Gerdau S.A. — FY 2019 Form 20-F
Reporting period: Year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. Consolidated financial statements are prepared under IFRS and presented in Brazilian reais (R$). Amounts below are rounded to R$ billions unless stated otherwise.
Business context and reporting period
Gerdau produces and sells steel products across the Americas, with iron ore operations in Brazil. Its four reporting segments are Brazil, North America, South America and Special Steel. At year-end, installed annual capacity was approximately 20.0 million tonnes of crude steel and 16.6 million tonnes of rolled products.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | R$39.64bn | R$46.16bn | -14.1% |
| Gross profit / margin | R$4.20bn / 10.6% | R$6.15bn / 13.3% | Profit -31.6%; margin -2.7 points |
| Operating income before financial result and taxes | R$3.18bn / 8.0% of sales | R$4.05bn / 8.8% | -21.3% |
| Net income | R$1.22bn | R$2.33bn | -47.7% |
| Net income attributable to parent shareholders | R$1.20bn | R$2.30bn | -47.7% |
| Operating cash flow, after interest and taxes paid | R$1.64bn | R$2.00bn | -17.8% |
| Capital expenditures | R$1.75bn | R$1.19bn | Increase |
Cash and cash equivalents were R$2.64bn and short-term investments R$3.65bn at year-end, or R$6.29bn combined. Current assets were R$18.24bn versus current liabilities of R$7.42bn; net working capital was R$10.81bn. Total assets were R$54.00bn and equity, including non-controlling interests, was R$27.17bn.
Debt figures require reconciliation: the balance-sheet loan and financing balance was R$13.14bn and debentures were R$2.91bn, totaling approximately R$16.05bn. Elsewhere, the selected-data debt table reports total debt of R$19.79bn and net debt of R$13.50bn, while the liquidity discussion cites R$6.3bn of cash and short-term investments. The filing text does not clearly reconcile these differing presentations. It reports a 7.4-year average gross-debt maturity and a 5.6% weighted-average nominal gross-debt cost. Approximately 80% of gross debt was U.S.-dollar denominated.
Consolidated shipments declined to 12.09 million tonnes from 14.56 million; crude steel production fell to 12.45 million tonnes from 15.34 million. Brazilian shipments rose modestly, while divestitures drove much of the declines in North America, South America and Special Steel.
Material changes versus the prior comparable period
- Revenue and gross profit fell, with gross margin contracting from 13.3% to 10.6%. Management attributed the revenue decline primarily to divestitures, especially U.S. rebar and wire-rod assets and the Chilean operation.
- Brazil segment sales increased 2.4%, but gross profit decreased 34.9%; management cited higher costs associated with Blast Furnace 1 refurbishment, mill maintenance and iron ore and coal prices.
- Special Steel gross profit fell 51.1%, with utilization below 50% and lower U.S. steel prices contributing to margin pressure.
- Operating cash flow declined, although working-capital movements were a net cash source in 2019. Cash used in investing was R$1.90bn, compared with R$2.38bn generated in 2018, when asset-sale proceeds were substantial.
- Gerdau prepaid all BNDES loans in 2019, issued additional debentures and arranged an unsecured US$800m working-capital facility; US$60m was drawn at year-end.
Outlook, risks, contingencies and unusual items
- Outlook and COVID-19: The filing, signed March 31, 2020, reports shutdowns in Peru and Argentina and in U.S. Special Steel operations, plus local restrictions in Brazil. Shipments were being maintained as permitted, but management said the future financial impact could not be reasonably estimated. The 2020 global capex plan was being carefully postponed.
- Investment plans: Management disclosed a R$7bn 2019–2021 capex plan, including maintenance and technology investments. Technology-related spending was to remain flexible and contingent on market conditions and free cash flow. The stated long-term financial policy targets net debt/EBITDA of 1.0–1.5x, debt maturity above six years and maximum gross debt of R$12bn.
- Liquidity and resilience: Management cited R$6.3bn cash and short-term investments, approximately R$4bn in standby credit facilities and the 7.4-year debt maturity profile as supporting liquidity during the COVID-19 disruption.
- Legal matters: Recorded provisions for tax, civil and labor claims totaled R$809m. Significant possible, unprovided tax contingencies include R$7.78bn related to goodwill amortization, R$1.24bn related to taxation of foreign profits, and other tax matters. Outcomes and timing remain uncertain. Two ICMS/PIS/COFINS cases became final in 2019, allowing recovery of amounts and withdrawal of judicial deposits.
- Other notable matters: The company agreed to acquire 96.35% of SILAT for a stated transaction value of US$110.8m, subject to CADE approval and other closing conditions. Goodwill was R$9.47bn; annual impairment testing found no 2019 impairment, but management warned more severe market deterioration could lead to future impairment.
- Audit and controls: KPMG issued an unqualified opinion on the IFRS financial statements and on internal control over financial reporting. Critical audit matters included goodwill valuation, deferred tax asset recoverability, tax risks and adoption of IFRS 16. The company adopted IFRS 16 in 2019, recognizing R$777m of right-of-use assets and R$804m of lease liabilities at year-end.
Most important facts for investors to verify
- Reconcile reported debt and net-debt figures across the selected financial data, debt discussion and audited balance sheet; confirm the definitions and inclusion of debentures, leases and other obligations.
- Assess whether the post-divestiture business can restore margins and utilization, particularly in Brazil and Special Steel, and distinguish operating trends from effects of asset sales.
- Track COVID-19 shutdowns, customer demand, shipments, capex deferrals and use of standby facilities; the filing states that impacts were not quantifiable.
- Review the status and potential exposure of major unprovided tax contingencies, the ICMS-related recoveries and the CARF-related investigations and proceedings.
- Test the assumptions underpinning goodwill and deferred-tax-asset recoverability, including segment forecasts, discount rates and sensitivity to weaker demand.
- Confirm SILAT transaction closing status and progress against the R$7bn three-year investment plan and stated leverage policy.