuring of derivatives during the nine months period ended September 30, 2009
In January 2009, the Company, along with its key counterparties, started a restructuring of its hedge transactions whose total market value was R$ 1,128,985 at December 31, 2008. The restructuring basically spread the maturity dates over a longer period, extending the life of the derivatives but, generally, maintaining all other terms (mainly residual value and strike price). With this action, the Company aimed at two main goals: first, to postpone cash payments, which were concentrated in the first half of 2009; second, to settle most of the transactions in a period when prices are expected to be less volatile and which, according to Company estimates, should also coincide with price levels closer to the hedging books prices.
The coverage profile, which was concentrated in the first half of 2009, is now more evenly distributed through 2009 and 2010, including a small coverage in the first quarter of 2011. For the next 12 months following September 30, 2009, the coverage accounts for 23% of the anticipated consumption. The average strike for transactions in the same period is now US$ 114 per barrel. Approximately 78% of the derivatives in notional volume in WTI barrels, as of the end of the third quarter, had been renegotiated, representing a reduction of around US$ 117 million of expected disbursements through the period ended in September 30, 2009.
Derivative financial instruments used as hedge of changes in jet fuel prices have been accounted for at fair value with unrealized gains and losses recognized in income. Restructured derivatives continue to be measured at fair value after the restructuring and, as a result, the impact of the restructuring has been recognized in gains and losses as part of the reassessment of the derivatives fair value. Consequently, the impact of the restructuring of the derivatives has been recognized in income.
(i.4) Outstanding positions of derivatives
The following table presents the percentages of anticipated consumption covered for the next twelve months after each date and the average strike price for the transactions outstanding as of each of those dates:
At the time the majority of the WTI derivatives were entered into, the expected price of WTI was between US$ 120-150 per barrel.
The following tables present both the notional amount and fair value of outstanding derivatives as of each date broken-down by maturity:
TAM only contracts derivatives with counterparties which have an investment grade rating issued by S&P, Moody's or Fitch. The distribution of the fair values as of September 30, 2009 of the counterparties by credit rating is:
* The ratings can be express in the global scale or in national currency.
A hypothetical 10% increase/decrease in the price of WTI would lead to a increase/decrease of approximately US$ 29 million (equivalent to R$ 51,565 million at the September 30, 2009 rate) in the fair value of the WTI derivatives. This increase/decrease would directly influence our financial results; in terms of cash flow, however, these changes in WTI price would be more than offset by a decrease/increase in our jet fuel costs.
(ii) Exchange rate risk
A significant part of the companys costs and operating expenses, such as aircraft and engine maintenance services, aircraft lease payments and aircraft insurance, are denominated in U.S. dollars. To manage exchange rate risk, TAM may enter into derivative contracts to protect itself against a possible depreciation or devaluation of the real in relation to the U.S. dollar. At September 30, 2009 and December 31, 2008 TAM had no outstanding currency derivative contracts.
At September 30, 2009, if the Brazilian real had weakened/strengthened by 10% against the U.S. dollar with all other variables held constant, finance results for the year to date would have been R$ 492 million lower/higher approximately, mainly as a result of foreign exchange gains/losses on translation of U.S. dollar denominated trade receivables and U.S. dollar denominated financial assets at fair value through profit or loss, and foreign exchange losses/gains on translation of U.S. dollar-denominated borrowings and finance leases.
(iii) Interest rate risk
TAMs earnings are affected by changes in interest rates due to the impact those changes have on interest expense from variable-rate debt instruments, variable-rate leasing contracts and on interest income generated from its cash and short-term investment balances. To minimize possible impacts from interest rate fluctuations, TAM has adopted a policy of diversification, alternating between contracting fixed and variable rates (such as LIBOR and CDI).
A hypothetical 100 basis point increase in USD LIBOR interest rates at September 30, 2009 would increase its aircraft rental and interest expense by approximately US$ 33 million (equivalent to R$ 58,677 million at the September 30, 2009 rate).
These amounts are determined by considering the impact of the hypothetical interest rates on TAMs variable-rate leasing contracts at September 30, 2009.
(b) Credit risk
Credit risk arises from the possibility of TAM not recovering amounts receivable from services provided to consumers and/or travel agencies, or from credits held by financial institutions generated by financial investment operations. Management does not currently expect any losses from non-performance by its counterparties, and does not have any significant exposure to any individual counterparty.
To reduce credit risk, TAM has adopted the practice of establishing credit limits and the permanent follow-up of its debtor balance (mainly from travel agencies).
TAM only deals with financial institution counterparties which have a credit rating of at least BBB- (Baa3) issued by S&P, Moody's or Fitch. In the case of derivatives contracted in Brazil, a local rating of at least brA- is required. In addition, each institution has a maximum limit for investments, as determined by the Company's Risk Committee.
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions.
Excess cash is invested mainly in TAMs exclusive investment funds. Each of these funds has a clear investment policy, with limits on concentration of risk in the underlying investments.
The table below analyses TAM's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and include interest, apart from the net settled derivatives, for which the fair value is disclosed.
6.1 Fair value estimation
The fair value of financial instruments traded in active markets (such as trading securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by TAM is the current bid price.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. TAM uses a variety of methods that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.
The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to TAM for similar financial instruments.
7 Financial liabilities
The carrying value of financial liabilities, all of which are measured at amortized cost, and their corresponding fair values are shown in the following table:
7.1 Finance lease obligations
The finance lease obligations are denominated in US dollars. TAM has provided letters of guarantee and deposits in guarantee in respect of the finance leases. At September 30, 2009 TAM has 66 aircraft under finance leases (December 31, 2008- 64 aircraft). See Note 4.
The minimum payments under finance leases are classified:
7.2 Senior Notes
On April 25, 2007, TAM Capital concluded an offer of senior bonds in the total amount of US$ 300 million (equivalent to R$ 710,4 million at the exchange rate of the date of the transaction) with interest of 7.375% per annum, payable semiannually and with principal payable in full in 2017, by means of a transaction abroad exempt from filing with the Brazilian CVM. The Company opted to register the securities with the United States Securities and Exchange Commission (SEC) on October 30, 2007.
FINIMP Import Financing, FINEM Government agency financing for machinery and equipment, TJLP Long term interest rate and CDI Interbank deposit rate.
Non-current maturities are as follows:
On December 28, 2007, TAM entered into a loan agreement with bank BNP Paribas to finance up to US$ 117,1 million (equivalent to R$ 207,3 million at the exchange rate of the date of the transaction) of pre-delivery payments for 30 Airbus aircraft with firm purchase orders and delivery scheduled between 2008 and 2010. At September 30, 2009, the balance of this loan was R$ 92,243 (December 31, 2008 R$ 106,718).
In 2005, TAM signed a loan agreement under the FINIMP program, obtaining funds mostly from Unibanco and Banco do Brasil to finance imports of aircraft engines and parts up to a sum of US$ 8,805 thousand (equivalent to R$ 21,435 at the exchange rate of the date of the transaction), with maturities until December 2008, except for a renegotiated portion with Banco do Brasil for US$ 4,719 thousand (equivalent to R$ 11,299 at the exchange rate of the date of the transaction), maturing in November 2009. In 2006, the Company raised US$ 37,885 thousand (equivalent to R$ 82,412 at the exchange rate of the date of the transaction) from Unibanco, maturing in July 2009. In 2008, for the same purpose, US$ 84,996 thousand (equivalent to R$ 155,862 at the exchange rate of the date of the transaction) was obtained from Unibanco, HSBC, Itaú, Santander and Banco do Brasil maturing in September 2010. At September 30, 2009 the balance of this type of financing amounts to R$ 258,609 (December 31, 2008 R$ 167,289).
At September 30, 2009, the Company is not subject to certain obligations under loan agreements, such as compliance with certain financial indices, limits on the issue of financial debt, and priority in the repayment of loans.
On July 7, 2006 the Board of Directors approved the issue of nominative, nonconvertible debentures with no security guarantee or preference but with a guarantee provided by TLA.
The debentures have a face value of R$ 10 and a term of six years, with repayment in three successive, equal, annual payments the first of which falls due on August 1, 2010.
Interest is to be paid every six months at a rate equivalent to 104.5% of the CDI as calculated and published by CETIP - the custodian and liquidation chamber. The effective interest rate was 11.70% as at September 30, 2009 (December 31, 2008 14.29%) .
The Company will be subject as from August 1, 2010 to certain obligations under the debenture contracts, such as compliance with certain financial indices, limits on the issuance of financial debt, and priority in the repayment, when the debentures will start to be amortized.
On July 16, 2009 the Board of Directors approved the issue of nominative, nonconvertible debentures with no security guarantee or preference but with a guarantee provided by TAM S.A.
The debentures have a face value of R$ 1,000 and a term of four years, with repayment in 13 quarterly installments as from July 24, 2010.
Interest is payable monthly at a rate equivalent to 126.50% of the CDI (tax in the day of contract 11.41%) as calculated and published by CETIP - the custodian and liquidation chamber. The effective interest rate was 14.17% as at September 30, 2009. The resources gotten with the debentures will be destined our strategy of reinforcement of our working capital and increase of liquidity.
Management of the Company and its subsidiaries recorded provisions for contingencies in all cases where loss by the Company is deemed probable, based on advice provided by the Companys internal and external legal counsel. As at September 30, 2009, the value of provisions and corresponding judicial deposits recognized were as follows:
(i) Corresponds to the discussion of the constitutionality of the increase in the tax base of the PIS tax and the increase in the contribution and basis of calculation of the COFINS tax, introduced under Law 9,718/98.
On November 9, 2005, the full bench of the Federal Supreme Court ruled that the increase in the tax base was unconstitutional. During the first quarter of 2007 the Company was successful in obtaining a favorable ruling in one process and reversed the related provision for the amount of R$ 7,560. At September 30, 2009, five lawsuits had not yet to been finally judged.
(ii) Corresponds to the collection of 1% of the amount of fares of all tickets sold for regular domestic routes. TLA management, based on the opinion of its external legal counsel, is contesting the constitutionality of this collection, and non-payment is supported by a judicial order.
(iii) Corresponds to the collection of 2.5% on the monthly payroll for private social welfare and professional training entities. TLA management, based on the opinion of its external legal counsel, is contesting the constitutionality of this collection, and the non-payment is supported by a judicial order.
(iv) Corresponds to the provision based on management estimates as to losses that are expected to be incurred as a result of the various labor claims filed by current or former employees.
Due to the nature of these disputes, the timing of the utilization of the provisions, and any associated cash outflows, is uncertain.
TAM had no major customers which represented more than 10% of revenues in 2009 or 2008. The Company utilizes its segmented gross revenue information by type of service rendered and by region, as follows:
(a) By type of service rendered
(b) By geographic location of the Companys destinations
The following table presents our net revenue in the first quarter, second and third quarter of 2009 and 2008 as a percentage of annual net revenue for the year ended December 31, 2008.
10 Operating expenses by nature
(a) Quarter ended September 30
(b) Nine months ended September 30
11 Net finance results
12 Income Tax
(a) Reconciliation of income tax and social contribution benefit (expense)
The tax on TAM's profit before tax differs from the theoretical amount that would arise using the enacted tax rate in Brazil as follows:
The applicable tax rate was 34% (2008 - 34%).
The tax years 2004 to 2008 are subject to examination by the Brazilian tax authorities.
(b) Breakdown of deferred income tax and social contribution assets
13 Earnings per Share
Considering that common and preferred shares have equal rights in respect of dividends, a single measure of earnings per share based on the total number of common and preferred shares is presented. Common and preferred shares are considered two classes of ordinary shares.
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares (common and preferred) in issue during the year excluding ordinary shares purchased by the Company and held as treasury shares.
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has only one category of dilutive potential ordinary shares: share options.
14 Cash Generated from Operations
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
The principal non-cash transactions are acquisitions of flight equipment under finance leases, which is discussed in Note 4.
15 Contingencies and commitments
(a) Operating lease commitments
TLA has obligations arising under 67 aircraft operating lease contracts (December 31, 2008 65 aircraft). These agreements have an average term of 126 months and are denominated in U.S. dollars plus LIBOR. The leasing expense, recognized in the consolidated statement of income in Costs of services rendered, was R$ R$ 124,052 and R$ 419,232 for the three and nine months period ended September 30, 2009 (September 30, 2008 R$ 108,460 and R$ 326,315).
For most of the operations TAM has given letters of guarantee issued by TAM or deposits in guarantees.
In addition, to meet the payment conditions established by contract, promissory notes guaranteed by TAM were issued, totaling US$ 28,353 thousand at September 30, 2009 (December 31, 2008 US$ 36,492 thousand).
Future aggregate minimum lease payments under these agreements are as follows:
The amounts expressed in thousand of Reais included above are denominated and payable in U.S. dollars.
(b) Commitments for future aircraft leases
In 2005, the Company executed an amendment to the contract with Airbus for the firm order of 20 Airbus A320, the remaining nine of which to be delivered by 2010, with an option for 20 more of the same aircraft family (including A319, A320 and A321). In 2006, the Company finalized the contract to acquire a further 37 Airbus aircraft (31 aircraft narrow body family A320 and six A330) for delivery by 2012. The options under the contract from 2005 were transferred to the 2006 contract.
On June 28, 2007, the Company also executed a Memorandum of Understanding for the purchase of 22 Airbus A350XWB models 800 and 900, with ten more options, for delivery between 2013 and 2018.
Additionally, the Company confirmed the exercise of four options for Airbus A330, two of which will be delivered in 2010, and the other two in 2011, related to the agreement signed at the end of 2006. TAM also confirmed the twenty options that had been postponed from 2005 to 2006 and the anticipated delivery before the end of 2014.
In 2006, the Company ordered four Boeing 777-300ER with options for four additional aircraft, which were exercised in 2007. Upon receipt of the four aircraft in 2008, the Company had six firm orders placed with Boeing for this type of aircraft, of which four are expected to be delivered in 2012 and two in 2013.
TAM maintains adequate insurance for risks which are expected to cover any liabilities generated by the accident on July 17, 2007, of an Airbus A320 aircraft, considering the agreements already made with and paid to the victims families by the insurance company. As of September 30, 2009, some 192 (December 31, 2008 160) compensation payments were paid to families of the victims and others are under negotiation with the Companys insurance firm. Management understands that the insurance coverage of these liabilities is adequate to cover all related costs. The Company believes that it will not incur additional or unexpected expenses outside the scope of the insurance agreement which would be TAMs direct responsibility.
(d) Contingent liabilities
Contingencies for which it is probable that TAM will be required to make payments are provided for and are discussed in Note 8.
The Company and its subsidiaries are involved parties in other judicial contingencies involving fiscal, labor and civil claims in the amount of R$ 923,840 as at September 30, 2009 (December 31, 2008 R$ 787,920) for which no provision is required. Based on the opinion of advice from internal and Brazilian external legal counsel, the Company believes that the chances of success are possible but not probable.
(e) Contingent assets
On December 17, 2001 the Federal Supreme Court ruled that domestic and international air passenger transportation revenue, as well as international air cargo transportation revenue was no longer subject to ICMS (Tax on the Circulation of Merchandise and Services, or ICMS).
However, based on this ruling, ICMS taxation on domestic air cargo transportation revenue is still due. On September 30, 2009, the provision maintained by the Company totaled R$ 4.430 (December 31, 2008 R$ 6,187), recorded in Taxes and tariffs payable. On September 30, 2009, the installments due in more than one year totaled R$ 71 (December 31, 2008 R$ 98), classified within Other liabilities.
Collection of certain ICMS payments made from May, 1989 to May, 1994 were later ruled to have been unconstitutional. TLA has filled several suits, in different states of the country, to claim the amount paid in excess. The Company will recognize the credits, estimated at approximately R$ 55,000 (not reviewed) at historical amount. The amount claimed may be monetarily adjusted at the time that payment is awarded by the courts.
(ii) Indemnification for losses on regulated fares
We are plaintiffs in an action filed against the Brazilian government in 1993 seeking damages for breaking-up of the economic-financial equilibrium of an air transport concession agreement as a result of having to freeze our prices from 1988 to September 1993 in order to maintain operations with the prices set by the Brazilian government during that period. The process is currently being heard before the Federal Regional Court and we are awaiting judgment on appeals we have lodged requesting clarification of the initial decision (which we challenged). The estimated value of the action is R$ 245 million, based on a calculation made by an expert witness of the court. This sum is subject to interest accruing from September 1993 and inflation since November 1994.
Based on the opinion of our legal advisors and recent rulings handed down by the Supreme Court of Justice in favor of airlines in similar cases (specifically, actions filed by Transbrasil and Varig) we believe that our chance of success is probable. We have not recognized these amounts as receivable in this condensed consolidated financial information and will only do so when the decision is made final.
(iii) Additional airport tariffs (ATAERO)
At 2001, TLA filed a claim addressing the legality of the additional airport tariffs (ATAERO), which represent an additional 50% on the tariff amount. On September 30, 2009, the amount under discussion totaled approximately R$ 744,175 (December 31, 2008 R$ 641,393), not recognized in this financial information.
16 Related-party Transactions
The Company is controlled by TAM - Empreendimentos e Participações S.A. (incorporated in Brazil), which is owned by the Amaro family, and which owns 89.26% of the Company's common shares and 24.67% of the Company's preferred shares. The remaining shares are widely held.
During the quarter and nine months period ended at September 30, 2009, TLA received from Táxi Aéreo Marília S.A. (TAM Marília), a company under common control, R$ 9 and R$ 41 (September 30, 2008 R$ 34 and R$ 117), as reimbursement for the use of its infra structure, being mainly the importation areas and human resources. This amount was credited to cost of services rendered. TAM Marília and TAM have common indirect stockholders.
On May 11, 2007, TLA and TAM Marília agreed to share the utilization of a hangar located by the Sao Paulo Congonhas airport, for a period of 10 years. TLA paid R$ 15,500 upfront to TAM Marília and is entitled to use the facilities and the infra-structure of the hangar, providing the same cargo services, as those previously provided in the cargo terminal. The total amount was established based on valuation reports performed by independent companies, reflecting the economic benefit obtained by the use of such a location in TLA cargo activities. The amount recognized in statement of income for the nine month period ended at September 30, 2009 amounted to R$ 1,162 (September 30, 2008 R$ 1,162).
The Company and its subsidiaries signed a contract in March, 2005 with TAM Milor Táxi Aéreo, Representações, Marcas e Patentes S.A. ("TAM Milor") for the right to use the "TAM" brand. This contract is valid for a term identical to the current passenger air transport concession of TLA and establishes a monthly fee, adjusted annually by the IGP-M inflation index, totaling R$ 4,222 and R$ 12,442 for the quarter and nine month period ended at September 30, 2009 (September 30, 2008 R$ 3,904 and R$ 11,512), recorded within Administrative expenses.
17 Supplemental information reconciliation of consolidated shareholders equity and net income.
We present the reconciliation of consolidated shareholders' equity and net income in accordance with accounting practices adopted in Brazil (BR GAAP) and consolidated shareholder's equity and net income in accordance with IFRS.
The description of the differences of criteria between BR GAAP and IFRS are presented in Note 4 to the financial statements for the year ended December 31, 2008.
(a) Reconciliation of consolidated equity
(b) Reconciliation of net income for three and nine month period ended September 30, 2009 and 2008
18 Post balance sheet events
On October 12, 2009, was constituted TAM Capital 2 Inc, wholly-owned subsidiary TAM Linhas Aéreas S.A.
On October 13, 2009, the Board of Directors approved the granting of an irrevocable, irreversible and comprehensive guarantee of all liabilities of the TAM Capital 2 Inc.
On October 22, 2009, TAM Capital 2 Inc, concluded an offer of Senior bonds in the total amount of US$ 300 million (equivalent to R$ 519,120), sold at 98.43% of the principal amount with interest of 9.5% and find maturity in 2020, by means of a transaction abroad exempt from registration with the Brazilian CVM. The transaction was not registered under United States Securities Act of 1933, as amended (Securities Act). The resources gotten with the Bonds will be destined first for our strategy of reinforcement of our working capital, increase of liquidity and guarantees of the credit conditions.
Pursuant to the requirements 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.
Date: November 12, 2009
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.