EX-99.1 2 a19-9501_1ex99d1.htm EX-99.1

Exhibit 99.1

 

GERDAU S.A.

 

Condensed consolidated interim financial statements

as of March 31, 2019

 


 

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

Note

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

1,941,764

 

2,890,144

 

Short-term investments

 

4

 

590,403

 

459,470

 

Trade accounts receivable - net

 

5

 

3,976,755

 

3,201,656

 

Inventories

 

6

 

9,377,329

 

9,167,689

 

Tax credits

 

 

 

538,228

 

527,428

 

Income and social contribution taxes recoverable

 

 

 

325,835

 

445,561

 

Unrealized gains on financial instruments

 

14

 

36,914

 

30,711

 

Other current assets

 

 

 

782,457

 

780,423

 

 

 

 

 

17,569,685

 

17,503,082

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS

 

 

 

 

 

 

 

Tax credits

 

 

 

38,167

 

32,065

 

Deferred income taxes

 

 

 

3,787,600

 

3,874,054

 

Unrealized gains on financial instruments

 

14

 

2,561

 

2,706

 

Related parties

 

16

 

74,998

 

27,939

 

Judicial deposits

 

15

 

2,157,968

 

2,135,414

 

Other non-current assets

 

 

 

439,271

 

449,592

 

Prepaid pension cost

 

 

 

16,715

 

17,952

 

Advance for future investment in joint venture

 

8

 

374,083

 

375,456

 

Investments in associates and joint ventures

 

8

 

1,379,597

 

1,367,802

 

Goodwill

 

10

 

9,163,909

 

9,112,390

 

Leasing

 

2.1

 

907,998

 

 

Other Intangibles

 

 

 

748,947

 

836,096

 

Property, plant and equipment, net

 

 

 

15,483,804

 

15,546,481

 

 

 

 

 

34,575,618

 

33,777,947

 

TOTAL ASSETS

 

 

 

52,145,303

 

51,281,029

 

 

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

 

March 31, 2019

 

December 31, 2018

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Trade accounts payable

 

11

 

4,066,763

 

4,335,054

 

Short-term debt

 

12

 

2,911,897

 

1,822,183

 

Debentures

 

13

 

26,981

 

2,755

 

Taxes payable

 

 

 

494,743

 

351,545

 

Income and social contribution taxes payable

 

 

 

415,564

 

395,682

 

Payroll and related liabilities

 

 

 

405,854

 

588,627

 

Dividends payable

 

 

 

 

169,616

 

Leasing payable

 

2.1

 

215,556

 

 

Employee benefits

 

 

 

 

157

 

Environmental liabilities

 

 

 

65,102

 

60,419

 

Unrealized losses on financial instruments

 

14

 

2,694

 

5,245

 

Other current liabilities

 

 

 

691,597

 

772,970

 

 

 

 

 

9,296,751

 

8,504,253

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

 

Long-term debt

 

12

 

10,529,771

 

11,545,658

 

Debentures

 

13

 

1,524,382

 

1,536,118

 

Related parties

 

16

 

5,285

 

1,350

 

Deferred income taxes

 

 

 

59,101

 

118,368

 

Provision for tax, civil and labor liabilities

 

15

 

698,953

 

770,305

 

Environmental liabilities

 

 

 

65,963

 

72,228

 

Employee benefits

 

 

 

1,348,681

 

1,356,560

 

Obligations with FIDC

 

17

 

958,211

 

938,526

 

Leasing payable

 

2.1

 

696,849

 

 

Other non-current liabilities

 

 

 

515,005

 

499,092

 

 

 

 

 

16,402,201

 

16,838,205

 

EQUITY

 

18

 

 

 

 

 

Capital

 

 

 

19,249,181

 

19,249,181

 

Treasury stocks

 

 

 

(261,282

)

(280,426

)

Capital reserves

 

 

 

11,597

 

11,597

 

Retained earnings

 

 

 

5,251,678

 

4,806,089

 

Operations with non-controlling interests

 

 

 

(2,870,825

)

(2,870,825

)

Other reserves

 

 

 

4,855,225

 

4,814,988

 

EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT

 

 

 

26,235,574

 

25,730,604

 

 

 

 

 

 

 

 

 

NON-CONTROLLING INTERESTS

 

 

 

210,777

 

207,967

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

26,446,351

 

25,938,571

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

 

 

52,145,303

 

51,281,029

 

 

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

 

 

 

Note

 

March 31, 2019

 

March 31, 2018

 

 

 

 

 

 

 

 

 

NET SALES

 

 

 

10,025,661

 

10,388,800

 

Cost of sales

 

21

 

(8,756,650

)

(9,049,700

)

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

 

1,269,011

 

1,339,100

 

Selling expenses

 

21

 

(122,637

)

(146,337

)

Impairment loss on trade receivables

 

21

 

(6,007

)

(4,098

)

General and administrative expenses

 

21

 

(238,668

)

(269,996

)

Other operating income

 

21

 

88,520

 

48,857

 

Other operating expenses

 

21

 

(14,444

)

(18,257

)

Gains and losses on assets held for sale and sales os interest in subsidiaries

 

21

 

 

(3,497

)

Equity in earnings of unconsolidated companies

 

8

 

14,228

 

17,749

 

 

 

 

 

 

 

 

 

INCOME BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES

 

 

 

990,003

 

963,521

 

Financial income

 

22

 

41,017

 

31,317

 

Financial expenses

 

22

 

(345,373

)

(366,031

)

Exchange variations, net

 

22

 

(70,456

)

(7,063

)

Gain and losses on financial instruments, net

 

22

 

79

 

(787

)

 

 

 

 

 

 

 

 

INCOME BEFORE TAXES

 

 

 

615,270

 

620,957

 

Current

 

7

 

(125,606

)

(148,175

)

Deferred

 

7

 

(37,038

)

(24,371

)

Income and social contribution taxes

 

 

 

(162,644

)

(172,546

)

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

452,626

 

448,411

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO:

 

 

 

 

 

 

 

Owners of the parent

 

 

 

449,003

 

441,029

 

Non-controlling interests

 

 

 

3,623

 

7,382

 

 

 

 

 

452,626

 

448,411

 

 

 

 

 

 

 

 

 

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

 

19

 

0.26

 

0.26

 

 

 

 

 

 

 

 

 

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

 

19

 

0.26

 

0.26

 

 

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

 

 

 

March 31, 2019

 

March 31, 2018

 

Net income for the period

 

452,626

 

448,411

 

Items that may be reclassified subsequently to profit or loss

 

 

 

 

 

Other comprehensive income from associates and joint ventures

 

(6,273

)

38,739

 

Cumulative translation adjustment

 

96,953

 

(7,936

)

Unrealized Losses on net investment hedge

 

(28,794

)

(36,134

)

Cash flowh hedges:

 

 

 

 

 

Unrealized (Losses)/Gains on financial instruments, net of tax

 

(310

)

5,761

 

 

 

61,576

 

430

 

 

 

 

 

 

 

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

 

514,202

 

448,841

 

 

 

 

 

 

 

Total comprehensive (loss) income attributable to:

 

 

 

 

 

Owners of the parent

 

506,847

 

439,801

 

Non-controlling interests

 

7,355

 

9,040

 

 

 

514,202

 

448,841

 

 

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, 2018

 

19,249,181

 

(76,085

)

11,597

 

628,228

 

611,531

 

2,075,615

 

 

(2,870,831

)

(4,552,984

)

4,972

 

8,841,450

 

(472,458

)

194,985

 

23,645,201

 

248,740

 

23,893,941

 

2018 Changes in Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

441,029

 

 

 

 

 

 

 

441,029

 

7,382

 

448,411

 

Other comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

 

 

(36,129

)

5,697

 

29,204

 

 

 

(1,228

)

1,658

 

430

 

Total comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

441,029

 

 

(36,129

)

5,697

 

29,204

 

 

 

439,801

 

9,040

 

448,841

 

Long term incentive plan cost recognized in the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,230

)

(27,230

)

(111

)

(27,341

)

Assignment of preferred shares

 

 

11,622

 

 

 

 

7,362

 

 

 

 

 

 

 

 

18,984

 

 

18,984

 

Effects of IFRS 9 adoption

 

 

 

 

 

 

 

 

 

 

(14,009

)

 

 

 

(14,009

)

(94

)

(14,103

)

Treasury stocks

 

 

(149,711

)

 

 

 

 

 

 

 

 

 

 

 

(149,711

)

(327

)

(150,038

)

Long term incentive plan exercised during the period

 

 

20,317

 

 

 

 

(3,000

)

 

 

 

 

 

 

 

17,317

 

70

 

17,387

 

Effects of interest changes in subsidiaries

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

941

 

947

 

Dividends/interest on capital

 

 

 

 

 

 

 

(51,020

)

 

 

 

 

 

 

(51,020

)

(3,067

)

(54,087

)

Balance as of March 31, 2018 (Note 18)

 

19,249,181

 

(193,857

)

11,597

 

628,228

 

611,531

 

2,079,977

 

390,009

 

(2,870,825

)

(4,589,113

)

(3,340

)

8,870,654

 

(472,458

)

167,755

 

23,879,339

 

255,192

 

24,134,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2019

 

19,249,181

 

(280,426

)

11,597

 

743,421

 

628,582

 

3,434,086

 

 

(2,870,825

)

(6,044,258

)

486,788

 

10,533,612

 

(320,303

)

159,149

 

25,730,604

 

207,967

 

25,938,571

 

2019 Changes in Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

449,003

 

 

 

 

 

 

 

449,003

 

3,623

 

452,626

 

Other comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

 

 

(28,794

)

(310

)

86,948

 

 

 

57,844

 

3,732

 

61,576

 

Total comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

449,003

 

 

(28,794

)

(310

)

86,948

 

 

 

506,847

 

7,355

 

514,202

 

Long term incentive plan cost recognized in the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,607

)

(17,607

)

(9

)

(17,616

)

Long term incentive plan exercised during the period

 

 

19,144

 

 

 

 

(3,313

)

 

 

 

 

 

 

 

15,831

 

6

 

15,837

 

Effects of interest changes in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

194

 

194

 

Complementary dividends

 

 

 

 

 

 

(101

)

 

 

 

 

 

 

 

(101

)

 

(101

)

Dividends/interest on equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,736

)

(4,736

)

Balance as of March 31, 2019 (Note 18)

 

19,249,181

 

(261,282

)

11,597

 

743,421

 

628,582

 

3,430,672

 

449,003

 

(2,870,825

)

(6,073,052

)

486,478

 

10,620,560

 

(320,303

)

141,542

 

26,235,574

 

210,777

 

26,446,351

 

 

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 three-month period ended

 

 

 

Note

 

March 31, 2019

 

March 31, 2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income for the period

 

 

 

452,626

 

448,411

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

21

 

505,799

 

453,516

 

Equity in earnings of unconsolidated companies

 

8

 

(14,228

)

(17,749

)

Exchange variation, net

 

22

 

70,456

 

7,063

 

(Gains) Loss on financial instruments, net

 

22

 

(79

)

787

 

Post-employment benefits

 

 

 

46,420

 

47,968

 

Stock based compensation

 

 

 

10,384

 

9,252

 

Income tax

 

7

 

162,644

 

172,546

 

Gains on disposal of property, plant and equipment, net

 

 

 

(7,977

)

(5,664

)

Gains and losses on assets held for sale and sales os interest in subsidiaries

 

 

 

 

3,497

 

Impairment loss on trade receivables

 

 

 

6,007

 

4,098

 

Provision for tax, labor and civil claims

 

 

 

(71,387

)

(36,035

)

Interest income on short-term investments

 

 

 

(16,742

)

(10,165

)

Interest expense on debt and debentures

 

22

 

249,960

 

273,841

 

Interest on loans with related parties

 

16

 

(565

)

(4

)

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

 

6

 

(428

)

(843

)

 

 

 

 

1,392,890

 

1,350,519

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Increase in trade accounts receivable

 

 

 

(743,494

)

(886,432

)

Increase in inventories

 

 

 

(202,171

)

(406,697

)

(Decrease) Increase in trade accounts payable

 

 

 

(286,996

)

378,481

 

Increase in other receivables

 

 

 

(41,416

)

(32,089

)

Decrease in other payables

 

 

 

(179,195

)

(281,316

)

Dividends from associates and joint ventures

 

 

 

3,160

 

5,343

 

Purchases of trading securities

 

 

 

(292,391

)

(174,923

)

Proceeds from maturities and sales of trading securities

 

 

 

157,581

 

141,526

 

Cash (used in) provided by operating activities

 

 

 

(192,032

)

94,412

 

 

 

 

 

 

 

 

 

Interest paid on loans and financing

 

 

 

(172,010

)

(235,256

)

Income and social contribution taxes paid

 

 

 

(24,405

)

(63,213

)

Net cash used in operating activities

 

 

 

(388,447

)

(204,057

)

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

9

 

(304,532

)

(216,656

)

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

 

 

 

13,817

 

332,410

 

Purchases of other intangibles

 

 

 

(9,063

)

(4,464

)

Net cash (used in) provided by investing activities

 

 

 

(299,778

)

111,290

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Purchases of Treasury stocks

 

 

 

 

 

(149,711

)

Dividends and interest on capital paid

 

 

 

(166,420

)

(55,150

)

Proceeds from loans and financing

 

 

 

211,249

 

479,150

 

Repayment of loans and financing

 

 

 

(240,540

)

(310,765

)

Intercompany loans, net

 

 

 

(42,558

)

7,704

 

Net cash used in financing activities

 

 

 

(238,269

)

(28,772

)

 

 

 

 

 

 

 

 

Exchange variation on cash and cash equivalents

 

 

 

(21,886

)

(58,352

)

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

 

(948,380

)

(179,891

)

Cash and cash equivalents at beginning of period

 

 

 

2,890,144

 

2,555,338

 

Cash and cash equivalents at end of period

 

 

 

1,941,764

 

2,375,447

 

 

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 March 31, 2019

(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 São Paulo, 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 expanded the product mix and made its operations even more competitive. The Company believes 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 Management on May 7, 2019.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

 

2.1 - Basis of Presentation

 

The Company’s Condensed Consolidated Interim Financial Statements for the three-month period ended on March 31, 2019 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, 2018, 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.

 

Changes in accounting policies

 

Except as described below, the accounting policies applied in this Condensed Consolidated Interim Financial Statements are the same as those applied in the Consolidated Financial Statements for the year ended December 31, 2018. The Company initially adopted IFRS 16 - Lease, as of January 1, 2019.

 

a) IFRS 16 - Lease. This standard introduces a single model for accounting for leases in the balance sheet for lessees. A lessee recognizes a right of use asset that represents its right to use the leased asset and a lease liability that represents its obligation to make lease payments. Exemptions are available for short term leases and low value items. This standard replaces existing lease standards, including IAS 17 - Leasing Operations and IFRIC 4, SIC 15 and SIC 27 - Complementary Aspects of Leasing Operations. The Company recognizes as from 2019 new assets and liabilities for its operating leases. The nature of the expenses related to these leases changes because the Company recognizes a depreciation of right of use assets and financial expense on lease obligations. The Company recognized until 2018 an operating lease expense during the lease term. No significant impact is expected on the Company’s financial leases.

 

The new standard provides practical expedient whose election is optional. The Company adopted the following practical expedient:

1) It did not reassess whether the contract is or contains lease at the initial application date, instead applied IAS 17 to contracts that were previously identified as a lease using IAS 17 and IFRIC 4;

2) It did not separate non-lease components from leasing components by considering them as a single lease component;

3) It did not register contracts with a term exceeding 12 months, which on the date of transition, they ends within 12 months of the date of initial application;

4) It did not register contracts of low value;

5) It did not exclude initial direct costs of measuring the right to use asset on the date of initial application;

6) It did make use of judgement in determining the term of the lease, if the contract contains options to extend or terminate the lease, among others; and

7) It did apply a single discount rate to the lease portfolio with fairly similar characteristics (such as similar remaining lease term, similar classes of underlying assets in a similar economic environment).

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

Variable elements of payments related to leases (such as a lease of machinery and/or equipment with parts of payments based on asset productivity) are not included in the liability calculation and recorded as operating expense. The discount rates used by the Company were obtained according to market conditions. The Company has recognized on March 31, 2019 a right of use of asset in the amount of R$ 907,998 (R$ 996,873 on January 1, 2019), a current liability of lease in the amount of R$ 215,556 (R$ 236,658 on January 1, 2019) and a non-current lease liability of lease in the amount of R$ 696,849 (R$ 760,215 on January 1, 2019). The Company adopted this standard on January 1, 2019 without updating the comparative information, as well as applied the standard for all contracts entered before January 1, 2019 that were identified as leases in accordance with IAS 17 and IFRIC 4.

 

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

 

The IASB has issued and/or reviewed some IFRS standards, which have mandatory adoption for the year 2020 and/or after. The Company is assessing the adoption impact of these standards in its Consolidated Financial Statements.

 

· Amendment of IFRS 3 - Definition of business. Clarifies aspects for the definition of business, in order to clarify when a transaction must have accounting treatment of business combination or acquisition of assets. This change in the standard is effective for years beginning on or after January 1, 2020. The Company does not expect significant impacts on possible future events of business combinations or acquisition of assets.

 

· Amendment of IAS 1 and IAS 8 - Definition of materiality Clarifies definition of materiality to the framework of the accounting standard where this concept is applicable. These changes are effective for years beginning on or after January 1, 2020. The Company does not expect material 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 March 31, 2019, when compared to those existing on December 31, 2018.

 

3.2 - Joint Ventures

 

The Company did not have material changes of interest in joint ventures for the period ended on March 31, 2019, when compared to those existing on December 31, 2018.

 

3.3 — Associate companies

 

The Company did not have material changes in interest in associate companies for the period ended on March 31, 2019, when compared to those existing on December 31, 2018.

 

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

 

Cash and cash equivalents

 

 

 

March 31, 2019

 

December 31, 2018

 

Cash

 

7,349

 

6,800

 

Banks and immediately available investments

 

1,934,415

 

2,883,344

 

Cash and cash equivalents

 

1,941,764

 

2,890,144

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

Short-term investments

 

 

 

March 31, 2019

 

December 31, 2018

 

Held for trading

 

590,403

 

459,470

 

Short-term investments

 

590,403

 

459,470

 

 

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

 

 

 

March 31, 2019

 

December 31, 2018

 

Trade accounts receivable - in Brazil

 

1,539,178

 

1,056,625

 

Trade accounts receivable - exports from Brazil

 

138,056

 

373,593

 

Trade accounts receivable - foreign subsidiaries

 

2,459,668

 

1,929,595

 

(-) Impairment loss on trade receivables

 

(160,147

)

(158,157

)

 

 

3,976,755

 

3,201,656

 

 

NOTE 6 - INVENTORIES

 

 

 

March 31, 2019

 

December 31, 2018

 

Finished products

 

4,172,181

 

3,985,964

 

Work in progress

 

1,889,389

 

1,688,794

 

Raw materials

 

2,159,810

 

2,296,074

 

Storeroom supplies

 

788,900

 

784,517

 

Imports in transit

 

380,383

 

426,044

 

(-) Allowance for adjustments to net realizable value

 

(13,334

)

(13,704

)

 

 

9,377,329

 

9,167,689

 

 

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:

 

Balance as of January 01, 2018

 

(3,556

)

Provision for the year

 

(11,943

)

Reversal of adjustments to net realizable value

 

3,715

 

Exchange rate variation

 

(871

)

Assets held for sale

 

(1,049

)

Balance as of December 31, 2018

 

(13,704

)

Provision for adjustments to net realizable value

 

(1,350

)

Reversal of adjustments to net realizable value

 

1,778

 

Exchange rate variation

 

(58

)

Balance as of March 31, 2019

 

(13,334

)

 

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 March 31, 2019 and 2018. The foreign subsidiaries of the Company are subject to taxation at rates ranging between 25.0% and 34.0%. The differences between the Brazilian tax rates and the rates of other countries are

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

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

 

 

 

March 31, 2019

 

March 31, 2018

 

Income before income taxes

 

615,270

 

620,957

 

Statutory tax rates

 

34

%

34

%

Income and social contribution taxes at statutory rates

 

(209,192

)

(211,125

)

Tax adjustment with respect to:

 

 

 

 

 

- Difference in tax rates in foreign companies

 

21,103

 

10,479

 

- Equity in earnings of unconsolidated companies

 

4,838

 

6,035

 

- Interest on equity *

 

 

208

 

- Tax credits and incentives

 

2,362

 

4,437

 

- Realization of deferred tax assets not recognized

 

1,490

 

4,606

 

- Other permanent differences, net

 

16,755

 

12,814

 

Income and social contribution taxes

 

(162,644

)

(172,546

)

Current

 

(125,606

)

(148,175

)

Deferred

 

(37,038

)

(24,371

)

 


(*) 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 equity — 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$ 263,340 (R$ 265,403 as of December 31, 2018), and negative basis of social contribution in subsidiaries, which do not have an expiration date. The subsidiaries abroad had R$ 543,024 (R$ 531,657 as of December 31, 2018) of tax credits on capital losses for 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$ 799,299 (R$ 795,775 as of December 31, 2018), which expire at various dates between 2019 and 2039.

 

NOTE 8 — INVESTMENTS

 

 

 

Investments in
North America

 

Investments in
South America

 

Investments in
Special Steel

 

Investments in
Brazil

 

Others

 

Total

 

Balance as of January 01, 2018

 

346,080

 

584,899

 

199,647

 

 

149,673

 

1,280,299

 

Equity in earnings

 

(77,909

)

51,648

 

15,629

 

(1,700

)

22,473

 

10,141

 

Cumulative Translation Adjustment

 

33,101

 

96,045

 

(1,377

)

(2,050

)

 

125,719

 

Capital increase

 

 

 

 

7,000

 

 

7,000

 

Dividends/Interest on equity

 

 

(31,359

)

 

 

(23,998

)

(55,357

)

Balance as of December 31, 2018

 

301,272

 

701,233

 

213,899

 

3,250

 

148,148

 

1,367,802

 

Equity in earnings

 

(14,593

)

22,667

 

896

 

(405

)

5,663

 

14,228

 

Cumulative Translation Adjustment

 

(17,901

)

9,883

 

(305

)

2,050

 

 

(6,273

)

Capital increase

 

 

 

 

7,000

 

 

7,000

 

Dividends/Interest on equity

 

(1,843

)

 

 

 

(1,317

)

(3,160

)

Balance as of March 31, 2018

 

266,935

 

733,783

 

214,490

 

11,895

 

152,494

 

1,379,597

 

 

a)        Advance for future investment in joint venture

 

In 2018, the Company made an advance for future investment in equity interest, representing the amount of R$ 374,083 as of March 31, 2019, in the joint venture Gerdau Corsa S.A.P.I. de C.V..

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

NOTE 9 — PROPERTY, PLANT AND EQUIPMENT

 

a) Summary of changes in property, plant and equipment — during the three-month period ended on March 31, 2019, acquisitions amounted to R$ 304,532 (R$ 216,565 as of March 31, 2018), and disposals amounted to R$ 5,840 (R$ 464 as of March 31, 2018).

 

b) Capitalized borrowing costs — borrowing costs capitalized during the three-month period ended on March 31, 2019 amounted to R$ 5,239 (R$ 6,323 as of March 31, 2018).

 

c) Guarantees — property, plant and equipment have been pledged as collateral for loans and financing in the amount of R$ 85,652 as of March 31, 2019 (R$ 90,463 as of December 31, 2018).

 

NOTE 10 — GOODWILL

 

The changes in goodwill are as follows:

 

 

 

Goodwill

 

Accumulated
impairment losses

 

Goodwill after
Impairment losses

 

Balance as of January 01, 2018

 

14,500,381

 

(6,609,239

)

7,891,142

 

(+/-) Foreign exchange effect

 

2,283,577

 

(1,062,329

)

1,221,248

 

Balance as of December 31, 2018

 

16,783,958

 

(7,671,568

)

9,112,390

 

(+/-) Foreign exchange effect

 

91,824

 

(40,305

)

51,519

 

Balance as of March 31, 2019

 

16,875,782

 

(7,711,873

)

9,163,909

 

 

The amounts of goodwill by segment are as follows:

 

 

 

March 31, 2019

 

December 31, 2018

 

Brazil

 

373,135

 

373,135

 

Special Steels

 

2,871,023

 

2,854,888

 

North America

 

5,919,751

 

5,884,367

 

 

 

9,163,909

 

9,112,390

 

 

NOTE 11 — TRADE ACCOUNTS PAYABLE

 

 

 

March 31, 2019

 

December 31, 2018

 

Trade accounts payable - domestic market

 

2,890,211

 

3,368,834

 

Trade accounts payable - debtor risk

 

401,338

 

215,998

 

Trade accounts payable - intercompany

 

11,314

 

7,400

 

Trade accounts payable - imports

 

763,900

 

742,822

 

 

 

4,066,763

 

4,335,054

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

NOTE 12 — LOANS AND FINANCING

 

Loans and financing are as follows:

 

 

 

Annual interest rate (*)

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Working capital

 

6.28

%

2,273,061

 

2,424,246

 

Financing of property, plant and equipment and others

 

13.49

%

1,269,698

 

1,205,281

 

Ten/Thirty Years Bonds

 

5.81

%

9,898,909

 

9,738,314

 

Total financing

 

 

 

13,441,668

 

13,367,841

 

Current

 

 

 

2,911,897

 

1,822,183

 

Non-current

 

 

 

10,529,771

 

11,545,658

 

 

 

 

 

 

 

 

 

Principal amount of the financing

 

 

 

13,176,554

 

13,178,457

 

Interest amount of the financing

 

 

 

265,114

 

189,384

 

Total financing

 

 

 

13,441,668

 

13,367,841

 

 


(*) Weighted average effective interest costs on March 31, 2019, which in a consolidated basis represents 6.45%

 

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:

 

 

 

March 31, 2019

 

December 31, 2018

 

Brazilian Real (R$)

 

2,186,294

 

2,361,610

 

U.S. Dollar (US$)

 

11,151,397

 

10,924,355

 

Other currencies

 

103,977

 

81,876

 

 

 

13,441,668

 

13,367,841

 

 

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

 

 

 

March 31, 2019

 

December 31, 2018

 

2020(*)

 

1,149,268

 

2,253,958

 

2021

 

1,205,608

 

1,199,045

 

2022

 

129,748

 

121,490

 

2023

 

1,216,476

 

1,209,109

 

2024

 

2,458,214

 

2,426,456

 

2025 on

 

4,370,457

 

4,335,600

 

 

 

10,529,771

 

11,545,658

 

 


(*) For the period as of March 31, 2019, the amounts represents payments from April 1, 2020 to December 31, 2020.

 

a) Principal funding in 2019

 

In February 2019, the subsidiary Gerdau Aços Longos obtained a loan of R$ 194.8 million from Banco Bradesco, maturing on August 5, 2019.

 

b) 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.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

c) Guarantees

 

All loans contracted under the FINAME/BNDES program, totaling R$ 85.7 million on March 31, 2019, are guaranteed by the assets (property, plant and equipment) being financed.

 

d) Credit Lines

 

In June 2009, the Company and some of its subsidiaries in Brazil, 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 March 31, 2019, the outstanding balance of this credit facility was R$ 222.4 million.

 

In October 2017, the Company completed the renewal and reduction of the volume of the Senior Unsecured Global Working Capital Credit Agreement, a US$ 800 million revolving credit line to provide liquidity to its subsidiaries. The line is divided into two tranches, of which US$ 200 million is allocated to North American subsidiaries and US$ 600 million to subsidiaries in Latin America, including Brazil. The companies Gerdau SA, Gerdau Açominas SA and Gerdau Aços Longos SA provide a guarantee and the operation expires in October 2020. As of March 31, 2019, the amount disbursed in this line was US$ 80 million (R$ 311.7 million as of March, 31, 2019).

 

NOTE 13 — DEBENTURES

 

 

 

 

 

Quantity as of March 31, 2019

 

 

 

 

 

 

 

Issuance

 

General Meeting

 

Issued

 

Held in treasury

 

Maturity

 

March 31, 2019

 

December 31, 2018

 

3rd- A and B

 

May 27,1982

 

144,000

 

141,502

 

06/01/2021

 

16,706

 

18,871

 

7th

 

July 14, 1982

 

68,400

 

68,279

 

07/01/2022

 

1,046

 

1,102

 

8th

 

November 11, 1982

 

179,964

 

178,790

 

05/02/2023

 

6,630

 

8,080

 

9th

 

June 10, 1983

 

125,640

 

125,423

 

09/01/2024

 

1,876

 

2,349

 

11th - A and B

 

June 29, 1990

 

150,000

 

149,707

 

06/01/2020

 

2,401

 

5,716

 

15th

 

November, 9, 2018

 

1,500,000

 

 

11/21/2022

 

1,522,704

 

1,502,755

 

Total Consolidated

 

 

 

 

 

 

 

 

 

1,551,363

 

1,538,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

26,981

 

2,755

 

Non-current

 

 

 

 

 

 

 

 

 

1,524,382

 

1,536,118

 

 

Maturities of long-term amounts are as follows:

 

 

 

March 31, 2019

 

December 31, 2018

 

2020(*)

 

2,401

 

5,716

 

2021

 

16,706

 

18,871

 

2022

 

1,496,769

 

1,501,102

 

2023

 

6,630

 

8,080

 

2024

 

1,876

 

2,349

 

 

 

1,524,382

 

1,536,118

 

 


(*) For the period as of March 31, 2019, the amounts represents payments from April 1, 2020 to December 31, 2020.

 

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 6.34% and 6.42% for the three-month period ended on March 31, 2019 and year ended on December 31, 2018, respectively.

 

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

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

NOTE 14 - 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 short-term investments, loans and financing, debentures, related-party transactions, unrealized gains on derivatives, unrealized losses on derivatives, obligations with FIDC, other current assets, other non-current assets, 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) Fair value — the fair value of the aforementioned financial instruments is as follows:

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

Book

 

Fair

 

Book

 

Fair

 

 

 

value

 

value

 

value

 

value

 

Assets

 

 

 

 

 

 

 

 

 

Short-term investments

 

590,403

 

590,403

 

459,470

 

459,470

 

Related parties

 

74,998

 

74,998

 

27,939

 

27,939

 

Unrealized gains on derivatives

 

39,475

 

39,475

 

33,417

 

33,417

 

Other current assets

 

782,457

 

782,457

 

780,423

 

780,423

 

Other non-current assets

 

439,271

 

439,271

 

449,592

 

449,592

 

Liabilities

 

 

 

 

 

 

 

 

 

Loans and Financing

 

 

 

 

 

 

 

 

 

Debentures

 

13,441,668

 

13,972,347

 

13,367,841

 

13,533,306

 

Related parties

 

1,551,363

 

1,551,363

 

1,538,873

 

1,538,873

 

Unrealized losses on financial instruments

 

5,285

 

5,285

 

1,350

 

1,350

 

Obligations with FIDC

 

2,694

 

2,694

 

5,245

 

5,245

 

Other current liabilities

 

958,211

 

958,211

 

938,526

 

938,526

 

Other non-current liabilities

 

691,597

 

691,597

 

988,967

 

988,967

 

 

 

515,005

 

515,005

 

499,092

 

499,092

 

 

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. The fair value hierarchy of the financial instruments above are presented in Note 14.g.

 

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 possibility of losses (or gains) due to 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 or 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 understands that the accounts receivables originated from exports, its cash and cash equivalents denominated in foreign currencies and

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

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 company not receiving amounts arising from sales to customers or investments made with financial institutions.  In order to minimize this risk, the company adopt the procedure of analyzing in details of the financial position of their customers, establishing a credit limit and constantly monitoring their balances. If customers are classified by an independent agency, these ratings are used. If an independent assessment is not available, the Company’s credit area provides a credit rating assessment, taking into consideration its financial position, past experience and other factors. 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.

 

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 Key Performance Indicators (KPIs) related to the “Capital Structure Management” objective are: WACC, Net Debt / EBITDA, Net Financial Expenses Coverage Ratio (Ebitda / Net Financial Expenses) and Debt / Total Capitalization Ratio. Net Debt consists of debt reduced by cash, cash equivalents and financial investments (notes 4, 12 and 13). Total Capitalization consists of Total Debt (composed of debt principal) and Equity (Note 18). The Company can change its capital structure, according to economic-financial conditions, in order to optimize its financial leverage and its debt management. At the same time, the Company seeks to improve its ROCE (Return on Capital Employed) through the implementation of working capital management and an efficient investment program in property, plant and equipment. In the long term, the Company seeks to remain within the parameters below, admitting occasional variations in the short term:

 

Net debt/ EBITDA

 

From 1.0 to 1.5 times

Gross debt limit

 

R$ 12 billion

Average maturity

 

more than 6 years

 

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 and financing, and debentures are presented in Notes 12 and 13, respectively.

 

Sensitivity analysis:

 

The Company performed a sensitivity analysis, which can be summarized as follows (assuming that other variables remain constant):

 

Impacts on Statements of Income

 

 

 

 

 

 

 

Assumptions

 

Percentage of change

 

March 31, 2019

 

March 31, 2018

 

Foreign currency sensitivity analysis

 

5

%

215,061

 

126,442

 

Interest rate changes sensitivity analysis

 

10bps

 

53,076

 

60,859

 

Sensitivity analysis of changes in prices of products sold

 

1

%

100,257

 

103,888

 

Sensitivity analysis of changes in raw material and commodity prices

 

1

%

64,037

 

66,257

 

Interest rate and Foreign currency Swaps

 

10bps/5

%

11,037

 

6,141

 

Sensitivity analysis of Swap of interest rate

 

50bps

 

418

 

 

Sensitivity analysis of NDF’s (Non Deliverable Forwards)

 

5

%

6,183

 

1,508

 

 

Foreign currency sensitivity analysis:  As of March 31, 2019, the Company is mainly exposed to variations between the Real and the Dollar. The sensitivity analysis carried out by the Company considers the effects of a 5% increase or reduction between the Real and the Dollar in its non-hedged debt. In this analysis, if the Real appreciates against the Dollar, this would represent a gain of R$ 215,061 and R$ 175,852 after the effects arising from the changes in the net investment hedge described in note 14.f - (R$ 126,442 and R$ 78,448 as of March 31, 2018, respectively). If the Real depreciates against the Dollar this would represent an expense of the same value. Due to the investment hedge, the variations are minimized when the exchange variation accounts and income tax are analyzed.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

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$ 51,049 as of March 31, 2019 (R$ 60,859 as of March 31, 2018) and would impact the Financial expenses account in the Consolidated Statements of Income. The specific interest rates to which the Company is exposed are related to the loans, financing, and debentures presented in Notes 12 and 13, 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 revenues and costs for three month periods ended on March 31, 2019, totals R$ 100,257 (R$ 103,888 as of March 31, 2018) and the variation in the price of raw materials and other inputs totals R$ 64,037 as of March 31, 2019 (R$ 66,257 as of March 31, 2018). 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 exchange rate, and its impacts in the swaps mark to market for Cross Currency Swap operations, and 50 bps on the interest curve for Pre x DI operations. These variations represent an income or expense of R$ 11,455 (R$ 6,141 as of March 31, 2018). These effects would be recognized in the statement of comprehensive income. The interest rate swaps to which the Company is exposed to are presented in note 14.e.

 

Sensitivity analysis of forward contracts in US Dollar: the Company has exposure to forward contracts for some of its assets and liabilities. The sensitivity analysis carried out by the Company considers the effects of a 5% increase or reduction of the US Dollar against the Real and Argentinian Peso, and its effects on fair value of these derivatives. A 5% increase in the US Dollar against the Real and the Argentinian Peso represents an income of R$ 6,183 (income or expense of R$ 1,508 as of March 31, 2018, considering that in this position we had operations of the Euro against Real and Dollar against Argentinian Peso), and a 5% reduction of the US Dollar against the Argentinian Peso represents an expense of the same amount. The US Dollar / Real and US Dollar / Argentinian Peso forward contracts had the objective of hedging the asset and liability positions in US Dollar and the fair value effects of these contracts were recorded in the Consolidated Income Statement. The forward contracts in US Dollars that the Company is exposed are presented in Note 14.e.

 

d) Financial Instruments per Category

 

Summary of the financial instruments per category:

 

March 31, 2019
Assets

 

Financial asset at
amortized cost

 

Financial asset at fair
value through proft or
loss

 

Financial asset at fair value
through other comprehensive
income

 

Total

 

Short-term investments

 

 

590,403

 

 

590,403

 

Unrealized gains on financial instruments

 

 

 

39,475

 

39,475

 

Related parties

 

74,998

 

 

 

74,998

 

Other current assets

 

782,457

 

 

 

782,457

 

Other non-current assets

 

439,271

 

 

 

439,271

 

Total

 

1,296,726

 

590,403

 

39,475

 

1,926,604

 

Financial result for the three-month period ended on March 31, 2019

 

62,380

 

26,740

 

 

89,120

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

Liabilities

 

Financial liability at
fair value through
profit or loss

 

Financial liability at
amortized cost

 

Total

 

Loans and Financing

 

 

13,441,668

 

13,441,668

 

Debentures

 

 

1,551,363

 

1,551,363

 

Related parties

 

 

5,285

 

5,285

 

FIDC Obligation

 

 

958,211

 

958,211

 

Other current liabilities

 

 

691,597

 

691,597

 

Other non-current liabilities

 

 

515,005

 

515,005

 

Unrealized losses on financial instruments

 

2,694

 

 

2,694

 

Total

 

2,694

 

17,163,129

 

17,165,823

 

Financial result for the three-month period ended on March 31, 2019

 

(7,507

)

(456,346

)

(463,853

)

 

December 31, 2018
Assets

 

Financial asset at
amortized cost

 

Financial asset at fair
value through proft or
loss

 

Financial asset at fair value
through other comprehensive
income

 

Total

 

Short-term investments

 

 

459,470

 

 

459,470

 

Unrealized gains on financial instruments

 

 

 

33,417

 

33,417

 

Related parties

 

27,939

 

 

 

27,939

 

Other current assets

 

780,423

 

 

 

780,423

 

Other non-current assets

 

449,592

 

 

 

449,592

 

Total

 

1,257,954

 

459,470

 

33,417

 

1,750,841

 

Financial result for the three-month period ended on March 31, 2018

 

90,537

 

12,377

 

 

102,914

 

 

Liabilities

 

Financial liability at
fair value through
profit or loss

 

Financial liability at
amortized cost

 

Total

 

Loans and financings

 

 

13,367,841

 

13,367,841

 

Debentures

 

 

1,538,873

 

1,538,873

 

Related parties

 

 

1,350

 

1,350

 

FIDC Obligation

 

 

938,526

 

938,526

 

Other current liabilities

 

 

988,967

 

988,967

 

Other non-current liabilities

 

 

499,092

 

499,092

 

Unrealized losses on financial instruments

 

5,245

 

 

5,245

 

Total

 

5,245

 

17,334,649

 

17,339,894

 

Financial result for the three-month period ended on March 31, 2018

 

(787

)

(444,691

)

(445,478

)

 

As of March 31, 2019, the Company has derivative financial instruments such as interest rate and currency swaps and forward dollar contracts. These derivative financial instruments had their realized and unrealized gains and / or gains presented in the Gains (Losses) 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 Financial Risk Management Committee, which validates the mark to market of these transactions. All derivative financial instruments are recognized at fair value in the Consolidated Financial Statements of the Company.

 

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 income. 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.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of March 31, 2019

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

(Unaudited)

 

Derivative transactions may include: interest rate and/or currency swaps, currency futures contracts and currency options contracts.

 

Swap Contracts

 

The Company has contracted Cross Currency Swaps operations, whether or not qualified as cash flow hedge, through which it receives a variable interest rate based on Libor and/or a fixed US dollar rate and pays a fixed interest rate or floating currency based on the local currency. The company also contracted the Pre x DI swap operation, through which it receives a fixed interest rate and pays a floating interest rate, both in local currency. The counterparties to these operations are financial institutions with low credit risk.

 

The derivatives instruments can be summarized and categorized as follows:

 

 

 

 

 

Notional value

 

Amount receivable

 

Amount payable

 

Contracts

 

 

 

March 31, 2019

 

December 31, 2018

 

March 31, 2019

 

December 31, 2018

 

March 31, 2019

 

December 31, 2018

 

Forward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity at 2019

 

purchase in US$

 

US$ 12.2 million

 

US$ 19.2 million

 

3,712