EX-99.1 2 a19-16619_1ex99d1.htm EX-99.1

Exhibit 99.1

 

GERDAU S.A.

Condensed consolidated interim financial statements

as of June 30, 2019

 


 

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

In thousands of Brazilian reais (R$)

(Unaudited)

 

 

 

Note

 

June 30, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

4

 

1,750,857

 

2,890,144

 

Short-term investments

 

4

 

390,607

 

459,470

 

Trade accounts receivable - net

 

5

 

3,732,421

 

3,201,656

 

Inventories

 

6

 

9,531,907

 

9,167,689

 

Tax credits

 

 

 

543,423

 

527,428

 

Income and social contribution taxes recoverable

 

 

 

375,619

 

445,561

 

Unrealized gains on financial instruments

 

14

 

 

30,711

 

Other current assets

 

 

 

571,023

 

780,423

 

 

 

 

 

16,895,857

 

17,503,082

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS

 

 

 

 

 

 

 

Tax credits

 

 

 

42,660

 

32,065

 

Deferred income taxes

 

 

 

3,627,519

 

3,874,054

 

Unrealized gains on financial instruments

 

14

 

3,086

 

2,706

 

Related parties

 

16

 

63,126

 

27,939

 

Judicial deposits

 

15

 

2,181,223

 

2,135,414

 

Other non-current assets

 

 

 

466,462

 

449,592

 

Prepaid pension cost

 

 

 

51,902

 

17,952

 

Advance for future investment in joint venture

 

8

 

91,973

 

375,456

 

Investments in associates and joint ventures

 

8

 

1,695,371

 

1,367,802

 

Goodwill

 

10

 

9,020,556

 

9,112,390

 

Leasing

 

2.1

 

727,742

 

 

Other Intangibles

 

 

 

727,827

 

836,096

 

Property, plant and equipment, net

 

 

 

15,529,952

 

15,546,481

 

 

 

 

 

34,229,399

 

33,777,947

 

TOTAL ASSETS

 

 

 

51,125,256

 

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

 

June 30, 2019

 

December 31, 2018

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Trade accounts payable

 

11

 

3,832,809

 

4,335,054

 

Short-term debt

 

12

 

1,851,194

 

1,822,183

 

Debentures

 

13

 

22,716

 

2,755

 

Taxes payable

 

 

 

407,905

 

351,545

 

Income and social contribution taxes payable

 

 

 

138,517

 

395,682

 

Payroll and related liabilities

 

 

 

482,219

 

588,627

 

Dividends payable

 

 

 

 

169,616

 

Leasing payable

 

2.1

 

219,466

 

 

Employee benefits

 

 

 

578

 

157

 

Environmental liabilities

 

 

 

60,973

 

60,419

 

Unrealized losses on financial instruments

 

14

 

3,061

 

5,245

 

Other current liabilities

 

 

 

695,792

 

772,970

 

 

 

 

 

7,715,230

 

8,504,253

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

 

Long-term debt

 

12

 

9,883,028

 

11,545,658

 

Debentures

 

13

 

2,916,947

 

1,536,118

 

Related parties

 

16

 

5,198

 

1,350

 

Deferred income taxes

 

 

 

61,015

 

118,368

 

Provision for tax, civil and labor liabilities

 

15

 

695,470

 

770,305

 

Environmental liabilities

 

 

 

61,394

 

72,228

 

Employee benefits

 

 

 

1,260,820

 

1,356,560

 

Obligations with FIDC

 

17

 

978,642

 

938,526

 

Leasing payable

 

2.1

 

517,949

 

 

Other non-current liabilities

 

 

 

461,118

 

499,092

 

 

 

 

 

16,841,581

 

16,838,205

 

EQUITY

 

18

 

 

 

 

 

Capital

 

 

 

19,249,181

 

19,249,181

 

Treasury stocks

 

 

 

(260,529

)

(280,426

)

Capital reserves

 

 

 

11,597

 

11,597

 

Retained earnings

 

 

 

5,502,202

 

4,806,089

 

Operations with non-controlling interests

 

 

 

(2,870,825

)

(2,870,825

)

Other reserves

 

 

 

4,733,425

 

4,814,988

 

EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT

 

 

 

26,365,051

 

25,730,604

 

 

 

 

 

 

 

 

 

NON-CONTROLLING INTERESTS

 

 

 

203,394

 

207,967

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

26,568,445

 

25,938,571

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

 

 

51,125,256

 

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

 

For the six-month period ended

 

 

 

Note

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

 

 

10,154,053

 

12,035,355

 

20,179,714

 

22,424,155

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

21

 

(8,881,496

)

(10,390,656

)

(17,638,146

)

(19,440,356

)

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

 

1,272,557

 

1,644,699

 

2,541,568

 

2,983,799

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

21

 

(120,131

)

(141,328

)

(242,768

)

(287,665

)

Impairment loss on trade receivables

 

21

 

(1,971

)

(16,237

)

(7,978

)

(20,335

)

General and administrative expenses

 

21

 

(231,833

)

(273,382

)

(470,501

)

(543,378

)

Other operating income

 

21

 

59,321

 

40,849

 

147,841

 

89,706

 

Other operating expenses

 

21

 

(14,219

)

(50,382

)

(28,663

)

(68,639

)

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

 

21

 

 

(47,824

)

 

(51,321

)

Equity in earnings of unconsolidated companies

 

8

 

(38,587

)

23,777

 

(24,359

)

41,526

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES

 

 

 

925,137

 

1,180,172

 

1,915,140

 

2,143,693

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial income

 

22

 

47,756

 

33,969

 

88,773

 

65,286

 

Financial expenses

 

22

 

(352,901

)

(387,264

)

(698,274

)

(753,295

)

Exchange variations, net

 

22

 

12,052

 

(388,210

)

(58,404

)

(395,273

)

Gain and losses on financial instruments, net

 

22

 

(7,173

)

27,842

 

(7,094

)

27,055

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE TAXES

 

 

 

624,871

 

466,509

 

1,240,141

 

1,087,466

 

Current

 

7

 

(105,467

)

(152,269

)

(231,073

)

(300,444

)

Deferred

 

7

 

(146,653

)

384,049

 

(183,691

)

359,678

 

Income and social contribution taxes

 

 

 

(252,120

)

231,780

 

(414,764

)

59,234

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

372,751

 

698,289

 

825,377

 

1,146,700

 

 

 

 

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO:

 

 

 

 

 

 

 

 

 

 

 

Owners of the parent

 

 

 

369,535

 

694,588

 

818,538

 

1,135,617

 

Non-controlling interests

 

 

 

3,216

 

3,701

 

6,839

 

11,083

 

 

 

 

 

372,751

 

698,289

 

825,377

 

1,146,700

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

19

 

0.22

 

0.41

 

0.48

 

0.67

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

19

 

0.22

 

0.40

 

0.48

 

0.66

 

 

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, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Net income for the period

 

372,751

 

698,289

 

825,377

 

1,146,700

 

Items that may be reclassified subsequently to profit or loss

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income from associates and joint ventures

 

(403

)

105,875

 

(6,676

)

144,614

 

Cumulative translation adjustment

 

(218,663

)

2,647,308

 

(121,710

)

2,639,372

 

Recycling of cumulative translation adjustment to net income

 

 

(413,694

)

 

(413,694

)

Unrealized Gains (Losses) on net investment hedge

 

88,726

 

(1,382,891

)

59,932

 

(1,419,025

)

Cash flowh hedges:

 

 

 

 

 

 

 

 

 

Unrealized Gains on financial instruments, net of tax

 

1,886

 

5,913

 

1,576

 

11,674

 

 

 

(128,454

)

962,511

 

(66,878

)

962,941

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period, net of tax

 

244,297

 

1,660,800

 

758,499

 

2,109,641

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income attributable to:

 

 

 

 

 

 

 

 

 

Owners of the parent

 

242,353

 

1,632,978

 

749,200

 

2,072,779

 

Non-controlling interests

 

1,944

 

27,822

 

9,299

 

36,862

 

 

 

244,297

 

1,660,800

 

758,499

 

2,109,641

 

 

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

 

 

 

 

 

 

 

1,135,617

 

 

 

 

 

 

 

1,135,617

 

11,083

 

1,146,700

 

Other comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

 

 

(1,418,766

)

11,544

 

2,344,384

 

 

 

937,162

 

25,779

 

962,941

 

Total comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

1,135,617

 

 

(1,418,766

)

11,544

 

2,344,384

 

 

 

2,072,779

 

36,862

 

2,109,641

 

Long term incentive plan cost recognized in the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,412

)

(22,412

)

(82

)

(22,494

)

Assignment of preferred shares

 

 

11,622

 

 

 

 

7,362

 

 

 

 

 

 

 

 

18,984

 

 

18,984

 

Effects of IFRS 9 adoption

 

 

 

 

 

 

 

 

 

 

(10,085

)

 

 

 

(10,085

)

(65

)

(10,150

)

Treasury stocks

 

 

(149,711

)

 

 

 

 

 

 

 

 

 

 

 

(149,711

)

(327

)

(150,038

)

Long term incentive plan exercised during the period

 

 

22,476

 

 

 

 

(3,000

)

 

 

 

 

 

 

 

19,476

 

75

 

19,551

 

Effects of interest changes in subsidiaries

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

10,510

 

10,516

 

Dividends/interest on capital

 

 

 

 

 

 

 

(187,171

)

 

 

 

 

 

 

(187,171

)

(4,574

)

(191,745

)

Balance as of June 30, 2018 (Note 18)

 

19,249,181

 

(191,698

)

11,597

 

628,228

 

611,531

 

2,079,977

 

948,446

 

(2,870,825

)

(5,971,750

)

6,431

 

11,185,834

 

(472,458

)

172,573

 

25,387,067

 

291,139

 

25,678,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

818,538

 

 

 

 

 

 

 

818,538

 

6,839

 

825,377

 

Other comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

 

 

59,926

 

1,576

 

(130,840

)

 

 

(69,338

)

2,460

 

(66,878

)

Total comprehensive income (loss) recognized in the period

 

 

 

 

 

 

 

818,538

 

 

59,926

 

1,576

 

(130,840

)

 

 

749,200

 

9,299

 

758,499

 

Long term incentive plan cost recognized in the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,225

)

(12,225

)

875

 

(11,350

)

Long term incentive plan exercised during the period

 

 

19,897

 

 

 

 

(3,521

)

 

 

 

 

 

 

 

16,376

 

6

 

16,382

 

Effects of interest changes in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,436

)

(1,436

)

Complementary dividends

 

 

 

 

 

 

(101

)

 

 

 

 

 

 

 

(101

)

 

(101

)

Dividends/interest on equity

 

 

 

 

 

 

 

(118,803

)

 

 

 

 

 

 

(118,803

)

(13,317

)

(132,120

)

Balance as of June 30, 2019 (Note 18)

 

19,249,181

 

(260,529

)

11,597

 

743,421

 

628,582

 

3,430,464

 

699,735

 

(2,870,825

)

(5,984,332

)

488,364

 

10,402,772

 

(320,303

)

146,924

 

26,365,051

 

203,394

 

26,568,445

 

 

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, 2019

 

June 30, 2018

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income for the period

 

 

 

825,377

 

1,146,700

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

21

 

1,032,637

 

910,061

 

Equity in earnings of unconsolidated companies

 

8

 

24,359

 

(41,526

)

Exchange variation, net

 

22

 

58,404

 

395,273

 

Loss (Gains) on financial instruments, net

 

22

 

7,094

 

(27,055

)

Post-employment benefits

 

 

 

81,636

 

93,147

 

Stock based compensation

 

 

 

19,714

 

21,036

 

Income tax

 

7

 

414,764

 

(59,234

)

Gains on disposal of property, plant and equipment, net

 

 

 

(836

)

(40,534

)

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

 

 

 

 

51,321

 

Impairment loss on trade receivables

 

 

 

7,978

 

20,235

 

Provision for tax, labor and civil claims

 

 

 

(74,805

)

(40,720

)

Interest income on short-term investments

 

 

 

(28,721

)

(20,715

)

Interest expense on debt and debentures

 

22

 

506,559

 

570,244

 

Interest on loans with related parties

 

16

 

(1,841

)

(91

)

Provision for net realizable value adjustment in inventory, net

 

6

 

4,036

 

2,421

 

 

 

 

 

2,876,355

 

2,980,563

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Increase in trade accounts receivable

 

 

 

(521,804

)

(1,040,329

)

Increase in inventories

 

 

 

(416,761

)

(1,462,671

)

(Decrease) Increase in trade accounts payable

 

 

 

(582,198

)

632,309

 

Increase in other receivables

 

 

 

(39,418

)

(30,183

)

Decrease in other payables

 

 

 

(465,863

)

(432,894

)

Dividends from associates and joint ventures

 

 

 

10,933

 

11,562

 

Purchases of trading securities

 

 

 

(424,016

)

(482,677

)

Proceeds from maturities and sales of trading securities

 

 

 

500,068

 

796,848

 

Cash provided by operating activities

 

 

 

937,296

 

972,528

 

 

 

 

 

 

 

 

 

Interest paid on loans and financing

 

 

 

(523,667

)

(566,434

)

Income and social contribution taxes paid

 

 

 

(183,896

)

(157,066

)

Net cash provided by operating activities

 

 

 

229,733

 

249,028

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

9

 

(728,273

)

(515,803

)

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

 

 

 

19,314

 

927,066

 

Purchases of other intangibles

 

 

 

(35,088

)

(13,965

)

Advance for future investment in joint venture

 

 

 

(94,687

)

 

Net cash (used in) provided by investing activities

 

 

 

(838,734

)

397,298

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Purchases of Treasury stocks

 

 

 

 

(149,711

)

Dividends and interest on capital paid

 

 

 

(297,624

)

(171,723

)

Proceeds from loans and financing

 

 

 

1,882,008

 

893,506

 

Repayment of loans and financing

 

 

 

(1,956,462

)

(1,345,884

)

Leasing payment

 

 

 

(108,747

)

 

Intercompany loans, net

 

 

 

(29,498

)

10,542

 

Net cash used in financing activities

 

 

 

(510,323

)

(763,270

)

 

 

 

 

 

 

 

 

Exchange variation on cash and cash equivalents

 

 

 

(19,963

)

199,297

 

 

 

 

 

 

 

 

 

(Decrease) Increase in cash and cash equivalents

 

 

 

(1,139,287

)

82,353

 

Cash and cash equivalents at beginning of period

 

 

 

2,890,144

 

2,555,338

 

Cash and cash equivalents at end of period

 

 

 

1,750,857

 

2,637,691

 

 

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, 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 August 6, 2019.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

 

2.1 - Basis of Presentation

 

The Company’s Condensed Consolidated Interim Financial Statements for the three and six-month periods ended on June 30, 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

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

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).

 

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. On January 1, 2019, the right of use of asset, as well as the lease obligation, represents the amount of R$ 772,859. On June 30, 2019, the Company has recognized a right-of-use asset in the amount of R$ 727,742, a current lease liability of R$ 219,466 and a non-current lease liability of R$ 517,949. 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 June 30, 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 June 30, 2019, when compared to those existing on December 31, 2018, except for the capital increase in Gerdau Corsa S.A.P.I. which changed the interest held by the Company in this entity to 70%, remaining as a joint venture.

 

3.3 — Associate companies

 

The Company did not have material changes in interest in associate companies for the period ended on June 30, 2019, when compared to those existing on December 31, 2018.

 

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

 

Cash and cash equivalents

 

 

 

June 30, 2019

 

December 31, 2018

 

Cash

 

7,926

 

6,800

 

Banks and immediately available investments

 

1,742,931

 

2,883,344

 

Cash and cash equivalents

 

1,750,857

 

2,890,144

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

Short-term investments

 

 

 

June 30, 2019

 

December 31, 2018

 

Held for trading

 

390,607

 

459,470

 

Short-term investments

 

390,607

 

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

 

 

 

June 30, 2019

 

December 31, 2018

 

Trade accounts receivable - in Brazil

 

1,514,876

 

1,056,625

 

Trade accounts receivable - exports from Brazil

 

163,526

 

373,593

 

Trade accounts receivable - foreign subsidiaries

 

2,164,867

 

1,929,595

 

(-) Impairment loss on trade receivables

 

(110,848

)

(158,157

)

 

 

3,732,421

 

3,201,656

 

 

NOTE 6 - INVENTORIES

 

 

 

June 30, 2019

 

December 31, 2018

 

Finished products

 

4,301,359

 

3,985,964

 

Work in progress

 

2,002,649

 

1,688,794

 

Raw materials

 

2,070,197

 

2,296,074

 

Storeroom supplies

 

880,285

 

784,517

 

Imports in transit

 

295,044

 

426,044

 

(-) Allowance for adjustments to net realizable value

 

(17,627

)

(13,704

)

 

 

9,531,907

 

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

 

(7,646

)

Reversal of adjustments to net realizable value

 

3,610

 

Exchange rate variation

 

113

 

Balance as of June 30, 2019

 

(17,627

)

 

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, 2019 and 2018. The foreign subsidiaries of the Company are subject to taxation at rates

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

ranging between 25.0% and 34.0%. 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, 2019

 

June 30, 2018

 

Income before income taxes

 

624,871

 

466,509

 

Statutory tax rates

 

34

%

34

%

Income and social contribution taxes at statutory rates

 

(212,456

)

(158,613

)

Tax adjustment with respect to:

 

 

 

 

 

- Difference in tax rates in foreign companies

 

(15,409

)

321,900

 

- Equity in earnings of unconsolidated companies

 

(13,120

)

8,084

 

- Interest on equity *

 

69

 

46,084

 

- Tax credits and incentives

 

1,093

 

1,388

 

- Realization of deferred tax assets not recognized

 

(1,038

)

3,863

 

- Other permanent differences, net

 

(11,259

)

9,074

 

Income and social contribution taxes

 

(252,120

)

231,780

 

Current

 

(105,467

)

(152,269

)

Deferred

 

(146,653

)

384,049

 

 

 

 

For the six-month period ended

 

 

 

June 30, 2019

 

June 30, 2018

 

Income before income taxes

 

1,240,141

 

1,087,466

 

Statutory tax rates

 

34

%

34

%

Income and social contribution taxes at statutory rates

 

(421,648

)

(369,738

)

Tax adjustment with respect to:

 

 

 

 

 

- Difference in tax rates in foreign companies

 

5,694

 

332,379

 

- Equity in earnings of unconsolidated companies

 

(8,282

)

14,119

 

- Interest on equity *

 

69

 

46,292

 

- Tax credits and incentives

 

3,455

 

5,825

 

- Realization of deferred tax assets not recognized

 

452

 

8,469

 

- Other permanent differences, net

 

5,496

 

21,888

 

Income and social contribution taxes

 

(414,764

)

59,234

 

Current

 

(231,073

)

(300,444

)

Deferred

 

(183,691

)

359,678

 

 


(*) 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$ 266,429 (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$ 542,521 (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

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

and also several tax losses of state credits in the amount of R$ 793,472 (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

 

(74,601

)

38,498

 

1,420

 

(879

)

11,203

 

(24,359

)

Cumulative Translation Adjustment

 

(9,520

)

(787

)

1,581

 

2,050

 

 

(6,676

)

Capital increase

 

362,537

 

 

 

7,000

 

 

369,537

 

Dividends/Interest on equity

 

(1,843

)

 

 

 

(9,090

)

(10,933

)

Balance as of June 30, 2018

 

577,845

 

738,944

 

216,900

 

11,421

 

150,261

 

1,695,371

 

 

a)        Advance for future investment in joint venture

 

The Company made an advance for future investment in equity interest, representing the amount of R$ 91,973 as of June 30, 2019, in the joint venture Gerdau Corsa S.A.P.I. de C.V ..

 

NOTE 9 — PROPERTY, PLANT AND EQUIPMENT

 

a) Summary of changes in property, plant and equipment — during the three-month period ended on June 30, 2019, acquisitions amounted to R$ 423,741 (R$ 299,147 as of June 30, 2018), and disposals amounted to R$ 12,638 (R$ 3,083 as of June 30, 2018). During the six-month period ended on June 30, 2019, acquisitions amounted to R$ 728,273 (R$ 515,803 as of June 30, 2018), and disposals amounted to R$ 18,478 (R$ 3,547 as of June 30, 2018).

 

b) Capitalized borrowing costs — borrowing costs capitalized during the three-month period ended on June 30, 2019 amounted to R$ 5,908 (R$ 6,276 as of June 30, 2018). Borrowing costs capitalized during the six-month period ended on June 30, 2019 amounted to R$ 11,147 (R$ 12,599 as of June 30, 2018)

 

c) Guarantees — property, plant and equipment have been pledged as collateral for loans and financing in the amount of R$ 81,062 as of June 30, 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

 

(167,496

)

75,662

 

(91,834

)

Balance as of June 30, 2019

 

16,616,462

 

(7,595,906

)

9,020,556

 

 

The amounts of goodwill by segment are as follows:

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

 

 

June 30, 2019

 

December 31, 2018

 

Brazil

 

373,135

 

373,135

 

Special Steels

 

2,823,501

 

2,854,888

 

North America

 

5,823,920

 

5,884,367

 

 

 

9,020,556

 

9,112,390

 

 

NOTE 11 — TRADE ACCOUNTS PAYABLE

 

 

 

June 30, 2019

 

December 31, 2018

 

Trade accounts payable - domestic market

 

2,869,240

 

3,368,834

 

Trade accounts payable - debtor risk

 

365,453

 

215,998

 

Trade accounts payable - intercompany

 

6,292

 

7,400

 

Trade accounts payable - imports

 

591,824

 

742,822

 

 

 

3,832,809

 

4,335,054

 

 

NOTE 12 — LOANS AND FINANCING

 

Loans and financing are as follows:

 

 

 

Annual interest rate (*)

 

June 30, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Working capital

 

5.68

%

886,416

 

2,424,246

 

Financing of property, plant and equipment and others

 

17.41

%

1,184,697

 

1,205,281

 

Ten/Thirty Years Bonds

 

5.81

%

9,663,109

 

9,738,314

 

Total financing

 

 

 

11,734,222

 

13,367,841

 

Current

 

 

 

1,851,194

 

1,822,183

 

Non-current

 

 

 

9,883,028

 

11,545,658

 

 

 

 

 

 

 

 

 

Principal amount of the financing

 

 

 

11,564,026

 

13,178,457

 

Interest amount of the financing

 

 

 

170,196

 

189,384

 

Total financing

 

 

 

11,734,222

 

13,367,841

 

 


(*) Weighted average effective interest costs on June 30, 2019, which in a consolidated basis represents 6.43%

 

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:

 

 

 

June 30, 2019

 

December 31, 2018

 

Brazilian Real (R$)

 

899,147

 

2,361,610

 

U.S. Dollar (US$)

 

10,702,950

 

10,924,355

 

Other currencies

 

132,125

 

81,876

 

 

 

11,734,222

 

13,367,841

 

 

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

 

 

 

June 30, 2019

 

December 31, 2018

 

2020(*)

 

650,506

 

2,253,958

 

2021

 

1,186,364

 

1,199,045

 

2022

 

120,555

 

121,490

 

2023

 

1,197,303

 

1,209,109

 

2024

 

2,417,828

 

2,426,456

 

2025 on

 

4,310,472

 

4,335,600

 

 

 

9,883,028

 

11,545,658

 

 


(*) For the period as of June 30, 2019, the amounts represents payments from July 1, 2020 to December 31, 2020.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

a) Principal funding in 2019

 

During the first semester of 2019, the subsidiary Gerdau Aços Longos obtained a loan for working capital of R$ 440.7 million from Banco Bradesco and Santander, with short-term maturities.

 

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.

 

c) Guarantees

 

All loans contracted under the FINAME/BNDES program, totaling R$ 81.1 million on June 30, 2019, are guaranteed by the assets (property, plant and equipment) being financed.

 

d) Credit Lines

 

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 June 30, 2019, the amount disbursed in this line was US$ 45 million (R$ 172.5 million as of June, 30, 2019).

 

NOTE 13 — DEBENTURES

 

 

 

 

 

Quantity as of June 30, 2019

 

 

 

 

 

 

 

Issuance

 

General Meeting

 

Issued

 

Held in treasury

 

Maturity

 

June 30, 2019

 

December 31, 2018

 

3rd- A and B

 

May 27,1982

 

144,000

 

141,612

 

06/01/2021

 

16,216

 

18,871

 

7th

 

July 14, 1982

 

68,400

 

68,281

 

07/01/2022

 

1,041

 

1,102

 

8th

 

November 11, 1982

 

179,964

 

179,013

 

05/02/2023

 

5,437

 

8,080

 

9th

 

June 10, 1983

 

125,640

 

125,425

 

09/01/2024

 

1,881

 

2,349

 

11th - A and B

 

June 29, 1990

 

150,000

 

149,745

 

06/01/2020

 

2,115

 

5,716

 

15th

 

November, 9, 2018

 

1,500,000

 

 

11/21/2022

 

1,506,664

 

1,502,755

 

16th - A

 

April 24, 2019

 

600,000

 

 

05/06/2023

 

602,706

 

 

16th - B

 

April 24, 2019

 

800,000

 

 

05/06/2026

 

803,603

 

 

Total Consolidated

 

 

 

 

 

 

 

 

 

2,939,663

 

1,538,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

22,716

 

2,755

 

Non-current

 

 

 

 

 

 

 

 

 

2,916,947

 

1,536,118

 

 

Maturities of long-term amounts are as follows:

 

 

 

June 30, 2019

 

December 31, 2018

 

2020(*)

 

 

5,716

 

2021

 

16,216

 

18,871

 

2022

 

1,497,049

 

1,501,102

 

2023

 

603,921

 

8,080

 

2024

 

1,881

 

2,349

 

2025 on

 

797,880

 

 

 

 

2,916,947

 

1,536,118

 

 


(*) For the period as of June 30, 2019, the amounts represents payments from July 1, 2020 to December 31, 2020.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

 

16th Issuance of Debentures: At the Board of Directors Meeting held on April 25, 2019, the Sixteenth Issuance of Simple and Non-convertible Debentures, in Two Series, was approved. The amount of the Issuance, subscribed and paid in, was R$ 1,400 million, of which R$ 600 million in the first series and R$ 800 million in the second series, with a unit par value of R$ 1,000.00, and net proceeds were used for cash reinforcement, in order to serve its ordinary management business. The 1st Series debentures mature in 48 months and yield interest equivalent to 105.5% of the CDI. The 2nd Series Debentures mature in 84 months and yield interest equivalent to 107.25% of the CDI.

 

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 6.32% and 6.42% for the three and six-month periods ended on June 30, 2019 and year ended on December 31, 2018, respectively.

 

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

 

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 financial instruments, unrealized losses on financial instruments, 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:

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

Book

 

Fair

 

Book

 

Fair

 

 

 

value

 

value

 

value

 

value

 

Assets

 

 

 

 

 

 

 

 

 

Short-term investments

 

390,607

 

390,607

 

459,470

 

459,470

 

Related parties

 

63,126

 

63,126

 

27,939

 

27,939

 

Unrealized gains on financial instruments

 

3,086

 

3,086

 

33,417

 

33,417

 

Other current assets

 

571,023

 

571,023

 

780,423

 

780,423

 

Other non-current assets

 

466,462

 

466,462

 

449,592

 

449,592

 

Liabilities

 

 

 

 

 

 

 

 

 

Loans and Financing

 

11,734,222

 

12,524,534

 

13,367,841

 

13,533,306

 

Debentures

 

2,939,663

 

2,939,663

 

1,538,873

 

1,538,873

 

Related parties

 

5,198

 

5,198

 

1,350

 

1,350

 

Unrealized losses on financial instruments

 

3,061

 

3,061

 

5,245

 

5,245

 

Obligations with FIDC

 

978,642

 

978,642

 

938,526

 

938,526

 

Other current liabilities

 

695,792

 

695,792

 

772,970

 

772,970

 

Other non-current liabilities

 

461,118

 

461,118

 

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.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

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 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. 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):

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

Impacts on Statements of Income

 

 

 

 

 

 

 

Assumptions

 

Percentage of change

 

June 30, 2019

 

June 30, 2018

 

Foreign currency sensitivity analysis

 

5

%

201,149

 

178,964

 

Interest rate changes sensitivity analysis

 

10bps

 

55,910

 

68,246

 

Sensitivity analysis of changes in prices of products sold

 

1

%

201,797

 

224,242

 

Sensitivity analysis of changes in raw material and commodity prices

 

1

%

128,948

 

143,700

 

Interest rate and Foreign currency Swaps

 

10bps/5%

 

 

23,799

 

Sensitivity analysis of Swap of interest rate

 

50bps

 

368

 

 

Sensitivity analysis of NDF’s (Non Deliverable Forwards)

 

5

%

1,067

 

 

Sensitivity analysis of Zero Cost Collar

 

5

%

 

1,536

 

 

Foreign currency sensitivity analysis:  As of June 30, 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$ 201,149 and R$ 162,551 after the effects arising from the changes in the net investment hedge described in note 14.f - (R$ 178,964 and R$ 114,464 as of June 30, 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.

 

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$ 55,910 as of June 30, 2019 (R$ 68,246 as of June 30, 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 sales 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 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 six-month period ended on June 30, 2019, totals R$ 201,797 (R$ 224,242 as of June 30, 2018) and the variation in the price of raw materials and other inputs totals R$ 128,948 as of June 30, 2019 (R$ 143,700 as of June 30, 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 50 bps in the interest curve for Pre x DI operations. These variations represent an income or expense of R$ 368 (R$ 23,799 as of June 30, 2018, considering that in this position we had interest rate and currency swaps). These effects would be recognized in the Consolidated Statements of 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 Dollar 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 Argentinian Peso, and its effects on fair value of these derivatives. A 5% increase in the US Dollar against the Argentinian Peso represents an income of R$ 1,067 (R$ 1,536 as of June 30, 2018, considering that in this position we had operations of the US Dollar against Real), and a 5% reduction of the US Dollar against the Argentinian Peso represents an expense of the same amount. The 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 Statements of Income. 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:

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

June 30, 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

 

 

390,607

 

 

390,607

 

Unrealized gains on financial instruments

 

 

 

3,086

 

3,086

 

Related parties

 

63,126

 

 

 

63,126

 

Other current assets

 

571,023

 

 

 

571,023

 

Other non-current assets

 

466,462

 

 

 

466,462

 

Total

 

1,100,611

 

390,607

 

3,086

 

1,494,304

 

Financial result for the three-month period ended on June 30, 2019

 

6,458

 

16,337

 

 

22,795

 

Financial result for the six-month period ended on June 30, 2019

 

68,838

 

43,077

 

 

111,915

 

 

Liabilities

 

Financial liability at
fair value through
profit or loss

 

Financial liability at
amortized cost

 

Total

 

Loans and Financing

 

 

11,734,222

 

11,734,222

 

Debentures

 

 

2,939,663

 

2,939,663

 

Related parties

 

 

5,198

 

5,198

 

FIDC Obligation

 

 

978,642

 

978,642

 

Other current liabilities

 

 

695,792

 

695,792

 

Other non-current liabilities

 

 

461,118

 

461,118

 

Unrealized losses on financial instruments

 

3,061

 

 

3,061

 

Total

 

3,061

 

16,814,635

 

16,817,696

 

Financial result for the three-month period ended on June 30, 2018

 

(5,224

)

(317,836

)

(323,060

)

Financial result for the six-month period ended on June 30, 2018

 

(12,731

)

(774,183

)

(786,914

)

 

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 June 30, 2018

 

264,046

 

51,000

 

 

315,046

 

Financial result for the six-month period ended on June 30, 2018

 

354,584

 

63,377

 

 

417,961

 

 

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

 

 

772,970

 

772,970

 

Other non-current liabilities

 

 

499,092

 

499,092

 

Unrealized losses on financial instruments

 

5,245

 

 

5,245

 

Total

 

5,245

 

17,118,652

 

17,123,897

 

Financial result for the three-month period ended on June 30, 2018

 

(8,933

)

(1,019,777

)

(1,028,710

)

Financial result for the six-month period ended on June 30, 2018

 

(9,719

)

(1,464,469

)

(1,474,188

)

 

As of June 30, 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 losses and / or gains presented in the Gains (Losses) account “Gains and losses on financial instruments, 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,

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

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.

 

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

 

Swap Contracts

 

The company has contracted 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

 

 

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

Forward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity at 2019

 

purchase in US$

 

US$

5.0 million

 

US$

19.2 million

 

 

 

(3,061

)

(4,069

)

Maturity at 2019

 

sell in US$

 

 

US$

18.3 million

 

 

462

 

 

(1,176

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross currency swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity in 2018

 

CDI 111.50%

 

 

R$

230.5 million

 

 

30,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap of interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity in 2020

 

CDI 111.50%

 

R$

50.0 million

 

R$

50.0 million

 

3,086

 

2,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fair value of financial instruments

 

 

 

 

 

 

 

3,086

 

33,417

 

(3,061

)

(5,245

)

 

The efects of financial instruments are classified as follow:

 

 

 

June 30, 2019

 

December 31, 2018

 

Unrealized gains on financial instruments

 

 

 

 

 

Current assets

 

 

30,711

 

Non-current assets

 

3,086

 

2,706

 

 

 

3,086

 

33,417

 

Unrealized losses on financial instruments

 

 

 

 

 

Current liabilities

 

(3,061

)

(5,245

)

 

 

(3,061

)

(5,245

)

 

 

 

June 30, 2019

 

June 30, 2018

 

Net Income

 

 

 

 

 

Gains on financial instruments

 

5,636

 

36,774

 

Losses on financial instruments

 

(12,730

)

(9,719

)

 

 

(7,094

)

27,055

 

Other comprehensive income

 

 

 

 

 

Gains on financial instruments

 

1,576

 

11,674

 

 

 

1,576

 

11,674

 

 

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.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

The exchange variation generated on the operations of Ten/Thirty Years Bonds in the amount of US$ 1.3 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 demonstrated effectiveness of the hedge as of its designation dates and demonstrated the high effectiveness of the hedge from the contracting of each debt for the acquisition of these companies abroad, whose effects were measured and recognized directly in the Statement of Comprehensive Income as an unrealized gain, net of taxes, in the amount R$ 59,932 for the six-month period ended on June 30, 2019 (loss of R$ 1,419,025 for the six-month period ended on June 30, 2018).

 

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 abroad mentioned above against positive and negative changes in the exchange rate. This objective is consistent with the Company’s risk management strategy and 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, 2019, the Company had some assets, in which 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, 2019 and December 31, 2018, are as follows:

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

(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, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - Held for Trading

 

390,607

 

459,470

 

 

114,027

 

390,607

 

345,443

 

Unrealized gains on financial instruments

 

 

30,711

 

 

 

 

30,711

 

Other current assets

 

571,023

 

780,423

 

 

 

571,023

 

780,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Related parties

 

63,126

 

27,939

 

 

 

63,126

 

27,939

 

Unrealized gains on financial instruments

 

3,086

 

2,706

 

 

 

3,086

 

2,706

 

Other non-current assets

 

466,462

 

449,592

 

 

 

466,462

 

449,592

 

 

 

1,494,304

 

1,750,841

 

 

238,008

 

1,494,304

 

9,052,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

1,851,194

 

1,822,183

 

 

 

1,851,194

 

1,822,183

 

Debentures

 

22,716

 

2,755

 

 

 

 

 

22,716

 

2,755

 

Unrealized losses on financial instruments

 

3,061

 

5,245

 

 

 

3,061

 

5,245

 

Other current liabilities

 

695,792

 

772,970

 

 

 

695,792

 

772,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

9,883,028

 

11,545,658

 

 

 

9,883,028

 

11,545,658

 

Debentures

 

2,916,947

 

1,536,118

 

 

 

2,916,947

 

1,536,118

 

Related parties

 

5,198

 

1,350

 

 

 

5,198

 

1,350

 

Obligations with FIDC

 

978,642

 

938,526

 

 

 

978,642

 

938,526

 

Other non-current liabilities

 

461,118

 

499,092

 

 

 

461,118

 

499,092

 

 

 

16,817,696

 

17,123,897

 

 

 

16,817,696

 

17,123,897

 

 

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

 

As required by IAS 7, the Company has summarized below the changes in the liabilities of cash flow from financing activities, from its Statement of Cash Flows:

 

 

 

 

 

Cash effects

 

Non-cash effects

 

 

 

 

 

December 31,
2018

 

Received/(Paid)
from financing
activities

 

Interest Payment

 

Interest on loans,
financing and loans
with related parties

 

Exchange
Variance and
others

 

June 30, 2019

 

Related Parties, net

 

(26,589

)

(29,498

)

 

(1,841

)

 

(57,928

)

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

 

14,878,542

 

(74,454

)

(523,667

)

506,559

 

(113,120

)

14,673,860

 

 

 

 

 

 

Cash effects

 

Non-cash effects

 

 

 

 

 

January 01,
2018

 

Received/(Paid)
from financing
activities

 

Interest Payment

 

Interest on loans,
financing and loans
with related parties

 

Exchange
Variance and
others

 

June 30, 2018

 

Related Parties, net

 

(51,839

)

10,542

 

 

(91

)

42

 

(41,346

)

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

 

16,510,851

 

(452,378

)

(566,434

)

570,244

 

2,015,086

 

18,077,369

 

 

NOTE 15 — 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 advisors, 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, operational results and liquidity of the Company and its subsidiaries.

 

For claims whose expected loss is considered probable, the provisions have been recorded considering the judgment of the Management of the Company with the assistance of its legal advisors and the provisions are considered sufficient to cover expected probable losses. The balances of the provisions are as follows:

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

I) Provisions

 

 

 

June 30, 2019

 

December 31, 2018

 

a) Tax provisions

 

287,962

 

268,009

 

b) Labor provisions

 

349,824

 

449,350

 

c) Civil provisions

 

57,684

 

52,946

 

 

 

695,470

 

770,305

 

 

a) Tax Provisions

 

Tax provisions refer substantially to the discussions regarding the offset of PIS and COFINS credits and the incidence of PIS and COFINS on other revenues.

 

b) Labor Provisions

 

The Company is party to a group of individual and collective labor and/or administrative lawsuits involving various labor amounts and the provision arises from unfavorable decisions and/or the likelihood of loss in the ordinary course of proceedings with the expectation of outflow of financial resources by the Company.

 

c) Civil Provisions

 

The Company and its subsidiaries are parties to civil lawsuits arising in the normal course of its business, which totaled as of June 30, 2019 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$ 621,516.

 

a.2) The Company and certain of its subsidiaries in Brazil are parties to claims related to: (i) Imposto sobre Produtos Industrializados - IPI, substantially related to IPI credit on inputs, whose demands total the updated amount of R$ 332,276; (ii) PIS and COFINS, substantially related to non-approval of compensation of credits on inputs totaling R$ 978,235, (iii) social security contributions in the total of R$ 89,501 and (iv) other taxes , whose updated total amount is currently R$ 507,067.

 

a.3) The Company and its subsidiary Gerdau Aços Longos SA are parties to three administrative proceedings related to Withholding Income Tax, levied on interest remitted abroad, linked to export financing formalized through “Prepayment of Exports Agreements “(PPE) or” Prepayment of Exports “(RAE), in the updated amount of R$ 744,985, of which: (i) R$ 126,981 corresponds to a lawsuit of the subsidiary Gerdau Aços Longos, which had its Voluntary Appeal judged at the first instance of the Administrative Council of Tax Appeals (CARF), which was dismissed by the quality vote, and Special Appeal was filed on May 17, 2019, which is pending judgment by the Superior Chamber of Tax Appeals (CSRF); (ii) R$ 134,402 corresponds to a lawsuit filed by the subsidiary Gerdau Aços Longos that was dismissed by the Federal Revenue Judgment Office (DRJ) and filed a Voluntary Appeal at the first instance of CARF, on August 28, 2018, which is pending of judgment; and; (iii) R$ 136,548, corresponds to a lawsuit filed by the subsidiary Gerdau Aços Longos SA, which was dismissed by the Federal Revenue Judgment Office (DRJ) and filed a Voluntary Appeal on June 3, 2019, which is pending of judgment. in the first instance of CARF; (iv) R$ 154,900 corresponds to a lawsuit of the Company, which was rejected as unfounded by the Federal Revenue Judgment Office (DRJ) and filed a Voluntary Appeal at first instance of CARF, on August 31, 2018, which is pending of judgment; and (v) R$ 192,154 corresponds to a lawsuit of the Company, whose objection was dismissed by the Federal Revenue Judgment Office (DRJ) and filed a Voluntary Appeal at first instance of CARF, on June 17, 2019, which is currently pending of judgment

 

a.4) The Company is party to administrative proceedings related to the deduction of the goodwill deducted pursuant to articles 7 and 8 of Law 9,532/97, from the basis of calculation of Corporate Income Tax (IRPJ) and Social Contribution on net income (CSLL), resulting from a corporate restructuring started in 2010. The updated total amount of the assessments is R$ 286,476, of which: (i) R$ 23,238 corresponds to a lawsuit in which the Company was challenged by the Federal Revenue of Judgment, resulting in a judgment that completely annulled the Notice of Infringement, but, in a judgment

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

made by the Administrative Council of Tax Appeals (CARF) on January 23, 2019, the legal appeal was granted in favor of the National Treasury, by judgment in which, on June 21, 2019, the Company filed Statement of Appeals, which are pending of judgment. (ii) R$ 194,804 corresponds to a lawsuit in which the Company was rejected as unfounded by the Federal Revenue Judgment Office (DRJ) and filed a Voluntary Appeal with the Administrative Council of Tax Appeals (CARF), which is pending of judgment; and (iii) R$ 68,434 correspond to a lawsuit in which the Company was rejected as unfounded and filed a Voluntary Appeal with the Administrative Council of Tax Appeals (CARF), which is pending of judgment.

 

a.5) The Company (as successor of Gerdau Aços Especiais S.A.) and its subsidiary Gerdau Internacional Empreendimentos Ltda. are parties to administrative and judicial proceedings relating to IRPJ — Corporate Income Tax and CSLL — Social Contribution Tax, in the current amount of R$ 1,219,452. Such proceedings relate to profits generated abroad, of which (i) R$ 1,039,339 correspond to two lawsuits of the subsidiary Gerdau Internacional Empreendimentos Ltda., of which (i.a) R$ 1,004,324 correspond to a lawsuit whose administrative discussion has already been closed and are currently in Fiscal Execution, in relation to which the Company filed Execution Embargoes, whereas they were partially dismissed by judgment of July 15, 2019, currently pending of publication to oppose the applicable appeals; and (i.b) R$ 35,016 are reminiscent of an assessment originally from R$ 372,213 and correspond to a lawsuit of the Company partially provided by CARF’s Superior Chamber of Tax Appeals (CSRF), in a decision published on May 25, 2017 and already transited; the case is currently pending of review of matters not previously analyzed by the first instance of the Administrative Council of Tax Appeals (CARF), as determined by the decision of the CSRF; and (ii) R$ 180,112 correspond to a lawsuit of the Company, which had its Voluntary Appeal judged at CARF’s first instance, which was dismissed, which is why it was submitted to a Special Appeal to the Superior Chamber of Tax Appeals (CSRF), known in part and pending of judgment.

 

a.6) The Company (as successor of Gerdau Aços Especiais S.A.) and its subsidiaries Gerdau Aços Longos 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$ 7,198,431, of which (i) R$ 5,208,914 correspond to four proceedings involving the Company (as successor of Gerdau Aços Especiais S.A.) and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A., for which administrative discussions already ended and are currently in the judicial collection stage; and the Companies obtained injunctive relief to permit it to offer a judicial guarantee using a liability insurance policy, for judicial discussions on Embargoes to Execution in the respective proceedings, and in the Embargoes to Execution filed by the Company (as successor of Gerdau Aços Especiais S.A.), on May 17, 2018, a judgment was rendered dismissing the fiscal launch, in the face of which the National Treasury filed an appeal, which is pending of judgment in the Federal Regional Court of the 4th Region; (ii) R$ 311,296 correspond to a lawsuit filed by the subsidiary Gerdau Aços Longos SA, awaiting judgment of its Special Appeal filed with CSRF, which has been partially followed. The portion of the debt whose Special Appeal has not been admitted is currently in judicial collection, in the amount of R$ 307,134, and the subsidiary has already lodged collateral through Guarantee Insurance and initiated legal discussion through Execution Embargoes filed on July 8, 2019, currently pending of judgment; (iii) R$ 350,302 corresponds to a lawsuit filed by subsidiary Gerdau Aços Longos S.A., which is awaiting of judgment of its Special Appeal filed with CSRF, which was partially followed up. The portion of the debt whose Special Appeal has not been admitted is currently in judicial collection, in the amount of R$ 284,730, and the subsidiary has already filed a Guarantee Insurance for further judicial discussion of the merits in view of the Tax Foreclosure filed by the National Treasury; (iv) R$ 130,940 corresponds to a lawsuit of the Company (as successor of Gerdau Aços Especiais SA), which had its Voluntary Appeal rejected by the first instance of CARF, reason why a Special Appeal was filed, which was partially known and it is pending of judgment; (v) R$ 558,367 corresponds to a lawsuit filed by subsidiary Gerdau Aços Longos S.A., which had its Voluntary Appeal partially granted, by decision issued by CARF on September 18, 2018 and notified to the Company on April 15, 2019. This decision was the subject of a Special Appeal by the National Treasury and a Special Appeal filed by the Company on April 29, 2019, both currently pending judgment; (vi) R$ 103,056 corresponds to a lawsuit of the Company (as successor of Gerdau Aços Especiais SA), which was dismissed, by decision of which it became aware on September 17, 2018 and in which it filed a Voluntary Appeal in the first instance of CARF, currently pending of judgment; and (vii) R$ 535,556 correspond to a lawsuit filed by the subsidiary Gerdau Aços Longos SA, which was rejected as unfounded, by decision of which it became aware on November 11, 2018 and against which it filed a Voluntary Appeal at first instance of CARF, currently pending of judgment.

 

The Company, supported by the advise of its legal counsel, understand 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).

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

In connection with the so-called Operation Zelotes and other matters, Brazilian federal authorities and the judiciary branch are investigating certain issues relating to CARF proceedings, as well as specific political contributions made by the Company, with the purpose of determining whether the Company engaged in any illegal conduct.  The Company previously disclosed that, in addition to its interactions with Brazilian authorities, the Company was providing information requested by the U.S. Securities and Exchange Commission (“SEC”).  The Company has since been informed by the SEC’s staff that it has closed its inquiry and therefore is not seeking any further information from the Company regarding these matters.

 

The Company believes it is not possible at this time to predict the term  or outcome of the proceedings in Brazil, and that there currently is not enough information to determine whether a provision for losses is required or any additional disclosures.

 

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 — Secretaria de Direito Econômico), 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 accountant 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 inexistence of a cartel. The Court, upon offer of bank guarantee letter, granted the suspension of the effects of CADE’s decision. Both actions were dismissed and their respective appeals were also rejected by the Federal Regional Court of the 1st Region. Both appeals were lodged against the Superior Court of Justice and the Federal Supreme Court, which are still awaiting admissibility analysis.

 

Regardless of the result of its resources, the Company will continue to seek all legal remedies to defend its rights.

 

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$ 278,739. For these demands, no accounting provision was recorded, since they were considered as possible losses, based on the opinion of its legal counsel.

 

c) Labor Contingencies

 

The Company and its subsidiaries are parties to other labor claims that together have an amount of approximately R$ 128,900. For these claims, no accounting provision was made, since these were considered as possible losses, based on the opinion of its legal counsel.

 

d) Administrative proceeding — Brazilian Securities Commission (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 counterparties 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 the clarification on the acquisition, disclosed that the decision to its acquisition had exclusively business purpose 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

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

defense for 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. Gerdau 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, 2019

 

December 31, 2018

 

Tax

 

2,006,339

 

1,963,859

 

Labor

 

134,526

 

126,620

 

Civil

 

40,358

 

44,935

 

 

 

2,181,223

 

2,135,414

 

 


The balance of judicial deposits as of June 30, 2019, in the amount of R$ 1,797,640, corresponds to judicial deposits made up to June 2017, 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.

 

For these actions, the Company and its subsidiaries were making judicial deposits and accounting provisions of the amounts under discussion, updated by the SELIC rate, which refer to the unsettled amounts of PIS and COFINS since 2009, whose liability was fully suspended, due to the realization of said deposits.

 

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, after the publication of the decision on October 02, 2017, the Attorney of the National Treasury filed an appeal, claiming that the decision of the Supreme Court was silent on certain points, and requested a modulation of the decision effects, which may limit its effects to the taxpayers.

 

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 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 International Financial Reporting Standards (IFRS), reversed the aforementioned accounting provision, through the recognition of R$ 929,711 in the line Reversal of contingent liabilities, net (Operational result) and R$ 369,819 in the line Reversal of monetary update of contingent liabilities, net (Financial Result), in its income statement. 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. 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.

 

Finally, the Company informs that, on July 19, 2019, the decision rendered in one of the mentioned lawsuits became final, assuring it, from then on: i) the right to withdraw the judicial deposits made during the proceedings of this lawsuit, whose updated amount is approximately R$ 175 million and whose request for release has already been filed in the process and it is in progress; and ii) the right to recovery of undue payments made prior to the filing of the lawsuit, subject to the statute of limitations of 5 years, whose estimated amount represents R$ 120 million (R$ 79 million, net of taxes).

 

IV) Contingent Asset - Eletrobrás Compulsory Loan — Centrais Elétricas Brasileiras S.A. (Eletrobrás)

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

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 greater than 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 issuance. Prior to the conversion of the credits into shares, those credits were monetary corrected through an indexer and quantifier, called Standard Unit (SU). However, 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 the following year, resulting in a lack of monthly monetary correction during the years of collection, as well as 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 legally entities existing at the time and that later became part of Gerdau S.A.) filed lawsuits claiming credits resulting from differences on the monetary correction of principal, interest, default interest 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 finally be calculated.

 

Obtaining favorable decisions represented by the final judgment mentioned above, suggests that an inflow of economic benefits may occur in the future. However, there are still substantial uncertainties on the timing, the way and the amount to be realized so that it is not yet practicable to reasonably determine that the realization of the gain arising from these decisions has reached a level of virtually certain and that the Company has control over such assets, which implies that such gains are not recorded until such conditions are demonstrably present.

 

NOTE 16 - RELATED-PARTY TRANSACTIONS

 

a)             Intercompany loans

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Associate companies

 

 

 

 

 

Aceros Corsa, S.A. de C.V.

 

38,332

 

 

 

 

 

 

 

 

Joint Venture

 

 

 

 

 

Gerdau Corsa SAPI de C.V.

 

91

 

72

 

 

 

 

 

 

 

Others

 

 

 

 

 

Fundação Gerdau

 

24,703

 

27,867

 

 

 

63,126

 

27,939

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Joint Venture

 

 

 

 

 

Diaco S.A.

 

(5,198

)

(1,350

)

 

 

(5,198

)

(1,350

)

 

 

 

For the six-month period ended

 

 

 

June 30, 2019

 

June 30, 2018

 

Net financial loss

 

1,841

 

91

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

b)             Operations with related parties

 

During the three and six-month periods ended on June 30, 2019, the Company, through its subsidiaries, performed commercial operations with some of its associate companies and joint ventures in sales of R$ 396,578 and R$ 761,248, respectively (R$ 307,715 and R$ 657,400 on June 30, 2018) and purchases in the amount of R$ 58,672 and R$ 107,660 on June 30, 2019 (R$ 30,498 and R$ 48,759 on June 30, 2018). The net balance totals R$ 653,588 on June 30, 2019 (R$ 608,641 on June 30, 2018).

 

During the three and six-month periods ended on June 30, 2019, the Company and 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$ 27 and R$ 60 for the three and six-month periods ended on June 30, 2019, respectively (R$ 51 and R$ 107 on June 30, 2018). Additionally , the Company recorded revenues of R$ 138 and R$ 277 for the three and six-mont periods ended on June 30, 2019, respectively (R$ 111 and R$ 222 on June 30, 2018), derived from rental agreement.

 

Guarantees granted

 

Related Party

 

Relationship

 

Object

 

Original
Amount

 

Maturity

 

Balance as of
June 30, 2019

 

Balance as of
December 31,
2018

 

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

 

Joint-venture

 

Financing Agreements

 

1,699,200

 

Dec/21 - Dec/22

 

1,848,234

 

1,933,929

 

Gerdau Summit Aços Fundidos e Forjados S.A.

 

Joint-venture

 

Financing Agreements

 

130,164

 

Aug/25

 

40,055

 

41,571

 

Gerdau Metaldom S.A.; Aceros Corsa S.A. de C.V.; Gerdau Corsa S.A.P.I de C.V.;

 

Associate company and Joint-venture

 

Financing Agreements

 

 

Jul/19

 

172,120

 

198,619

 

 

c)              Debentures

 

Debentures are held by subsidiaries in the amount of R$ 47,056 as of June 30, 2019 (R$ 42,755 as of December 31, 2018), which corresponds to 583 debentures (546 as of December 31, 2018).

 

d)             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.

 

e)              Management compensation

 

The Company paid to its management salaries, benefits and variable compensation totaling R$ 9,637 for the three-month period ended on June 30, 2019 (R$ 9,539 for the three-month period ended on June 30, 2018). The Company paid to its management salaries, benefits and variable compensation totaling R$ 17,864 for the six-month period ended on June 30, 2019 (R$ 17,666 for the six-month period ended on June 30, 2018). The contributions for the defined contribution plan, related to the management of the Company, totaled R$ 423 for the three-month period ended on June 30, 2019 (R$ 428 on June 30, 2018). The contributions for the defined contribution plan, related to the management of the Company, totaled R$ 805 for the six-month period ended on June 30, 2019 (R$ 810 on June 30, 2018).

 

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$ 5,294 during the three-month period ended on June 30, 2019 (R$ 6,363 for the three-month period ended on June 30, 2018). 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$ 11,852 during the six-month period ended on June 30, 2019 (R$ 11,520 for the six-month period ended on June 30, 2018).

 

NOTE 17 - 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.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

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$ 978,642 recognized in the account “Obligations with FIDC” as of June 30, 2019 (R$ 938,526 as of December 31, 2018).

 

NOTE 18 — 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, 2019

 

December 31, 2018

 

 

 

Common shares

 

Preferred shares

 

Common shares

 

Preferred shares

 

Balance at the beginning of the year

 

571,929,945

 

1,124,233,755

 

571,929,945

 

1,137,327,184

 

Acquisition of Treasury shares

 

 

 

 

(16,000,000

)

Exercise of stock option

 

 

1,027,409

 

 

1,597,235

 

Assignment of preferred shares

 

 

 

 

1,309,336

 

Balance at the end of the period/year

 

571,929,945

 

1,125,261,164

 

571,929,945

 

1,124,233,755

 

 

On June 30, 2019, 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, 2019

 

December 31, 2018

 

Shareholders

 

Common

 

%

 

Pref.

 

%

 

Total

 

%

 

Common

 

%

 

Pref.

 

%

 

Total

 

%

 

Metalúrgica Gerdau S.A.*

 

557,898,901

 

97.3

 

69,869,922

 

6.1

 

627,768,823

 

36.5

 

557,898,901

 

97.3

 

95,469,922

 

8.3

 

653,368,823

 

38.0

 

Brazilian institutional investors

 

2,548,147

 

0.4

 

201,293,819

 

17.6

 

203,841,966

 

11.9

 

2,383,207

 

0.4

 

224,073,547

 

19.6

 

226,456,754

 

13.2

 

Foreign institutional investors

 

4,322,116

 

0.8

 

422,283,315

 

36.8

 

426,605,431

 

24.8

 

4,836,488

 

0.8

 

410,387,290

 

35.8

 

415,223,778

 

24.1

 

Other shareholders

 

7,160,781

 

1.2

 

431,814,108

 

37.7

 

438,974,889

 

25.5

 

6,811,349

 

1.2

 

394,302,996

 

34.4

 

401,114,345

 

23.3

 

Treasury stock

 

1,697,538

 

0.3

 

20,770,081

 

1.8

 

22,467,619

 

1.3

 

1,697,538

 

0.3

 

21,797,490

 

1.9

 

23,495,028

 

1.4

 

 

 

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.

 

b) Treasury stocks

 

Changes in treasury shares are as follows:

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

Common

 

R$

 

Preferred shares

 

R$

 

Common

 

R$

 

Preferred shares

 

R$

 

Balance at the beginning of the period

 

1,697,538

 

557

 

21,797,490

 

279,869

 

1,697,538

 

557

 

8,704,061

 

75,528

 

Repurchase of shares

 

 

 

 

 

 

 

16,000,000

 

243,396

 

Exercise of stock option

 

 

 

(1,027,409

)

(19,897

)

 

 

(1,597,235

)

(27,433

)

Assignment of preferred shares

 

 

 

 

 

 

 

(1,309,336

)

(11,622

)

Balance at the end of the period

 

1,697,538

 

557

 

20,770,081

 

259,972

 

1,697,538

 

557

 

21,797,490

 

279,869

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

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$ 12.52.

 

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 net investment hedge, gains and losses on financial instruments accounted as cash flow hedge, cumulative translation adjustments, expenses recorded for stock option plans and actuarial gains and losses on postretirement benefits.

 

g) Dividends - The Company credited dividends to its shareholders in the amounts presented below:

 

Period

 

Nature

 

R$/share

 

Outstandings shares (thousands)

 

Credit

 

Payment

 

Amount

 

1st quarter

 

Dividends

 

0.07

 

1,697,180

 

05/17/2019

 

05/29/2019

 

118,803

 

 

The dividends credited during the period is composed of anticipation of minimum statutory dividend.

 

NOTE 19 — EARNINGS PER SHARE (EPS)

 

Basic

 

 

 

For the three-month period ended on

 

 

 

June 30, 2019

 

June 30, 2018

 

 

 

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

 

124,540

 

244,995

 

369,535

 

233,427

 

461,161

 

694,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

571,929,945

 

1,125,097,160

 

 

 

571,936,368

 

1,129,921,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share (in R$) — Basic

 

0.22

 

0.22

 

 

 

0.41

 

0.41

 

 

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

 

 

For the six-month period ended on

 

 

 

June 30, 2019

 

June 30, 2018

 

 

 

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

 

275,923

 

542,615

 

818,538

 

381,525

 

754,092

 

1,135,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

571,929,945

 

1,124,727,129

 

 

 

571,933,615

 

1,130,436,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share (in R$) — Basic

 

0.48

 

0.48

 

 

 

0.67

 

0.67

 

 

 

 

Diluted

 

 

 

For the three-month period ended on

 

 

 

June 30, 2019

 

June 30, 2018

 

Diluted numerator

 

 

 

 

 

Allocated net income available to Common and Preferred shareholders

 

 

 

 

 

Net income allocated to preferred shareholders

 

244,995

 

461,161

 

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

 

899

 

617

 

 

 

245,894

 

461,778

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

124,540

 

233,427

 

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

 

(899

)

(2,547

)

 

 

 

 

 

 

 

 

123,641

 

230,880

 

 

 

 

 

 

 

Diluted denominator

 

 

 

 

 

Weighted - average number of shares outstanding

 

 

 

 

 

Common Shares

 

571,929,945

 

571,936,368

 

Preferred Shares

 

 

 

 

 

Weighted-average number of preferred shares outstanding

 

1,125,097,160

 

1,129,921,679

 

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

 

12,337,579

 

13,994,846

 

Total

 

1,137,434,739

 

1,143,916,525

 

 

 

 

 

 

 

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

 

0.22

 

0.40

 

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

 

 

For the six-month period ended on

 

 

 

June 30, 2019

 

June 30, 2018

 

Diluted numerator

 

 

 

 

 

Allocated net income available to Common and Preferred shareholders

 

 

 

 

 

Net income allocated to preferred shareholders

 

542,615

 

754,092

 

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

 

2,086

 

2,143

 

 

 

544,701

 

756,235

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

275,923

 

381,525

 

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

 

(2,086

)

(3,947

)

 

 

 

 

 

 

 

 

273,837

 

377,578

 

 

 

 

 

 

 

Diluted denominator

 

 

 

 

 

Weighted - average number of shares outstanding

 

 

 

 

 

Common Shares

 

571,929,945

 

571,933,615

 

Preferred Shares

 

 

 

 

 

Weighted-average number of preferred shares outstanding

 

1,124,727,129

 

1,130,436,699

 

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

 

12,920,341

 

15,064,140

 

Total

 

1,137,647,470

 

1,145,500,839

 

 

 

 

 

 

 

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

 

0.48

 

0.66

 

 

NOTE 20 — LONG-TERM INCENTIVE PLANS

 

a)  Restricted Shares and Performance Shares Summary:

 

Balance as of January 01, 2018

 

18,975,084

 

Granted

 

2,411,345

 

Forfeited

 

(3,150,635

)

Exercised

 

(3,974,293

)

Balance on December 31, 2018

 

14,261,501

 

Granted

 

2,282,508

 

Forfeited/Canceled

 

(686,346

)

Exercised

 

(1,551,225

)

Quantity on June 30, 2019

 

14,306,438

 

 

The Company recognizes the cost of the long-term incentive plan through Restricted Shares and Performance Shares based on the fair value of the options granted on the grant date during the vesting period of each grant. The grace period for the year is 3 years for grants made as from 2017 and 5 years for grants made up to 2016. The costs with long-term incentive plans recognized in the income statement in the three-month period ended on June 30, 2019 was R$ 9,330 (R$ 11,784 on June 30, 2018) and the costs with long-term incentive plans recognized in the income statement in the six-month period ended on June 30, 2019 was R$ 19,714 (R$ 21,036 on June 30, 2018).

 

As of June 30, 2019 the Company has a total of 20,770,081 preferred shares in treasury and, according to note 17, these shares may be used for serving this plan.

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

b)             Stock Options Plan:

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

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

 

15,480

 

16.72

 

292,391

 

17.91

 

Options Exercised

 

 

 

(33,499

)

14.86

 

Options Forfeited

 

(15,480

)

16.72

 

(243,412

)

18.62

 

Available at the end of the period

 

 

 

15,480

 

16.72

 

 

NOTE 21 — 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, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Depreciation and amortization

 

(526,786

)

(456,545

)

(1,032,637

)

(910,061

)

Labor expenses

 

(1,293,290

)

(1,456,292

)

(2,576,586

)

(2,812,835

)

Raw material and consumption material

 

(6,489,030

)

(7,744,302

)

(12,894,785

)

(14,370,029

)

Freight

 

(569,546

)

(733,517

)

(1,134,138

)

(1,347,431

)

Other expenses/income

 

(311,677

)

(440,480

)

(602,069

)

(830,311

)

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

 

 

(47,824

)

 

(51,321

)

 

 

(9,190,329

)

(10,878,960

)

(18,240,215

)

(20,321,988

)

 

 

 

 

 

 

 

 

 

 

Classified as:

 

 

 

 

 

 

 

 

 

Cost of sales

 

(8,881,496

)

(10,390,656

)

(17,638,146

)

(19,440,356

)

Selling expenses

 

(120,131

)

(141,328

)

(242,768

)

(287,665

)

Impairment loss on trade receivables

 

(1,971

)

(16,237

)

(7,978

)

(20,335

)

General and administrative expenses

 

(231,833

)

(273,382

)

(470,501

)

(543,378

)

Other operating income

 

59,321

 

40,849

 

147,841

 

89,706

 

Other operating expenses

 

(14,219

)

(50,382

)

(28,663

)

(68,639

)

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

 

 

(47,824

)

 

(51,321

)

 

 

(9,190,329

)

(10,878,960

)

(18,240,215

)

(20,321,988

)

 

NOTE 22 — FINANCIAL INCOME

 

 

 

For the three-month periods ended

 

For the six-month periods ended

 

 

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Income from short-term investments

 

18,286

 

14,225

 

37,440

 

26,602

 

Interest income and other financial incomes

 

29,470

 

19,744

 

51,333

 

38,684

 

Financial income total

 

47,756

 

33,969

 

88,773

 

65,286

 

 

 

 

 

 

 

 

 

 

 

Interest on debts

 

(256,599

)

(296,403

)

(506,559

)

(570,244

)

Monetary variation and other financial expenses

 

(96,302

)

(90,861

)

(191,715

)

(183,051

)

Financial expenses total

 

(352,901

)

(387,264

)

(698,274

)

(753,295

)

 

 

 

 

 

 

 

 

 

 

Exchange variations, net

 

12,052

 

(388,210

)

(58,404

)

(395,273

)

Gains and Losses on derivatives, net

 

(7,173

)

27,842

 

(7,094

)

27,055

 

Financial result, net

 

(300,266

)

(713,663

)

(674,999

)

(1,056,227

)

 


 

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2019

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

(Unaudited)

 

NOTE 23 — SEGMENT REPORTING

 

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, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Net sales

 

4,017,910

 

3,797,717

 

3,812,330

 

5,411,484

 

840,480

 

1,107,974

 

1,844,474

 

2,133,363

 

(361,141

)

(415,183

)

10,154,053

 

12,035,355

 

Cost of sales

 

(3,425,943

)

(3,138,365

)

(3,441,459

)

(4,906,551

)

(719,338

)

(956,818

)

(1,670,111

)

(1,806,699

)

375,355

 

417,777

 

(8,881,496

)

(10,390,656

)

Gross profit

 

591,967

 

659,352

 

370,871

 

504,933

 

121,142

 

151,156

 

174,363

 

326,664

 

14,214

 

2,594

 

1,272,557

 

1,644,699

 

Selling, general and administrative expenses

 

(136,785

)

(131,676

)

(112,930

)

(175,437

)

(29,674

)

(38,875

)

(44,026

)

(42,697

)

(30,520

)

(42,262

)

(353,935

)

(430,947

)

Other operating income (expenses)

 

2,630

 

672

 

4,890

 

14,089

 

(108

)

(10,511

)

7,470

 

1,944

 

30,220

 

(15,727

)

45,102

 

(9,533

)

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

 

 

 

 

 

 

 

 

 

 

(47,824

)

 

(47,824

)

Equity in earnings of unconsolidated companies

 

(474

)

 

(60,008

)

(11,092

)

15,831

 

24,000

 

523

 

5,200

 

5,541

 

5,669

 

(38,587

)

23,777

 

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

 

457,338

 

528,348

 

202,823

 

332,493

 

107,191

 

125,770

 

138,330

 

291,111

 

19,455

 

(97,550

)

925,137

 

1,180,172

 

Finacial result, net

 

(124,358

)

(114,808

)

(23,780

)

(9,951

)

(33,048

)

(57,221

)

(24,285

)

(31,038

)

(94,795

)

(500,645

)

(300,266

)

(713,663

)

Income (Loss) before taxes

 

332,980

 

413,540

 

179,043

 

322,542

 

74,143

 

68,549

 

114,045

 

260,073

 

(75,340

)

(598,195

)

624,871

 

466,509

 

Income and social contribution taxes

 

(84,491

)

(104,480

)

(57,671

)

(61,006

)

(24,064

)

(17,383

)

(27,958

)

(60,217

)

(57,936

)

474,866

 

(252,120

)

231,780

 

Net income (Loss)

 

248,489

 

309,060

 

121,372

 

261,536

 

50,079

 

51,166

 

86,087

 

199,856

 

(133,276

)

(123,329

)

372,751

 

698,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales between segments

 

307,177

 

368,584

 

28,015

 

26,256

 

 

1,983

 

25,949

 

18,360

 

 

 

361,141

 

415,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation/amortization

 

258,520

 

214,479

 

140,385

 

123,002

 

30,804

 

26,724

 

97,077

 

92,340

 

 

 

526,786

 

456,545

 

 

 

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

Investments in associates and joint-ventures

 

11,421

 

3,250

 

577,845

 

301,271

 

738,944

 

701,233

 

216,900

 

213,899

 

150,261

 

148,149

 

1,695,371

 

1,367,802

 

Total assets

 

17,434,608

 

17,473,039

 

14,668,340

 

14,659,926

 

4,338,683

 

4,421,487

 

8,869,197

 

8,825,830

 

5,978,950

 

5,900,747

 

51,289,778

 

51,281,029

 

Total liabilities

 

6,991,081

 

8,072,380

 

4,635,162

 

4,935,210

 

910,520

 

1,053,007

 

1,729,612

 

1,736,085

 

10,454,959

 

9,545,776

 

24,721,334

 

25,342,458

 

 

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, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Net sales

 

7,866,724

 

7,408,888

 

7,654,350

 

9,839,460

 

1,579,601

 

2,074,802

 

3,684,397

 

3,864,949

 

(605,358

)

(763,944

)

20,179,714

 

22,424,155

 

Cost of sales

 

(6,746,505

)

(6,067,774

)

(6,840,981

)

(9,094,961

)

(1,348,621

)

(1,767,456

)

(3,318,734

)

(3,273,964

)

616,695

 

763,799

 

(17,638,146

)

(19,440,356

)

Gross profit

 

1,120,219

 

1,341,114

 

813,369

 

744,499

 

230,980

 

307,346

 

365,663

 

590,985

 

11,337

 

(145

)

2,541,568

 

2,983,799

 

Selling, general and administrative expenses

 

(281,935

)

(280,095

)

(224,527

)

(317,807

)

(57,746

)

(82,307

)

(90,910

)

(85,831

)

(66,129

)

(85,338

)

(721,247

)

(851,378

)

Other operating income (expenses)

 

38,581

 

524

 

21,908

 

16,432

 

10,900

 

(7,654

)

8,674

 

3,995

 

39,115

 

7,770

 

119,178

 

21,067

 

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

 

 

 

 

 

 

 

 

 

 

(51,321

)

 

(51,321

)

Equity in earnings of unconsolidated companies

 

(879

)

 

(74,601

)

(30,390

)

38,498

 

52,283

 

1,419

 

8,410

 

11,204

 

11,223

 

(24,359

)

41,526

 

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

 

875,986

 

1,061,543

 

536,149

 

412,734

 

222,632

 

269,668

 

284,846

 

517,559

 

(4,473

)

(117,811

)

1,915,140

 

2,143,693

 

Finacial result, net

 

(245,479

)

(212,908

)

(49,273

)

(21,930

)

(71,564

)

(114,231

)

(46,565

)

(56,055

)

(262,118

)

(651,103

)

(674,999

)

(1,056,227

)

Income (Loss) before taxes

 

630,507

 

848,635

 

486,876

 

390,804

 

151,068

 

155,437

 

238,281

 

461,504

 

(266,591

)

(768,914

)

1,240,141

 

1,087,466

 

Income and social contribution taxes

 

(161,288

)

(212,808

)

(145,366

)

(88,243

)

(40,421

)

(46,143

)

(57,965

)

(105,150

)

(9,724

)

511,578

 

(414,764

)

59,234

 

Net income (Loss)

 

469,219

 

635,827

 

341,510

 

302,561

 

110,647

 

109,294

 

180,316

 

356,354

 

(276,315

)

(257,336

)

825,377

 

1,146,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales between segments

 

512,817

 

689,718

 

33,122

 

41,205

 

 

3,554

 

59,419

 

29,467

 

 

 

605,358

 

763,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation/amortization

 

513,173

 

431,939

 

274,287

 

246,753

 

59,205

 

52,610

 

185,972

 

178,759

 

 

 

1,032,637

 

910,061

 

 

 

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

Investments in associates and joint-ventures

 

11,421

 

3,250

 

577,845

 

301,271

 

738,944

 

701,233

 

216,900

 

213,899

 

150,261

 

148,149

 

1,695,371

 

1,367,802

 

Total assets

 

17,434,608

 

17,473,039

 

14,668,340

 

14,659,926

 

4,338,683

 

4,421,487

 

8,869,197

 

8,825,830

 

5,978,950

 

5,900,747

 

51,289,778

 

51,281,029

 

Total liabilities

 

6,991,081

 

8,072,380

 

4,635,162

 

4,935,210

 

910,520

 

1,053,007

 

1,729,612

 

1,736,085

 

10,454,959

 

9,545,776

 

24,721,334

 

25,342,458

 

 

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, corporate expenses, gains and losses on assets held for sale and sales of interest in subsidiaries, 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)

 

Asia

 

Consolidated

 

 

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Net sales

 

4,437,225

 

4,132,707

 

997,704

 

1,401,551

 

4,719,124

 

6,298,437

 

 

202,660

 

10,154,053

 

12,035,355

 

 

 

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

Total assets

 

26,304,132

 

26,283,287

 

5,440,861

 

5,251,637

 

19,544,786

 

19,746,105

 

 

 

51,289,779

 

51,281,029

 

 


(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

 

Information by geographic area:

 

 

 

For the six-month periods ended

 

 

 

Brazil

 

Latin America (1)

 

North America (2)

 

Asia

 

Consolidated

 

 

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

 

Net sales

 

8,699,564

 

7,986,384

 

1,933,514

 

2,544,247

 

9,546,636

 

11,516,167

 

 

377,357

 

20,179,714

 

22,424,155

 

 

 

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

June 30, 2019

 

December 31, 2018

 

Total assets

 

26,304,132

 

26,283,287

 

5,440,861

 

5,251,637

 

19,544,786

 

19,746,105

 

 

 

51,289,779

 

51,281,029

 

 


(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

 

IFRS 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, 2019

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

(Unaudited)

 

NOTE 24 — 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 2018, 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: exceeded book value by R$ 1,474 million; b) Special Steel: exceeded book value by R$ 2,483 million; c) South America: exceeded book value by R$ 593 million; and d) Brazil: exceeded the book value by R$ 3,048 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: exceeded the book value by R$ 1,672 million; b) Special Steel: exceeded the book value by R$ 2,645 million; c) South America: exceeded the book value by R$ 640 million; and d) Brazil: exceeded the book value by R$ 3,318 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, 2019 is required.

 

The Company will maintain over 2019 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 challenging scenario, events that impact economic environment and business, 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 25 - SUBSEQUENT EVENTS

 

I) On July 2, 2019, the Board of Directors of Gerdau S.A. authorized the early redemption of all debentures of the following Company issues: (i) 3rd Issuance, “A” and “B” Series, dated June 11, 1982; (ii) 7th Issuance, dated July 19, 1982; (iii) 8th Issuance, dated November 16, 1982; (iv) 9th Issuance, dated June 10, 1983; and (v) 11th Issuance “A” and “B” Series, dated July 13, 1990. Payment to debenture holders will be made by crediting the current account registered with the Company (i) within 60 days. counted from the publication of the minutes of the Meeting in the newspapers used by the Company to disclose the notices related to the Debenture Issuances; or (ii) the first business day following the communication of the debenture holder delivered to the Company requesting the acquisition of its debentures, whichever occurs first. In both cases, the amounts to be paid to debenture holders will be updated until their settlement date in accordance with the corresponding Debenture Issuances.

 

II) On August 5, 2019, 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 16, 2019, in the amount of R$ 118.8 million (R$ 0.07 per common and preferred share), with payment on August 28, 2019, which was submitted and approved by the Board of Directors on August 6, 2019.

 

********************************