Gerdau S.A. — 2020 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are consolidated, prepared under IFRS, and presented in Brazilian reais (R$); amounts below are generally in R$ billions unless stated otherwise.
Business context and financial performance
Gerdau produces and sells steel and iron ore across the Americas, organized into Brazil, North America, South America and Special Steel segments. COVID-19 disrupted production and demand early in 2020, followed by recovery in the second half. Consolidated steel shipments were 11.46 million tonnes, down 5.2% from 12.09 million tonnes; crude steel production was 12.19 million tonnes, down 2.1%.
- Revenue: Net sales were R$43.815 billion, up 10.5% from R$39.644 billion. Management attributed much of the increase to the weaker real, which increased reported results from foreign operations; Brazil and North America were the largest segments.
- Profit and margins: Gross profit was R$5.931 billion versus R$4.203 billion; the consolidated gross margin was approximately 13.5% versus 10.6% in 2019, calculated from reported gross profit and sales. Operating income before financial income, expenses and taxes was R$5.194 billion, up 63%. Net income was R$2.388 billion, up 96%; parent-attributable income was R$2.366 billion. Basic EPS was R$1.39, compared with R$0.71.
- Notable operating items: Other operating income included R$1.764 billion, primarily from tax credits following final court decisions. Other operating expenses were R$646 million, mainly reflecting additions to tax and labor provisions. The company also recorded R$412 million of impairment on certain long-lived assets in North America and Special Steel; no goodwill impairment was recorded.
- Cash flow and investment: Net cash from operating activities was R$6.408 billion, compared with R$1.643 billion in 2019. Purchases of property, plant and equipment were R$1.651 billion. Investing activities used R$2.229 billion, including the Silat acquisition. Financing activities used R$2.494 billion; cash and cash equivalents increased by R$1.976 billion to R$4.617 billion.
- Liquidity and debt: Short-term investments were R$3.041 billion, giving cash and short-term investments of R$7.658 billion. Current assets were R$23.409 billion and current liabilities R$11.482 billion, with net working capital of R$11.927 billion. Loans and financing plus debentures totaled approximately R$17.515 billion; reported net debt was R$9.857 billion. Gross debt was 92% long-term, with a weighted average maturity of 7.7 years. The company reported approximately R$4 billion of standby credit facilities.
- Margins and costs: Raw materials represented 44.6% of production costs and energy and reducing agents 14.3%. Management cited 2020 increases in scrap and iron ore costs; the filing also identifies exchange-rate movements as a significant influence on reported revenue and costs.
Material changes versus 2019
- Sales rose 10.5%, while shipments declined 5.2%; the weaker real materially increased the translated value of overseas sales.
- Gross profit increased 41% and net income nearly doubled, supported by higher sales and substantially greater other operating income, including tax-related gains. These gains are not necessarily recurring.
- Operating cash flow increased substantially. Management cited earnings and proceeds from maturities and sales of short-term investments as key factors; working-capital movements also changed year over year.
- Net debt declined to R$9.857 billion from R$13.500 billion, despite higher reported gross debt than 2019. The Silat acquisition added 600,000 tonnes of annual long-steel rolling capacity for R$476 million.
- Brazilian exports fell 50% to 825,000 tonnes; export revenue was R$2.028 billion versus R$3.210 billion. Special Steel shipments and revenue declined, reflecting the pandemic’s impact on automotive customers.
Outlook, risks and contingencies
- Investment outlook: Management projected 2021 capital expenditure of R$3.5 billion and revised the 2019–2021 total estimate to R$6.9 billion. Planned investment was conditional on market recovery expectations and free-cash-flow generation.
- COVID-19 and demand: Management described a gradual recovery in construction and automotive activity after severe first-half disruption, but said the pandemic’s future effects on demand, operations, cash flows and financial condition could not be reasonably estimated.
- Market and input risks: Steel is cyclical and exposed to global capacity, competition, trade restrictions, steel prices, scrap and iron ore availability and cost, energy supply, and Brazil’s economic and political conditions. The real’s depreciation affects foreign-currency debt and translated results.
- Debt and liquidity risks: About 77% of gross debt was foreign-currency denominated at year-end, mainly U.S. dollars. Management’s long-term policy targets net debt/EBITDA of 1.0–1.5 times, average debt maturity above six years and gross debt of no more than R$12 billion; actual gross debt exceeded that stated target. The filing does not provide a clear 2020 EBITDA value in the supplied text, so the leverage ratio cannot be verified here.
- Legal and environmental matters: Provisions for tax, labor and civil matters totaled R$1.173 billion. Separately, substantial tax cases were classified as possible losses and not provided for, including approximately R$7.984 billion of goodwill-amortization disputes, R$1.257 billion of withholding-tax claims and other significant tax claims. Environmental liabilities were R$297 million. Management said it could not predict the outcome of Brazilian investigations concerning CARF matters and political contributions; the SEC staff had closed its inquiry.
- Other risks: The company disclosed that it has no proven or probable mineral reserves under SEC definitions. It also highlighted operational interruptions, climate-related regulation and physical risks, cybersecurity, customer credit, and impairment and deferred-tax recoverability as areas of uncertainty.
- Dividends: The 2020 annual per-share amount shown was R$0.42, including interest on equity; the fourth-quarter R$0.30 interest-on-equity distribution was approved in February 2021. Actual payments and timing should be distinguished from amounts declared or recognized.
Most important facts for investors to verify
- Reconcile reported earnings with the R$1.764 billion of other operating income, particularly tax-credit gains, and assess their repeatability.
- Verify the gross-debt, net-debt and liquidity calculations against the audited statements and debt notes; compare gross debt with management’s R$12 billion long-term policy limit.
- Review the possible tax contingencies, provision movements, judicial deposits and subsequent developments in major cases.
- Assess the assumptions supporting goodwill recoverability, deferred tax assets and the R$412 million impairment charge, including the sensitivity to steel-market recovery.
- Track 2021 capital expenditure against the R$3.5 billion projection, and compare subsequent operating cash flow and demand recovery with management’s stated conditions.
- Confirm dividend amounts, declaration dates and cash payment dates, especially distributions approved after year-end.