FORM 6-K

U.S. SECURITIES AND EXCHANGE COMMISSION

dated March 6, 2013

  Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

PROPOSAL OF THE BOARD OF DIRECTORS TO THE ANNUAL AND EXTRAORDINARY GENERAL MEETING TO BE HELD ON APRIL 9, 2013

Dear Shareholders,

The Board of Directors of BRF – Brasil Foods S.A. hereby submits to the Shareholders the following proposals for deliberation at the General Meeting , to be held on April 9, 2013:

Annual General Meeting

1. To e xamine and vote the Management Report, Financial Statements and other documents with respect to the fiscal year ending December 31, 2012 and decide on the allocation of the result; to approve the following allocation of the Net Income for the Fiscal Year 2012:

(Attachment 9-1-II pursuant to CVM Instruction 481)

2.              To ratify the distribution of remuneration to the shareholders pursuant to the decision by the Board of Directors in the amount of R$ 274.7 million, corresponding to R$ 0.315855520 per share, payouts having taken place on August 15, 2012 (R$ 0.11501051 per share) and on February 15, 2013 (R$ 0.20084501 per share) in the form of interest on shareholders’  equity with due retention of Withholding income Tax at Source pursuant to the current legislation (Attachment 13 pursuant to CVM Instruction 481) ; 

3.              To approve the distribution of complementary dividends in the amount of R$ 45.3 million to be paid out on April 30, 2013;

4.              To approve the number of members to make up the Board of Directors at 11 (eleven) pursuant to the provision in Article 16, caption sentence, of the Bylaws;

5.              To elect the slate made up of the individuals nominated below to comprise the Board of Directors for a term of office of 2 (two) years as set forth in Article 16 of the Bylaws.

5.1        Pursuant to CVM instructions 165 and 282, the minimum percentage for participation in the voting capital necessary for the requisition of the multiple voting system is 5% (five percent). (Attachment 24, items 12.6 to 12.10 pursuant to CVM Instruction 480);

6.           Pursuant to the provision of Paragraph 1, Article 16 of the Bylaws, to nominate as Chairman and Vice Chairman of the Board of Directors, respectively, Messrs. Abílio Diniz and Sérgio Rosa.

7.           To elect the members of the Fiscal Council/Audit Committee – Term of Office: Until the E/AGM of 2014. (Attachment 24, items 12.6 to 12.10 pursuant to CVM Instruction 480)

Extraordinary General Meeting

1.              To approve the amendment of the following article of the current Bylaws: ARTICLE 1-  alteration of the corporate denomination from BRF – BRASIL FOODS S.A. to BRF S.A.;

2.              To approve the total annual and aggregate compensation for the Members of the Management of the BRF Companies in the amount of up to R$ 39 million, including extra compensation in the month of December 2013 in the amount corresponding to one monthly fee. (Attachment 13, pursuant to CVM Instruction 481).

3.              To approve the amendment to the Stock Option Plan (Stock Options), item 7. Limit of Dilution, to permit the maximum dilution of 2.0% up to 2.5%, and the alteration of the regulations of the Stock Option Plan (Stock Options) with respect to the following aspects: amendment in the quantity of exercise windows (item 9.1.2 of the Plan) from 2 to 4 and the alteration of the parity (item 4.2.1 of the Plan) of the number of stock option grants versus acquired shares for the additional plan: from 0.5 to 1.0 option from 1.0 to 2.0 options and from 2.0 to 4.0 options (Attachment 13, pursuant to CVM Instruction 481)

This is what the Board of Directors has to propose and expects to be examined and approved by the shareholders.

The Company’s shareholders interested in accessing information or clarifying doubts relative to the above proposals should contact the Company’s Investor Relations area by calling +55 (11) 2322-5061/5050/5048/5049/5051/5052/5037 or via e-mail: acoes@brf-br.com. All documents pertaining to this Meeting may be found at the disposal of the shareholders in the site: www.brf-br.com/ri in addition to the system of powers of attorney for permitting the participation of the shareholder. Furthermore, the Meeting shall be transmitted via video conference to the São Paulo office located at Rua Hungria, 1,400 – 5 ^th floor, Jardim Europa, for the shareholders that so prefer.

São Paulo (SP), March 4, 2013.

Nildemar Secches

Chairman of the Board of Directors

Paulo Assunção de Sousa

Vice Chairman

Décio Da Silva

José Carlos Reis Magalhães Neto

Heloisa Helena Silva de Oliveira

Luís Carlos Fernandes Afonso

Luiz Fernando Furlan

Manoel Cordeiro Silva Filho

Pedro de Andrade Faria

Walter Fontana Filho

(Attachment I – Information with respect to the Reference Form and CVM Instruction 481 – document being prepared)

Attachments to the Proposal of the Board of Directors to the Ordinary and Extraordinary General Meeting to be held on April 9, 2013.

(According to CVM Instruction nº 480 and 481)

Item 14.c

The reserve for capital increase was established based on the article 30, item 3, of Company’s bylaws, approved by the shareholders meeting in December 18, 2012, in the amount that corresponds to 20,00% of the net income to be distributed presented above, such reserve shall not exceed 20,00%of the capital stock.

The reserve for expansion was established based on the article 30, item 4, of Company’s bylaws, approved by the shareholders meeting in December 18, 2012, in the amount that corresponds to 30,63% of the net income to be distributed presented above, such reserve shall not exceed  80% of the capital stock, with the purpose of ensuring investments in fixed assets or increases in working capital, including through amortization of the Company’s debts, irrespective of retention of profit earmarked to the capital expenditures budget, and its balance being used, as may be the case, for: (i) absorbing losses whenever necessary; (ii) distribution of dividends at any time; (iii) operations of redemption, reimbursement or the authorized purchase of shares as permitted in the legislation; and (iv) for incorporation into the Capital Stock, including through new stock dividends.

10. Management Comments

10.1. Comments of Directors on financial conditions and asset status

The year will go down in the annals of BRF as the one in which we implemented one of the most complex mergers anywhere in the world - that between Perdigão and Sadia  - with the Company embarking on a new cycle. During the year, we complied in full with the agreement signed with the Administrative Council for Economic Defense (Cade), the Brazilian anti-trust authority, selling off plants, brands and distribution centers as well as temporarily suspending the use of the Perdigão brand for some product categories. We successfully ended the year by completing the merger process, including the incorporation of Sadia. 

In the business field, we were faced with an international economic crisis and an unprecedented spike in costs on the back of highly volatile and rising grain prices, characterizing one of the most difficult years for the world animal protein segment. But despite the transfer of assets and the suspension of brands representing about a third of our sales volume to the domestic market, we successfully increased consolidated net sales by 10.9% to R$ 28.5 billion. Adjusted EBITDA reached R$ 2.7 billion, and EBITDA reached R$2.3 billion, while net income totaled R$ 813.2 million, a negative variation of 40.5% over the preceding year. It should be pointed out that in the second half of 2012 following the agreement with CADE, domestic market sales rose 50% on the same comparative basis.

This result is a reflection of extremely arduous and consistent work on a process which involved the Company in the implementation of two agendas in parallel: the daily operational routine together with the commitments surrounding the execution of the merger. The result proved a reaffirmation of the capacity of the Company to plan as a critical element in its success and one of its competitive advantages. Since the announcement of the merger, we have reached an average of 30.2% per year in Total Shareholder Return with our market capitalization standing at R$ 36.8 billion, BRF ranking as the  7 ^th largest food company in the world.

Net financial expenses totaled R$ 570,6 million, a 19.0% increase, especially due to higher debt levels as a result of the currency effect and the need to allocate cash to support investments in Capex and working capital , the result of reduced cash generation in the period.

In the light of the high level of exports, the Company conducts operations with the specific purpose of currency hedging. In accordance with hedge accounting standards (CPC 38 and IAS 39), the Company uses financial derivatives (for example: NDF) and non-derivative financial instruments (for example: foreign currency debt) for hedge operations and concomitantly, to eliminate the respective unrealized foreign exchange rate variations from the income statement (under the Financial Expenses line).

The use of non-derivative financial instruments for foreign exchange cover, continues to permit a significant reduction in the net currency exposure in the balance sheet, resulting in substantial benefits through the matching of currency liability flows with export shipments and therefore contributing to a reduction in the volatility of the financial result.

On December 31, 2012, the non-financial derivative instruments designated as hedge accounting for foreign exchange cover amounted to USD 614 million, and a proportional reduction in book currency exposure of the same value. In addition, the financial derivative instruments designated as hedge accounting according to the concept of a cash flow hedge for coverage of highly probable exports, totaled USD 1,007 million + EUR 197 million + GBP 53.4 million and also contributed directly to the reduction in currency exposure. In both cases, the unrealized result for foreign exchange rate variation was booked to shareholders’ equity, thus avoiding the impact on the Financial Expenses.

The Company’s net debt was R$ 7,0 billion, 29.7% more than reported for December 31, 2011, resulting in a net debt to EBITDA ratio (last twelve months)  of 2.6 times with a book currency exposure of US$ 411,6 million, a 12.5% decline.  

In 2011, the good operating performance, obtained in our business performance in both segments of the internal market, external and food service, were instrumental in improving the operating cash flow, provide investments in Capital Expenditure to promote organic growth defined and in acquisitions.

Even with the economic scenario experienced and especially waiting for the opinion of the antitrust agency, we close the year with excellent results, which proves our great potential performance going forward. Net revenues totaled R $ 25.7 billion, 13.3% over 2010, ending 2011 at 6.2 million tons of products. Cash flow, as measured by EBITDA, evolved 23.1%, to $ 3.2 billion, with EBITDA margin of 12.6%. Net income registered an increase of 70.1% over the previous year, reaching R $ 1.6 billion, adjusted to the provision of corporate merger of Sadia SA expected to occur in 2012.

Besides having ended the year with good operating margins, the Company recorded positive indicators of liquidity, with $ 2.9 billion in investments and 82% of net debt in the long run. This allows us to comfort with the short-term and reliable for the long term.

Net debt, comprising the total gross debt less financial investments, increased by 48.7%, representing $ 5.4 billion, concentrated in the long run. The expenditure required for investments and acquisitions have resulted in greater use of cash, with gross debt increasing due to currency fluctuations. Thus, the net debt in relation to generation EBITDA was 1.7 times compared to 1.4 times recorded on 31/12/10.

Recent acquisitions have demanded a series of adjustments necessary to reflect the expected return. Moreover, the extreme volatility and uncertainty of foreign markets by the end of the year the administration requested greater prudence. The Company's financial position is safe and comfortable, having been promoted the elongation of short-term debt with maturities bearable planned for 2012 and 2013. Thus allowing the continuity of the plans outlined for investment, providing a continuous and sustained growth, aligned to the Strategic Plan for Long-Term - 15 BRF recovery, albeit slow, in 2010 the international economy and domestic market growth provided a more favorable environment for the Company's business.

The recent acquisitions demanded several necessary adjustments to reflect the expected return. Moreover, the extreme volatile and uncertain market conditions at the yearend demanded more administration caution. The Company financial position is safe and comfortable; it was promoted the short term debt extension, with bearable due dates scheduled for late 2012 and 2013, thus allowing the continuity of investment plans and the continuous and sustainable growth, in line with Strategic Plan for Long-Term - BRF15 recovery, albeit slow, of the international economy in 2010 and growth of the market provided a more favorable environment for the Company's business.

Because of financial discipline adopted in the debt restructuring plan, reductions were observed in the average cost of debt, as well as an extension of average maturity. The Company ended 2010 with 69% of its debt in the long run.

The net indebtedness of 12/31/10 was 13.2% lower than recorded in 2009, supported by the operating results, even considering the disbursement for investment in capital expenditures, marketing and project synergies.

The net debt / EBITDA were reduced to 1.38 times due to improved cash generation achieved in the year and the equilibrium level of net debt in relation to the Company's operations. The consolidated foreign exchange exposure was $ 76 million (asset position), contemplating the policy implemented hedge accounting, compared with $ 1.1 billion (liability) recorded in the previous year.

Debt restructuring of the subsidiary Sadia was made possible by the input of resources from the primary offering of equity issues whose funding totaled U.S. $ 5.3 billion held in July/09. Were transferred U.S. $ 3.5 billion of this amount for Sadia, among AFAC operations and mutual obligations for early and thus reduce the costly short-term debt, of which R $ 1.2 billion was transferred during the year 2010.

Order to stretch the debt profile and reduce its average cost, were issued on 21/01/10, bonus of 10 (ten) years totaling $ 750 million (bonds), maturing on 1/28/20 and coupon (interest ) of 7.250% per annum (7.375% yield to maturity), which are paid every six months, from July 28, 2010.

In 2009, the BRF – Brazil Foods S.A., a corporation resulting from the merger between the groups Perdigão and Sadia, was born as one of the world leading group in the food industry, taking its products and brands for more than 100 countries.

The success of the shareholding structure that resulted in the BRF creation, besides the fund raising of R$5,3 billion, turned the year of 2009 remarkable for the Brazilian and global food industry.

At operational sphere, the positive spotlight was the good performance of the company in the local market, with 9,5% of growth in revenues of processed products. However, the results and margins were negatively impacted by the international scenario, which showed high exchange volatility, leading to an important drop in the exported products prices. The reduction of consumption in the international market led the company to several adjustments in its production, which reflected in the increase of products cost and increase in the commercial expenses.

Although the adverse scenario, BRF recorded an adjusted net profit of R$360 million and EBITDA of R$1,2 billion in terms of proforma. The net indebtedness increased 14,4% compared to 12.31.08, however, in proforma comparative the drop of indebtedness was supported by the entrance of funds of primary offer of shares issuance, whose raising was of R$ 5,3 billion. From this amount, R$ 2,2 billion were transferred to Sadia, aiming the reduction of the costly short term debt. The relation net debt/EBITDA became 3,6 times, due to the minor cash generation in the year, although the proper level of net indebtedness.

Item 10.1.b. Capital Structure

On 12.31.10, the BRF capital structure is composed of 65,4% in equity capital and 34,6% in debt capital. The company does not have issuance of redeemable stock.

Considering that 69% of the Gross indebtedness is of long term, that the Company has availability of R$ 3.552 million to pay its short term financial commitments of R$ 2.233 and that we hope a positive cash generation for the year of 2011, based on the continuous improvement of the world economy, the Company considers as comfortable its ability to pay.

Item 10.1.d;e. Financing sources for working capital and for investment in non-current assets that the Company intends to use to cover liquidity deficiency.

The Company current availabilities reduce the need of new loans. However, we keep funds raised at low cost and long term, as the financing along with the development bodies as BNDES (Brazilian Economic and Social Development Bank), BNB (NE Bank) and FINEP (Financing of Studies and Projects) used to mainly finance fixed capital, and renewals of Rural Credit operations, which are operations with interests subsided by the Federal Government as EGF and NPR to finance the company working capital.

During the year of 2011, the Company may obtain new loans and borrowing in the financial and capital markets, in case additional funds are necessary to finance the long term investment plans or to continue improving the indebtedness profile.

Item 10.1.g. Usage Limits of the already contracted financing

A Company has contracted with the Brazilian Development Bank ("BNDES"), Banco do Nordeste ("BNB"), and Financier of Studies and Projects ("FINEP"), lines of credit available for release in the amount of R$ 679 million.

Additionally, in April 2012 the Company contracted with a group of 19 banks with a syndication of US$500 million (Syndicated Revolving Credit Facility - Dual Currency). During 2012, the Company did not use the line of credit available.

Item 10.1.h.

Item 10.1.h. significant variations in each item of financial statements

Main variations in the consolidated balance sheet, comparing December 31, 2012 to December 31, 2011.

Current assets

The current asset totalized R$11,590.0 million on December 31, 2012 and R$11,123.7 million on December 31, 2011. On December 31, 2012, the current assets represented 37.7% of total assets, compared to 37.1% in the previous year.

Cash and cash equivalents

Cash and cash equivalents presented a increase of 41.3%, from R$1,366.8 million as of December 31, 2011 to R$1,930.7 million as of December 31, 2012. Such increase is mainly due to the Company’s financing activities.

Trade accounts receivable, net

Trade accounts receivable totaled R$3,131.2 million as of December 31, 2012, decreasing 2.4% when compared to December 31, 2011, which totaled R$3,207.8 million. This reduction is due to the better management of receivables in receipts.

Inventories

On December 31, 2012, inventories totaled R$3,018.6 million compared with R$2,679.2 million as of December 31, 2012, increasing 12.7% or R$339.4 million. There was a significant variation on the inventory, mainly due to the decrease on the external market demand.

Non-current assets

As of December 31, 2012, non-current assets totaled R$19,182.3 million (R$18,859.7 million as of December 31, 2011), increasing R$322.6 million. This variation is a consequence from the net increase in property, plant and equipment.

Property, plant and equipment, net

On December 31, 2012 property, plant and equipment increased 8.9%, totaling R$10,670.7 million (R$9,798.3 million as of December 31, 2011). Improvement and productivity projects amounted to R$893.0 million and were allocated in several plants and regions. Depreciation and amortization amounted to R$488.3 million and there were also disposals in the total amount of R$723.4 million mainly due to implementation of TCD, sales or obsolescence.

Current liabilities

Current liabilities totaled R$7,464.2 million as of December 31, 2012 (R$7,987.8 million as of December 31, 2011) presenting an decrease of 6.6%. Such decrease is related to the export credit lines, which decreased approximately 67.6%, meaning R$929.4 million aiming to finance the Company’s working capital. Current liabilities represented 24.3% of total liabilities, compared to 26.6% from the previous year.

Short-term loans and financing

Short-term debts, including the current portion of long-term debt with financial institutions totaled R$2,440.8 million as of December 31, 2012 (R$3,452.4 million as of December 31, 2011), presenting a reduction of 29.3%. The decrease of the debts is related for the export credit lines to finance the Company’s working capital.

Suppliers

Debts to suppliers of raw materials, materials and services that are necessary to the operational activities of the Company amounted to R$3,381.3 million as of December 31, 2012 and R$2,681.3 million as of December 31, 2011, increasing 26.1%. This decrease is related to the growth of the production and the costs of the main raw materials

Non-current liabilities

As of December 31, 2012 non-current liabilities totaled R$8,732.0 million (R$7,885.7 million as of December 31, 2011), representing a increase of R$846.3 million during the year, mainly due to increase of long-term debts.

Long-term loans and financing

Long-term debts with financial institutions totaled R$7,077.5 million, as of December 31, 2012 and R$4,601.0 million as of December 31, 2011, representing an increase of R$2,476.5 million.

Shareholder´s Equity

The shareholders’ equity of 2012 corresponded to R$14,576.0 million (R$14,110.0 million as of December 31, 2011). There was an increase of 3.3% derived from the variation of the following groups: reserve for expansion in the amount of R$237.5 million; reserve for capital increase in the amount of R$155.1 million; legal reserve in the amount of R$40.7 million and reserve for government grants in the amount of R$67.4 million.

Main variations in the consolidated balance sheet, comparing December 31, 2011 to December 31, 2010.

Current assets

The current asset totalized R$11,123.7 million on December 31, 2011 and R$10,020.6 million on December 31, 2010. The increase of R$1,103 million is primarily represented by the trade accounts receivable and inventories, as a consequence from the organic growth of the Company and its subsidiaries. On December 31, 2011, the current assets represented 37.1% of total assets, compared to 36.1% in the previous year.

Cash and cash equivalents

Cash and cash equivalents presented a decrease of 40.8%, from R$2,310.6 miillion as of December 31, 2010 to R$1,366.8 million as of December 31, 2011. Such decrease is mainly due to the Company’s investment activities.

Trade accounts receivable, net

Trade accounts receivable totaled R$3,207.8 million as of December 31, 2011, increasing 25.1% when compared to December 31, 2010, which totaled R$2,565.0 million. This increase is due to the growth of 12.8% on sales during the 2011 fiscal year.

Inventories

On December 31, 2011, inventories totaled R$2,679.2 million (R$2,135.8 million as of December 31, 2010), increasing 25.4% or R$543.4.million There was a significant variation on the inventory of finished goods, mainly due to the decrease on the external market demand.

Non-current assets

As of December 31, 2011, non-current assets totaled R$18,859.7 million (R$17,730.8 million as of December 31, 2010), increasing R$1,128.9 million. Such variation is a consequence from the net increase in property, plant and equipment and from the increase in other assets group, due to an advanced payment in the amount of R$180.0 million for the acquisition of assets related to the integration, production and porks slaughtering.

Current liabilities

Current liabilities totaled R$7,987.8 million as of December 31, 2011 (R$5,686.4 million as of December 31, 2010) presenting an increase of 40.5%. Such increase is related to the export credit lines, which increased approximately 160.9%, meaning R$1,097.3  million aiming to finance the Company’s working capital. Current liabilities represented 26.6% of total liabilities, compared to 20.5% from the previous year.

Short-term loans and financing

Short-term debts, including the current portion of long-term debt with financial institutions totaled R$3,452.4 million as of December 31, 2011 (R$2,222.7 million as of December 31, 2010), presenting a growth of 55.0%. The increase of the debts is related to the funding for the export credit lines to finance the Company’s working capital.

Accounts Payable

Debts to suppliers of raw materials, materials and services that are necessary to the operational activities of the Company amounted to R$2,681.3 million as of December 31, 2011 and R$2,059.2 million as of December 31, 2010, increasing 30.2%. This increase is related to the growth of the production and the costs of the main raw materials, such as soybean meal (5.1%).

Non-current liabilities

As of December 31, 2011 non-current liabilities totaled R$8,428.6 million (R$7,885.7 million  as of December 31, 2010), representing a decrease of R$542.9 million during the year, mainly due to the higher amount transferred from long-term to short-term and to the reduction of the provision for civil risks.

Long-term loans and financing

Long-term debts with financial institutions totaled R$4,601.0 million as of December 31, 2011 and R$4,975.2 million as of December 31, 2010, representing a decrease of R$542.9 million. This decrease is a consequence of the transference of the debt from the long-term to the short-term.

Shareholder´s Equity

The shareholders’ equity of 2011 corresponded to R$14,110.0 million (R$13,636.5 million as of December 31, 2010). There was an increase of 3.5% derived from the variation of the following groups: reserve for expansion in the amount of R$305.2 million; reserve for capital increase in the amount of R$265.3 million; legal reserve in the amount of R$68.4 million and reserve for government grants in the amount of R$56.5 million.

Main variations in the consolidated balance sheet, comparing December 31, 2010 to December 31, 2009.

Current Assets

Current assets totaled R$9,852.1 million on December 31, 2010 and R$10,677.9 on December 31, 2009, representing a decrease of R$825.8 million, mainly due to the financial investments in the amount of R$1,481.7 million. The accounts receivable from customers increased R$424.3 million as a consequence of the sales revenue growth. The reduction of financial applications plus the generation of operational cash was allocated primarily to the reduction of loans and increase on the Company’s investments. As of December 31, 2010, current assets represented 35.5% of the total assets, when compared to 37.6% from the previous year.

Cash and cash equivalents

The group presented a decrease of 25.2%, from R$4,243.8 million as of December 31, 2009 to R$3,174.4 million as of December 31, 2010 as a result, mainly to the financial investments redemption utilized for the settlement of the indebtedness from the wholly-owned subsidiary Sadia.

Trade accounts receivable, net

Trade accounts receivable totaled R$2,565.0 million as of December 31, 2010, increasing 19.8% when compared to December 31, 2009, which totaled R$2,140.7 million. Such increase is a consequence of the growth of sales revenue.

Inventories

As of December 31, 2010, inventories amounted to R$2,135.8 million  (R$2,225.5 million as of December 31, 2009), representing a decrease of 5.3%. There was a decrease in finished goods in tem amount of R$216.9 million  due to a better sales performance in the current year, while in the end of the prior year the inventories levels were high due to a lower demand in the foreign market. The remaining inventories items increased R$97.2. million  The poultry, pork and beef in formation to be slaughtered, are classified as biological assets, in the current assets and totalized R$900.7 million on December 31, 2010 (R$865.5 million on December 31, 2009).

The poultry and pork for production, breeding stocks with the purpose of generating new biological assets, are classified as biological assets, in the noncurrent assets and totalized  R$377.7 million on December 31, 2010 (R$391.2 million   on December 31,  2009).

Recoverable taxes

The recoverable taxes balance corresponded to R$695.9 million on December 31, 2010 and R$745,6 million on December 31, 2009. Such credits, which are expected to be compensated in the 2011 fiscal year, basically refers to ICMS, PIS, COFINS, Income Taxes and Social Contribution. The export activity, reduced taxes rates in the domestic market, investments in fixed assets and investments in marketable securities provided credits superior to debits generated in the sales.

Noncurrent assets

The noncurrent assets amounted to R$17,899.4 million on December 31, 2010 and R$17,705.7 million  on December 31, 2009; increasing R$193.7 million . The increase is related to investments in property, plant and equipment and the deferred recoverable taxes, which fluctuations amounted R$368.1 million . On the other hand, there was a reduction of R$299.0 million  in the balance of marketable securities.

Recoverable Taxes

The recoverable taxes balance increased R$114.3 million ; reaching R$767.4 million  on December 31, 2010, as well as, in the current assets refers basically to ICMS, PIS, COFINS, Income Taxes and Social Contribution Taxes, subject to future offsets.

Deferred income taxes

The deferred income taxes balance totalized R$2,487.6 million  on December 31, 2010 and R$2,426.4 million  on December 31, 2009. The balance comprises net operating losses and temporary differences. The realization of such assets will occur as long as the contingencies are settled and profits generated.

Property, plant and equipment

The balance increased R$192.6 million , totalizing R$9,066.8 million  on December 31, 2010 and R$8,874.2 million  on December 31, 2009. The acquisitions amounted to R$693.3 million  disposals, depreciations and the fair value due to business combination with Sadia totalized R$504.1 million . Among the acquisitions the following are highlighted: expansion of R$116.4 million , of Campos Novos - SC R$75.1 million , constructions in progress in Sadia mainly related to the Lucas do Rio Verde and  Vitória de Santo Antão in the amount of R$198.1.

Intangible

The balance totalized R$4,247.3 million  on December 31, 2010 and R$4,276.5 million  on December 31, 2009; and comprises: goodwill in the amount R$2,833.0 and the trademark of R$1,256. million . 

Current liabilities

The current liabilities totalized R$5,621.2 million  on December 31, 2010 and R$6,267.9 million  on December 31, 2009; a reduction of 10.3%, mainly in the debt with financial institutions due to the payment of Sadia’s outstanding loans.

Financing and loans

The short term debt, including the short term portion of non current debt totalized on December 31, 2010 R$2,227.7 million  and on December 31, 2009 R$3,202.7 million , a reduction of 30.4%. The reduction on the debt is mainly due to the payment of Sadia’s outstanding loans.

Suppliers

The suppliers balance R$2,059.2 on December 31, 2010 and R$1,905.4 million  on December 31, 2009, increasing 8.1%, above the increase in the cost of goods sold which increased 33.2% and are related to the purchase policy and the prices behavior of the main raw materials.

Noncurrent liabilities

Totalized R$8,493.8 million  on December 31, 2010 and R$9,120.0 million  on December 31, 2009; reducing 6.9%, mainly due to the payment of Sadia’s outstanding loan.

Financing and loans

The noncurrent debt totalized R$4,975.2 million  on December 31, 2010 and R$5,853.5 million  on December 31, 2009, reducing R$878.3 million , mainly due to the payment of Sadia’s outstanding loan.

Tax, labor and civil contingencies

The tax, labor and civil contingencies totalized R$1,118.9 million  on December 31, 2010 and R$1,031.6 million  on December 31, 2009.  The balance is related to the lawsuits which the outcomes are considered probable, being: tax R$859.9 million , labor R$110.1 million , civil R$148.9 million . 

Deferred income taxes

Totalized R$1,635.7 million  on December 31, 2010 and R$1,456.4 million  on December 31, 2009. The amount of R$1,124.4 million  refers to net operating losses and temporary differences in the amount of R$511.3 million . 

Shareholders’ equity

The shareholders’ equity totalized R$13,636.5, while in the end of the 2010 fiscal year amounted to R$12,995.7 million . There was an increase of 4.9% due to the net profit of R$806.8, reduced by the interest on own capital in the amount of R$262.5 million . 

Segment Presentation

The operating segments are reported consistently with the management reports provided to Board and Directors for assessment the performance of each segment and allocating resources.

The segment information is prepared considering 4 reportable segments, as follows: domestic market, foreign market, dairy products and food service. The reportable segments identified primarily observe division by sales channel.

(i)          Domestic market: includes the Company´s sales for inside the Brazilian territory, except those relating to products in the dairy and the food service channel.

(ii)         Foreign market: includes the Company´s sales for exports and those generated outside the national territory, except those relating to products in the dairy and the food service channel.

(iii)        Dairy products: includes the Company´s sales of milk and dairy products produced in the domestic and foreign market.

(iv)       Food service: includes the Company's sales of all products in its portfolio, except in the category of dairy products, generated in the domestic and foreign market to the customers for food service category that includes: bars, restaurants, industrial kitchens, among others.

Hence, these segments are subdivided according to the nature of the products whose characteristics are described below:

(i)          Poultry: involves the production and trade of whole poultry and cuts in  natura.

(ii)         Pork and beef cuts: involves the production and trade of cuts in natura.

(iii)        Processed: involves the production and trade of processed foods, frozen and processed derivatives of poultry, pork and beef.

(iv)       Others processed: involves the production and trade of processed foods like margarine and vegetable products and soybean-based.

(v)        Milk: involves the production and trade of pasteurized and UHT (“Ultra-high temperature”) milk.

(vi)       Dairy products and other beverages: involves the production and trade of foods milk derivatives, including flavored milk, yogurts, cheeses and desserts. This category also includes beverages from fruit and soybean-based.

(vii)      Others: involves the production and trade of animal feed, soy meal and refined soy flour.

The net sales for each one of the reportable operating segments are presented below (In thousands Reais):

The operating results before financial income (expenses) for each one of the reportable operating segments are presented below (In thousands Reais):

No customer was individually responsible for more than 5% of the total revenue earned in the twelve month period ended December 31, 2012.

Net revenues from exports originate in the segments of the foreign market, dairy products and food service, as set for below (In thousands Reais):

The goodwill originated from the expectation of future profitability, as well as the intangible assets with indefinite useful life (trademarks), were allocated to the reportable operating segments, taking into account the nature of the products manufactured in each segment (cash-generating unit). The allocation of intangible assets is presented below (In thousands Reais):

⁽¹⁾      Write-off of goodwill and trademarks due to the execution of TCD (note 12).

⁽²⁾      During the year ended December 31, 2012, there was an increase in the goodwill allocated from Heloisa in the amount of R$7,296 thousand, due to an adjustment in the open balance from acquired company.

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Net Operating Sales

BRF reported net operating sales of R$ 28,5 billion in the year, a growth of 10.9% the result of organic growth, the incorporation of companies acquired in Argentina, more especially Quickfood, and an expanded portfolio thanks to innovation with the launch of various products and categories designed to cushion the impact of asset transfers in 3Q12 in accordance with the agreement signed with CADE (TCD).

DOMESTIC MARKET

The principal challenge to BRF’s domestic operation in 2012 was to mitigate or minimize the impact of asset sales and the suspension of brands both from the operational point of view as well as from that of restoring the scale of the business. There were other challenges as well: the spike in grain prices with the impact on the cost of production, and the oversupply of finished product due to different problems in the export market, among them, Russian restrictions on imports of pork meat for protectionist reasons and excess inventory in Japan.

Between asset sales and suspended brands, there was a reduction of a third by volume in the domestic market.  The objective of minimizing this impact was achieved: a growth of 9% on the revenues of the 4T12 compared with 2011, despite taking into account the ceding of R$ 850 million in quarterly sales with respect to our commitment under the TCD agreement. The Company adopted the strategy of using the Sadia brand to recover the scale lost as a result of the suspension of some of the categories under the Perdigão brand, the latter in turn innovating in other categories or in new ones where there was no restriction.

A large part of the Company’s success is due precisely to innovation, research and planning. In 2012, 58 innovation projects were developed leading to the launch of 97 new products in the domestic market and accounting for 8.5% of total domestic sales revenue for the year. Among new product launches under the  Sadia label were: pork sausage, pizzas, lasagnas, beef cuts, processed products and ready-to-eat dishes; under the Perdigão brand name: the Sanduba and Meu Menu line; industrialized and frozen products; and margarines with the relaunch  of the Claybon brand.

There were also some important launches of convenience foods, with the Assa Fácil line for example and new festive line products. Using spare capacity at the Dánica plant in Argentina, the Company launched Perdigão mayonnaise in the retail market.

These options seek to track trends in convenience foods to meet the demand for health-related products with brands aligned to a balanced life style.

Sales to the domestic market reached R$ 12,6 billion, a 8.5% increase, with a 1.1% rise in volume and average prices 9.7% higher against an increase of 16.3% in average costs, reflecting operating profits of R$ 1,0 billion in this segment, 16.9% down, the operational margin recording 8.2% in 2012 compared with 10.7% in 2011.

Three strategic initiatives have been established for domestic market business in 2013, the first full year as a completely unified operation: identify the role and positioning of each category in the market; establish strategies for each brand; and effectively capture synergies through the increase in productivity and efficiency at low cost. This will be possible thanks to the seamless operation of a single company using distribution centers operating all the brands and  deliveries being realized in a single vehicle.

MARKET SHARE –  %

EXPORTS

Export operations reflected the international scenario characterized by excess inventory in the Middle East, Japan and Russia and by the sharp rise in grain prices creating worldwide oversupply and squeezing the Company’s margins – albeit with some recovery in sales, prices and profitability in the last quarter of the year.

Exports reached R$ 11,6 billion in the year, a growth of 15.2% in revenues with 9.6% higher volume, totaling 2,5 million tons. Average prices reported a gradual recovery as supply adjusted to demand in the leading markets, rising by 5.1% in local currency terms. However, this proved insufficient for a total recovery in operating margins which declined from 5.5% to 1.6% for the year due to the 8.8% hike in production costs – principally driven by significant increases in the main raw materials and the prevailing conditions in the Company’s principal markets.

In the year, BRF recorded progress in its international operations based on its four key pillars of brand, portfolio, advances in distribution logistics and local production. The following initiatives are of note:

Argentina – Initiation of a process of consolidation and capture of synergies of five companies through concentration on BRF Argentina, with nine plants and 22 refrigerated distribution centers. Work has been accelerated since June when the company took full control of Quickfood, leader in the hamburger market with the Paty brand, as part of the asset exchange agreement. Integrated operations in the Argentine market represented R$ 1.2 billion of sales/year.

Middle East –  Start of work on the construction of a processed foods plant in Abu Dhabi (United Arab Emirates) with inauguration scheduled for 2013. The first to be built outside Brazil, the unit will have a capacity to produce approximately 80 thousand tons per year of breaded products, hamburgers, pizzas and industrialized products. A 49% stake in Federal Foods was also acquired, a company which for more than 20 years has distributed products under the Sadia brand name in the region. The company has six branches in the United Arab Emirates and one in Qatar, serving two thousand points of sale. The company also distributes Hilal and Perdix brands.

Europe – A new high productivity line was installed at Plusfood with technological improvements and a 75% expansion in production capacity to 20 thousand tons annually of breaded, cooked and grilled chicken products as well as hamburgers and other items.

China – A company was constituted with Dah Chong Hong Limited (DCH) for the distribution of the Sadia brand to the retailing and food  services segments in Hong Kong and Macau. The joint venture is responsible for BRF’s businesses in the Chinese market including the Perdix brand and all the Company’s operations - for which DCH’s existing storage, sales and distribution infrastructure will be used. During the year, feasibility studies were initiated for building a processing plant in China using raw material imported from Brazil or acquired locally.

Africa – Sadia-branded products, previously commercialized to trading companies and wholesalers, were substituted by the Perdix brand. The Sadia brand will be relaunched in 15 countries in Africa in 2013 with the focus on retailing and food services and a new portfolio to include breaded products, pastas, frankfurters and hamburgers.

More than 219, products were launched on the international market during the year. In Europe, a novelty was the launch in August of the Chixxs line of breaded products with specific flavors (Indian, Mexican, Italian).

A new international marketing strategy is designed to position Sadia as a premium brand. The new concept evaluated in 22 countries and by more than 7 thousand people presents a single visual identity but with regionalization of packaging and communication through colors and images.

During the year, the leading markets recorded the following performance in revenues and volumes comparing 2012 with 2011.

DAIRY PRODUCTS

During the year, the Company repositioned the Batavo and Elegê brands, investing in new packaging to communicate the new concepts of the product lines in a more efficient way. Another initiative which gained traction was the ‘Cheese you ask by the

brand and it’s Sadia’ ( Queijo se pede pela marca, e é Sadia )  marketing campaign. The objective is to reinforce BRF’s presence, expanding its market share of higher value-added products such as processed and refrigerated items. The Company ended 2012 as the third largest dairy products manufacturer in Brazil with a 10.5% share of domestic business in the segment .  

In line with Mundo Batavo guidelines, the brand adopted the ‘Thinking about your nature’ ( Pensado para sua natureza ) signature .  This is printed on the packages and conveys the concept of a sustainable waste-free world with attributes of wellbeing, balance and nature, proposing solutions for the life of the modern man. The entire project is focused on innovation. The Pense Zero line added functional products to the yogurts line such as Bio Fibras. With the launch of the Pedaços line (with fruit chunks), a yogurt with up to ten times more fruit than similar products in the

market, the brand reported a 3.3 percentage points growth by volume in the cups category between April and November (Nielsen data).

With the Elegê brand, restyled packaging helps disseminate the new brand slogan: One gesture, two smiles (Um gesto ,dois sorrisos) . On the back of the packages are stories of affection and on the side, there is space where consumers can leave messages. Market leader in various categories in the states of Rio Grande do Sul and Rio de Janeiro, BRF is now seeking to expand and strengthen the brand’s footprint throughout the country. For example, the strategy includes the launch of products customized to habits of the Northeast Region such as milk-based drinks in sachets.

Revenue from milk products amounted to R$ 2,7 billion, a growth of 6.9% with volumes 0.7% down and average prices 7.7% higher while average costs rose 7.6%. The operating margin recovered from a fall of returning profitability de 1.0% to stability compared with the preceding year.

The major challenge in 2012 was to fully integrate the dairy products business into BRF’s operational structure. The capture of synergies will benefit production and this process should be complete by the end of 2014, involving: distribution centers, and sales, technical and management teams; definition of the optimum size of the business prioritizing results; improving execution and growth in a sustainable manner.

Plant remodeling has adopted these guidelines. In 2012, 11 units of the dairy products business underwent expansion and modernization with an increase in the number of shifts and the hiring of additional labor. More than R$ 30 million was invested in the cheese plant in Itumbiara (GO) which is now producing a thousand tons per month. Building work began on a modern factory in Barra do Piraí in the state of Rio de Janeiro with a capacity of 15 million liters per month for efficiently meeting demand from one of the largest markets for fluid milk in Brazil at lower cost.

The Company also signed a joint venture with Carbery to improve the processing of whey protein ingredients, a byproduct of cheese manufacture, using the Irish group’s technology. The agreement involves a shared investment of US$ 50 million for the construction of a production unit which is scheduled to begin operations in 2014.

FOOD SERVICES

The focus during the year was in the harmonization of commercial models in a challenging period for the sector. The strong upward trend in the consumption of away-from-home eating which has characterized the last few years suffered from inflation in the services segment driven by spiraling rental and labor costs.

In meeting the challenge of these difficulties, the food services unit expanded its commercial force, consolidated services provided to 62 thousand companies and gained market share with strategic clients. In spite of a less positive scenario, the business was able to report growth of 10%. Investments were also made in a new category of product: sachets of ketchup, mustard and mayonnaise produced by the plant acquired in Argentina. This launch represents part of the strategy of increasing innovation for leveraging the growth and value of the business.

Revenues from the food services segment rose 7.9% to R$ 1,6 billion with volumes 0.9% higher on an operational margin of 10.7% against 15.1% in 2011 and R$ 166,9 million in operational results – a 23.3% decline in relation to the year 2011.

The segment’s growth has been driven principally by two important factors: level of employment and income which will tend to maintain upward momentum. Another important element is the change in life style with the emergence of a new consumer profile with greater purchasing power and seeking practicality in eating. This sector of the population have their meals more frequently away from home being principally made up of retirees, small families or those living alone.

Away-from-home meals should receive a further boost from tourism and services thanks to the major sporting events programmed for future years such as the Confederations Cup in 2013, the World Cup in 2014 and the Rio Olympics in 2016.

Another growth catalyst is the international market with the opportunities that are opening up in China as a result of the joint venture with Dah Chong Hong Limited (DCH) for food services in that country as well as meeting demand from the global fast food network accounts.

Cost of Sales (CPV)  

Cost of sales  rose 15.8% in relation to 2011 recording R$ 22.1 billion reporting an increase proportionally greater than sales revenue, squeezing margins during the year. The principal impacts on costs of products sold were: 1)  the significant increase in the cost of the principal raw materials – corn and soybeans  due to failure in the American grain crop; 2)  readjustments in the industry as a whole as a result of collective wage bargaining; 3)  an increase in items restated against the foreign exchange rate such as: packaging, freight, vitamins; 4)  temporary spike in  production costs due to the breakup of certain parts of the Company with the implementation of the TCD process.

Gross Profit and Gross Margin

Gross Profit amounted to R$ 6,5 billion, a 3.1% reduction in the year with a gross margin 3.3 percentage points lower than reported for 2011,  declining from 25.9% to 22.6%. In spite of the positive commercial  performance in sales, margins remained under pressure from rising costs.

Operating Expenses  

Thanks to efforts to reduce overall expenses, BRF was able to maintain operating expenses at the same level as 2011 at 16.5%.

Commercial expenses growth 12.5%, reflecting the growth of variable expenses due to: 1)  investments in the development of new lines and products (innovation), product launches and marketing campaigns; 2)  an increase of operations in the logistics chain, which was also significantly impacted by the TCD process (transfer of assets and repositioning of the  portfolio and distribution channels); 3)  port and truck driver strikes.

Administrative expenses and fees fell 8.9% due to the simplification of the administrative structure of the relationship between BRF and its subsidiaries and the lower disbursements of consultancy fees in the quarter (in 2011, there were significant payments to consultancies advising the Company in its negotiations with CADE for approving the merger).

Other Operational Expenses  

Despite the pre-operational phase of the new industrial units, insurance claims, provisions for tax risks, results of TCD-related divestments, the other operational expenses item posted a decline of 5.4% in the year due to revenues from the  reversal of provisions, recovery of expenses and leasing with third parties. Expenses with profit sharing are also booked under this item and recorded a decline as a reflection of the operating results.

Operating result before financial expenses and Operating Margin  

In the light of the above explanations, the operating result before net financial expenses reached R$ 1,4 billion in the year –30.6% down in relation to the operating margin of 4.9% of net sales against 7.8%. The 2.9 percentage point decrease is due to a combination of factors during the year of a one-off nature such as: inflated inventories in the Japanese market; pressure on variable commercial costs and expenses; and extraordinary expenses due to the  transitory process of transferring assets in accordance with the provisions of the TCD.

Financial Result

Net financial expenses totaled R$ 570,6 million, a 19.0% increase, especially due to higher debt levels as a result of the currency effect and the need to allocate cash to support investments in Capex and working capital, the result of reduced cash generation in the period.

Income Tax and Social Contribution

Income tax and social contribution totaled a positive R$ 2,4 million in the year against a negative R$ 156,5 million reported in 2011 due to the differences in tax rates on the results of overseas subsidiaries and foreign exchange variation on overseas investments. This deterioration is a combination of reductions due to the results of the overseas subsidiaries and payment of interest on equity before the provision for tax losses as a result of the incorporation of Sadia recorded in 2011.

Participation of non-controlling shareholders  

The result of R$ 7,4 million negative against R$ 2,3 million positive in 2011 recorded for this item reflects the consolidation of results of the subsidiaries acquired in Argentina through Avex and, as from 3Q12, the incorporation of the results of Quickfood plus those of the Al Wafi and Plusfood subsidiaries, among others.

Net Income and Net Margin  

In the light of the foregoing, the net income was R$813,2 million in 2012 with a net margin of 2.9%, a decline of 40.5% compared with 2011 due to the squeeze on margins during the year from production costs which reported a proportionally greater increase than revenues.

EBITDA

Adjusted EBITDA (operating cash generation) reached R$ 2,7 billion, a 17.4% decline, recording an adjusted EBITDA margin of 9.4% against 12.6% in 2011, down by 3.2 percentage points. In 4Q12, adjusted EBITDA was R$ 1,0 billion, a 10.7% decline with an adjusted EBITDA margin of 12.5% against 13% reported for the same period in 2011, for reasons already explained above.

Adjusted EBITDA reached R$ 2,3 billion in 2012 (18.7% lower than 2011), with adjusted EBITDA margin of 8.2% against 11.2% in 2011. Adjusted EBITDA reached R$ 850,5 million in the 4Q12 (16.4% over than 2011), with adjusted EBITDA margin of 10.4% against 10.3%.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

The following tables provide a comparison of results of operation on December 31, 2011 and December 31, 2010, based on the consolidated financial statements prepared in accordance with IFRS.

From the year 2011, the BRF has included a larger opening of market segmentation, as described above.

Net Sales – BRF registered net operating sales of R$ 25.7 billion in the year, 13.3% higher, principally supported by good performance in the domestic market and the Food Service segment. In 4Q11, net operating revenue totaled R$ 7.1 billion, a 10.9% increase, driven by the commercialization of the festive line of products (year-end holiday season). 

Domestic Market

Domestic market sales evolved 14.3% to R$ 11.6 billion, a period marked by lower robust consumption rates compared with 2010. Additionally, the increase in the price of commodities exerted upward pressure on production costs. On the other hand, price and cost management policy, the efforts made to improve sales team productivity and investments in innovation contributed positively to results.

Meats –  Despite an increase in costs – more especially those of grains – the meats segment posted a 18% improvement in revenue with the commercialization of 1.8 million tons in the year. Total revenue was R$ 9 billion.  

Other processed products – In 2011, BRF dedicated special attention to innovation in the frozen product business. The distribution of the Sadia-branded products under the Escondidinho label was expanded throughout Brazil and reported excellent sales performance. The Perdigão Meu Menu line was also expanded, consumer reception being particularly good. Total revenue for the segment was R$ 2.0 billion, a growth of 2.3%.

External Market

Operations in the international market developed satisfactorily in 2011. Despite oscillations in foreign exchange rates, the economic crisis in Europe, the Russian trade ban on Brazilian meat imports and the escalating costs of commodities, net sales grew 12.3% to R$ 10 billion, equivalent to a volume of 2.2 million tons, 1.2% lower than the preceding year due to the strategy of prioritizing wider margins.

Some markets such as Europe, Japan, China and Singapore helped drive a positive performance while the Middle East and Egypt, affected by popular uprisings (the Arab Spring), as well as Iraq, reported a weaker business climate. The European Plusfood division turned in results above forecast reflecting strategic changes in the client and product portfolios and the modernization of the industrial unit in the Netherlands.

Far East – Volumes grew 4% and revenues, 20.1% in the year despite pressure to reduce prices in the final quarter in the Japanese market, which had performed well up to the end of the first half.  We expect margins to be squeezed in this market until local inventories adjust to demand.

Eurasia – Revenues fell 26.6%, with volumes also down 31.5% due to the Russian ban on imports from the majority of Brazilian exporting plants. The ban has since been lifted and exports should normalize as from February 2012. However, the Ukraine took a large part of the volume originally destined for Russia, alleviating most of the negative impact of these import restrictions.

Europe – In this region, difficulties in some countries, especially Greece, Italy and Portugal have had no impact on our businesses. Sales revenue in this market increased 8.1%, albeit on lower volumes of 9.2% due to the Company’s switch in strategic focus to higher value added particularly in the case of those products made at Plusfood, which expanded its portfolio, doubling our production capacity in Europe.

Middle East – Sales revenue was up 5.7% on stable volume. Margins were squeezed for products such as chicken griller – a heavily demanded product in this market, more especially in the 2H11. However, while our marketing campaigns focused on the religious period of Ramadan with the objective of further enhancing customer loyalty to the Sadia brand - Top of Mind in the region -, it also served to relieve some of the pressure on margins for in natura products. The Company’s objective in this market is to add value by building a new industrial unit in the United Arab Emirates focused on the production of processed products (breaded products, hamburgers, etc.).

South America – Revenues increased 55.2% and volumes 14.8%. In addition to growing demand in these markets, business benefited from the incorporation of the acquired Avex and Dánica operations as from 4Q11 in Argentina.

Africa and other countries – In Africa, the Company continued to pursue its principal objective of improving relationships with some distributors in those regions of the continent considered strategic, the area as a whole growing sales revenue by 32.7%, while in other countries growth was 51.7%.

Dairy products – An improved product mix was instrumental in increasing the dairy product sales revenue 9.8% to R$ 2.5 billion. The atypical spike in sugar and the continual upward pressure on milk prices paid to the producers, pressured production costs in the segment.

Some important  steps were taken in remodeling the industrial complex in this segment and launching the Naturis line, Sadia-branded danbo and mozzarella cheeses and the ecologically correct packaging for Batavo milk.

Food Service – In 2011, this segment reported a performance which was better than the average for the market. This reflects the importance of the Food Service business in the Company’s expansion strategy in a process which adds in customer service as a competitive differential. Sales revenue increased 19.7% to R$ 1.4 billion. The result is largely due to the growth in the consumption of away-from-home meals, increased purchasing power nation-wide, more especially the C class, and by the increase in food service chains as a result of a growing number of shopping malls not only in the major cities but also in upcountry areas. The management model for the area contributed to results, reflecting the adoption of processes representing the best practices of both Sadia and Perdigão following the effective merger of the two. Examples are the added value in the delivery of beef and the improved focus on the service provider areas with dedicated portfolio and commercialization areas. In addition, the adding of value in the positioning of the global accounts contributed to the performance of the Food Service segment.

Cost of Sales – The cost of sales rose 12.4% to R$ 19 billion. Although the cost of the principal raw materials – corn and soybeans – increased 38% for corn and 15% for soybeans during the year and there was also pressure from other costs such as direct raw materials, COGS was 74.1% of net sales, 60 basis points lower than the preceding year, principally due to captured synergies.

In 4Q11, the cost of sales reported a year-on-year 13% increase, representing a 130 basis points rise in COGS from 71.3% to 72.6%.  4Q10 benefited from a well adjusted inventory policy both for raw materials as well as seasonal products, built up to confront grain costs.

Gross Profit and Gross Margin – Gross Profit amounted to R$ 6.7 billion, a gain of 16.2%, reflecting an improvement of 60 basis points, or 0.6 percentage points in gross margin, which increased from 25.3% to reach 25.9% of net sales, supported by revenue performance and synergy gains. In 4Q11, Gross Profit amounted to R$ 1.9 billion – a year-on-year increase of 5.8%, which we consider positive given the excellent performance in 4Q10 when costs were lower.

Operating Expenses – Operating expenses were 10.6% higher due to a rise of 40.2% in fixed commercial expenses and 28.2% in administrative expenses due to investments in the implementation of IT systems and in consultancy work related to the merger. However, variable commercial expenses fell 18.3% thanks to gains in synergies due to a reduction in logistics costs. In 4Q11, operating expenses amounted to R$ 1.2 billion – 17.4% higher, also a reflection of the increase in fixed commercial overheads and administrative expenses/management compensation.

Other Operating Results – The amount of R$ 402.7 million in other operating results is 2.2% higher than the preceding year and incorporates income from the reversal of provisions, recovery of expenses, benefits plan and insurance claims. Expenses include: costs with the pre-operational phase of the new industrial units, loss damages, provision for tax and civil risks. In line with IFRS rules, participations in profits are also booked to this item.

Operating Profit and Margin – The Company recorded an operating margin which was 130 basis points higher – from 6.5% to 7.8%, the operating result indicative of the improvement in business performance. Operating income before financial expenses (EBIT) reached R$ 2 billion, a gain of 34.8%.

However in 4Q11, there was a decline of 9.2% to R$ 508 million in operating profit – EBIT, equivalent to an operating margin of 7.2% (150 basis points below the figure registered in 4Q10). This reflects greater pressures from costs of the principal raw materials, direct materials, exports and a one-off spike in fixed commercial and administrative expenses.

Financial – Net financial expenses totaled R$ 479.5 million (0.7% lower) and remained largely unchanged in relation to the preceding year. While currency volatility during the course of the year had an impact on increased outstanding debt and financial overheads, efficient risk management and the adoption of best practices of hedge accounting mitigated the adverse effects on financial result.

In addition to the foreign exchange translation effect, allocation of cash to investments in Capex  and acquisitions made during the year, increased net debt by 48.7% to R$ 5.4 billion, resulting in a net debt/EBITDA ratio of 1.7 times, with a book currency exposure of US$ 470.7 million.

In 4Q11, financial expenses were 21.6% higher than the same period in 2010 due to the foreign exchange translation effect on loans, financing and other currency denominated liabilities as well as a loss on the conversion of overseas investments.

In the light of the high level of exports, the company conducts operations with the specific purpose of currency hedging. In accordance with hedge accounting standards (CPC 38 and IAS 39), the Company uses financial derivatives (for example: NDF) and non-derivative financial instruments (for example: foreign currency debt) for conducting hedging operations and concomitantly, to eliminate the respective unrealized foreign exchange rate variations from the income statement (under the Financial Expenses line).

The use of non-derivative financial instruments for foreign exchange cover continues to permit significant reduction in the net currency exposure in the balance sheet, resulting in substantial benefits through the matching of currency liability flows with export shipments and therefore contributing to a reduction in the volatility of the financial result.

In 12.31.11, the non-financial derivative instruments designated as hedge accounting for foreign exchange cover amounted to USD 645.2 million with a reduction in currency exposure in the balance sheet of the same value. In addition, the financial derivative instruments designated as hedge accounting according to the concept of a cash flow hedge for coverage of highly probable exports, totaled USD 1,360 million + EUR 316 million + GBP 69,3 million and also contributed directly to the reduction in currency exposure. In both cases, the unrealized result for foreign exchange rate variation was booked to shareholders’ equity, thus avoiding the impact on the Financial Expenses.

Debt profile

Income Tax and Social Contribution – Income tax and social contribution totaled R$ 156.5 million for the year, 20.3% lower, due to differences in tax rates on the earnings of foreign subsidiaries and the foreign exchange translation effect on overseas investments. However, in 4Q11, the Company booked R$ 215 million under this item with respect to the constitution of a provision for losses of income tax and deferred social contribution on tax losses and negative base for social contribution on net income and not to be used following the incorporation of Sadia into BRF, expected for 2012, in line with CPC 24 (Subsequent Events – IAS 10), and CPC 32 (Taxes on Profits – IAS 12). The foregoing value reflects Management’s current best estimates. The final impact of Sadia’s incorporation with BRF will be calculated as at 31 December 2012. The provision will not affect the amount of dividends proposed/distributed relative to fiscal year 2011, and relating to the dividend distribution through the intermediary of payment of interest on shareholders’ equity.

Net Income and Net Margin – Net income was R$ 1.4 billion in the year with a net margin of 5.3%, an increase of 70.1% in relation to the preceding year, reflecting BRF’s good operating performance and synergies captured – this despite the twin challenges of exports and associated currency volatility. In 4Q11, net income reached R$ 121 million, 66.4% down due to the factors explained above.

As mentioned in the previous item, a provision was constituted in 4Q11 for the future incorporation of Sadia. Excluding this effect, the adjusted net income for the year would have been R$ 1.6 billion,  an increase of 96.8%, with a net margin of de 6.2% and R$ 336 million in 4Q11, 6.7% lower and equivalent to net margin of  4.7%.

EBITDA – EBITDA reached R$ 3.2 billion, 23.1% higher, recording a gain of 100 basis points in relation to the preceding year, building in the improvement in results and synergy gains in commercial cost and expense variables. On a year-on-year comparative basis, 4Q11 reported a reduction of 4.1%. In spite of factors already discussed such as: pricing pressure in some export markets, pressure from grain prices – reflecting in higher production costs for the principal raw materials, and strikes in the port of Itajai delaying shipments due to the need for diversion to other port causing the Company to turn in a narrower EBITDA margin, there was significant cash generation in 4Q11.

Ebitda breakdown

Comments on the performance of the results for the fiscal year ending December 31, 2010, compared to December 31, 2009.

The following tables provide a comparison of the results of the operation on 31 December 2010 and December 31, 2009, based on the consolidated financial statements prepared in accordance with IFRS.

To facilitate the comparison of two periods, we present some data from the sales volume and prices on a combined basis in order to give effect to the acquisition of Sadia as if it had occurred on January 1, 2009. This combined sales volume of information and the average sales price are not in accordance with IFRS and do not give effect to any pro forma adjustments related to business combination . 

Net Sales

Our net sales increased 8.3% to R$22.7 billion in 2010 from R$20.9 billion in 2009, primarily due to on a pro-forma basis and 42.6% higher according to CL(Corporate Law) figures considering the incorporation of results for Sadia as from July 2009, partially due to the results in 4Q10.

Net sales reached R$ 6.4 billion in 4Q10, a 20.6% increase and a growth of 12.2% in relation to 3Q10, particularly boosted by the domestic market with sales of year-end holiday products to the Brazilian market and an improved export performance. 

Domestic Market

BRF has successfully maintained its market share for the principal product categories thanks to innovative initiatives, product launches and brand sustainability campaigns in addition to the hands on management of prices and costs. In all segments, including dairy products, BRF has prioritized commercialization margin (value share) over to market share.

Sales to the domestic market totaled R$13.5 billion, a growth of 11.3% against the preceding year. The Company sold 3.8 million tons of product, 4.9% higher than 2009 on a pro-forma basis. Thanks to these results, margins were restored to pre-crisis levels.

In the fourth quarter, domestic market sales posted growth of 22% at R$ 4.0 billion and total volumes 9.8% higher.

The buoyant domestic market associated with an increase in real incomes in a scenario of full employment in conjunction with rising consumption among the emerging social classes, have helped stimulate demand and  sales to all  segments, especially those directed towards lines catering for products traditional to the year–end holiday period.

Meats - The segment posted an increase of 10.5% in sales and 6.6% in volume. The recovery in in natura meat exports helped to steady supplies of product to the domestic market sustaining prices and the sale of items with greater added value. As a result, average prices remained 3.6% above those registered for 2009 on a pro-forma basis while processed products registered an improvement of 690 basis points for the year. 

Due to the excellent demand for traditional year-end holiday products, 4Q10 reported sales 22,9% higher for meats, with a 10,4% increase in volume. The operating margin for higher added value products posted growth of 4.7 percentage points compared with 4Q09.

Dairy Products – Net sales for the dairy product segment in 2010 recovered to 2008 levels ending the period totaling R$ 2.3 billion. Margins were squeezed by high prices paid to milk producers. Average prices continued in the same level of 2009. The year under review did not show the typical pattern of an on- and off-season, a fact that rendered management of costs and inventory even more difficult. Since these problems prevented margins returning to historical levels, BRF pursued a policy of preserving profitability in the segment which translated into a reduced market share for processed items and UHT milks.

Other processed products- Highlights for the year in this segment were Meu Menu, a line of ready-to-eat/cook, frozen and individual dishes for consumers that live alone, and Escondidinho, inspired by traditional recipes of Brazilian cuisine and directed towards the family market. The Company ran campaigns designed to consolidate the brands, taking full advantage of events with major popular appeal such as the World Soccer Tournament. Overall, market share remained stable – with the exception of margarines where there was growth. Total sales for the segment were R$ 2.0 billion, a growth of 25.7% while volume reached 454.9 thousand tons, a rise of 13.1% and 79%, respectively on a pro forma and CL basis. In the fourth quarter, growth was 27.3% and 10.5%, respectively, in sales and volumes.

Food Service – This segment is a strategic one in BRF’s growth plans with the food service market benefiting from a change in the habits of the Brazilian population, growth in incomes and a recovery in employment. According to the IBGE’s Family Budgets Survey, the percentage of expenses on food away from home rose from 24.1% (2002/2003) to 31.1% (2008/2009). Thanks to this trend and BRF’s investments in products and services, the segment posted a year-on-year increase of 13.1% in sales and 15% in volume.

BRF is the leading player in the Brazilian food service business, supplying the largest food service chains and franchises in the country and developing customized solutions for enhancing its services and proximity to the customer. This segment is present in all the major urban centers, BRF using a proprietary and dedicated fleet of delivery trucks in addition to maintaining high standards of quality and reliability.

Foreign Markets

In line with guidance from the anti-trust authority CADE, the merging of international sales has permitted gains in synergies and scale with better price and portfolio management. The Company has repositioned its brands, benefiting from the segmentation of the markets. Sadia has become a premium brand focused on higher added value and innovation. Perdix is positioned as a mainstream high brand, dedicated to the commercialization of large volumes and products attuned to local tastes. Borella, Halal, Fazenda and others have been maintained as brands which compete with local overseas food product industries.

BRF’s international division, Plusfood, with units in The Netherlands and the United Kingdom, is reinforcing its strategy with the manufacture of items destined for the European market. Examples are Perfect Portions, a standardized line of items for the food service business as well as specific products geared satisfying European consumer demand.

In 2010, export revenue increased 4.3% to R$ 9,2 billion on volumes of 2.3 million tons (5.9% greater) – pro-forma basis and a growth of 40.2% in sales revenue on a CL basis. In the fourth quarter, exports reached R$ 2.4 billion, representing an increase of 18.3%, and 4.2% up in volume.

Pro forma

Meats – During the first half, full inventories in world markets depressed prices. In the light of this scenario, the Company adjusted its portfolio accordingly and by the second half with supply and demand back in balance, conditions had improved. However, the devaluation of US$ dollar against Reais, thus reducing revenues when translated into Reals, without reducing profitability.

Meat exports amounted to R$ 9.0 billion, 5% higher with volumes 6.1% up for the year. In 4Q10, export sales reached R$ 2.3 billion, an increase of 17.4% in export revenues and 3.9% in volume. Average prices in US dollars FOB (Free on Board), were 14% in relation to the preceding year. The appreciation of the real in relation to US Dollars resulted in price decline in terms of Reals and an overall reduction in export revenues also in local currency terms.

Dairy Products - The scenario of weaker international demand restricted sales volume on the overseas market with shipments recording a year-on-year decline of 28%. In the fourth quarter, volumes were 24.9% down, albeit with export revenues 11.2% higher. The Company is shortly to expand its unit in Argentina – a cheese manufacturer – to make it self-sustainable and to source of value-added exports. Argentina offers a stable supply of quality and competitively priced raw materials in addition to enjoying sanitary agreements with European countries making exports to these markets a feasible proposition.

Europe – The crisis in some countries – Greece, Ireland, Portugal and Spain – weakened the domestic economy and causing considerable instability throughout the year. Operations benefited from the pressure on international quotations for the principal grains (corn and soybeans), permitting an increase in prices to the European market. Expansion at Plusfood was instrumental in BRF enhancing its penetration in the region and the doubling of capacity at the Dutch unit is expected by mid- 2011. Production will be sold to such countries as Spain, Germany, Austria and Poland.

Middle East – These markets were severely pressured in the first half of last year due to high product inventory. Importers remained cautious, but resumed business in the second half. The Middle East continues to be BRF’s principal overseas market. Among the countries where there is major potential are Iraq, Jordan and Iran. In 2010, 15 new products under the Sadia brand name were launched in the region, a trend which is expected to increase in 2011.

Far East – The Japanese market reported an improvement in the prices for imported products with consumption remaining steady. In China, demand for BRF’s products continued strong especially following the opening of the Company’s office in the financial hub of Shanghai. BRF plans to leverage its business on the major growth potential presented by the Chinese market.

Eurasia – Demand from countries in the region remained strong both for poultry meat and pork products, resulting in higher prices and volumes.

Africa, Americas and other countries – There was an increase in the African market, especially for processed products with an improvement in volumes and prices. The region presents major growth potential for BRF’s products, more notably in countries such as Algeria, Tunisia, Egypt and Morocco, Mozambique, South Africa and Namibia as well as Angola.

With a proprietary distribution system in Argentina, Uruguay, Chile and Peru, sales to the region have been particularly strong for a new line of specialty ham products in Argentina and Uruguay, and Qualy light margarine in Chile.

Internationalization Project - BRF is structuring its Long-Term Internationalization Project focused on its international footprint for products with higher added value and distribution in its main operating regions.

Cost of Sales - For the year as a whole, cost of sales was 1.4% higher on a comparative pro-forma basis and 33.2% up on a Corporate Law basis, although also registering gains in the light of stronger proportional growth in net sales vis a vis cost of sales.

Costs of sales were 11.9% higher in 4Q10, the increase being proportionally less than sales revenue. This permitted a gain in gross margin despite the cost pressure from the principal raw materials – breeding stock, corn and soybeans - due to the highly volatile scenario for these commodities.

Taking into account Company performance in 4Q09 – this already a result of synergies arising from the integration of supplies and services – BRF reported a gain of 550 basis points, the cost of sales/net sales ratio increasing from 76.8% to 71.3%.

Gross Profit and Gross Margin – Gross Profits amounted to R$ 1.8 billion, an increase of 49.5% with a gross margin of 28.7 against 23.2%, driven by the growth in sales and the reduction in production costs in 4Q10 compared with 4Q09. For the accumulated period, Gross Profits amounted to R$ 5.7 billion – 35.8% higher on a pro-forma basis and 80.4% higher on a CL basis, reflecting a gradual and consistent recovery in performance.

Operating Expenses – The increase for this item was also proportionally less than that of sales for the quarter although 9.4% higher but taking into account expenses relating to investments in marketing, improvements to the IT system and disbursements with respect to consultancy work on the integration process and  new executive hires. As a result, the operating expenses/net sales ratio improved from 18.2% to 16.5%, a gain of 170 basis points in the quarter.

Consequently, operating expenses totaled R$ 3.9 billion in the year, 11.2% higher on pro-forma basis and 37.7% up on a Corporate Law basis. 

Operating Income and Margin – Operating profit before other results, equity income and financial expenses was R$ 781.1 million, a significant gain of 197.8% on the back of the strong business performance, with an operating margin 730 basis points higher – increasing from 4.9% to 12.2% for the comparative quarters 4Q09/4Q10. The Company also posted a quarter-on-quarter gain of R$ 356 million in operating income. For the accumulated annual period there was a 6.4 percentage points gain in operating margin (pro-forma basis) reflecting the expected and gradual post-crisis recovery in the results, 396.3% up in Corporate Law terms, and with a nominal 378% pro-forma growth reaching R$ 1.8 billion in the operating result for the year.

Financial Results – BRF reported a reduction in the average cost of debt as well as a longer average debt maturity profile thanks to the financial discipline adopted in the debt restructuring plan. Significant reductions in net currency exposure have been possible thanks to the use of non-derivative instruments (currency denominated debt) for foreign exchange protection in line with hedge accounting standards. This has been responsible for major benefits from matching currency liability flows with export shipments. As a consequence of this process there has been a reduction in the volatility of financial expenses on a monthly basis.

Net debt for December 31 2010 was 13.3% less than reported in 2009, supported by operating results despite investments in capex, marketing and for synergy projects.

Net debt/EBITDA ratio fell to 1.38 times from 3.6 due to the improvement in cash generation posted in the year and the equilibrium between the Company’s net debt and operations. Consolidated currency exposure was US$ 76 million (asset position), contemplating the implemented hedge accounting policy, against US$ 1.1 billion (liability position) for the preceding year.

Net financial expenses in the quarter were R$ 152.5 million against a net financial expense of R$ 27.5 million in 4Q09. The result for the previous year was impacted by the positive effect of foreign exchange rate variation on the net currency exposure. On a pro-forma basis for the year, financial expenses amounted to R$ 483.1 million against R$ 617.3 million in financial income, principally due to the positive foreign exchange rate effect on net currency exposure throughout 2009. Meanwhile on Corporate Law basis, financial income accumulated R$ 262.5 million in 2009 due to the incorporation of Sadia’s results in July 2009.

The restructuring of the Sadia subsidiary’s debt was secured with the funds raised from a primary share issue totaling R$ 5.3 billion in July 2009. Of this amount, a total of R$ 3.5 billion was transferred to Sadia in 2009 via an Advance for Future Capital Increases (AFAC) and an intercompany loan, for anticipating payments, and thus reducing short term bank borrowings. A further R$1.2 billion was transferred during 2010.

On January 21 2010, BRF issued (10) ten-year bonds totaling US$750 million (bonds), maturing January 28 2020 and a coupon (interest) of 7.250% per annum (yield to maturity 7.375%), which shall fall due and be payable in semi-annual payments as from July 28 2010. This operation increased average debt maturity by one year.

Other Operating Results – In 4Q10, other operating results totaled R$222.6 million, 24.7% higher, and accumulating R$ 393.9 million for the year, 41.2% higher on a pro-forma basis and 30.1% up on a CL basis. This item largely reflects the costs of idle capacity – due to the pre-operational phase of the new industrial units in: Bom Conselho-PE, Lucas do Rio Verde-MT, Vitória de Santo Antão-PE, Mineiros-GO and Três de Maio-RS.

Income Tax and Social Contribution – Income tax and social contribution for the quarter was R$ 47.7 million against R$ 34.7 million in 4Q09, considering the appropriation of interest on shareholders’ equity declared for the final quarter of 2010. In the year, income tax and social contribution totaled R$196.5 million – 49.5% higher on a pro-forma basis, 120.2% higher in Corporate Law terms, due to the negative result recorded by Sadia in that period and the effects of the results from wholly owned overseas subsidiaries due to the currency translation impact.

Net Income and Net Margin – BRF posted a net income of R$ 360.2 million in the quarter on a net margin of 5.6%, a significant increase of 520 basis points a year on year improvement of 1,537.2%.  The improvement in net result reflects the better operating performance in the quarter. For the full year, net income reached R$ 804.1 million, a 125% increase on a pro-forma basis and 215.3% up on a CL basis based on the adjusted result of R$255 million reported for 2009 (including an additional R$ 132 million  reflecting the incorporation of Perdigão Agroindustrial in 1H09). 

EBITDA – EBITDA reached R$ 959.1 million during 4Q10, registering a gain of 167.2% compared with 4Q09 and reflecting the Company’s consistent and the gradual improvements already incorporated in management forecasts. EBITDA margin was 15% against 6.8% (a significant gain of 820 basis points), with an additional gain of R$ 341.7 million in the quarter compared to 3Q10.

Operating cash generation for 2010 as measured by EBITDA (operating income before expenses, taxes and depreciation) was R$ 2.6 billion, 123.1% better than the same period in 2009 on a pro-forma basis and 202.6% on a Corporate Law basis. Principal factors contributing to this increase were: the larger volume of processed products sold in the domestic market, a gradual recovery seen in some important export markets, the reduction in production costs and commercial expenses and the synergies from the merging of processes already authorized by CADE such as in export business and the domestic market for in natura meat and the acquisition of some raw materials and services.

10.3. Events with significant effects occurred and expected, in the financial statements

Performance Commitment Agreement

On June 11, 2012, the Company and Marfrig Alimentos S.A. (“Marfrig”), in accordance to the terms and conditions established by the Administrative Council for Economic Defense (“CADE”) in the Performance Commitment Agreement (“TCD”), signed the conclusion of the Asset Exchange and Other Agreements signed on March 20, 2012 which included the following measures:

(i)             the acquision, by Marfrig, of the entire equity interest of Athena Alimentos S.A. (“Athena”), a company for which the following assets were transferred by BRF:

(a)    all the assets and rights related to the production plants depicted below:

(b)    all the assets and rights related to the following distribution centers:

(i)             temporary suspension of the use of the Perdigão trademark,  for the following products and periods:

(ii)            temporary suspension of the use of the Batavo trademark, related to the products and periods listed in item (i) above.

The accounting effects of the conclusion of the Asset Exchange and Other Agreements signed with Marfrig are presented in note 6.1.

1.3.         Establishment of joint venture in China

On February 14, 2012, the Company disclosed to the market the establishment of Rising Star Food Company Limited , a joint venture (“JV”) with the participation of Dah Chong Hong Limited (“DCH”), which purpose is: 

(i)          to access the distribution market in Continental China, Hong Kong and  Macau including retail and food service channels;

(ii)         local processing of products; and

(iii)        developing the Sadia trademark in these markets.

The Company owns 50% of equity interest in the JV and in April 2012 made a capital investment amounting to approximately R$1,300 thousands, which is proportional to its participation in the JV.

Management estimates that during the first year of operation, which is expected for the second quarter of 2013, the JV will have sales volumes exceeding 140,000 tons and report annual revenues of approximately R$844,000 thousands.

For the fiscal year ended December 31, 2012, the JV had sales volumes of 136,719 tons and reported net revenues of R$593,251 thousands.

1.4.         Constitution of JV between BRF and Carbery Group (“Carbery”)

On November 5, 2012, BRF and Carbery established a JV for whey processing.

Carbery is a worldwide leading manufacturer player of whey based ingredients and has an advanced range dairy based nutritional ingredients.

The Company owns 50% of the equity interest of the JV and involves a total shared investment of R$50,000 thousands utilizing Carbery’s innovative technology to process whey generated by BRF’s cheese operations.

The project includes the construction of a manufacturing plant to produce high added value nutritional ingredients, which are mainly used by baby food and nutritional sports customers. The construction of the plant is expected to commence in 2013 and the beginning of its operations is planned for 2014.

1.5.         Acquisition of assets related to integration, production and slaughter of porks – DOUX

On November 7, 2012, the Company established an agreement with CADE aiming the creation of the rules for the assets related to integration, production and slaughter of porks from Doux, located in the City of Ana Rech, State of Rio Grande do Sul, pledged to BRF during the year of 2011, according to note 6.4 of the financial statements for the fiscal year ended December 31, 2011 disclosed on March 22, 2012, to have their property transferred to third parties through an extrajudicial auction.

This agreement was necessary to allow the execution of the guarantees offered by Doux in consideration to the advances made by BRF which were not settled yet. On December 31, 2012, such advances totaled R$191,514 thousands, and were accounted for as other rights in non-current assets. In addition, the agreement establishes the limits for the use of such assets by BRF, as well as authorizes the Company to take all necessary measures to recovery these advances.

The Company’s management do not expect any significant impact on the future earnings and the assets offered by Doux are sufficient to cover the advances made by BRF.

On December 28, 2012, aiming to accelerate the integration of its business in Argentina, the Company, through its wholly-owned subsidiary Sadia Alimentos S.A., acquired the equity interest held by non-controlling shareholders in Avex, corresponding to 33.33% of the capital for the amount of R$82,776 thousands, to be settled until March 31, 2013, and therefore holding 99.46% of the equity interest of Avex.

Due to the fact that BRF already held the control of Avex prior to the acquisition of the non-controlling interest mentioned above, such transaction is not accounted for as business combination. Therefore, the amount of R$33,851 thousands corresponds to the difference between the carrying amount and the effective amount paid for the shares. Such amount was recorded as a debt in the shareholders’ equity.

1.7.         Merger of wholly-owned subsidiaries Sadia S.A. (“Sadia”) and Heloísa Ind. e Com. de Produtos Lácteos Ltda. (“Heloísa”) into BRF

On December 31, 2012, the wholly-owned subsidiaries Sadia and Heloísa were merged into BRF. The main objective of these mergers was the full integration of the businesses, maximizing synergies, streamlining processes and consequent reduction of administrative, operational and tax costs and increase of productivity.

The decision to merge Sadia into BRF resulted in a loss recorded in the statement of income for the year ended December 31, 2011 in the amount of R$215,205 related to the provision for tax loss carryforwards and negative basis calculation.

The effective loss was R$130,959 thousands and, therefore, a reversal of R$84,246 thousands was recorded in the statement of income for the year ended December 31, 2012 as current tax expense, considering that the taxable income earned by the wholly-owned subsidiary was higher than the estimated amounts on December 31, 2011.

BUSINESS COMBINATION AND OTHER ACQUISITIONS

1.1       Business combination – QUICKFOOD

As described in note 1.2, in order to comply the requirements of TCD, the Company acquired the equity interest held by Marfrig of the capital of Quickfood.

In the Extraordinary General Shareholder´s Meeting occurred on May 23, 2012, the Company’s shareholders ratified the approval of the acquisition, through assets exchange, of the entire equity interest held by the Company in Athena by the interest held either directly or indirectly by Marfrig, equivalent to 90.05% of the capital of Quickfood, according to the terms and conditions established in the Asset Exchange and Other Agreements, signed on March 20, 2012 with the effective conclusion on June 11, 2012.

Quickfood is a public company located in Buenos Aires, Argentina. The total equity interest acquired corresponds to 90.05% equivalent to 32,841,224 common shares.

The Company utilized its subsidiary Athena to operationalize the disposal of the assets listed in the TCD. Therefore, the following corporate acts were performed:

(i)       the wholly-owned subsidiary Sadia made a capital increase in Athena in the amount of R$333,061 thousands, which was paid with assets of its property included in the TCD;

(ii)      the subsidiary Sino dos Alpes made a capital increase in Athena in the amount of R$5,174 thousands, which was paid with assets of its property included in the TCD;

(iii)     BRF made a capital increase in Athena in the amount of R$163,043 thousands, which was paid with assets of its property included in the TCD; and

(iv)    on May 31, 2012, BRF acquired the book value of the equity interest of the capital of Athena held by Sino dos Alpes and Sadia.

In summary, the consolidated assets of TCD transferred to Marfrig are presented below (in thousands reais):