0001104659-17-050687.txt : 20170809 0001104659-17-050687.hdr.sgml : 20170809 20170809160146 ACCESSION NUMBER: 0001104659-17-050687 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20170809 FILED AS OF DATE: 20170809 DATE AS OF CHANGE: 20170809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GERDAU S.A. CENTRAL INDEX KEY: 0001073404 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 000000000 STATE OF INCORPORATION: D5 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14878 FILM NUMBER: 171017800 BUSINESS ADDRESS: STREET 1: AVENIDA FARRAPOS, 1811 CITY: PORTO ALEGRE, RIO GRANDE DO SU STATE: D5 ZIP: 90220-005 BUSINESS PHONE: 011-55-51-3323-2703 MAIL ADDRESS: STREET 1: AVENIDA FARRAPOS, 1811 CITY: PORTO ALEGRE, RIO GRANDE DO SU STATE: D5 ZIP: 90220-005 FORMER COMPANY: FORMER CONFORMED NAME: GERDAU SA DATE OF NAME CHANGE: 19981112 6-K 1 a17-19886_16k.htm 6-K

 

 

FORM 6-K

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

 

Dated August 9, 2017

 

Commission File Number 1-14878

 

GERDAU S.A.

(Exact Name as Specified in its Charter)

 

N/A

(Translation of Registrant’s Name)

 

Av. Farrapos 1811

Porto Alegre, Rio Grande do Sul - Brazil CEP 90220-005

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F x            Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

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

 

Yes o            No x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):  Not applicable.

 

 

 



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:  August 9, 2017

 

 

GERDAU S.A.

 

 

 

 

 

By:

/s/ Harley Lorentz Scardoelli

 

Name:

Harley Lorentz Scardoelli

 

Title:

Investor Relations Director

 

2



 

EXHIBIT INDEX

 

Exhibit

 

Description of Exhibit

 

 

 

99.1

 

GERDAU S.A. Condensed consolidated interim financial statements as of June 30, 2017

 

3


EX-99.1 2 a17-19886_1ex99d1.htm EX-99.1

Exhibit 99.1

 

GERDAU S.A.

Condensed consolidated interim financial statements

as of June 30, 2017

 



 

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

Note

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

4,305,434

 

5,063,383

 

Short-term investments

 

 

 

 

 

 

 

Held for Trading

 

4

 

1,124,769

 

1,024,411

 

Trade accounts receivable - net

 

5

 

3,920,408

 

3,576,699

 

Inventories

 

6

 

6,995,222

 

6,332,730

 

Tax credits

 

 

 

432,951

 

504,429

 

Income and social contribution taxes recoverable

 

 

 

442,829

 

623,636

 

Unrealized gains on financial instruments

 

13

 

 

2,557

 

Other current assets

 

 

 

674,381

 

668,895

 

 

 

 

 

17,895,994

 

17,796,740

 

NON-CURRENT ASSETS

 

 

 

 

 

 

 

Tax credits

 

 

 

43,299

 

56,703

 

Deferred income taxes

 

 

 

3,047,007

 

3,407,230

 

Unrealized gains on financial instruments

 

13

 

4,050

 

10,394

 

Related parties

 

15

 

54,052

 

57,541

 

Judicial deposits

 

14

 

1,985,057

 

1,861,784

 

Other non-current assets

 

 

 

528,056

 

447,260

 

Prepaid pension cost

 

 

 

11,517

 

56,797

 

Investments in associates and jointly-controlled entities

 

8

 

1,343,010

 

798,844

 

Goodwill

 

10

 

9,586,600

 

9,470,016

 

Other Intangibles

 

 

 

1,174,432

 

1,319,941

 

Property, plant and equipment, net

 

 

 

18,502,051

 

19,351,891

 

 

 

 

 

36,279,131

 

36,838,401

 

TOTAL ASSETS

 

 

 

54,175,125

 

54,635,141

 

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

 



 

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

Note

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Trade accounts payable

 

 

 

3,062,395

 

2,743,818

 

Short-term debt

 

11

 

4,186,259

 

4,458,220

 

Taxes payable

 

 

 

256,545

 

341,190

 

Income and social contribution taxes payable

 

 

 

60,025

 

74,458

 

Payroll and related liabilities

 

 

 

415,391

 

464,494

 

Employee benefits

 

 

 

395

 

409

 

Environmental liabilities

 

 

 

18,502

 

17,737

 

Unrealized losses on financial instruments

 

13

 

 

6,584

 

Other current liabilities

 

 

 

608,645

 

514,599

 

 

 

 

 

8,608,157

 

8,621,509

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

 

Long-term debt

 

11

 

15,646,225

 

15,959,590

 

Debentures

 

12

 

131,797

 

165,423

 

Deferred income taxes

 

 

 

292,947

 

395,436

 

Provision for tax, civil and labor liabilities

 

14

 

1,079,894

 

2,239,226

 

Environmental liabilities

 

 

 

70,284

 

66,069

 

Employee benefits

 

 

 

1,451,576

 

1,504,394

 

Obligations with FIDC

 

16

 

1,076,751

 

1,007,259

 

Other non-current liabilities

 

 

 

471,717

 

401,582

 

 

 

 

 

20,221,191

 

21,738,979

 

EQUITY

 

17

 

 

 

 

 

Capital

 

 

 

19,249,181

 

19,249,181

 

Treasury stocks

 

 

 

(77,550

)

(98,746

)

Capital reserves

 

 

 

11,597

 

11,597

 

Retained earnings

 

 

 

4,650,781

 

3,763,207

 

Operations with non-controlling interests

 

 

 

(2,873,335

)

(2,873,335

)

Other reserves

 

 

 

4,122,574

 

3,976,232

 

EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT

 

 

 

25,083,248

 

24,028,136

 

 

 

 

 

 

 

 

 

NON-CONTROLLING INTERESTS

 

 

 

262,529

 

246,517

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

25,345,777

 

24,274,653

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

 

 

54,175,125

 

54,635,141

 

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

 



 

GERDAU S.A.

CONSOLIDATED STATEMENTS OF INCOME

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

 

 

For the three-month period ended

 

For the six-month period ended

 

 

 

Note

 

June 30, 2017

 

June 30, 2016

 

June 30, 2017

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

 

 

9,165,853

 

10,248,778

 

17,624,517

 

20,333,289

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

20

 

(8,229,142

)

(9,165,474

)

(16,033,919

)

(18,437,307

)

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

 

936,711

 

1,083,304

 

1,590,598

 

1,895,982

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

20

 

(133,297

)

(175,609

)

(271,743

)

(389,941

)

General and administrative expenses

 

20

 

(287,139

)

(401,965

)

(588,186

)

(831,519

)

Other operating income

 

20

 

70,968

 

54,833

 

139,934

 

102,057

 

Other operating expenses

 

20

 

(32,246

)

(26,519

)

(37,702

)

(33,928

)

Results in operations with subsidiaries

 

3.4

 

(72,478

)

(105,048

)

(72,478

)

(105,048

)

Reversal of contingent liabilities, net

 

14

 

 

 

929,711

 

 

Equity in earnings of unconsolidated companies

 

8

 

(2,429

)

(109

)

(3,239

)

(7,690

)

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES

 

 

 

480,090

 

428,887

 

1,686,895

 

629,913

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial income

 

21

 

44,087

 

45,022

 

125,914

 

120,812

 

Financial expenses

 

21

 

(453,780

)

(484,200

)

(917,017

)

(1,009,302

)

Exchange variations, net

 

21

 

(96,389

)

433,186

 

(21,351

)

942,616

 

Reversal of monetary update of contingent liabilities, net

 

14

 

 

 

369,819

 

 

Gain and losses on financial instruments, net

 

21

 

1,125

 

(16,700

)

(8,606

)

(38,220

)

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

 

 

(24,867

)

406,195

 

1,235,654

 

645,819

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

7

 

(96,395

)

(47,146

)

(145,927

)

(80,454

)

Deferred

 

7

 

197,779

 

(279,840

)

(189,666

)

(471,970

)

Income and social contribution taxes

 

 

 

101,384

 

(326,986

)

(335,593

)

(552,424

)

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

76,517

 

79,209

 

900,061

 

93,395

 

 

 

 

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO:

 

 

 

 

 

 

 

 

 

 

 

Owners of the parent

 

 

 

75,023

 

73,078

 

890,364

 

81,773

 

Non-controlling interests

 

 

 

1,494

 

6,131

 

9,697

 

11,622

 

 

 

 

 

76,517

 

79,209

 

900,061

 

93,395

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share - preferred and common - (R$)

 

18

 

0.04

 

0.04

 

0.52

 

0.05

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share - preferred and common - (R$)

 

18

 

0.04

 

0.04

 

0.52

 

0.05

 

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

 



 

GERDAU S.A.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

For the three-month period ended

 

For the six-month period ended

 

 

 

June 30, 2017

 

June 30, 2016

 

June 30, 2017

 

June 30, 2016

 

Net income for the period

 

76,517

 

79,209

 

900,061

 

93,395

 

Items that may be reclassified subsequently to profit or loss

 

 

 

 

 

 

 

 

 

Other comprehensive income (losses) from associates and jointly-controlled entities

 

58,299

 

(130,290

)

60,449

 

(238,650

)

Cumulative translation adjustment

 

726,191

 

(2,598,847

)

335,796

 

(5,113,825

)

Recycling of cumulative translation adjustment to net income

 

(76,430

)

(970,276

)

(76,430

)

(970,276

)

Unrealized (Losses)/Gains on net investment hedge

 

(355,743

)

880,845

 

(141,229

)

1,800,061

 

Cash flowh hedges:

 

 

 

 

 

 

 

 

 

Unrealized Gains (Losses) on cash flow hedges

 

1,085

 

(2,364

)

(6,578

)

(45

)

 

 

353,402

 

(2,820,932

)

172,008

 

(4,522,735

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) for the period, net of tax

 

429,919

 

(2,741,723

)

1,072,069

 

(4,429,340

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to:

 

 

 

 

 

 

 

 

 

Owners of the parent

 

420,896

 

(2,729,206

)

1,055,437

 

(4,406,371

)

Non-controlling interests

 

9,023

 

(12,517

)

16,632

 

(22,969

)

 

 

429,919

 

(2,741,723

)

1,072,069

 

(4,429,340

)

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

 



 

GERDAU S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

in thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

Attributed to parent company’s interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

Other Reserves

 

 

 

 

 

 

 

 

 

Capital

 

Treasury
stocks

 

Capital
Reserve

 

Legal reserve

 

Tax Incentives
Reserve

 

Investments
and working
capital reserve

 

Retained
earnings

 

Operations
with non-
controlling
interests

 

Gains and
losses on net
investment
hedge

 

Gains and
losses on
financial
instruments

 

Cumulative
translation
adjustment

 

Pension Plan

 

Stock Option

 

Total parent
company’s
interest

 

Non-controlling
interests

 

Total
Shareholder’s
Equity

 

Balance as of January 1, 2016

 

19,249,181

 

(383,363

)

11,597

 

628,228

 

611,531

 

5,668,300

 

 

(2,877,488

)

(6,083,288

)

16,084

 

15,021,878

 

(314,981

)

138,122

 

31,685,801

 

284,582

 

31,970,383

 

2016 Changes in Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

81,773

 

 

 

 

 

 

 

81,773

 

11,622

 

93,395

 

Other comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

 

 

1,799,571

 

(37

)

(6,287,678

)

 

 

(4,488,144

)

(34,591

)

(4,522,735

)

Total comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

81,773

 

 

1,799,571

 

(37

)

(6,287,678

)

 

 

(4,406,371

)

(22,969

)

(4,429,340

)

Long term incentive plan cost recognized in the period

 

 

 

 

 

 

 

 

 

 

 

 

 

11,405

 

11,405

 

(67

)

11,338

 

Long term incentive plan exercised during the period

 

 

6,971

 

 

 

 

(4,146

)

 

 

 

 

 

 

 

2,825

 

63

 

2,888

 

Assignment of preferred shares

 

 

369,499

 

 

 

 

(163,699

)

 

 

 

 

 

 

 

205,800

 

 

205,800

 

Effects of interest changes in subsidiaries

 

 

 

 

 

 

 

 

4,153

 

 

 

 

 

 

4,153

 

(4,224

)

(71

)

Balance as of June 30, 2016 (Note 17)

 

19,249,181

 

(6,893

)

11,597

 

628,228

 

611,531

 

5,500,455

 

81,773

 

(2,873,335

)

(4,283,717

)

16,047

 

8,734,200

 

(314,981

)

149,527

 

27,503,613

 

257,385

 

27,760,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2017

 

19,249,181

 

(98,746

)

11,597

 

628,228

 

611,531

 

2,523,448

 

 

(2,873,335

)

(4,404,436

)

16,323

 

8,532,065

 

(357,072

)

189,352

 

24,028,136

 

246,517

 

24,274,653

 

2017 Changes in Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

890,364

 

 

 

 

 

 

 

890,364

 

9,697

 

900,061

 

Other comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

 

 

(141,245

)

(6,557

)

312,875

 

 

 

165,073

 

6,935

 

172,008

 

Total comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

890,364

 

 

(141,245

)

(6,557

)

312,875

 

 

 

1,055,437

 

16,632

 

1,072,069

 

Long term incentive plan cost recognized in the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,731

)

(18,731

)

(36

)

(18,767

)

Long term incentive plan exercised during the period

 

 

21,196

 

 

 

 

(2,790

)

 

 

 

 

 

 

 

18,406

 

30

 

18,436

 

Effects of interest changes in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

950

 

950

 

Dividends/interest on capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,564

)

(1,564

)

Balance as of June 30, 2017 (Note 17)

 

19,249,181

 

(77,550

)

11,597

 

628,228

 

611,531

 

2,520,658

 

890,364

 

(2,873,335

)

(4,545,681

)

9,766

 

8,844,940

 

(357,072

)

170,621

 

25,083,248

 

262,529

 

25,345,777

 

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

 



 

GERDAU S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

 

 

For the six-month period ended

 

 

 

Note

 

June 30, 2017

 

June 30, 2016

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income for the period

 

 

 

900,061

 

93,395

 

Adjustments to reconcile net income for the period to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

20

 

1,054,233

 

1,298,492

 

Equity in earnings of unconsolidated companies

 

8

 

3,239

 

7,690

 

Exchange variation, net

 

21

 

21,351

 

(942,616

)

Loss (Gains) on financial instruments, net

 

21

 

8,606

 

38,220

 

Post-employment benefits

 

 

 

103,692

 

111,614

 

Long term incentive plan

 

 

 

17,777

 

20,786

 

Income and social contribution taxes

 

7

 

335,593

 

552,424

 

Gains on disposal of property, plant and equipment, net

 

 

 

(61,456

)

(2,085

)

Results in operations with subsidiaries

 

3.4

 

72,478

 

105,048

 

Allowance for doubtful accounts

 

 

 

7,738

 

51,656

 

Provision for tax, labor and civil claims

 

 

 

141,481

 

147,538

 

Reversal of contingent liabilities, net

 

14

 

(929,711

)

 

Interest income on trading securities

 

 

 

(44,608

)

(40,635

)

Interest expense on loans

 

21

 

703,772

 

771,580

 

Reversal of monetary update of contingent liabilities, net

 

14

 

(369,819

)

 

Interest on loans with related parties

 

15

 

 

2,532

 

(Reversal) Provision for net realizable value adjustment in inventory, net

 

6

 

(12,884

)

(48,380

)

 

 

 

 

1,951,543

 

2,167,259

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Increase in trade accounts receivable

 

 

 

(332,409

)

(384,706

)

(Increase) Decrease in inventories

 

 

 

(768,705

)

398,820

 

Increase in trade accounts payable

 

 

 

314,644

 

176,439

 

Increase in other receivables

 

 

 

(212,125

)

(93,070

)

Decrease in other payables

 

 

 

(124,381

)

(226,895

)

Dividends from associates and jointly-controlled entities

 

 

 

20,985

 

36,839

 

Purchases of trading securities

 

 

 

(490,074

)

(367,631

)

Proceeds from maturities and sales of trading securities

 

 

 

441,968

 

458,425

 

Cash provided by operating activities

 

 

 

801,446

 

2,165,480

 

 

 

 

 

 

 

 

 

Interest paid on loans and financing

 

 

 

(728,383

)

(600,642

)

Income and social contribution taxes paid

 

 

 

(56,279

)

(92,006

)

Net cash provided by operating activities

 

 

 

16,784

 

1,472,832

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

9

 

(431,850

)

(811,496

)

Proceeds from sales of property, plant and equipment, investments and other intangibles

 

 

 

415,524

 

2,969

 

Additions to other intangibles

 

 

 

(16,619

)

(41,730

)

Capital increase in jointly-controlled entity

 

 

 

(178,670

)

 

Net cash used in investing activities

 

 

 

(211,615

)

(850,257

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Dividends and interest on capital paid

 

 

 

(2,282

)

 

Proceeds from loans and financing

 

 

 

349,584

 

1,032,953

 

Repayment of loans and financing

 

 

 

(917,767

)

(2,798,441

)

Intercompany loans, net

 

 

 

3,489

 

6,271

 

Net cash used in financing activities

 

 

 

(566,976

)

(1,759,217

)

 

 

 

 

 

 

 

 

Exchange variation on cash and cash equivalents

 

 

 

3,858

 

(702,014

)

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

 

(757,949

)

(1,838,656

)

Cash and cash equivalents at beginning of period

 

 

 

5,063,383

 

5,648,080

 

Cash and cash equivalents at end of period

 

 

 

4,305,434

 

3,809,424

 

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

 


 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

NOTE 1 - GENERAL INFORMATION

 

Gerdau S.A. is a publicly traded corporation (sociedade anônima) with its corporate domicile in the city of Rio de Janeiro, Brazil. Gerdau S.A and subsidiaries (collectively referred to as the “Company”) is a leading producer of long steel in the Americas and one of the largest suppliers of special steel in the world. In Brazil, the Company also produces flat steel and iron ore, activities which expands the product mix and make its operations even more competitive. It is the largest recycler in Latin America and around the world it transforms each year millions of tons of scrap into steel, reinforcing its commitment to sustainable development of the regions where it operates. Gerdau is listed on the São Paulo, New York and Madrid stock exchanges.

 

The Condensed Consolidated Interim Financial Statements of the Company were approved by the Board of Directors on August 8, 2017.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

 

2.1 - Basis of Presentation

 

The Company’s Condensed Consolidated Interim Financial Statements for the three-month and six-month periods ended on June 30, 2017 have been prepared in accordance with International Accounting Standard (IAS) Nº 34, which establishes the content of condensed interim financial statements. These Condensed Consolidated Interim Financial Statements should be read in conjunction with the Consolidated Financial Statements of Gerdau S.A., as of December 31, 2016, which were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board - IASB.

 

The preparation of the Condensed Consolidated Interim Financial Statements in accordance with IAS 34 requires Management to make accounting estimates. The Condensed Consolidated Interim Financial Statements have been prepared using the historical cost as its basis, except for the valuation of certain financial instruments, which are measured at fair value.

 

The same accounting policies and methods of calculation were used in these Condensed Consolidated Interim Financial Statements as they were applied in the Consolidated Financial Statements as of December 31, 2016.

 

2.2 — New IFRS and Interpretations of the IFRIC (International Financial Reporting Interpretations Committee)

 

The IASB releases of IFRS standards with effect for periods beginning in 2017 had no impact in the Company’s Financial Statements. Some new IASB accounting procedures and IFRIC interpretations were issued and/or reviewed and have their mandatory adoption for the year 2018 and/or after. The Company is assessing the adoption impact of these standards in its Consolidated Financial Statements.

 

· IFRS 9 - Financial Instruments. Has the objective of replacing the standard IAS 39 and addresses some application questions and introduced a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments, besides adding the impairment requirements relating to the accounting for an entity’s expected credit losses on its financial assets, commitments to extend credit and hedge accounting. This standard is effective for annual reporting periods beginning on or after January 1, 2018. The Company believes that the new guidance of IFRS 9 will not bring a significant impact in its classification and measurement of financial assets and liabilities, as well as on the hedge operations.

 

· IFRS 15 - Revenue from Contracts with Customers and subsequently the issuance of document for clarification on this standard. The objective of IFRS 15 is to establish the principles of revenue recognition and disclosure of information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer, as well as the subsequent document issued, which clarifies on important matters of this standard. This standard is effective for years beginning on or after January 1, 2018. The Company’s evaluation process of all the impacts of the new standard is ongoing and in a preliminary and non-conclusive stage. This preliminary assessment of the impacts on the measurement and timing for revenue recognition from contracts with our customers does not indicate significant changes or impacts in the Company’s Financial Statements. The company is currently in the process of evaluating other aspects of the application of the standard to complete the analysis.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

· IFRS 16 - Lease. Establishes aspects of recognition, measurement and disclosure of leases. This standard is effective for fiscal years beginning on or after January 1, 2019. The Company is evaluating the impacts on its Financial Statements of the register of its operating leasing operations, however does not expect significant impacts in relation to total property, plant and equipment and existing debt.

 

· Amendments to IFRS 2 - Classification and Measurement of Share-based Payment Transactions. It addresses changes in some paragraphs to better clarify the application of the standard. This change in the standard is effective for years beginning on or after January 1, 2018.

 

· IFRIC 23 — Uncertainty over Income Tax Treatments. Establishes aspects of recognition and measurement of the IAS 12 when there are uncertainties about the treatment of income tax related to tax assets or liabilities and current or deferred taxes, based on taxable income, tax losses, taxable bases, unused tax losses, unused tax credits and tax rates. This interpretation is effective for fiscal years beginning on or after January 1, 2019. The Company is evaluating the impacts on its Financial Statements

 

NOTE 3 — CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

3.1 - Subsidiaries

 

The Company did not have material changes of interest in subsidiaries for the period ended on June 30, 2017, when compared to those existing on December 31, 2016, except for the operation described in note 3.4.

 

3.2 - Jointly-Controlled Entities

 

The Company did not have material changes of interest in jointly controlled entities for the period ended on June 30, 2017, when compared to those existing on December 31, 2016, except for the operations of creation of the jointly controlled entities (i) Gerdau Summit Aços Fundidos e Forjados S.A., as described below and (ii) Diaco S.A. in Colombia, as described in note 3.4.

 

On January 5, 2017, Gerdau S.A. made a payment of capital to Gerdau Summit Aços Fundidos e Forjados S.A. through the contribution of some of its assets and liabilities, which were evaluated by a specialized independent valuation company. On January 31, 2017, the Extraordinary General Meeting of Gerdau Summit Aços Fundidos e Forjados S.A. was held, where Sumitomo Corporation and The Japan Steel Works, Ltd. subscribed capital stock in this company, and a joint control agreement was signed among the partners. Accordingly, Gerdau Summit Aços Fundidos e Forjados S.A. will have accounting treatment of a jointly controlled entity in the Financial Statements of Gerdau S.A., with a 58.73% interest and will not have a significant impact on the Company’s total Assets.

 

3.3 — Associate companies

 

The Company did not have material changes in interest in associate companies for the period ended on June 30, 2017, when compared to those existing on December 31, 2016.

 

3.4 — Results in operations with subsidiaries

 

On June 30, 2017, the Company concluded the operation to create a jointly controlled entity, based on the sale of 50% interest in Diaco S.A., in Colombia, to Putney Capital Management, which is already partner in its operation in the Dominican Republic. The new company’s assets are Gerdau’s long-steel industrial units in Colombia, with an annual installed steel capacity of 674 thousand tons. The transaction attributed an economic value to the jointly controlled entity of US$ 165 million (equivalent to R$ 546 million on June 30, 2017). As a result of the transaction, the Company received US$ 44.7 million in cash (equivalent to R$ 145.1 million) and recognized an expense of R$ 72.5 million in the row Results in operations with subsidiaries of its Consolidated Statements of Income, mainly due to the fair value adjustment of the remaining interest in accordance with IFRS.

 

The transaction is aligned with the process to optimize Company’s assets with focus on profitability and deleveraging and allowed the Company to reduce its indebtedness and working capital levels in the amounts of R$ 226 million and R$ 175 million, respectively.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

NOTE 4 — CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

 

Cash and cash equivalents

 

 

 

June 30, 2017

 

December 31, 2016

 

Cash

 

16,374

 

9,412

 

Banks and immediately available investments

 

4,289,060

 

5,053,971

 

Cash and cash equivalents

 

4,305,434

 

5,063,383

 

 

Short term investments

 

 

 

June 30, 2017

 

December 31, 2016

 

Held for trading

 

1,124,769

 

1,024,411

 

Short-term investments

 

1,124,769

 

1,024,411

 

 

Held for Trading

 

Held for trading securities include Bank Deposit Certificates and marketable securities investments, which are stated at their fair value. Income generated by these investments is recorded as financial income.

 

NOTE 5 — ACCOUNTS RECEIVABLE

 

 

 

June 30, 2017

 

December 31, 2016

 

Trade accounts receivable - in Brazil

 

1,335,902

 

1,251,739

 

Trade accounts receivable - exports from Brazil

 

116,606

 

265,252

 

Trade accounts receivable - foreign subsidiaries

 

2,637,300

 

2,259,014

 

(-) Allowance for doubtful accounts

 

(169,400

)

(199,306

)

 

 

3,920,408

 

3,576,699

 

 

NOTE 6 - INVENTORIES

 

 

 

June 30, 2017

 

December 31, 2016

 

Finished products

 

3,373,902

 

2,987,785

 

Work in progress

 

1,367,944

 

1,201,327

 

Raw materials

 

1,578,334

 

1,487,971

 

Storeroom supplies

 

363,893

 

430,731

 

Imports in transit

 

327,107

 

253,729

 

(-) Allowance for adjustments to net realizable value

 

(15,958

)

(28,813

)

 

 

6,995,222

 

6,332,730

 

 

The allowance for adjustment to net realizable value of inventories, on which the provision and reversal of provision are registered with impact on cost of sales, is as follows:

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Balance as of January 01, 2016

 

(101,121

)

Provision for adjustments to net realizable value

 

(62,899

)

Reversal of adjustments to net realizable value

 

94,391

 

Exchange rate variation

 

10,711

 

Effect of selling of subsidiary

 

30,105

 

Balance as of December 31, 2016

 

(28,813

)

Provision for adjustments to net realizable value

 

(15,359

)

Reversal of adjustments to net realizable value

 

28,243

 

Exchange rate variation

 

(29

)

Balance as of June 30, 2017

 

(15,958

)

 

NOTE 7 — INCOME AND SOCIAL CONTRIBUTION TAXES

 

In Brazil, income taxes include federal income tax (IR) and social contribution (CS), which represents an additional federal income tax. The statutory rates for income tax and social contribution are 25% and 9%, respectively, and are applicable for the periods ended on June 30, 2017 and 2016. The foreign subsidiaries of the Company are subject to taxation at rates ranging between 25.0% and 38.5%. The differences between the Brazilian tax rates and the rates of other countries are presented under “Difference in tax rates in foreign companies” in the reconciliation of income tax and social contribution below.

 

a) Reconciliations of income and social contribution taxes at statutory rates to amounts presented in the Statement of Income are as follows:

 

 

 

For the three-month period ended

 

 

 

June 30, 2017

 

June 30, 2016

 

Income (Loss) before income taxes

 

(24,867

)

406,195

 

Statutory tax rates

 

34

%

34

%

Income and social contribution taxes at statutory rates

 

8,455

 

(138,106

)

Tax adjustment with respect to:

 

 

 

 

 

- Difference in tax rates in foreign companies

 

81,026

 

(195,396

)

- Equity in earnings of unconsolidated companies

 

(826

)

(37

)

- Interest on equity *

 

28

 

 

- Tax credits and incentives

 

10,750

 

1,426

 

- Tax deductible goodwill recorded in statutory books

 

 

9,117

 

- Other permanent differences, net

 

1,951

 

(3,990

)

Income and social contribution taxes

 

101,384

 

(326,986

)

Current

 

(96,395

)

(47,146

)

Deferred

 

197,779

 

(279,840

)

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

 

 

For the six-month period ended

 

 

 

June 30, 2017

 

June 30, 2016

 

Income before income taxes

 

1,235,654

 

645,819

 

Statutory tax rates

 

34

%

34

%

Income and social contribution taxes at statutory rates

 

(420,122

)

(219,578

)

Tax adjustment with respect to:

 

 

 

 

 

- Difference in tax rates in foreign companies

 

54,673

 

(364,294

)

- Equity in earnings of unconsolidated companies

 

(1,101

)

(2,615

)

- Interest on equity *

 

56

 

 

- Tax credits and incentives

 

15,062

 

2,626

 

- Tax deductible goodwill recorded in statutory books

 

 

36,469

 

- Other permanent differences, net

 

15,839

 

(5,032

)

Income and social contribution taxes

 

(335,593

)

(552,424

)

Current

 

(145,927

)

(80,454

)

Deferred

 

(189,666

)

(471,970

)

 


(*) The Brazilian Law 9,249/95 provides that a company may, at its sole discretion, consider dividends distributions to shareholders to be considered as interest on own capital — subject to specific limitations - which has the effect of a taxable deduction in the determination of income tax and social contribution. The limitation considers the greater of (i) shareholders’ equity multiplied by the TJLP (Long Term Interest Rate) rate or (ii) 50% of the net income in the fiscal year.  This expense is not recognized for financial reporting purposes and thus it does not impact accounting profit.

 

b) Tax Assets not booked:

 

Due to the lack of expectation of usage, the Company has not recorded a portion of tax assets arising from its operations in Brazil of R$ 315,255 (R$ 317,889 as of December 31, 2016), and negative basis of social contribution in subsidiaries, which do not have an expiration date. The subsidiaries abroad had R$ 357,213 (R$ 349,072 as of December 31, 2016) of tax credits on capital losses which deferred tax assets have not been booked and which expire between 2029 and 2035 and also several tax losses of state credits in the amount of R$ 986,413 (R$ 857,215 as of December 31, 2016), which expire at various dates between 2017 and 2037.

 

NOTE 8 — INVESTMENTS

 

 

 

Jointly controlled entities

 

Associate companies

 

 

 

 

 

Joint Ventures
North America

 

Gerdau Corsa
S.A.P.I. de
C.V.

 

Gerdau
Metaldom
Corp.

 

Gerdau
Summit Aços
Fundidos e
Forjados S.A.
(note 3.2)

 

Diaco S.A.
(note 3.4)

 

Dona Francisca
Energética S.A.

 

Corsa
Controladora
S.A. de C.V.

 

Corporación
Centro
Americana del
Acero, S.A.

 

Others

 

Total

 

Balance as of January 01, 2016

 

60,733

 

88,785

 

575,845

 

 

 

89,595

 

359,568

 

216,272

 

2,084

 

1,392,882

 

Equity in earnings

 

13,533

 

(96,306

)

16,362

 

 

 

17,780

 

12,155

 

23,705

 

 

(12,771

)

Cumulative Translation Adjustment

 

(9,492

)

(11,748

)

(88,051

)

 

 

 

(105,420

)

(36,134

)

(350

)

(251,195

)

Effect of selling of subsidiary

 

 

 

 

 

 

 

 

(203,843

)

(1,734

)

(205,577

)

Dividends/Interest on equity

 

(8,282

)

 

(99,634

)

 

 

(16,579

)

 

 

 

(124,495

)

Balance as of December 31, 2016

 

56,492

 

(19,269

)

404,522

 

 

 

90,796

 

266,303

 

 

 

798,844

 

Equity in earnings

 

3,337

 

(41,996

)

18,821

 

6,187

 

(1,302

)

9,619

 

2,095

 

 

 

(3,239

)

Cumulative Translation Adjustment

 

2,385

 

8,922

 

10,370

 

 

(3,854

)

 

42,626

 

 

 

60,449

 

Capital increase

 

 

178,670

 

 

184,187

 

 

 

 

 

 

362,857

 

Creation of jointly controlled entity

 

 

 

 

 

145,084

 

 

 

 

 

145,084

 

Dividends/Interest on equity

 

(6,828

)

 

 

 

 

(14,157

)

 

 

 

(20,985

)

Balance as of June 30, 2017

 

55,386

 

126,327

 

433,713

 

190,374

 

139,928

 

86,258

 

311,024

 

 

 

1,343,010

 

 

NOTE 9 — PROPERTY, PLANT AND EQUIPMENT

 

a) Summary of changes in property, plant and equipment — during the three-month period ended on June 30, 2017, acquisitions amounted to R$ 195,252 (R$ 326,184 as of June 30 2016), and disposals amounted to R$ 95,290 (R$ 309 as of June 30, 2016). During the six-month period ended on June 30, 2017, acquisitions amounted to R$ 431,850 (R$ 811.496 as of June 30 2016), and disposals amounted to R$ 272,161 (R$ 904 as of June 30, 2016). As described in note 3.4, the Company has no longer consolidated amounts, regarding its former subsidiary in Colombia, in the total amount of R$ 424,989.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

b) Capitalized borrowing costs — borrowing costs capitalized during the three-month period ended on June 30, 2017 amounted to R$ 12,873 (R$ 62,629 as of June 30, 2016). Borrowing costs capitalized during the six-month period ended on June 30, 2017 amounted to R$ 27,867 (R$ 126.534 as of June 30, 2016).

 

c) Guarantees — property, plant and equipment have been pledged as collateral for loans and financing in the amount of R$ 640,241 as of June 30, 2017 (R$ 632,376 as of December 31, 2016).

 

NOTE 10 — GOODWILL

 

The changes in goodwill are as follows:

 

 

 

Goodwill

 

Accumulated
impairment losses

 

Goodwill after
Impairment losses

 

Balance as of January 1, 2016

 

18,099,186

 

(2,974,756

)

15,124,430

 

(+/-) Foreign exchange effect

 

(2,645,368

)

63,516

 

(2,581,852

)

(-) Impairment (note 23)

 

 

(2,678,582

)

(2,678,582

)

(-) Effect of selling of subsidiary

 

(393,980

)

 

(393,980

)

Balance as of December 31, 2016

 

15,059,838

 

(5,589,822

)

9,470,016

 

(+/-) Foreign exchange effect

 

273,270

 

(156,686

)

116,584

 

Balance as of June 30, 2017

 

15,333,108

 

(5,746,508

)

9,586,600

 

 

The amounts of goodwill by segment are as follows:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Brazil

 

380,644

 

380,644

 

 

 

Special Steels

 

2,522,462

 

2,508,056

 

 

 

North America

 

6,683,494

 

6,581,316

 

 

 

 

 

9,586,600

 

9,470,016

 

 

 

 

NOTE 11 — LOANS AND FINANCING

 

Loans and financing are as follows:

 

 

 

Annual interest rate (*)

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Working capital

 

9.13

%

3,020,284

 

3,468,490

 

Financing of property, plant and equipment and others

 

8.23

%

2,554,150

 

2,855,860

 

Ten/Thirty Years Bonds

 

6.24

%

14,258,050

 

14,093,460

 

Total financing

 

 

 

19,832,484

 

20,417,810

 

Current

 

 

 

4,186,259

 

4,458,220

 

Non-current

 

 

 

15,646,225

 

15,959,590

 

 

 

 

 

 

 

 

 

Principal amount of the financing

 

 

 

19,498,064

 

20,049,854

 

Interest amount of the financing

 

 

 

334,420

 

367,956

 

Total financing

 

 

 

19,832,484

 

20,417,810

 

 


(*) Weighted average effective interest costs on June 30, 2017.

 

Loans and financing denominated in Brazilian Reais are indexed at fixed rates or to the following indicators: the TJLP (long-term interest rate), CDI (Interbank Deposit Certificate), the IGP-M (general market price index, a Brazilian inflation rate measured by Fundação Getúlio Vargas) and IPCA (Extended National Consumer Price Index).

 

Summary of loans and financing by currency:

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

 

 

June 30, 2017

 

December 31, 2016

 

Brazilian Real (R$)

 

2,985,728

 

3,228,759

 

U.S. Dollar (US$)

 

16,250,117

 

16,487,116

 

Other currencies

 

596,639

 

701,935

 

 

 

19,832,484

 

20,417,810

 

 

The amortization schedules of long-term loans and financing are as follows:

 

 

 

June 30, 2017

 

December 31, 2016

 

2018(*)

 

1,188,730

 

1,679,416

 

2019

 

892,431

 

875,319

 

2020

 

3,294,983

 

3,261,435

 

2021

 

3,555,930

 

3,500,937

 

2022

 

147,072

 

150,916

 

2023 on

 

6,567,079

 

6,491,567

 

 

 

15,646,225

 

15,959,590

 

 


(*) For the period as of June 30, 2017, the amounts represents payments from July 01, 2018 to December 31, 2018.

 

a) Monitoring indexes

 

Only operations with BNDES include the Company’s contract established debt ratios. In the event of a possible breach of the indicator at the annual measurement, the Company enters into a curing period and a subsequent warranties renegotiation, not characterizing the possibility of a default event.

 

b) Guarantees

 

All loans contracted under the FINAME/BNDES program, totaling R$ 119.2 million on June 30, 2017, are guaranteed by the assets being financed.

 

c) Credit Lines

 

In June 2009, the subsidiaries of the Company, Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and the former subsidiary Aços Villares S.A., obtained a pre-approved credit line with BNDES in the total amount of R$ 1.5 billion to be used for the revamp and modernization of several areas, an increase in the production capacity of certain product lines, investment in logistics and energy generation, and also environmental and sustainability projects. The funds are made available at the time each subsidiary starts its specific investment and presents to BNDES the evidence of the investment made. The interest rate for this credit line is determined at the time of each disbursement, and is composed by indexes linked to of TJLP + 2.16% p.a. As of June 30, 2017, the outstanding balance of this credit facility was R$ 561.7 million.

 

In November 2015, the Company concluded the renewal and increase of the volume of the Senior Unsecured Global Working Capital Credit Agreement, which is a US$ 1 billion revolving credit line with the purpose of providing liquidity to its subsidiaries. The line is divided into two tranches, US$ 250 million destined for Gerdau’s North American subsidiaries borrowing needs and US$ 750 million for Gerdau’s Latin American subsidiaries’ borrowing needs. The total term of the transaction is 3 years and the following companies guarantee this agreement: Gerdau S.A., Gerdau Açominas S.A., Gerdau Aços Longos S.A. and Gerdau Aços Especiais S.A. As of June 30, 2017, the outstanding balance of this credit line was US$ 47 million (R$ 155.5 million as of June 30, 2017).

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

NOTE 12 — DEBENTURES

 

 

 

 

 

Quantity as of June 30, 2017

 

 

 

 

 

 

 

Issuance

 

General Meeting

 

Issued

 

Held in treasury

 

Maturity

 

June 30, 2017

 

December 31, 2016

 

3rd- A and B

 

May 27,1982

 

144,000

 

137,174

 

06/01/2021

 

41,111

 

44,292

 

7th

 

July 14, 1982

 

68,400

 

66,122

 

07/01/2022

 

17,895

 

35,942

 

8th

 

November 11, 1982

 

179,964

 

170,631

 

05/02/2023

 

47,901

 

57,191

 

9th

 

June 10, 1983

 

125,640

 

124,358

 

09/01/2024

 

10,070

 

10,731

 

11th - A and B

 

June 29, 1990

 

150,000

 

148,010

 

06/01/2020

 

14,820

 

17,267

 

Total Consolidated

 

 

 

 

 

 

 

 

 

131,797

 

165,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

131,797

 

165,423

 

 

Maturities of long-term amounts are as follows:

 

 

 

June 30, 2017

 

December 31, 2016

 

2020

 

14,820

 

17,267

 

2021

 

41,111

 

44,292

 

2022

 

17,895

 

35,942

 

2023 on

 

57,971

 

67,922

 

 

 

131,797

 

165,423

 

 

The debentures are denominated in Brazilian Reais, are nonconvertible, and pay variable interest as a percentage of the CDI — Interbank Deposit Certificate. The average notional interest rate was 12.85% and 14.00% for the six-month period ended on June 30, 2017 and year ended on December 31, 2016, respectively.

 

The Company has guarantees provided by the parent entity for debentures of the 7ª, 8ª, 9ª and 11ª issuances.

 

NOTE 13 - FINANCIAL INSTRUMENTS

 

a) General considerations - Gerdau S.A. and its subsidiaries enter into transactions with financial instruments whose risks are managed by means of strategies and exposure limit controls. All financial instruments are recorded in the accounting books and presented as cash and cash equivalents, short-term investments, trade accounts receivable, trade accounts payable, Loans and financing, debentures, related-party transactions, unrealized gains on derivatives, unrealized losses on derivatives, other current assets, other non-current assets, FIDC Obligation, other current liabilities and other non-current liabilities.

 

The Company has derivatives and non-derivative instruments, such as the hedge for some operations under hedge accounting. These operations are non-speculative in nature and are intended to protect the company against exchange rate fluctuations on foreign currency loans and against interest rate fluctuations.

 

b) Market value — the market value of the aforementioned financial instruments is as follows:

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Book

 

Fair

 

Book

 

Fair

 

 

 

value

 

value

 

value

 

value

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4,305,434

 

4,305,434

 

5,063,383

 

5,063,383

 

Short-term investments

 

1,124,769

 

1,124,769

 

1,024,411

 

1,024,411

 

Trade accounts receivable

 

3,920,408

 

3,920,408

 

3,576,699

 

3,576,699

 

Related parties

 

54,052

 

54,052

 

57,541

 

57,541

 

Unrealized gains on derivatives

 

4,050

 

4,050

 

12,951

 

12,951

 

Judicial Deposits

 

1,985,057

 

1,985,057

 

1,861,784

 

1,861,784

 

Other current assets

 

674,381

 

674,381

 

668,895

 

668,895

 

Other non-current assets

 

528,056

 

528,056

 

447,260

 

447,260

 

Liabilities

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

3,062,395

 

3,062,395

 

2,743,818

 

2,743,818

 

Loans and Financing

 

19,832,484

 

20,269,664

 

20,417,810

 

20,716,266

 

Debentures

 

131,797

 

131,797

 

165,423

 

165,423

 

Unrealized losses on derivatives

 

 

 

6,584

 

6,584

 

Obligations with FIDC

 

1,076,751

 

1,076,751

 

1,007,259

 

1,007,259

 

Other current liabilities

 

608,645

 

608,645

 

514,599

 

514,599

 

Other non-current liabilities

 

471,717

 

471,717

 

401,582

 

401,582

 

 

The fair values of Loans and Financing are based on market premises, which may take into consideration discounted cash flows using equivalent market rates and credit rating. All other financial instruments, which are recognized in the Consolidated Financial Statements at their carrying amount, are substantially similar to those that would be obtained if they were traded in the market. However, because there is no active market for these instruments, differences could exist if they were settled in advance.

 

c) Risk factors that could affect the Company’s and its subsidiaries’ businesses:

 

Price risk of commodities: this risk is related to the possibility of changes in prices of the products sold by the Company or in prices of raw materials and other inputs used in the productive process.  Since the Company operates in a commodity market, net sales and cost of sales may be affected by changes in the international prices of their products or materials. In order to minimize this risk, the Company constantly monitors the price variations in the domestic and international markets.

 

Interest rate risk: this risk arises from the effects of the fluctuations in interest rates applied to the Company’s financial liabilities or assets and future cash flows and income. The Company evaluates its exposure to these risks: (i) comparing financial assets and liabilities denominated at fixed and floating interest rates and (ii) monitoring the variations of interest rates like Libor and CDI. Accordingly, the Company may enter into interest rate swaps in order to reduce this risk.

 

Exchange rate risk: this risk is related to the possibility of fluctuations in exchange rates affecting the amounts of financial assets and liabilities or of future cash flows and income. The Company assesses its exposure to the exchange rate by measuring the difference between the amount of its assets and liabilities in foreign currency. The Company believes that the accounts receivables originated from exports, its cash and cash equivalents denominated in foreign currencies and its investments abroad are more than equivalent to its liabilities denominated in foreign currency. Since the management of these exposures occurs at each operation level, if there is a mismatch between assets and liabilities denominated in foreign currency, the Company may employ derivative financial instruments in order to mitigate the effect of exchange rate fluctuations.

 

Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales to customers or investments made with financial institutions.  In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in details the financial position of their customers, establishing a credit limit and constantly monitoring their balances.  Regarding cash investments, the Company invests solely in financial institutions with low credit risk, as assessed by rating agencies. In addition, each financial institution has a maximum limit for investment, determined by the Company’s Credit Committee.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Capital management risk: this risk comes from the Company’s choice in adopting a financing structure for its operations. The Company manages its capital structure, which consists of a ratio between the financial debts and its own capital (Equity) based on internal policies and benchmarks. The KPIs (Key Performance Indicators) related to the objective “Capital Structure Management” are: WACC (Weighted Average Cost of Capital), Net Debt/ EBITDA, Net Financial Expenses Coverage Ratio, and Indebtedness/Equity Ratio. The Net Debt is composed of the outstanding principal of the debt, less cash, cash equivalents and short-term investments (notes 4, 11 and 12). The total capitalization is formed by Total Debt (composed by the outstanding principal of the debt) and Equity (note 17). The Company may change its capital structure, as economic and financial conditions to optimize its financial leverage and its debt management. At the same time, the Company seeks to improve its ROCE (Return on Capital Employed) by implementing a working capital management and an efficient program of capital expenditures. In the long-term, the Company seeks to remain between the parameters below, admitting specific short-term variations:

 

WACC

 

between 10% to 13% a year

Net debt/EBITDA

 

less or equal to 2.5 times

Net Financial Expenses Coverage Ratio

 

greater or equal to 5.5 times

Debt/Equity Ratio

 

less than or equal to 60%

 

These key indicators are used to monitor objectives described above and may not necessarily be used as indicators for other purposes, such as impairment tests.

 

Liquidity risk: the Company’s management policy of indebtedness and cash on hand is based on using the committed lines and the currently available credit lines with or without a guarantee in export receivables for maintaining adequate levels of short, medium, and long-term liquidity. The maturity of long-term loans, financing, and debentures are presented in Notes 11 and 12, respectively.

 

Sensitivity analysis:

 

The Company performed a sensitivity analysis, which can be summarized as follows:

 

Impacts on Statements of Income

 

Assumptions

 

Percentage of change

 

June 30, 2017

 

June 30, 2016

 

Foreign currency sensitivity analysis

 

5

%

197,991

 

247,783

 

Interest rate changes sensitivity analysis

 

10bps

 

59,064

 

71,602

 

Sensitivity analysis of changes in prices of products sold

 

1

%

176,245

 

203,333

 

Sensitivity analysis of changes in raw material and commodity prices

 

1

%

111,068

 

123,868

 

Interest rate and Foreign currency Swaps

 

10bps/5

%

10,391

 

9,697

 

Sensitivity analysis of NDF’s (Non Deliverable Forwards)

 

5

%

1,335

 

16,352

 

 

Foreign currency sensitivity analysis:  As of June 30, 2017, the Company is mainly exposed to variations between the Brazilian real and US Dollar. The sensitivity analysis made by the Company considers the effects of an increase or a reduction of 5% between the Brazilian real and the US Dollar on debts that do not have hedge operations. The impact calculated considering such variation in the foreign exchange rate totals R$ 197,991 and R$ 108,975 after the effects of changes in the net investment hedge described in note 13.f, as of June 30, 2017 (R$ 247.783 and R$ 179.426 as of June 30, 2016, respectively) and represents income if appreciation of the Brazilian real against the US Dollar occurs or an expense in the case of a depreciation of the Brazilian real against the US Dollar, however due to the investment hedge these effects would be mitigated when considered the income tax and exchange rate variance accounts.

 

The net amounts of trade accounts receivable and trade accounts payable denominated in foreign currency do not represent any relevant risk in the case of any fluctuation of exchange rates.

 

Interest rate sensitivity analysis: The interest rate sensitivity analysis made by the Company considers the effects of an increase or reduction of 10 basis point (bps) on the average interest rate applicable to the floating part of its debt. The calculated impact, considering this variation in the interest rate totals R$ 59,064 as of June 30, 2017 (R$ 71.602 as of June 30, 2016) and would impact the Financial expenses account in the Consolidated Statements of Income. The specific interest

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

rates to which the Company is exposed are related to the loans, financing, and debentures presented in Notes 11 and 12, and are mainly comprised by Libor and CDI — Interbank Deposit Certificate.

 

Sensitivity analysis of changes in sales price of products and price of raw materials and other inputs used in production: the Company is exposed to changes in the price of its products. This exposure is associated with the fluctuation of the sale price of the Company’s products and the price of raw materials and other inputs used in the production process, mainly for operating in a commodity market. The sensitivity analysis made by the Company considers the effects of an increase or of a reduction of 1% on both prices. The impact measured considering this variation in the price of products sold, considering the net income and costs of the six month period ended on June 30, 2017, totals R$ 176,245 (R$ 203,333 as of June 30, 2016) and the variation in the price of raw materials and other inputs totals R$ 111,068 as of June 30, 2017 (R$ 123,868 as of June 30, 2016). The impact in the price of products sold and raw materials would be recorded in the accounts Net Sales and Cost of Sales, respectively, in the Consolidated Statements of Income. The Company does not expect to be more vulnerable to a change in one or more specific product or raw material.

 

Sensitivity analysis of interest rate and foreign currency swaps: the Company has exposure to interest rate swaps for some of its loans and financing. The sensitivity analysis calculated by the Company considers the effects of either an increase or a decrease of 10 bps in the interest curve and of 5% in the interest rate, and its impacts in the swaps mark to market. These variations represent an income or expense of R$ 10,391 (R$ 9,697 as of June 30, 2016). These effects would be registered in the statement of comprehensive income. The interest rate swaps to which the Company is exposed to are presented in note 13.e.

 

Sensitivity analysis of forward contracts in US Dollar: the Company has exposure in forward contracts in US Dollar to some of its assets and liabilities. The sensitivity analysis calculated by the Company considers an effect of a 5% US Dollar depreciation or appreciation against the Indian Rupee and corresponds to the effects on the mark to market of such transactions. An increase of 5% on the US Dollar against the Indian Rupee represents a gain of R$ 1,335 as of June 30, 2017 (R$ 16,352 as of June 30, 2016, considering that in this amount there were Dollar/Colombian Pesos forward contracts) and a decrease of 5% on the US Dollar against the Indian Rupee represents a loss in the same amount presented above. The Dollar/Indian Rupee forward contracts were entered into to hedge liabilities (debt) and these effects in the mark to market would be recognized in the Consolidated Statement of Income. The forward contracts in US Dollar, in which the Company is exposed, are presented in note 13.e.

 

d) Financial Instruments per Category

 

Summary of the financial instruments per category:

 

June 30, 2017
Assets

 

Loans and receivables

 

Assets at fair value
with gains and losses
recognized in income

 

Assets at fair value with
gains and losses recognized
in shareholder’s equity

 

Total

 

Cash and cash equivalents

 

4,305,434

 

 

 

4,305,434

 

Short-term investments

 

 

1,124,769

 

 

1,124,769

 

Unrealized gains on financial instruments

 

 

 

4,050

 

4,050

 

Trade accounts receivable

 

3,920,408

 

 

 

3,920,408

 

Related parties

 

54,052

 

 

 

54,052

 

Judicial Deposits

 

1,985,057

 

 

 

1,985,057

 

Other current assets

 

674,381

 

 

 

674,381

 

Other non-current assets

 

438,692

 

89,364

 

 

528,056

 

Total

 

11,378,024

 

1,214,133

 

4,050

 

12,596,207

 

Financial result for the three-month period ended on Jun 30, 2017

 

109,471

 

18,797

 

 

128,268

 

Financial result for the six-month period ended on Jun 30, 2017

 

124,170

 

51,750

 

 

175,920

 

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Liabilities

 

Liabilities at fair value
with gains and losses
recognized in income

 

Other financial liabilities at
amortized cost

 

Total

 

Trade accounts payable

 

 

3,062,395

 

3,062,395

 

Loans and Financing

 

 

19,832,484

 

19,832,484

 

Debentures

 

 

131,797

 

131,797

 

FIDC Obligation

 

 

1,076,751

 

1,076,751

 

Other current liabilities

 

 

608,645

 

608,645

 

Other non-current liabilities

 

 

471,717

 

471,717

 

Total

 

 

25,183,789

 

25,183,789

 

Financial result for the three-month period ended on June 30, 2017

 

713

 

(633,938

)

(633,225

)

Financial result for the six-month period ended on June 30, 2017

 

(11,145

)

(616,016

)

(627,161

)

 

December 31, 2016
Assets

 

Loans and receivables

 

Assets at fair value
with gains and losses
recognized in income

 

Assets at fair value with
gains and losses recognized
in shareholder’s equity

 

Total

 

Cash and cash equivalents

 

5,063,383

 

 

 

5,063,383

 

Short-term investments

 

 

1,024,411

 

 

1,024,411

 

Unrealized gains on financial instruments

 

 

 

12,951

 

12,951

 

Trade accounts receivable

 

3,576,699

 

 

 

3,576,699

 

Related parties

 

57,541

 

 

 

57,541

 

Judicial Deposits

 

1,861,784

 

 

 

1,861,784

 

Other current assets

 

668,895

 

 

 

668,895

 

Other non-current assets

 

380,211

 

67,049

 

 

447,260

 

Total

 

11,608,513

 

1,091,460

 

12,951

 

12,712,924

 

Financial result for the three-month period ended on June 30, 2016

 

(35,751

)

53,606

 

 

17,855

 

Financial result for the six-month period ended on June 30, 2016

 

(72,643

)

208,757

 

 

136,114

 

 

Liabilities

 

Liabilities at market
value with gains and
losses recognized in
income

 

Other financial liabilities at
amortized cost

 

Total

 

Trade accounts payable

 

 

2,743,818

 

2,743,818

 

Loans and Financing

 

 

20,417,810

 

20,417,810

 

Debentures

 

 

165,423

 

165,423

 

FIDC Obligation

 

 

1,007,259

 

1,007,259

 

Other current liabilities

 

 

514,599

 

514,599

 

Other non-current liabilities

 

 

401,582

 

401,582

 

Unrealized losses on financial instruments

 

6,584

 

 

6,584

 

Total

 

6,584

 

25,250,491

 

25,257,075

 

Financial result for the three-month period ended on June 30, 2016

 

(14,919

)

(25,627

)

(40,546

)

Financial result for the six-month period ended on June 30, 2016

 

(45,467

)

(74,741

)

(120,208

)

 

As of June 30, 2017, the Company has derivative financial instruments such as currency swaps and forward contracts in US Dollar. Part of these instruments are classified as cash flow hedges and their effectiveness can be measured, having their unrealized losses and /or gains classified directly in Other Comprehensive Income. The other derivative financial instruments have their realized and unrealized losses and/or gains presented in the account “Gains and losses on derivatives, net” in the Consolidated Statement of Income.

 

e) Operations with derivative financial instruments

 

Risk management objectives and strategies: In order to execute its strategy of sustainable growth, the Company implements risk management strategies in order to mitigate market risks.

 

The objective of derivative transactions is always related to mitigating market risks as stated in our policies and guidelines. The monitoring of the effects of these transactions is performed monthly by the Cash Management and Debt Committee, which validates the mark to market of these transactions. All derivative financial instruments gains and losses are recognized at fair value in the Consolidated Financial Statements of the Company.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Policy for use of derivatives: The Company is exposed to various market risks, including changes in exchange rates, commodities prices and interest rates. The Company uses derivatives and other financial instruments to reduce the impact of such risks on the fair value of its assets and liabilities or in future cash flows and results. The Company has established policies to evaluate the market risks and to approve the use of derivative transactions related to these risks. The Company enters into derivative financial instruments solely to manage the market risks mentioned above and never for speculative purposes. Derivative financial instruments are used only when they have a related position (asset or liability exposure) resulting from business operations, investments and financing.

 

Policy for determining fair value: the fair value of derivative financial instruments is determined using models and other valuation techniques, including future prices and market curves.

 

The derivative transactions may include: interest rate swaps, (both in the Libor dollar, as in other currencies), currency swaps and currency forward contracts.

 

Forward Contracts in US Dollar

 

The Company has entered into NDFs (Non Deliverable Forward) in order to mitigate the exchange variance risk on liabilities denominated in foreign currencies, mainly US dollar. The counterparties of these transactions are financial institutions with a low credit risk.

 

Swap Contracts

 

The Company entered into cross currency swap, designated as a cash flow hedge, contract whereby it receives a variable interest rate based on LIBOR in US dollars and pays a fixed interest rate based in the local currency. The counterparties to these transactions are financial institutions with low credit risk.

 

The derivatives instruments can be summarized and categorized as follows:

 

 

 

 

 

 

 

Notional value

 

Amount receivable

 

Amount payable

 

Contracts

 

Position

 

June 30, 2017

 

December 31, 2016

 

June 30, 2017

 

December 31, 2016

 

June 30, 2017

 

December 31, 2016

 

Forward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity at 2017

 

 

 

long in US$

 

US$8.2 million

 

US$84.8 million

 

454

 

734

 

 

(6,584

)

Maturity at 2017

 

 

 

short in US$

 

 

US$15.0 million

 

 

1,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross currency swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity in 2017

 

receivable under the swap

payable under the swap

 

Libor 6M + 2.25%

INR 11.02%

 

US$25.0 million

 

US$25.0 million

 

1,172

 

5,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity in 2018

 

receivable under the swap

payable under the swap

 

Libor 6M +2%

INR 10.17%

 

US$40.0 million

 

US$40.0 million

 

2,424

 

4,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fair value of financial instruments

 

 

 

 

 

 

 

 

 

4,050

 

12,951

 

 

(6,584

)

 

Prospective and retrospective tests demonstrated the effectiveness of the instruments qualified as cash flow hedge.

 

 

 

June 30, 2017

 

December 31, 2016

 

Unrealized gains on financial instruments

 

 

 

 

 

Current assets

 

 

2,557

 

Non-current assets

 

4,050

 

10,394

 

 

 

4,050

 

12,951

 

Unrealized losses on financial instruments

 

 

 

 

 

Current liabilities

 

 

(6,584

)

 

 

 

(6,584

)

 

 

 

June 30, 2017

 

June 30, 2016

 

Net Income

 

 

 

 

 

Gains on financial instruments

 

9,093

 

13,320

 

Losses on financial instruments

 

(17,699

)

(51,540

)

 

 

(8,606

)

(38,220

)

Other comprehensive income

 

 

 

 

 

Losses on financial instruments

 

(6,578

)

(45

)

 

 

(6,578

)

(45

)

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

f) Net investment hedge

 

The Company designated as hedge of part of its net investments in subsidiaries abroad the operations of Ten/Thirty Years Bonds. As a consequence, the effect of exchange rate changes on these debts has been recognized in the Statement of Comprehensive Income.

 

The exchange variation generated on the operations of Ten/Thirty Years Bonds in the amount of US$ 2.5 billion (designated as hedges) is recognized in the Statement of Comprehensive Income, while the exchange rate on the portion of US$ 0.8 billion (not designated as hedges) is recognized in income. Additionally, the Company opted to designate as hedge of the net investment financing operations held by the subsidiary Gerdau Açominas SA, in the amount of US$ 0.1 billion, which were made in order to provide part of the funds to purchase these investments abroad.

 

The Company has proven the effectiveness of the hedge from its designation dates and demonstrated high effectiveness of the hedge as from the debt hiring for acquisition of these companies abroad, whose effects were measured and recognized directly in the Statement of Comprehensive Income as an unrealized loss, net of taxes, in the amount of R$ 355,743 and R$ 141,229 for the three-month and six-month periods ended on June 30, 2017 (gain of R$ 880,845 and R$ 1,800,061 for the three and six month period ended on June 30, 2016).

 

The objective of the hedge is to protect, during the existence of the debt, the amount of part of the Company’s investment in the subsidiaries mentioned above against positive and negative oscillations in the exchange rate. This objective is consistent with the Company’s risk management strategy. Prospective and retrospective tests demonstrated the effectiveness of these instruments.

 

g) Measurement of fair value:

 

The IFRS defines fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The standard also establishes a three level hierarchy for the fair value, which prioritizes information when measuring the fair value by the company, to maximize the use of observable information and minimize the use of non-observable information. This IFRS describes the three levels of information to be used to measure fair value:

 

Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities.

 

Level 2 - Inputs other than quoted prices included in Level 1 available, where (unadjusted) quoted prices are for similar assets and liabilities in non-active markets, or other data that is available or may be corroborated by market data for substantially the full term of the asset or liability.

 

Level 3 - Inputs for the asset or liability that are not based on observable market data, because market activity is insignificant or does not exist.

 

As of June 30, 2017, the Company had some assets that the fair value measurement is required on a recurring basis. These assets include investments in private securities and derivative instruments.

 

Financial assets and liabilities of the Company, measured at fair value on a recurring basis and subject to disclosure requirements of IFRS 7 as of June 30, 2017 and December 31, 2016, are as follows:

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

Quoted Prices Active Markets for Identical
Assets (Level 1)

 

Quoted Prices in Non-Active Markets for
Similar Assets
(Level 2)

 

 

 

June 30, 2017

 

December 31, 2016

 

June 30, 2017

 

December 31, 2016

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

4,305,434

 

5,063,383

 

 

 

4,305,434

 

5,063,383

 

Short-term investments - Held for Trading

 

1,124,769

 

1,024,411

 

252,669

 

458,639

 

872,100

 

565,772

 

Trade accounts receivable

 

3,920,408

 

3,576,699

 

 

 

3,920,408

 

3,576,699

 

Unrealized gains on financial instruments

 

 

2,557

 

 

 

 

2,557

 

Other current assets

 

674,381

 

668,895

 

 

 

674,381

 

668,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Related parties

 

54,052

 

57,541

 

 

 

54,052

 

57,541

 

Unrealized gains on financial instruments

 

4,050

 

10,394

 

 

 

4,050

 

10,394

 

Judicial deposits

 

1,985,057

 

1,861,784

 

 

 

1,985,057

 

1,861,784

 

Other non-current assets

 

528,056

 

447,260

 

 

 

528,056

 

447,260

 

 

 

12,596,207

 

12,712,924

 

252,669

 

458,639

 

12,343,538

 

12,254,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

3,062,395

 

2,743,818

 

 

 

3,062,395

 

2,743,818

 

Short-term debt

 

4,186,259

 

4,458,220

 

 

 

4,186,259

 

4,458,220

 

Unrealized losses on financial instruments

 

 

6,584

 

 

 

 

6,584

 

Other current liabilities

 

608,645

 

514,599

 

 

 

608,645

 

514,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

15,646,225

 

15,959,590

 

 

 

15,646,225

 

15,959,590

 

Debentures

 

131,797

 

165,423

 

 

 

131,797

 

165,423

 

FIDC Obligation

 

1,076,751

 

1,007,259

 

 

 

1,076,751

 

1,007,259

 

Other non-current liabilities

 

471,717

 

401,582

 

 

 

471,717

 

401,582

 

 

 

25,183,789

 

25,257,075

 

 

 

25,183,789

 

25,257,075

 

 

h) Changes in liabilities from Cash flow from financing activities:

 

As required by IAS 7, the Company demonstrates below the changes in the liabilities of Cash Flow from financing activities, of the Statement of Cash Flows:

 

 

 

 

 

Cash effects

 

Non-cash effects

 

 

 

 

 

December
31, 2016

 

Received/(Paid)
from financing
activities

 

Interest Payment

 

Interest on loans,
financing and loans
with related parties

 

Exchange
Variance and
others

 

June 30, 2017

 

Related Parties, net

 

(57,541

)

3,489

 

 

 

 

(54,052

)

Loans and Financing, Debentures and Unrealized Gains and Losses on financial instruments

 

20,576,866

 

(568,183

)

(728,383

)

703,772

 

(23,841

)

19,960,231

 

 

 

 

 

 

Cash effects

 

Non-cash effects

 

 

 

 

 

December
31, 2015

 

Received/(Paid)
from financing
activities

 

Interest Payment

 

Interest on loans,
financing and loans
with related parties

 

Exchange
Variance and
others

 

June 30, 2016

 

Related Parties, net

 

(53,506

)

6,271

 

 

2,532

 

(16,011

)

(60,714

)

Loans and Financing, Debentures and Unrealized Gains and Losses on financial instruments

 

26,417,256

 

(1,765,488

)

(600,642

)

771,580

 

(4,146,324

)

20,676,382

 

 

NOTE 14 — PROVISIONS FOR TAX, CIVIL AND LABOR CLAIMS

 

The Company and its subsidiaries are party in judicial and administrative proceedings involving labor, civil and tax matters. Based on the opinion of its legal counsel, Management believes that the provisions recorded for these judicial and administrative proceedings is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and that the final decisions will not have significant effects on the financial position and operational results of the Company and its subsidiaries.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

For claims whose expected loss is considered more likely than not, the provisions have been recorded considering the judgment of the Company’s legal advisors and of Management and the provisions are considered sufficient to cover more likely than not expected losses. The balances of the provisions are as follows:

 

I) Provisions

 

 

 

June 30, 2017

 

December 31, 2016

 

a) Tax provisions

 

493,631

 

1,829,771

 

b) Labor provisions

 

539,711

 

358,901

 

c) Civil provisions

 

46,552

 

50,554

 

 

 

1,079,894

 

2,239,226

 

 

As the net result of the reversal of the accounting provision described below (tax provisions), related to the discussion of the exclusion of the ICMS (“Imposto sobre a circulação de Mercadorias e Serviços” — ICMS — State VAT) from the tax base for contributions to PIS (“Contribuição ao Programa de Integração Social”- PIS) and COFINS (“Contribuição para o Financiamento da Seguridade Social” - COFINS), and the recognition of other accounting provisions for the six-month period ended on June 30, 2017, the Company recorded the amounts of R$ 929,711 on the item “Reversal of contingent liabilities, net” (Operating Result), and R$ 369,819, on the item “Reversal of monetary update of contingent liabilities, net” (Financial Income), in its Consolidated Statements of Income.

 

a) Tax Provisions

 

The Company and its subsidiaries are parties to lawsuits related to the exclusion of the ICMS from the tax base for contributions to PIS and COFINS, with respect to which the Company made judicial deposits and accounting provisions, which in turn were updated in accordance with the SELIC rate. The balances recorded as of December 31, 2016 refer to the unpaid amounts of PIS and COFINS since 2009, the collection of which was fully suspended, due to these judicial deposits.

 

Recently, on March 15, 2017, the Brazilian Federal Supreme Court (STF — Supremo Tribunal Federal) ruled on a claim related to this matter, and by 6 votes to 4, concluded: “The ICMS does not comprise the tax base for PIS and COFINS assessment purposes”. The STF decision, in principle, affects all of the judicial proceedings in progress, due to its general repercussion. However, it is expected that, once this decision is published, the National Treasury Attorney will ask the STF to modulate this decision prospectively, which could limit the production of its effects for taxpayers.

 

Pursuant to paragraph 14 of IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, a provision is recognized only when “it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation”, among other requirements. On March 31, 2017 the Company, based on (i) the conclusion of this judgment by the STF (sitting en banc) in Extraordinary Appeal No. 574,706/RG with general repercussion, which ruled that the inclusion of the ICMS in the PIS and COFINS calculation tax base was unconstitutional, and (ii) the accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS), reversed the aforementioned accounting provision. The Company’s decision is supported by the position of its legal advisors who, when reassessing the likelihood of loss in the ongoing lawsuits related to the matter, concluded that the probability of loss, as to the merits of these lawsuits, became remote as of the date of the enactment of this decision.

 

The Company emphasizes, however, that in view of the possibility that the STF may understand that the modulation mechanism necessarily applies to its decision, and that the application of such a mechanism could limit the effects of the same, a revaluation of the risk of loss associated with the aforementioned lawsuits may be required, pursuant to paragraph 59 of IAS 37. Accordingly, depending on the terms of the modulation, as defined by the STF, such revaluation may result in the need to record new provisions in connection with this matter in the future.

 

The balance of judicial deposits as of June 30, 2017, in the amount of R$ 1,643,386, referring to the same discussion on the inclusion of the ICMS in the tax base of PIS and COFINS, awaits termination of the relevant lawsuits before the Brazilian courts in order to be returned to the Company.

 

The other tax provisions refer substantially to discussions related to the ICMS, the settlement of PIS credits and the assessment of PIS and COFINS on other revenues.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

b) Labor Provisions

 

The Company is party to individual and collective labor lawsuits, and the claims substantially refer to overtime payment, nightshift premium, time spent during transportation time, health hazard and hazardous duty premiums, labor accident damages, labor-related diseases and damages for mental anguish, among others.

 

c) Civil Provisions

 

The Company and its subsidiaries are also a party to civil lawsuits arising in the normal course of its business, which totaled as of June 30, 2017 the amount shown as provision liabilities.

 

II) Contingent liabilities for which provisions were not recorded

 

Considering the opinion of legal advisors and management’s assessment, contingencies listed below have chance of loss considered as possible (but not likely) and due to this classification accruals have not been made in accordance with IFRS.

 

a) Tax contingencies

 

a.1) The Company and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A., have other lawsuits related to the ICMS (state VAT) which are mostly related to credit rights and rate differences, whose demands totaled R$ 1,998,754.

 

a.2) The Company and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A., Gerdau Aços Especiais and Gerdau S.A., are parties to the lawsuits relating to other taxes. The total amount of these lawsuits is R$ 909,096.

 

a.3) Subsidiary Gerdau Aços Longos S.A. is a party to an administrative proceeding relating to Withholding Income Tax, in the amount of R$ 119,773, assessed on the remittance abroad of interest charged on export financings under Export Prepayment or Export Advance Agreements. The Company submitted an administrative claim challenging the tax assessment on January 13, 2017, which was rejected by the Brazilian Federal Revenue Judgment Office (Delegacia de Julgamento da Receita Federal do Brasil), reason for which the Company is preparing a voluntary appeal, to be submitted to the Brazilian Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais — “CARF”, administrative body of the Ministry of Finance of Brazil)

 

a.4) Subsidiaries Gerdau Internacional Empreendimentos Ltda. and Gerdau Aços Especiais S.A., are parties to administrative and judicial proceedings relating to IRPJ — Corporate Income Tax and CSLL — Social Contribution Tax, in the current amount of R$ 1,455,853. Said proceedings relate to profits generated abroad, of which (i) R$ 1,288,123 correspond to two proceedings involving Gerdau Internacional Empreendimentos Ltda., of which (i.a.) R$ 930,081 relate to a proceeding that is no longer subject to appeal in CARF and was referred for judicial collection, which collection is being challenged in the competent judicial lower court; and (i.b) R$ 358,042 relate to a voluntary appeal which was partially granted in the lower tribunal of the Brazilian Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais — “CARF”, administrative body of the Ministry of Finance of Brazil), and was subject to special appeal which was partially granted in CARF’s superior tribunal with the publication of the judgment on May 25, 2017, and is currently awaiting due diligence by the Internal Revenue Service, as determined by the CARF decision, and new appeals may be filed after the conclusion of such procedure; and (ii) R$ 167,730 correspond to a proceeding involving Gerdau Aços Especiais S.A., whose voluntary appeal in CARF’s lower tribunal was dismissed, for which a special appeal was filed, and currently awaits judgment in CARF’s superior tribunal.

 

a.5) Subsidiaries Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Açominas S.A., are parties to administrative proceedings relating to the disallowance of the deductibility of goodwill generated in accordance with Article 7 and 8 of Law 9,532/97 — as a result of a corporate restructuring carried out in 2004/2005 — from the tax base of the Corporate Income tax - IRPJ and Social Contribution on Net Income - CSLL. The total updated amount of the proceedings is R$ 5,788,292, of which (i) R$ 4,563,274 correspond to four proceedings involving subsidiaries Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Açominas S.A., for which administrative discussions already ended and are currently in the administrative collection stage; and the Companies obtained injunctive relief to permit it to offer a judicial guarantee using a liability insurance policy in the amount of R$ 4,696,249, for judicial discussions on Embargoes to Execution by the subsidiary Gerdau Aços Longos S.A. were initiated, in their respective proceedings, which total the amount of R$ 3,122,552; (ii) R$ 525,370 correspond to two proceedings involving Gerdau Aços Longos S.A., whose

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

voluntary appeal is currently pending in CARF’s lower tribunal; (iii) R$ 119,629 correspond to a proceeding involving the subsidiary Gerdau Aços Especiais S.A., whose voluntary appeal is currently pending in CARF’s lower tribunal; and (iv) R$ 580,019 correspond to one proceeding involving the subsidiary Gerdau Aços Longos S.A., the challenge to which was filed by the Company on January 13, 2017 and was partially granted by the Brazilian Federal Revenue Judgment Office (Delegacia de Julgamento da Receita Federal do Brasil) on June 30, 2017, decision which is currently pending a court summons to the company for opposition of the applicable appeal.

 

Some of the decisions obtained at the CARF related to those proceedings along with other matters involving the Company included in the scope of the so-called Operation Zelotes (“Operation”) are being investigated by Brazilian federal authorities including the Judiciary Branch, with the purpose of verifying the occurrence or not of alleged illegal acts.

 

Considering the involvement of Gerdau’s name in press reports concerning the Operation, the Board of Directors decided to engage outside counsel, which would report to a Special Committee of the Board, to conduct an investigation to determine, among other things: (i) whether, in light of current knowledge, proper protocol was followed in the relationship of the Company with governmental authorities, including CARF, and in the hiring of firms representing the Company in cases before CARF; (ii) whether such firms have remained within the scope of their work/hiring; (iii) whether the engagement terms for such firms included clauses intended to prevent activity that violates ethical codes or laws currently in force; (iv) whether the engagement terms for such firms included the establishment of sanctions for any violations (whether contractual breaches or otherwise); and (v) if there is any evidence of fraud, deceit, bad faith, or any expression of an intent to commit an illegal act on the part of directors and/or officers of the Company in the relationship of the Company with governmental authorities, including CARF, in the negotiation, signing or carrying out of the aforementioned contracts (“Internal Investigation”).

 

The Internal Investigation is ongoing, and the Company is cooperating with the Federal Police an as of the date of the approval of these interim financial statements, the Company believes it is not possible to predict either the duration or the outcome of the Operation by the Federal Police or of the Internal Investigation. Additionally, the Company believes that currently there is not enough information to determine whether a provision for losses is required or disclose any contingency.

 

The Company’s legal advisors confirm that the procedures adopted by the Company with respect to the tax treatment of profits abroad and the deductibility of goodwill were strictly legal, and, therefore, the likelihood of loss with respect to said proceedings is possible (but not likely).

 

b) Civil contingencies

 

b.1) A lawsuit arising from the request by two civil construction unions in the state of São Paulo alleging that Gerdau S.A. and other long steel producers in Brazil share customers, thus, violating the antitrust legislation. After investigations carried out by the Economic Law Department (SDE), the final opinion was that a cartel exists. The lawsuit was therefore forwarded to the Administrative Council for Economic Defense (CADE) for judgment, which resulted in a fine to the Company and other long steel producers, on September 23, 2005, an amount equivalent to 7% of gross revenues in the year before the Administrative Proceeding was commenced, excluding taxes (fine of R$ 245,070, updated by the judicial accounting on August 01, 2013 to R$ 417,820)

 

Two lawsuits challenge the investigation conducted by the Competition Defense System and its merits judgment, whose grounds are procedural irregularities, especially the production of evidence, based on an economic study, to prove the lack of a cartel. The Court, upon offer of bank guarantee letter, granted the suspension of the effects of CADE’s decision. Sentences were handed down for the dismissal of the actions and both are found in appeal phase.

 

The Company denies having been engaged in any type of anti-competitive conduct and believes based on information available, including the opinion of its legal counsel, that it is possible that the decision will be reverted.

 

b.2) The Company and its subsidiaries are parties to other demands of a civil nature that collectively have a discussion amount of approximately R$ 232,519. For these demands was not performed accounting accrual, since were considered as possible losses, based on the opinion of its legal advisors.

 

b.3) On May 26, 2016, a securities class action complaint was filed in the United States District Court for the Southern District of New York against Gerdau and certain executives and former executives of the Company by purchasers of

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

American Depositary Receipts (ADRs) of the Company that trade on the New York Stock Exchange. On August 9, 2016, the court appointed the Policemen’s Annuity and Benefit Fund of Chicago as lead plaintiff. On October 31, 2016, lead plaintiff filed an amended complaint under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a purported class of purchasers of Gerdau ADRs between April 23, 2012 and May 16, 2016. Among other things, the amended complaint alleged that the Company and certain executives had engaged in a bribery scheme involving members of the Brazilian Board of Tax Appeals (CARF), which had purportedly resulted in the nonpayment of approximately US$ 429 million in taxes and resulted in defendants’ statements in Gerdau’s securities filings about Gerdau’s business, operations, and prospects being false and misleading and/or lacking a reasonable basis. The amended complaint did not specify an amount of alleged damages, and it also included claims pertaining to the transaction relating to the acquisition of equity interests described in note (c) below. On January 17, 2017, the Company filed a motion to dismiss, but before its review by the Court, the parties asked for a stay of the proceedings, so that they could engage in a mediation process. As a result of the mediation, on July 5, 2017 lead plaintiff and the defendants reached a settlement, in the amount of US$ 15 million, which remains subject to final approval by the court. The amount of the settlement was substantially covered by insurance. The settlement does not acknowledge any liability by the defendants and, in the opinion of the Company and its legal advisors, is the best alternative to eliminate the uncertainties, burdens and costs to be incurred if the dispute were to continue.

 

c) Administrative proceeding — Brazilian Securities Comission (CVM)

 

On July 14, 2015, the Company acquired non-controlling interests in the following companies: Gerdau Aços Longos S.A. (4.77%), Gerdau Açominas S.A. (3.50%), Gerdau Aços Especiais S.A. (2.39%) and Gerdau América Latina Participações S.A. (4.90%), having as counterparty Itaú Unibanco S.A. and ArcelorMittal Netherlands BV. This transaction was approved by the Board of Directors of Gerdau S.A. by unanimous vote of the directors on July 13, 2015, based on the market opportunity and the analysis that the prices were appropriate considering: economic evaluations conducted by independent report, the financial instruments used, the payment terms, capturing value through a more concentrated cash flow and long-term vision for the Company. The Company, in compliance with CVM requests for clarification on the acquisition, disclosed that the decision to its acquisition had exclusively business merit and was duly considered and unanimously approved by the Board of Directors. The terms and conditions for the acquisition considered long-term market prospects. On October 21, 2016, Metalúrgica Gerdau S.A. and certain directors and former directors of Gerdau S.A. filed a defense in the administrative proceeding brought by CVM on the acquisition of non-controlling interests in the subsidiaries, in the sense that the operation was businesslike justified, as above stated. There is no estimate for a final decision of the matter. Metalúrgica Gerdau S.A. believes that, currently, there is not enough information to disclose or determine if a provision for losses is required.

 

III) Judicial deposits

 

The Company has judicial deposits related to tax, labor and civil lawsuits as listed below:

 

 

 

June 30, 2017

 

December 31, 2016

 

Tax

 

1,828,250

 

1,716,996

 

Labor

 

117,325

 

107,191

 

Civil

 

39,482

 

37,597

 

 

 

1,985,057

 

1,861,784

 

 

IV) Eletrobrás Compulsory Loan

 

The Compulsory Loan, instituted by the Brazilian government in order to expand and improve the energy sector of the country was charged and collected from industrial consumers with monthly consumption equal or superior to 2000kwh through the “electricity bills” issued by the electric power distribution companies, was converted into credits to the taxpayers based on the annual value of these contributions made between 1977 and 1993. The legislation sets a maximum 20 years period to return the compulsory loan to the taxpayers, providing Eletrobrás the possibility of anticipating this return through the conversion of those loans in shares of its own issue. Prior to the conversion of the credits into shares, those credits were adjusted through an indexer and quantifier, called Standard Unit (SU). It happens that the compulsory loan was charged to the companies in their monthly electricity bills, consolidated during the year, and only indexed by the SU in January of next year, resulting in a lack of monthly monetary adjustment during the years of collection, as well as

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

interest. This procedure imputed to taxpayers considerable financial losses, particularly during the periods when the monthly inflation rates stood at high levels.

 

In order to claim the appropriate interest and monetary correction, subtracted by the methodology applied by Eletrobrás, the Company (understood to be legal entities existing at the time and later became part of Gerdau S.A.) filed lawsuits claiming credits resulting from differences on the monetary correction of principal, interest, moratory and other accessory amounts owed by Eletrobrás due to the compulsory loans, totaling approximately R$ 1,260 million. Recently, particularly in 2015, processes involving representative amounts were definitively judged by the Superior Court of Justice - STJ favorable to the Company so that no further appeals against such decisions apply (“final judgment”). For claims with a final judgment, it yet remains the enforcement of ruling (or execution phase) where the actual amounts to be settled will be calculated.  Obtaining favorable decisions represented by the final judgment mentioned above, in accordance with IAS 37, suggests that the inflow of economic benefits has become probable. However, it is not yet practicable to reasonably determine the realization of the gain in the form of fitting of resources arising from these decisions has reached a level of virtually certain and that the Company has control over such assets, which under the above standards, implies that such gains are not recorded until such conditions are demonstrably present.

 

NOTE 15 - RELATED-PARTY TRANSACTIONS

 

a)             Intercompany loans

 

 

 

June 30, 2017

 

December 31, 2016

 

Assets

 

 

 

 

 

Jointly-controlled entities

 

 

 

 

 

Gerdau Corsa SAPI de C.V.

 

 

48

 

 

 

 

 

 

 

Others

 

 

 

 

 

Fundação Gerdau

 

54,052

 

57,493

 

 

 

54,052

 

57,541

 

 

 

 

 

 

 

 

 

For the three-month period ended

 

 

 

June 30, 2017

 

June 30, 2016

 

Net financial loss

 

 

(2,532

)

 

Operations with related parties

 

During the three and six-month periods ended on June 30, 2017 and 2016, the Company, through its subsidiaries, performed commercial operations with some of its associate companies and jointly controlled entities in sales of R$ 152,569 and R$ 241,219 as of June 30, 2017, respectively (R$ 107,434 and R$ 186,056 as of June 30, 2016, respectively) and purchases in the amount of R$ 29,726 and R$ 61,541 as of June 30, 2017, respectively (R$ 25,546 and R$ 60,383 as of June 30, 2016, respectively). The net balance totals R$ 179,679 as of June 30, 2017 (R$ 125,673 as of June 30, 2016).

 

During the three and six-month periods ended on June 30, 2017 and 2016, the Company, through its subsidiaries, performed transactions with controlling shareholders, directly or indirectly, mainly of guarantees provided by the controlling in guarantees of debentures, on which the Company pays a fee of 0.95 % p.a. on the amount guaranteed. The effect of these transactions was an expense of R$ 281 and R$ 551, respectively (R$ 413 and R$ 1,365 on June 30, 2016).  Additionally, the Company recorded revenues of R$ 216 and R$ 416 in the three and six-month periods, respectively (R$ 251 and R$ 503 on June 30, 2016, respectively), derived from rental agreement.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Guarantees granted

 

Related Party

 

Relationship

 

Object

 

Original
Amount

 

Maturity

 

Balance as of
June 30,
2017

 

Balance as of
December 31,
2016

 

GTL Trade Finance Inc.

 

Subsidiary

 

10-year Bond

 

1,744,000

 

oct/17

 

2,616,125

 

2,577,296

 

GTL Trade Finance Inc.

 

Subsidiary

 

30-year Bond

 

1,118,000

 

apr/44

 

1,654,100

 

1,629,550

 

Diaco S.A.

 

Jointly-controlled entity

 

Financing Agreements

 

302,314

 

aug/18 - june/19

 

290,354

 

397,238

 

Gerdau Holding Inc.

 

Subsidiary

 

10-year Bond

 

2,188,125

 

jan/20

 

1,828,528

 

1,801,389

 

Gerdau Trade Inc.

 

Subsidiary

 

10-year Bond

 

2,117,750

 

jan/21

 

3,395,619

 

3,345,222

 

Gerdau Corsa S.A.P.I. de C.V.

 

Jointly-controlled entity

 

Financing Agreements

 

2,038,379

 

july/17 - dec/20

 

2,055,450

 

2,061,260

 

GTL Trade Finance Inc., Gerdau Holdings Inc.

 

Subsidiary

 

10-year Bond

 

2,606,346

 

apr/24

 

3,032,157

 

2,987,154

 

Sipar Aceros S.A.

 

Subsidiary

 

Financing Agreements

 

436,959

 

sep/18-sep/21

 

118,677

 

434,706

 

Gerdau Trade Inc.

 

Subsidiary

 

10-year Bond

 

1,501,275

 

apr/23

 

1,792,399

 

1,832,625

 

Gerdau Steel India Ltd.

 

Subsidiary

 

Financing Agreements

 

295,471

 

aug/17 - feb/19

 

368,903

 

354,585

 

Gerdau Steel India Ltd.

 

Subsidiary

 

Financing Agreements

 

285,673

 

Undetermined

 

142,095

 

55,130

 

Comercial Gerdau Bolivia

 

Subsidiary

 

Financing Agreements

 

12,980

 

nov/17

 

13,233

 

13,036

 

Gerdau Açominas S.A.

 

Subsidiary

 

Financing Agreements

 

3,160,958

 

july/18 - feb/21

 

2,507,565

 

2,627,205

 

Gerdau Ameristeel Us. Inc.

 

Subsidiary

 

25-year Bond

 

103,596

 

oct/37

 

244,807

 

166,214

 

Gerdau Aços Longos S.A.

 

Subsidiary

 

Financing Agreements

 

556,247

 

oct/24 - dec/30

 

300,921

 

318,784

 

Gerdau Aços Longos S.A.

 

Subsidiary

 

Financing Agreements

 

299,918

 

dec/17 - july/18

 

311,629

 

304,194

 

Siderúrgica Zuliana, C.A.

 

Subsidiary

 

Financing Agreements

 

50,010

 

dec/17

 

33,082

 

65,182

 

Gerdau Aços Especiais S.A.

 

Subsidiary

 

Financing Agreements

 

70,000

 

feb/20

 

56,000

 

63,000

 

 

b)             Debentures

 

Debentures are held by parent companies, directly or indirectly, in the amount of R$ 25,975 as of June 30, 2017 (R$ 33,438 as of December 31, 2016), which corresponds to 4,375 debentures (5,964 as of December 31, 2016).

 

c)              Price conditions and charges

 

Loan agreements between Brazilian companies carry interest based on the CDI (Interbank Deposit Certificate) and Libor rate plus exchange variance, when applicable. Sales of products and purchases of inputs are made under terms and conditions agreed between the parties.

 

d)             Management compensation

 

The Company paid to its management salaries, benefits and variable compensation totaling R$ 8,426 and R$ 16,725 for the three and six-month periods ended on June 30, 2017 (R$ 9,351 and R$ 19,424 for the three and six-month periods ended on June 30, 2016). The contributions for the defined contribution plan, related to the management of the Company, totaled R$ 291 and R$ 576 for the three and six-month period ended on June 30, 2017, respectively (R$ 468 and R$ 695 on June 30, 2016).

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

The cost of long-term incentive plans recognized in income and attributable to key management (members of Board of Directors and executive officers) totaled R$ 3,678 and R$ 7,327 during the three and six-month period ended on June 30, 2017, respectively (R$ 2,806 and R$ 4,634 for the three and six-month period ended on June 30, 2016).

 

Additionally, for the three and six-month period ended on June 30, 2017, the compensation for the members of the Advisory Board was R$ 0 (R$ 490 and R$ 979 in the three and six-month periods ended on June 30, 2016).

 

NOTE 16 - OBLIGATIONS WITH FIDC - INVESTMENT FUND IN CREDIT RIGHTS

 

Part of the assets resulting from the favorable judgments of credits with Eletrobras mentioned in Note 14 iv were used to set up a Non Standardized Credit Right Investment Fund, constituted and duly authorized to operate by the Securities and Exchange Commission of Brazil (“FIDC NP Barzel”), whose fair value at the FIDC Inception date was R$ 800 million. The single quota of this FIDC was sold in 2015 in the acquisition of minority interests transaction in subsidiaries of Gerdau S.A.

 

The Company assures the FIDC, through the transfer agreement price adjustments clause, minimum return on the transferred amount of the credits rights on the lawsuits. However, where the amounts received in the lawsuits exceed the transferred amount, monetarily adjusted, the Company will be entitled to a substantial percentage of that gain. Additionally, the Company has the right of first offer to repurchase those receivables in the event of sale by the Fund, in accordance to the contract subscribed, and has the amount of R$ 1,076,751 recognized in the account “Payables to FIDC” as of June 30, 2017 (R$ 1,007,259 as of December 31, 2016).

 

NOTE 17 — EQUITY

 

a) Capital — The Board of Directors may, without need to change the bylaws, issue new shares (authorized capital), including the capitalization of profits and reserves up to the authorized limit of 1,500,000,000 common shares and 3,000,000,000 preferred shares, all without nominal value. In the case of capital increase through subscription of new shares, the right of preference shall be exercised in up to 30 days, except in the case of a public offering, when the limit is not less than 10 days.

 

Reconciliation of common and preferred outstanding shares is presented below:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Common shares

 

Preferred shares

 

Common shares

 

Preferred shares

 

Balance at the beginning of the period

 

571,929,945

 

1,137,018,570

 

571,929,945

 

1,114,744,538

 

Repurchase of Shares

 

 

 

 

(10,000,000

)

Exercise of stock option

 

 

205,093

 

 

2,274,032

 

Transfer of Shares

 

 

 

 

30,000,000

 

Balance at the end of the period

 

571,929,945

 

1,137,223,663

 

571,929,945

 

1,137,018,570

 

 

On June 30, 2017, 573,627,483 common shares and 1,146,031,245 preferred shares are subscribed and paid up, with a total capital of R$ 19,249,181 (net of share issuance costs). Ownership of the shares is presented below:

 

 

 

Shareholders

 

 

 

June 30, 2017

 

December 31, 2016

 

Shareholders

 

Common

 

%

 

Pref.

 

%

 

Total

 

%

 

Common

 

%

 

Pref.

 

%

 

Total

 

%

 

Metalúrgica Gerdau S.A. and subsidiary*

 

483,922,176

 

84.4

 

169,447,856

 

14.8

 

653,370,032

 

38.0

 

449,712,654

 

78.4

 

202,806,626

 

17.7

 

652,519,280

 

37.9

 

Brazilian institutional investors

 

31,241,647

 

5.4

 

93,998,273

 

8.2

 

125,239,920

 

7.3

 

41,883,032

 

7.3

 

92,721,295

 

8.1

 

134,604,327

 

7.8

 

Foreign institutional investors

 

18,440,996

 

3.2

 

713,762,621

 

62.3

 

732,203,617

 

42.6

 

11,122,498

 

1.9

 

705,652,715

 

61.5

 

716,775,213

 

41.8

 

Other shareholders

 

38,325,126

 

6.7

 

160,014,913

 

13.9

 

198,340,039

 

11.5

 

69,211,761

 

12.1

 

135,837,934

 

11.9

 

205,049,695

 

11.9

 

Treasury stock

 

1,697,538

 

0.3

 

8,807,582

 

0.8

 

10,505,120

 

0.6

 

1,697,538

 

0.3

 

9,012,675

 

0.8

 

10,710,213

 

0.6

 

 

 

573,627,483

 

100.0

 

1,146,031,245

 

100.0

 

1,719,658,728

 

100.0

 

573,627,483

 

100.0

 

1,146,031,245

 

100.0

 

1,719,658,728

 

100.0

 

 


*Metalurgica Gerdau S.A. is the controlling shareholder and Stichting Gerdau Johannpeter is the ultimate controlling shareholder of the Company.

 

Preferred shares do not have voting rights and cannot be redeemed but have the same rights as common shares in the distribution of dividends and also priority in the capital distribution in case of liquidation of the Company.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

b) Treasury stocks

 

Changes in treasury shares are as follows:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Common

 

R$

 

Preferred shares

 

R$

 

Common

 

R$

 

Preferred
shares

 

R$

 

Balance at the beginning of the period

 

1,697,538

 

557

 

9,012,675

 

98,189

 

1,697,538

 

557

 

31,286,707

 

382,806

 

Repurchase of shares

 

 

 

 

 

 

 

10,000,000

 

95,343

 

Exercise of stock option

 

 

 

(205,093

)

(21,196

)

 

 

(2,274,032

)

(10,461

)

Transfer of shares

 

 

 

 

 

 

 

(30,000,000

)

(369,499

)

Balance at the end of the period

 

1,697,538

 

557

 

8,807,582

 

76,993

 

1,697,538

 

557

 

9,012,675

 

98,189

 

 

These shares will be held in treasury for subsequent cancelling or will service the long-term incentive plan of the Company and its subsidiaries or subsequently sold on the market. The average acquisition cost of the treasury preferred shares was R$ 8.74.

 

c) Capital reserves - consists of premium on issuance of shares.

 

d) Retained earnings

 

I)  Legal reserves - under Brazilian Corporate Law, the Company must transfer 5% of the annual net income determined on its statutory books in accordance with Brazilian accounting practices to the legal reserve until this reserve equals 20% of the paid-in capital. The legal reserve can be utilized to increase capital or to absorb losses, but cannot be used for dividend purposes.

 

II) Tax incentive reserve - under Brazilian Corporate Law, the Company may transfer to this account part of net income resulting from government benefits which can be excluded from the basis for dividend calculation.

 

III) Investments and working capital reserve - consists of earnings not distributed to shareholders and includes the reserves required by the Company’s by-laws. The Board of Directors may propose to the shareholders the transfer of at least 5% of the profit for each year determined in its statutory books in accordance with accounting practices adopted in Brazil to this reserve. Amounts can be allocated to the reserve only after the minimum dividend requirements have been met and its balance cannot exceed the amount of paid-in capital. It is also recognized in this account the difference between the average amount of the treasury stocks and transactional value of the share in the case of stock option exercised and assignment of preferred shares. The reserve can be used to absorb losses, if necessary, for capitalization, for payment of dividends or for the repurchase of shares.

 

e) Operations with non-controlling interests - correspond to amounts recognized in equity for changes in non-controlling interests.

 

f) Other reserves - Includes gains and losses on available for sale securities, gains and losses on net investment hedge, gains and losses on derivatives accounted as cash flow hedge, cumulative translation adjustments, expenses recorded for stock option plans and actuarial gains and losses on postretirement benefits.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

NOTE 18 — EARNINGS PER SHARE (EPS)

 

Basic

 

 

 

For the three-month period ended on

 

 

 

June 30, 2017

 

June 30, 2016

 

 

 

Common

 

Preferred

 

Total

 

Common

 

Preferred

 

Total

 

 

 

(in thousands, except share and per share data)

 

(in thousands, except share and per share data)

 

Basic numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated net income available to Common and Preferred shareholders

 

25,111

 

49,912

 

75,023

 

24,443

 

48,635

 

73,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average outstanding shares, after deducting the average of treasury shares

 

571,929,945

 

1,136,773,427

 

 

 

571,929,945

 

1,138,008,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share (in R$) — Basic

 

0.04

 

0.04

 

 

 

0.04

 

0.04

 

 

 

 

 

 

For the six-month period ended on

 

 

 

June 30, 2017

 

June 30, 2016

 

 

 

Common

 

Preferred

 

Total

 

Common

 

Preferred

 

Total

 

 

 

(in thousands, except share and per share data)

 

(in thousands, except share and per share data)

 

Basic numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated net income (loss) available to Common and Preferred shareholders

 

298,019

 

592,345

 

890,364

 

27,511

 

54,262

 

81,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average outstanding shares, after deducting the average of treasury shares

 

571,929,945

 

1,136,773,427

 

 

 

571,929,945

 

1,128,067,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share (in R$) — Basic

 

0.52

 

0.52

 

 

 

0.05

 

0.05

 

 

 

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Diluted

 

 

 

For the three-month period ended on

 

 

 

June 30, 2017

 

June 30, 2016

 

Diluted numerator

 

 

 

 

 

Allocated net income available to Common and Preferred shareholders

 

 

 

 

 

Net income allocated to preferred shareholders

 

49,912

 

48,635

 

Add:

 

 

 

 

 

Adjustment to net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long term incentive plan

 

195

 

98

 

 

 

50,107

 

48,733

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

25,111

 

24,443

 

Less:

 

 

 

 

 

Adjustment to net income allocated to common shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long term incentive plan

 

(195

)

(98

)

 

 

 

 

 

 

 

 

24,916

 

24,345

 

 

 

 

 

 

 

Diluted denominator

 

 

 

 

 

Weighted - average number of shares outstanding

 

 

 

 

 

Common Shares

 

571,929,945

 

571,929,945

 

Preferred Shares

 

 

 

 

 

Weighted-average number of preferred shares outstanding

 

1,136,773,427

 

1,138,008,484

 

Potential increase in number of preferred shares outstanding due to the long term incentive plan

 

13,411,564

 

6,871,291

 

Total

 

1,150,184,991

 

1,144,879,775

 

 

 

 

 

 

 

Earnings per share — Diluted (Common and Preferred Shares) - in R$

 

0.04

 

0.04

 

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

 

 

For the six-month period ended on

 

 

 

June 30, 2017

 

June 30, 2016

 

Diluted numerator

 

 

 

 

 

Allocated net income available to Common and Preferred shareholders

 

 

 

 

 

Net income allocated to preferred shareholders

 

592,345

 

54,262

 

Add:

 

 

 

 

 

Adjustment to net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long term incentive plan

 

2,483

 

129

 

 

 

594,828

 

54,391

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

298,019

 

27,511

 

Less:

 

 

 

 

 

Adjustment to net income allocated to common shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long term incentive plan

 

(2,483

)

(129

)

 

 

 

 

 

 

 

 

295,536

 

27,382

 

 

 

 

 

 

 

Diluted denominator

 

 

 

 

 

Weighted - average number of shares outstanding

 

 

 

 

 

Common Shares

 

571,929,945

 

571,929,945

 

Preferred Shares

 

 

 

 

 

Weighted-average number of preferred shares outstanding

 

1,136,773,427

 

1,128,067,246

 

Potential increase in number of preferred shares outstanding due to the long term incentive plan

 

14,358,052

 

7,978,234

 

Total

 

1,151,131,479

 

1,136,045,480

 

 

 

 

 

 

 

Earnings per share — Diluted (Common and Preferred Shares) - in R$

 

0.52

 

0.05

 

 

NOTE 19 — LONG-TERM INCENTIVE PLANS

 

a)             Restricted Shares and Performance Shares Plan:

 

Quantity on January 01, 2016

 

12,525,256

 

Granted

 

13,357,922

 

Forfeited/Canceled

 

(3,046,593

)

Exercised

 

(2,403,094

)

Quantity on December 31, 2016

 

20,433,491

 

Granted

 

3,170,952

 

Forfeited/Canceled

 

(1,522,833

)

Exercised

 

(1,988,573

)

Quantity on June 30, 2017

 

20,093,037

 

 

In 2017, the Company approved changes to the long-term incentive plan allowing the use of multiple forms of stock-based compensation and changing the vesting period for each grant to three years. In 2017 Restricted Shares and Performance Shares were granted.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

b)             Stock Options Plan:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Number of
shares

 

Average exercise
price in the year

 

Number of
shares

 

Average exercise
price in the year

 

 

 

 

 

R$

 

 

 

R$

 

Available at beginning of the year

 

569,115

 

16.64

 

1,074,246

 

18.36

 

Options Forfeited

 

(259,376

)

14.74

 

(505,131

)

20.49

 

Available at the end of the period

 

309,739

 

18.05

 

569,115

 

16.64

 

 

The average market price of the share in the six month period ended on June 30, 2017 was R$ 11.06 (R$ 7.68 in the year ended December 31, 2016).

 

As of June 30, 2017 the Company has a total of 8,807,582 preferred shares in treasury. These shares may be used for serving this plan.

 

Exercise price

 

Quantity

 

Average period of
grace (in years)

 

Average
exercise price

 

Number
exercisable at
June 30, 2017*

 

 

 

 

 

 

 

R$

 

 

 

R$ 14.39

 

40,873

 

1.7

 

13.84

 

40,873

 

R$ 10,58 a R$ 29,12

 

268,866

 

5.0

 

18.69

 

13,660

 

 

 

309,739

 

 

 

 

 

54,533

 

 


*The total of options vested that are exercisable on June 30, 2017 is 54,533 (57,678 on December 31, 2016).

 

During the three and six month period ended on June 30, 2017, the long-term incentive plans costs recognized in income were R$ 7,564 and R$ 12,393 respectively (R$ 9,362 and R$ 16,113 on June 30, 2016).

 

The Company recognizes costs of employee compensation based on the fair value of the options granted, considering their fair value on the date of granting. The Company uses the Black-Scholes model for determining the fair value of the options. There were no options granted for this plan in the six-month period ended June 30, 2017 and for the year ended December 31, 2016.

 

c) Other Plans — North America

 

The Company terminated the existing long-term incentive plan (“LTIP”), and no further awards will be granted under the LTIP. All outstanding awards under the LTIP will remain outstanding until either exercised, forfeited or they expire. On June 30, 2017, there were 147,210 cash settled SARs - Share Appreciation Rights outstanding under the LTIP. These awards are accrued over the vesting period of 4 years. As of June 30, 2017 and December 31, 2016, the outstanding liability for share-based payment transactions included in other non-current liabilities of the subsidiaries in North America was US$ 6 thousand (R$ 19.8) and US$ 10 thousand (R$ 32.6), respectively.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

NOTE 20 — EXPENSES BY NATURE

 

The Company opted to present its Consolidated Statement of Income by function. As required by IAS 1, the Consolidated Statement of Income by nature is as follows:

 

 

 

For the three-month periods ended

 

For the six-month periods ended

 

 

 

June 30, 2017

 

June 30, 2016

 

June 30, 2017

 

June 30, 2016

 

Depreciation and amortization

 

(526,175

)

(617,304

)

(1,054,233

)

(1,298,492

)

Labor expenses

 

(1,413,710

)

(1,691,137

)

(2,776,300

)

(3,530,418

)

Raw material and consumption material

 

(5,722,512

)

(6,228,472

)

(11,106,753

)

(12,386,840

)

Freight

 

(566,743

)

(628,560

)

(1,096,632

)

(1,221,557

)

Other expenses/income

 

(381,716

)

(549,261

)

(757,698

)

(1,153,331

)

Reversal of contingent liabilities, net

 

 

 

929,711

 

 

Results in operations with subsidiaries

 

(72,478

)

(105,048

)

(72,478

)

(105,048

)

 

 

(8,683,334

)

(9,819,782

)

(15,934,383

)

(19,695,686

)

 

 

 

 

 

 

 

 

 

 

Classified as:

 

 

 

 

 

 

 

 

 

Cost of sales

 

(8,229,142

)

(9,165,474

)

(16,033,919

)

(18,437,307

)

Selling expenses

 

(133,297

)

(175,609

)

(271,743

)

(389,941

)

General and administrative expenses

 

(287,139

)

(401,965

)

(588,186

)

(831,519

)

Other operating income

 

70,968

 

54,833

 

139,934

 

102,057

 

Other operating expenses

 

(32,246

)

(26,519

)

(37,702

)

(33,928

)

Reversal of contingent liabilities, net

 

 

 

929,711

 

 

Results in operations with subsidiaries

 

(72,478

)

(105,048

)

(72,478

)

(105,048

)

 

 

(8,683,334

)

(9,819,782

)

(15,934,383

)

(19,695,686

)

 

NOTE 21 — FINANCIAL INCOME

 

 

 

For the three-month periods ended

 

For the six-month periods ended

 

 

 

June 30, 2017

 

Jun 30, 2016

 

June 30, 2017

 

Jun 30, 2016

 

Income from short-term investments

 

19,400

 

26,816

 

49,692

 

67,694

 

Interest income and other financial incomes

 

24,687

 

18,206

 

76,222

 

53,118

 

Financial income total

 

44,087

 

45,022

 

125,914

 

120,812

 

 

 

 

 

 

 

 

 

 

 

Interest on debts

 

(346,261

)

(374,345

)

(703,772

)

(771,580

)

Monetary variation and other financial expenses

 

(107,519

)

(109,855

)

(213,245

)

(237,722

)

Financial expenses total

 

(453,780

)

(484,200

)

(917,017

)

(1,009,302

)

 

 

 

 

 

 

 

 

 

 

Exchange variations, net

 

(96,389

)

433,186

 

(21,351

)

942,616

 

Reversal of monetary update of contingent liabilities, net

 

 

369,819

 

 

Gains and Losses on derivatives, net

 

1,125

 

(16,700

)

(8,606

)

(38,220

)

Financial result, net

 

(504,957

)

(22,692

)

(451,241

)

15,906

 

 

NOTE 22 — SEGMENT REPORTING

 

In the fourth quarter of 2016, the Company made a change in the composition of its segments, with changes with effect as of 2016 year end, with the objective of obtaining greater strategic, operational and management synergies in the markets of South America and North America. The change relates to the jointly controlled entity Gerdau Metaldom Corp., in the Dominican Republic, which became part of the business segment South America and thus its results and equity are no longer presented in the North America segment and are from now on presented in the South America segment. For disclosure purposes, the comparative information has been modified regarding the originally presented information, in order to reflect the changes approved by the Gerdau Executive Committee, according to the criteria established by IFRS 8.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

Information by business segment:

 

 

 

For the three-month periods ended

 

 

 

Brazil Operation

 

North America
Operation

 

South America
Operation

 

Special Steels
Operation

 

Eliminations and
Adjustments

 

Consolidated

 

 

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

Net sales

 

3,060,033

 

3,047,381

 

3,903,389

 

4,291,221

 

967,572

 

1,210,158

 

1,615,652

 

1,962,971

 

(380,793

)

(262,953

)

9,165,853

 

10,248,778

 

Cost of sales

 

(2,683,666

)

(2,703,265

)

(3,712,001

)

(3,942,078

)

(849,524

)

(1,025,395

)

(1,364,198

)

(1,752,612

)

380,247

 

257,876

 

(8,229,142

)

(9,165,474

)

Gross profit

 

376,367

 

344,116

 

191,388

 

349,143

 

118,048

 

184,763

 

251,454

 

210,359

 

(546

)

(5,077

)

936,711

 

1,083,304

 

Selling, general and administrative expenses

 

(136,288

)

(161,564

)

(145,294

)

(201,192

)

(50,161

)

(60,704

)

(46,900

)

(79,028

)

(41,793

)

(75,086

)

(420,436

)

(577,574

)

Other operating income (expenses)

 

3,126

 

(683

)

4,848

 

194

 

1,192

 

17,056

 

2,344

 

(53

)

27,212

 

11,800

 

38,722

 

28,314

 

Results in operations with subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(72,478

)

(105,048

)

(72,478

)

(105,048

)

Equity in earnings of unconsolidated companies

 

 

 

(17,680

)

(11,363

)

5,697

 

6,722

 

4,811

 

 

4,743

 

4,532

 

(2,429

)

(109

)

Operational income (Loss) before financial income (expenses) and taxes

 

243,205

 

181,869

 

33,262

 

136,782

 

74,776

 

147,837

 

211,709

 

131,278

 

(82,862

)

(168,879

)

480,090

 

428,887

 

Finacial result, net

 

(138,672

)

(161,625

)

(10,301

)

(18,734

)

(9,349

)

(33,786

)

(33,178

)

(40,241

)

(313,457

)

231,694

 

(504,957

)

(22,692

)

Income (Loss) before taxes

 

104,533

 

20,244

 

22,961

 

118,048

 

65,427

 

114,051

 

178,531

 

91,037

 

(396,319

)

62,815

 

(24,867

)

406,195

 

Income and social contribution taxes

 

(25,370

)

(6,281

)

26,893

 

(16,510

)

(27,690

)

(35,104

)

(52,155

)

(19,762

)

179,706

 

(249,329

)

101,384

 

(326,986

)

Net income (Loss)

 

79,163

 

13,963

 

49,854

 

101,538

 

37,737

 

78,947

 

126,376

 

71,275

 

(216,613

)

(186,514

)

76,517

 

79,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales between segments

 

337,450

 

212,212

 

15,526

 

23,344

 

1,669

 

1,140

 

26,148

 

26,257

 

 

 

380,793

 

262,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation/amortization

 

229,860

 

220,484

 

171,583

 

215,304

 

38,326

 

46,211

 

86,406

 

135,305

 

 

 

526,175

 

617,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

Investments in associates and jointly-controlled entities

 

 

 

492,737

 

303,526

 

573,642

 

404,522

 

190,374

 

 

86,257

 

90,796

 

1,343,010

 

798,844

 

Total assets

 

16,613,582

 

18,672,770

 

16,862,983

 

16,459,784

 

4,928,132

 

5,582,926

 

11,594,792

 

11,970,203

 

4,175,636

 

1,949,458

 

54,175,125

 

54,635,141

 

Total liabilities

 

9,282,603

 

10,761,705

 

3,482,403

 

3,407,444

 

1,123,596

 

1,651,590

 

6,129,389

 

6,519,255

 

8,811,357

 

8,020,494

 

28,829,348

 

30,360,488

 

 

Information by business segment:

 

 

 

For the six-month periods ended

 

 

 

Brazil Operation

 

North America
Operation

 

South America
Operation

 

Special Steels
Operation

 

Eliminations and
Adjustments

 

Consolidated

 

 

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

Net sales

 

5,844,283

 

5,740,963

 

7,527,481

 

8,588,010

 

1,971,050

 

2,446,179

 

2,972,298

 

4,133,230

 

(690,595

)

(575,093

)

17,624,517

 

20,333,289

 

Cost of sales

 

(5,168,209

)

(5,175,413

)

(7,226,125

)

(7,937,564

)

(1,750,852

)

(2,056,682

)

(2,579,346

)

(3,836,590

)

690,613

 

568,942

 

(16,033,919

)

(18,437,307

)

Gross profit

 

676,074

 

565,550

 

301,356

 

650,446

 

220,198

 

389,497

 

392,952

 

296,640

 

18

 

(6,151

)

1,590,598

 

1,895,982

 

Selling, general and administrative expenses

 

(276,645

)

(355,029

)

(294,787

)

(421,917

)

(102,822

)

(132,035

)

(88,391

)

(180,017

)

(97,284

)

(132,462

)

(859,929

)

(1,221,460

)

Other operating income (expenses)

 

5,252

 

3,684

 

10,093

 

3,865

 

6,497

 

17,164

 

7,891

 

10,597

 

72,499

 

32,819

 

102,232

 

68,129

 

Results in operations with subsidiary

 

 

 

 

 

 

 

 

 

(72,478

)

(105,048

)

(72,478

)

(105,048

)

Reversal of contingent liabilities, net

 

 

 

 

 

 

 

 

 

929,711

 

 

 

929,711

 

 

Equity in earnings of unconsolidated companies

 

 

 

(36,564

)

(34,928

)

17,518

 

16,731

 

6,187

 

 

9,620

 

10,507

 

(3,239

)

(7,690

)

Operational income (Loss) before financial income (expenses) and taxes

 

404,681

 

214,205

 

(19,902

)

197,466

 

141,391

 

291,357

 

318,639

 

127,220

 

842,086

 

(200,335

)

1,686,895

 

629,913

 

Finacial result, net

 

(298,859

)

(327,651

)

(23,376

)

(22,984

)

(32,592

)

(45,054

)

(65,912

)

(84,727

)

(30,502

)

496,322

 

(451,241

)

15,906

 

Income (Loss) before taxes

 

105,822

 

(113,446

)

(43,278

)

174,482

 

108,799

 

246,303

 

252,727

 

42,493

 

811,584

 

295,987

 

1,235,654

 

645,819

 

Income and social contribution taxes

 

(27,351

)

28,115

 

81,563

 

17,330

 

(47,725

)

(75,430

)

(78,155

)

(14,477

)

(263,925

)

(507,962

)

(335,593

)

(552,424

)

Net income (Loss)

 

78,471

 

(85,331

)

38,285

 

191,812

 

61,074

 

170,873

 

174,572

 

28,016

 

547,659

 

(211,975

)

900,061

 

93,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales between segments

 

611,325

 

482,449

 

30,580

 

46,181

 

3,110

 

2,572

 

45,580

 

43,891

 

 

 

690,595

 

575,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation/amortization

 

456,958

 

435,788

 

344,050

 

452,859

 

81,602

 

96,045

 

171,623

 

313,800

 

 

 

1,054,233

 

1,298,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

Investments in associates and jointly-controlled entities

 

 

 

492,737

 

303,526

 

573,642

 

404,522

 

190,374

 

 

86,257

 

90,796

 

1,343,010

 

798,844

 

Total assets

 

16,613,582

 

18,672,770

 

16,862,983

 

16,459,784

 

4,928,132

 

5,582,926

 

11,594,792

 

11,970,203

 

4,175,636

 

1,949,458

 

54,175,125

 

54,635,141

 

Total liabilities

 

9,282,603

 

10,761,705

 

3,482,403

 

3,407,444

 

1,123,596

 

1,651,590

 

6,129,389

 

6,519,255

 

8,811,357

 

8,020,494

 

28,829,348

 

30,360,488

 

 

The main products by business segment are:

Brazil Operation: rebar, bars, shapes, drawn products, billets, blooms, slabs, wire rod, structural shapes and iron ore.

North America Operation: rebar, bars, wire rod, light and heavy structural shapes.

South America Operation: rebar, bars and drawn products.

Special Steel Operation: stainless steel, round, square and flat bars, wire rod.

 

The column of eliminations and adjustments includes the elimination of sales between segments applicable to the Company in the context of the Condensed Consolidated Interim Financial Statements.

 

The Company’s geographic information with net sales classified according to the geographical region where the products were shipped is as follows:

 

Information by geographic area:

 

 

 

For the three-month periods ended

 

 

 

Brazil

 

Latin America (1)

 

North America (2)

 

Europe/Asia

 

Consolidated

 

 

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

Net sales

 

3,248,268

 

3,219,259

 

1,159,501

 

1,503,769

 

4,620,672

 

4,908,157

 

137,412

 

617,593

 

9,165,853

 

10,248,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

Total assets

 

23,485,473

 

24,266,983

 

6,029,109

 

6,159,387

 

23,869,069

 

23,463,447

 

791,474

 

745,324

 

54,175,125

 

54,635,141

 

 


(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

 

 

 

For the six-month periods ended

 

 

 

Brazil

 

Latin America (1)

 

North America (2)

 

Europe/Asia

 

Consolidated

 

 

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

June 30,
2017

 

June 30,
2016

 

Net sales

 

6,149,229

 

5,919,982

 

2,332,667

 

3,020,586

 

8,895,179

 

9,935,723

 

247,442

 

1,456,998

 

17,624,517

 

20,333,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

June 30,
2017

 

December
31, 2016

 

Total assets

 

23,485,473

 

24,266,983

 

6,029,109

 

6,159,387

 

23,869,069

 

23,463,447

 

791,474

 

745,324

 

54,175,125

 

54,635,141

 

 


(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

 

IFRSs require that the Company disclose the net sales per product unless the information is not available and the cost to obtain it would be excessive. Accordingly, management does not consider this information useful for its decision making process, because it would entail aggregating sales for different markets with different currencies, subject to the effects of exchange differences. Steel consumption patterns and the pricing dynamics of each product or group of products in different countries and different markets within these countries are poorly correlated, and thus the information would not be useful and would not serve to conclude on historical trends and progresses. In light of this scenario and considering that the information on net sales by product is not maintained on a consolidated basis and the cost to obtain net sales per product would be excessive compared to the benefits that would be derived from this information, the Company is not presenting the breakdown of net sales by product.

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

NOTE 23 — IMPAIRMENT OF ASSETS

 

The impairment test of goodwill and other long-lived assets is tested based on the analysis and identification of facts or circumstances that may involve the need to perform the impairment test. The Company performs impairment tests of goodwill and other long-lived assets, based on projections of discounted cash flows, which take into account assumptions such as: cost of capital, growth rate and adjustments applied to flows in perpetuity, methodology for working capital determination, investment plans, and long-term economic-financial forecasts.

 

To determine the recoverable amount of each business segment, the Company uses the discounted cash flow method, taking as basis, financial and economic projections for each segment. The projections are updated to take into consideration any observed changes in the economic environment of the market in which the Company operates, as well as premises of expected results and historical profitability of each segment.

 

The goodwill impairment test allocated to business segments is performed annually in December, also being performed at interim reporting dates if events or circumstances indicate possible impairment. In the test performed for the year ended on 2016, the Company performed a sensitivity analysis in the assumptions of discount rate and perpetuity growth rate, due to the potential impact in the discounted cash flows, therefore, an increase of 0.5% in the discount rate to discount the cash flow of each segment would result in recoverable amounts that are below the book value and/or that exceeded the book value as shown below: a) North America: below book value of R$ 872 million; b) Special Steel: exceeded book value by R$ 1,170 million; c) South America: exceeded book value by R$ 486 million; and d) Brazil: exceeded the book value by R$ 425 million. On the other hand, a decrease of 0.5 % in the perpetuity growth rate of the cash flow of each business segment would result in a recoverable amount below the book value and / or that exceeded the book value as shown below: a) North America: below the book value by R$ 661 million; b) Special Steel: exceeded the book value by R$ 1,301 million; c) South America: exceeded the book value by R$ 561 million; and d) Brazil: exceeded the book value by R$ 673 million.

 

The Company concluded that there are no indications that an impairment test of goodwill and other long-lived assets for the period ended on June 30, 2017 is required.

 

The Company will maintain over 2017 its constant monitoring of the steel market in order to identify any deterioration, significant drop in demand from steel consuming sectors (notably automotive and construction), stoppage of industrial plants or activities relevant changes in the economy or financial market that result in increased perception of risk or reduction of liquidity and refinancing capacity. Although the projections made by the Company provide a more challenging scenario than that in recent years, the events mentioned above, if manifested in a greater intensity than that anticipated in the assumptions made by management, may lead the Company to revise its projections of value in use and eventually result in impairment losses.

 

NOTE 24 - SUBSEQUENT EVENTS

 

I)  On July 20, 2017, Gerdau S.A. and Metalúrgica Gerdau S.A. issued a material fact, in connection with the application to register the public stock tender offer to increase interest through the exchange of common shares for preferred shares issued by Gerdau S.A. (“Offer”) and, supplementing the Material Fact notice dated March 8, 2017; complemented by the Notice to the Market dated March 13, 2017; by the Material Fact notice dated March 22, 2017; and by the Notice to the Market dated May 22, 2017, inform to their shareholders and the general market that they received on July 19, 2017 Official Letter 198/2017/CVM/SRE/GER-1 from the Brazilian Securities Commission (“CVM”) granting the registration of the Offer and in view of the decision of the Board of Commissioners of the CVM, in a meeting held on June 13, 2017, determining the maintenance of the proportionate limit for the exchange of common (GGBR3) and preferred (GGBR4) shares issued by the Company, as provided for in Article 15 of CVM Instruction 361/2002, the Offer is subject to adherence by the holders of at least thirty nine million, five hundred fifty thousand and four hundred seventy-four (39,550,474) common shares issued by the Company, which corresponds to two-thirds (2/3) of the free-float common shares. On July 21, 2017 the Offer notice was published, which will remain valid between July 22, 2017 and August 22, 2017, date on which the auction will be held. The notice and other documents related to the Offer, as applicable, were made available after their publication on the websites of the Companies, of Banco Bradesco BBI S.A., of the CVM and of B3 S.A. - Brasil, Bolsa, Balcão and at the headquarters of the Companies, of Bradesco BBI, of the CVM and of B3.

 

II)  On August 7, 2017, the Company proposed the anticipation of the mandatory minimum dividend on income of the current fiscal year, stipulated in its Bylaws, to be paid in the form of dividends, which will be calculated and credited on the shareholding interest owned on August 21, 2017, in the amount of R$ 34.2 million (R$ 0.02 per common and preferred

 



 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2017

(In thousands of Brazilian Reais — R$, unless otherwise stated)

(Unaudited)

 

share), with payment on September 1, 2017, which was submitted and approved by the Board of Directors on August 8, 2017.

 

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