GERDAU S.A. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under IFRS as issued by the IASB; the auditor reported fairly presented statements and effective internal control over financial reporting.
Business context and reporting period
Gerdau produces and sells steel products across the Americas, Europe and Asia, with iron ore operations in Brazil. Its four reporting divisions are Brazil, North America, South America and Special Steel. The company reported consolidated installed capacity of approximately 26.1 million tonnes of crude steel and 21.1 million tonnes of rolled products.
Key financial and operating metrics
Amounts below are R$ million unless otherwise stated.
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Net sales | 36,918 | 37,652 | Down 1.9% |
| Gross profit / margin | 3,605 / 9.8% | 3,464 / 9.2% | Profit up 4.1%; margin improved |
| Operating income (loss), before financial result and taxes | 1,100 | (1,636) | Turned positive |
| Net income (loss) | (339) | (2,886) | Loss narrowed substantially |
| Net loss attributable to parent owners | (359) | (2,891) | Basic and diluted loss per share: R$0.21 |
| Net cash from operating activities | 2,076 | 3,516 | Down 41.0% |
| Capital expenditures | 873 | 1,324 | Down 34.0% |
| Cash and short-term investments | 3,377 | 6,088 | Cash alone was 2,555 |
| Total debt | 16,510 | 20,583 | Debt reduction, including bond repayment |
| Net debt | 13,133 | 14,495 | Down 7.5%; non-IFRS measure |
| Current assets / current liabilities | 17,982 / 7,714 | 17,797 / 8,622 | Current ratio: 2.3 at year-end |
Consolidated shipments were 14.938 million tonnes, down from 15.558 million tonnes in 2016. Crude steel production rose to 16.120 million tonnes from 15.677 million tonnes. The Brazil and Special Steel divisions reported net income of R$302 million and R$475 million, respectively; North America recorded a R$956 million loss, and South America earned R$154 million.
Material changes versus 2016
- Revenue declined modestly, while gross profit and gross margin improved. Selling, general and administrative expenses fell 26% to R$1,655 million, reflecting cost controls and lower shipments.
- Operating results recovered from a loss to positive income, in part because impairment charges declined to R$1,115 million from R$2,918 million. The 2017 charge included R$849 million of North America goodwill impairment and R$265 million of property, plant and equipment impairment.
- Net loss narrowed, but the net financial result worsened to a loss of R$1,143 million from R$945 million, reflecting foreign-exchange effects despite lower financial expenses. Brazilian real depreciation was reported as 1.5% in management’s discussion; another filing table gives 0.5%, so the stated rate is inconsistent.
- Operating cash flow fell as working capital absorbed cash, particularly through a R$1,269 million inventory increase. Financing activities used R$4,056 million, mainly reflecting debt repayments.
- Gerdau sold 50% of its Colombian Diaco operation and accounted for it as a joint venture. The company also agreed to sell certain U.S. rebar mills and related businesses for US$600 million; the assets were classified as held for sale, with a R$649 million expense recorded on measurement. The transaction remained subject to approvals and closing conditions at year-end.
- A Brazilian Supreme Court ruling prompted reversal of a provision concerning ICMS in the PIS/COFINS tax base, contributing to R$930 million of operating income from contingent-liability reversals and R$370 million of financial income from monetary-update reversals.
Outlook, risks and unusual items
Management described the steel market as challenging and volatile, while expecting global finished-steel demand to grow 1.6% in 2018. It cited expected Brazilian steel-demand growth of 4% and U.S. long-steel consumption growth of 3.7%. Planned 2018 capital expenditures were approximately R$1.2 billion. Management expected U.S. steel import tariffs announced in March 2018 to benefit North American operations; that expectation is subject to market and policy developments.
- Tax and regulatory contingencies: Possible, unprovided tax claims include R$6.218 billion concerning goodwill deductibility and R$1.489 billion concerning foreign profits, as well as other tax disputes. The company’s legal advisers assessed the relevant loss likelihood as possible, not probable. A R$1.692 billion judicial deposit relating to the ICMS/PIS/COFINS dispute remained awaiting resolution for return.
- Operation Zelotes: A Brazilian investigation and the company’s internal investigation remained ongoing. Gerdau said their duration and outcomes could not be predicted and that information was insufficient to determine whether a provision was required. The related U.S. securities class action was settled for US$15 million in 2017, substantially covered by insurance, without admission of liability.
- Market and operating exposure: Steel demand and prices are cyclical; imports, global excess capacity, competition, scrap and other raw-material costs, energy prices, foreign exchange and interest rates may affect margins, cash flows and debt service. Production interruptions, environmental requirements and mining risks are also identified.
- Debt and currency: About 81% of gross debt was denominated in foreign currency, mainly U.S. dollars. The company disclosed net-debt-to-EBITDA of 3.0 under BNDES covenant calculations, above its stated long-term objective of no more than 2.5 times. BNDES tests provide a grace period and renegotiation process rather than automatic default if a test is missed.
- Other unusual items: The company had no proven or probable mineral reserves under SEC definitions. It reported two tailings dams in Minas Gerais as low risk and within monitoring limits. Environmental liabilities were R$85 million at year-end.
Important facts for investors to verify
- Reconcile the filing’s inconsistent descriptions of 2017 Brazilian real depreciation and the reported Brazil shipment comparison.
- Track completion, proceeds and final adjustments for the U.S. mill sale and other announced divestitures, including the Chilean operation and hydroelectric plants.
- Monitor North America goodwill recoverability: management reported that a 0.5 percentage-point increase in the discount rate would leave recoverable value R$506 million below book value.
- Follow the final rulings on the goodwill-deductibility and foreign-profit tax cases, Operation Zelotes, and the return or continued restriction of judicial deposits.
- Assess debt reduction, refinancing needs, liquidity and cash conversion against the stated 2018 investment plan and the company’s long-term leverage objectives.