GERDAU S.A.

Transcrição

GERDAU S.A.

GERDAU S.A.
Condensed consolidated
interim financial information
at September 30, 2005 and 2004
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Gerdau S.A.
We have reviewed the accompanying condensed consolidated balance sheets of Gerdau S.A. and
its subsidiaries (the “Company”) as of September 30, 2005 and 2004, and the related condensed
consolidated statements of income, of comprehensive income, of cash flows and of changes in
shareholders’ equity for each of the three-month and nine-month periods ended September 30,
2005 and 2004. This interim financial information is the responsibility of the Company’s
management.
The review of the interim financial information of Gallatin Steel Company, a 50% owned joint
venture, which represented an equity investment of 1.50% of total consolidated assets as of
September 30, 2005 and equity in income amounting to 2.64% and 4.60% of income before taxes
on income and minority interests for the three-month and nine-month period ended September 30,
2005, respectively, has been carried out by other accountants.
We conducted our review in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review and the review performed by the other accountants, we are not aware of any
material modifications that should be made to the accompanying condensed consolidated interim
financial information for it to be in conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the
related consolidated statements of income, of comprehensive income and of cash flows for the year
then ended (not presented herein), and in our report dated April 28, 2005 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is
fairly stated in all material respects in relation to the consolidated balance sheet from which it has
been derived.
PricewaterhouseCoopers
Auditores Independentes
Porto Alegre, Brazil
December 12, 2005
F-1
GERDAU S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars, except number of shares)
ASSETS
Note
Current assets
Cash and cash equivalents
Restricted cash
Short-term investments
Trade accounts receivable, net
Inventories
Unrealized gains on derivatives
Deferred income taxes
Tax credits
Prepaid expenses
Other
Total current assets
3
9
Non-current assets
Property, plant and equipment, net
Judicial deposits
Unrealized gains on derivatives
Equity investments
Investments at cost
Goodwill
Prepaid pension cost
Advance payment for acquisition of investment in Colombia
Other
Total assets
F-2
4
6
9
September 30, (Unaudited)
2005
2004
December
31, 2004
395,972
14,066
1,670,040
920,074
1,686,197
23
24,072
108,906
40,211
86,749
4,946,310
255,636
4,277
412,201
785,746
1,111,002
104,099
48,382
24,459
64,022
2,809,824
248,954
6,063
404,512
835,484
1,594,118
82,829
75,908
22,218
52,941
3,323,027
3,525,162
152,467
61,160
1,294
178,488
13,631
155,623
68,788
19,295
134,550
9,256,768
2,497,101
181,976
35,112
197,169
8,045
135,103
44,192
72,860
5,981,382
2,790,201
153,430
42,554
207,767
6,640
141,463
53,276
68,500
65,391
6,852,249
GERDAU S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars, except number of shares)
LIABILITIES
Note
Current liabilities
Short-term debt
Current portion of long-term debt
Trade accounts payable
Income taxes payable
Unrealized losses on derivatives
Payroll and related liabilities
Dividends and interest on equity payable
Taxes payable, other than income taxes
Accrued acqusition costs
Other
Total current liabilities
Non-current liabilities
Long-term debt, less current portion
Debentures
Accrued pension and other post-retirement benefits obligation
Provision for contingencies
Unrealized losses on derivatives
Other
Total non-current liabilities
5
5
9
5
5
6
9
Total liabilities
Commitments and contingencies
September 30, (Unaudited)
2005
2004
December
31, 2004
153,442
389,430
641,252
48,844
10,344
44,801
106,575
3,447
87,941
123,514
1,609,590
355,214
271,232
535,355
133,967
12,658
6,052
67,297
45,457
70,922
93,177
1,591,331
412,910
260,294
627,897
80,445
12,470
14,496
88,969
3,609
56,699
51,790
102,726
1,712,305
2,199,638
447,803
97,722
126,657
111,868
1,772
73,899
3,059,359
1,224,815
183,827
112,379
105,818
77,003
9,024
82,403
1,795,269
1,280,516
344,743
58,654
119,925
87,718
6,323
77,509
1,975,388
4,668,949
3,386,600
3,687,693
934,036
382,338
641,971
1,456,479
1,016,846
1,016,846
755,903
134,141
522,358
3,448
522,358
3,743
(21,951)
138,698
1,466,639
(15,256)
64,517
1,334,307
(15,256)
122,813
1,509,847
(260,785)
(15,341)
3,653,783
(702,257)
(11,519)
2,212,444
(622,425)
(15,341)
2,522,585
9,256,768
5,981,382
6,852,249
6
Minority interest
7
SHAREHOLDERS' EQUITY
Preferred shares - no par value - 800,000,000 authorized shares and
290,657,361 shares issued at September 30, 2005 and 2004 and at December 31, 2004
after giving, at September 30, 2004 and December 31, 2004, retroactive effect to the
stock bonus approved on March 31, 2005
Common shares - no par value - 400,000,000 authorized shares and
154,404,672 shares issued at September 30, 2005 and 2004 and at December 31, 2004
after giving, at September 30, 2004 and December 31, 2004, retroactive effect to the
stock bonus approved on March 31, 2005
Additional paid-in capital
Treasury stock - 3,045,695 preferred shares at September 30, 2005 and 2,359,800 preferred
shares at September 30, 2004 and December 31, 2004, respectively, after giving, at
September 30, 2004 and December 31, 2004, retroactive effect to the stock bonus on
March 31, 2005
Legal reserve
Retained earnings
Cumulative other comprehensive loss
- Foreign currency translation adjustment
- Additional minimum pension liability
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of this condensed consolidated interim financial information.
F-3
GERDAU S.A.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF INCOME
(in thousands of U.S. Dollars, except number of shares and per share amounts)
Note
Sales
Less: Federal and state excise taxes
Less: Discounts
Three-month period ended
September 30, (unaudited)
2005
2004
Nine-month period ended
2005
2004
2,493,558
(268,970)
(31,273)
2,088,128
(194,558)
(24,249)
7,417,461
(733,478)
(82,099)
5,550,097
(511,971)
(61,160)
2,193,315
(1,610,138)
1,869,321
(1,236,877)
6,601,884
(4,841,657)
4,976,966
(3,424,675)
583,177
(48,705)
(133,968)
(10,012)
632,444
(35,553)
(92,717)
32,783
1,760,227
(141,547)
(325,342)
13,453
1,552,291
(105,989)
(242,009)
32,219
Operating income
Financial expenses
Financial income
Foreign exchange gains and losses, net
Gains and losses on derivatives, net
Equity in earnings of unconsolidated companies, net
390,492
(51,927)
66,181
76,237
(2,597)
15,582
536,957
(50,057)
30,944
89,367
(37,590)
55,674
1,306,791
(157,846)
111,118
171,502
(23,597)
73,778
1,236,512
(115,345)
50,398
(13,836)
143
103,142
Income before taxes on income and minority interest
493,968
625,295
1,481,746
1,261,014
(74,345)
(45,478)
(119,823)
(108,155)
7,874
(100,281)
(277,653)
(133,700)
(411,353)
(217,488)
(50,678)
(268,166)
Income before minority interest
374,145
525,014
1,070,393
992,848
Minority interest
(50,872)
(63,327)
(145,495)
(123,835)
Net income
323,273
461,687
924,898
869,013
0.73
0.73
1.04
1.04
2.09
2.09
1.96
1.96
0.72
0.72
1.04
1.04
2.08
2.08
1.96
1.96
Number of weighted-average common shares outstanding after giving
retroactive effect to stock bonus approved on March 31, 2005 - Basic
and diluted
154,404,672
154,404,672
154,404,672
154,404,672
Number of weighted-average preferred shares outstanding after giving
retroactive effect to stock bonus approved on on March 31, 20005
– Basic
287,729,012
288,297,561
288,189,825
288,481,431
Number of weighted-average preferred shares outstanding after giving
retroactive effect to stock bonus approved on March 31, 2005
– Diluted
291,771,181
289,224,275
289,649,333
289,412,033
Net sales
Cost of sales
Gross profit
Sales and marketing expenses
General and administrative expenses
Other operating income (expenses), net
Provision for taxes on income
Current
Deferred
Per share data (in US$)
Basic earnings per share
Preferred
Common
Diluted earnings per share
Preferred
Common
11
8
F-4
GERDAU S.A.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME
(in thousands of U.S. Dollars)
2005
2004
2005
2004
Net income as reported in the consolidated statement of income
Foreign currency translation adjustments
323,273
191,441
461,687
164,954
924,898
361,640
869,013
88,474
Comprehensive income for the period
514,714
626,641
1,286,538
957,487
F-5
GERDAU S.A.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in thousands of U.S. Dollars, except and per share data)
Note
Preferred
shares
Additional
paid-in
capital
Common
shares
Total
63,834
-
-
34
-
(9,336)
-
683
-
1,161,527
869,013
(556,603)
(717)
-
-
(138,913)
-
-
143
-
-
-
-
143
Balances as of September 30, 2004
1,016,846
522,358
3,448
(15,256)
64,517
1,334,307
(713,776)
2,212,444
Balances as of January 1, 2005
Net income
Capitalization of reserves
Appropriation of reserves
Purchase of treasury preferred shares
Gain on change of interest
Stock options exercised during the period
Foreign currency translation adjustment
Dividends - $0.63 per Common share and per Preferred share (*)
Stock option plan expense recognized during the period
1,016,846
439,633
-
522,358
233,545
-
3,743
444
129,950
(163)
167
(15,256)
(7,093)
398
-
122,813
15,885
-
1,509,847
924,898
(673,178)
(16,329)
(278,599)
-
(637,766)
361,640
-
2,522,585
924,898
(7,093)
129,950
235
361,640
(278,599)
167
1,456,479
755,903
134,141
(21,951)
138,698
1,466,639
(276,126)
3,653,783
Balances as of September 30, 2005
7.1
7.2
-
Retained
earnings
(5,920)
-
7.2
329,257
193,101
Legal
reserve
3,271
-
Balances as of January 1, 2004
Net income
Capitalization of reserves
Appropriation of reserves
Purchase of treasury preferred shares
Foreign currency translation adjustment
Dividends (interest on equity) - $0.31 per Common share
and per Preferred share
Stock option plan expense recognized during the period
653,344
363,502
Treasury
stock
Cumulative
other
comprehensive
loss
-
-
-
-
(802,250)
88,474
-
1,403,063
869,013
(9,336)
88,474
(138,913)
(*) After giving retroactive effect to the stock bonus approved on March 31, 2005 as described in Note 7.1. Preferred treasury stock for the nine-month period ended September 30,
2005 and 2004 are not considering outstanding.
F-6
GERDAU S.A.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
2005
2004
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization
Equity in earnings on unconsolidated companies
Foreign exchange loss (gain)
Losses (gains) on derivative instruments
Minority interest
Loss on disposal of property, plant and equipment
Provision (reversal) for doubtful accounts
Provision for contingencies
Distributions from joint ventures
Other
Changes in assets and liabilities:
Increase in accounts receivable
Decrease (increase) in inventories
Increase (decrease) in accounts payable and accrued liabilities
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Purchases of short-term investments
Proceeds from maturities and sales of short-term investments
Net cash provided by (used in) operating activities
Cash flows from investing activities
Additions to property, plant and equipment
Payment of North Star
Payment of installments for acquisition of Margusa
Payment for acquisition of Potter Form & Tie Co
Payment for Distribuidora Matco S.A.
Payment for acquisition of Gerdau Sipar Inversiones S.A. and Diaco S.A.
Cash balance of acquired companies
Purchases of short-term investments
Others
Net cash used in investing activities
323,273
461,687
924,898
869,013
61,413
(15,582)
(76,237)
2,597
50,872
45,478
2,132
248
2,630
30,425
-
42,561
(55,674)
(89,367)
37,590
63,327
(7,874)
95
(32)
1,011
31,120
-
207,301
(73,778)
(171,502)
23,597
145,495
133,700
2,470
563
7,188
90,828
-
174,963
(103,142)
13,836
(143)
123,835
50,678
3,172
2,187
19,373
14,245
(33,591)
(23,875)
(52,024)
(151,854)
134,278
(937,060)
146,742
(490,135)
(36,754)
(167,277)
76,575
52,020
50,958
(88,549)
25,088
396,505
(31,970)
(17,742)
(43,141)
(84,900)
(28,443)
(1,316,635)
391,538
159,467
(288,021)
(304,496)
165,620
34,732
132,592
(383,548)
265,195
790,091
(178,321)
-
(97,753)
(1,018)
(3,846)
(496,808)
(49,654)
-
(248,837)
(13,472)
(11,128)
(3,846)
(23,450)
8,609
(23,115)
(216,277)
F-7
2005
2004
(102,617)
(23,450)
8,609
(76,115)
(637,418)
270
(10,147)
(287,160)
GERDAU S.A.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
Three-month period
ended September 30,
2005
2004
Cash flows from financing activities
Cash dividends and interest on equity paid
Dividends paid to minority shareholdes of Gedau Ameristeel
Purchase of treasury shares
Increase in restricted cash
Debt issuance, short term
Debt issuance, long term
Repayment of debt, short term
Repayment of debt, long term
Proceeds from issuance of common stock by Gerdau Participações
Net related party debt loans and repayments
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash of Dona Francisca Energética S.A. as of January 1, 2004
Cash and cash equivalents at end of period
(98,614)
(2,060)
(2,504)
(3,454)
19,345
799,724
(14,619)
(29,124)
(3,862)
664,832
(87,771)
0
(947)
68,634
328,671
(326,330)
(176,457)
(181,011)
5,196
(189,004)
(300,588)
(20,442)
(7,093)
(6,748)
506,582
1,004,329
(583,719)
(136,586)
221,613
(4,059)
673,289
19,560
(4,301)
(48,320)
1,771
(22,020)
417,992
100,583
155,053
255,636
147,018
248,954
151,826
92,504
11,306
255,636
395,972
Non-cash transactions
Release of judicial deposits to settlement tax contingencies
Funds advanced to acquisiton of Diaco S.A. and used to settle this transaction
on September 30, 2005
2005
2004
395,972
118,587
49,205
(9,336)
(2,039)
250,482
626,769
(568,897)
(475,532)
6,688
(352,876)
118,587
49,205
F-8
GERDAU S.A.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited)
(in thousands of U.S. Dollars, unless otherwise stated)
1
Operations
Gerdau S.A. is a sociedade anônima incorporated as a limited liability company under the laws of the
Federative Republic of Brazil. The principal business of Gerdau S.A. (“Gerdau”) in Brazil and of its
subsidiaries in Canada, Chile, the United States, Uruguay, and as from this quarter also in Colombia and
Argentina (collectively the “Company”) comprise the production of crude steel and related long rolled products,
drawn products and long specialty products. The Company produces steel based on the mini-mill concept,
whereby steel is produced in electric arc furnaces from scrap and pig iron acquired mainly in the region where
each mill operates. Gerdau also operates plants which produce steel from iron ore in blast furnaces and through
the direct reduction process.
The Company manufactures steel products for use by civil construction, manufacturing, agribusiness as well as
specialty steel products. The markets where the Company operates are located in Brazil, the United States,
Canada and Chile and, to a lesser extent, in Colombia, Argentina and Uruguay.
2
Basis of presentation
2.1
Accounting practices
The accompanying condensed consolidated financial information has been prepared in accordance with
generally accepted accounting principles in the United States (“U.S. GAAP”), which differ in certain aspects
from the accounting practices adopted in Brazil (“Brazilian GAAP”) applied by the Company in the preparation
of its statutory financial statements and for other legal and regulatory purposes. The consolidated financial
statements for statutory purposes are prepared in Brazilian reais.
The condensed consolidated financial information for the three-month and nine-month periods ended September
30, 2005 and 2004 is unaudited. However, in the opinion of management, this financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows for the interim periods presented. The
results for the nine-month period ended September 30, 2005 are not necessarily indicative of the results to be
expected for the entire year.
This condensed financial information has been prepared on substantially the same basis as the consolidated
financial statements as of and for the year ended December 31, 2004 and should be read in conjunction
therewith.
With the implementation of Interpretation 46 (FIN 46) of the Financial Accounting Standards Board (“FASB”)
the Company concluded that Dona Francisca Energética S.A. (“Dona Francisca”) was a variable interest entity
and the Company was the primary beneficiary and, effective January 1, 2004, Dona Francisca was consolidated.
Subsequently, the Company re-evaluated the application of FIN 46 and determined that Dona Francisca is not a
VIE. Therefore, Dona Francisca is not consolidated as of and for the three-month and nine-month periods ended
September 30, 2005. Financial information as of and for the three-month and nine-month periods September 30,
2004 has not been modified considering the immateriality of Dona Francisca in relation to the financial
position, results of operations and cash flows of the Company on a consolidated basis.
F-9
GERDAU S.A.
2.2
Recently issued accounting standards
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB
Opinion no. 29, which eliminates the exception from fair value measurements for nonmonetary exchanges of
similar productive assets and replaces it with an exception for exchanges that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS no. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier adoption permitted. The
company does not believe that the adoption of SFAS no. 153 will have a material impact on the company's
consolidated financial position or results of operations.
On December 16, 2004, the FASB issued its Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (Statement 123R), which addresses the accounting for employee stock options and
eliminates the alternative to use Option 25’s intrinsic value method of accounting that was provided in
Statement 123 as originally issued. This statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which an employee is required to provide service in
exchange for the award (vested period). The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted to the unique characteristics of those
instruments. The implementation date of Statement 123R was originally determined to be the beginning of the
first interim or annual reporting period that begins after June 15, 2005 and applies to all awards granted after the
required effective date. For periods before the required effective date, the companies may elect to apply a
modified version of retrospective application under which financial statements for prior periods are adjusted on
a basis consistent under which pro forma disclosures required for those periods by Statement 123. On April 14,
2005 the United States Securities and Exchange Commission (“SEC”) amended the effective date to the first
interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005.
Had the provisions of Statement 123R been applied for the six-month period ended June 30, 2005 stock based
compensation would have been modified as presented in the pro-forma disclosures in Note 2.5.
In November 2004, the FASB issued SFAS no. 151, Inventory Costs, an amendment of ARB no. 43, Chapter 4,
which requires idle facility expenses, excessive spoilage, and double freight and rehandling costs to be treated
as current period charges and also requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. Accounting Research Bulletin no. 43,
Inventory Pricing, previously required such expenses to be treated as current period expenses only if they meet
the criterion of "so abnormal", which was not a defined term. SFAS no. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005, with earlier adoption permitted. The company does
not believe that the adoption of SFAS no. 151 will have a material impact on the company’s consolidated
financial position or results of operations.
In November 2004, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 03-13,
"Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
Discontinued Operations" ("EITF 03- 13" ). The guidance should be applied to a component of an enterprise
that is either disposed of or classified as held for sale in fiscal periods that began after December 15, 2004. The
Company does not believe that the adoption of EITF 03-13 will have a significant effect on our financial
statements.
2.3
Currency translation
The Company has selected the United States dollar as its reporting currency. The U.S. dollar amounts have been
translated following the criteria established in SFAS No. 52, “Foreign Currency Translation” from the financial
statements expressed in the local currency of the countries where Gerdau and each subsidiary operates.
F-10
GERDAU S.A.
The Company’s main operations are located in Brazil, the United States, Canada, and Chile . The local currency
is the functional currency for those operations. These financial statements, except for those of the subsidiaries
located in the United States which already prepare their financial statements in United States dollars, are
translated from the functional currency into the US dollar. Assets and liabilities are translated at the exchange
rate in effect at the end of each period. Average exchange rates are used for the translation of revenues,
expenses, gains and losses in the statement of income. Capital contributions, treasury stock transactions and
dividends are translated using the exchange rate as of the date of the transaction. Translation gains and losses
resulting from the translation methodology described above are recorded directly in “Cumulative other
comprehensive loss” within shareholders’ equity. Gains and losses on foreign currency denominated
transactions are included in the consolidated statement of income.
2.4
Controlling shareholder
As of September 30, 2005, the Company’s parent, Metalúrgica Gerdau S.A. (“MG”, collectively with its
subsidiaries and affiliates, the “Conglomerate”) owned 44.80% (December 31, 2004 - 44.76%; September 30,
2004 - 48.23%) of the total capital of the Company. MG’s share ownership consisted of 75.73% (December 31,
2004 - 75.75%; September 30, 2004 - 85.71%) of the Company’s voting common shares and 28.38%
(December 31, 2004 - 28.30%; September 30, 2004 - 28.30%) of its non-voting preferred shares.
2.5
Stock Based Compensation Plans
Gerdau Ameristeel Corp (“Gerdau Ameristeel”) and its subsidiaries and Gerdau S.A. maintain stock based
compensation plans. The Company accounts for the stock-based compensation plans under Accounting
Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related
interpretations. SFAS No. 123 “Accounting for Stock-Based Compensation” as amended by SFAS No. 148
“Accounting for Stock-Based Compensation – Transition and Disclosure” allows companies to continue
following the accounting guidance of APB 25 but requires pro forma disclosures of net income and earnings per
share for the effects on compensation had the accounting criteria of SFAS No. 123 been adopted. The following
table illustrates the effects on net income and on earnings per share if the fair value method had been applied.
2005
2004
2005
2004
Net income as reported
Reversal of stock-based compensation cost included in the
determination of net income as reported
323,273
461,687
924,898
869,013
66
49
167
143
Stock-based compensation cost following the fair value method
Pro-forma net income
(371)
322,968
(283)
461,453
(946)
924,119
(485)
868,671
Earnings per share - basic
Common - As reported and pro-forma
Preferred - As reported and pro-forma
0.73
0.73
1.04
1.04
2.09
2.09
1.96
1.96
Earnings per share - diluted
Common - As reported and pro-forma
Preferred - As reported and pro-forma
0.73
0.73
1.04
1.04
2.08
2.08
1.96
1.96
F-11
GERDAU S.A.
The following assumptions were used to estimate the compensation following the fair value method for
compensation in stock of Gerdau S.A. and of Gerdau Ameristeel Corp., as appropriate.
Expected dividend yield:
Expected stock price volatility:
Risk-free rate of return:
Expected period until exercise:
2.6
Gerdau
S.A.
Gerdau
Ameristeel
Corp
7%
43%
8%
3.8 to 4.9 years
0%
55%
4%
5 years
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majorityowned operational subsidiaries, as follows:
Percentage interest (%)
Aceros Cox S.A. (Chile)
Armafer Serviços de Construção Ltda. (Brazil)
Diaco S.A. (Colombia) (See Note 2.8)
Gerdau Ameristeel Corporation (Canada) and its subsidiaries:
Ameristeel Bright Bar Inc. (USA)
Gerdau Ameristeel MRM Special Sections Inc. (Canada)
Gerdau Ameristeel Perth Amboy Inc. (USA)
Gerdau Ameristeel Sayreville Inc. (USA)
Gerdau Ameristeel US Inc. (USA)
Gerdau Açominas S.A. (“Gerdau Açominas”) (Brazil) (See Note 2.7)
Gerdau Aços Longos S.A. (“Gerdau Aços Longos”) (Brazil) (See Note 2.7)
Gerdau Aços Especiais S.A. (Brazil) (“Gerdau Aços Especiais”) (See Note 2.7)
Gerdau Comercial de Aços S.A. (“Gerdau Comercial de Aços”) (Brazil) (See Note 2.7)
Gerdau América do Sul Participações S.A. (“Gerdau América do Sul Participações”)
(Brazil) (See Note 2.7)
Gerdau Aza S.A. (Chile)
Gerdau Internacional Emprendimentos Ltda. (Brazil) and its wholly owned
subsidiary Gerdau GTL Spain S. L. (Spain) and subsidiaries
Gerdau Laisa S.A. (Uruguay)
Maranhão Gusa S.A. – Margusa (Brazil)
Seiva S.A. – Florestas e Indústrias (Brazil) and subsidiaries
Sipar Aceros S.A. (Argentina) (See Note 2.8)
(*)
September
30, 2005
September
30, 2004
98% (*)
57
65 (*)
65 (*)
65 (*)
65 (*)
65 (*)
65 (*)
89 (*)
89 (*)
89 (*)
89 (*)
89 (*)
100
100
69
69
69
69
69
69
92
-
98 (*)
100
98 (*)
98 (*)
89 (*)
97
72
100
99
97
38
As result of the transaction described in Note 2.7 the interest of the Company in the holding company Gerdau
Participações S.A. and its subsidiaries has been diluted. Such dilution resulted in a decrease in the interest as
compared to the interest previously held.
F-12
GERDAU S.A.
2.7
Corporate Restructuring
In December 2004, the investments in Gerdau Açominas and 22% of total shares of Gerdau Internacional
Empreendimentos Ltda previously held directly by the Company were transferred to our subsidiary Gerdau
Participações S.A. For statutory purposes, such investments were valued at their fair value through an appraisal
report based on projections of expected cash flows discounted to present values. The difference between the
book value and the fair value resulted in a deferred capital gain on the Company’s investment in Gerdau
Participações S.A. originally equal to goodwill recorded by Gerdau Participações S.A. Goodwill at September
30, 2005 amounts to R$ 3,003,650 thousand (equivalent to $ 1,207,705 at the exchange rate as of September 30,
2005).
In May 2005, Gerdau Participações S.A. issued new shares in exchange for cash and was subsequently merged
with Gerdau Açominas. As a result of the first transaction, the Company recorded a gain in the amount of US$
129,950. The Company, following the guidance of Staff Accounting Bulletin (“SAB”) 5-H, concluded that
such gain should be recognized in shareholders’ equity under “Gain on change in interest”.
Pursuant to SFAS 109 “Accounting for Income Taxes”, no deferred tax was recorded and tax effects are being
recognized when realized on the tax return over a 10 year period.
Up to July 28, 2005, Gerdau Açominas was the legal entity that carried out all operational steel business in
Brazil as well as holding 22% of the total shares of Gerdau Internacional Empreendimentos Ltd. On July 29,
2005 certain assets and liabilities of Gerdau Açominas were spun-off to other four newly created entities:
Gerdau Aços Longos, Gerdau Aços Especiais, Gerdau Comercial de Aços and Gerdau América do Sul
Participaçoes. As a result of such spin-off assets and liabilities were grouped in separate legal entities
considering the nature of operations carried out by each entity as follows:
Legal entity
Gerdau Açominas
Gerdau Aços Longos
Gerdau Aços Especiais
Gerdau Comercial de Aços
Gerdau América do Sul Participações
Nature of operations performed
Steel production in the Ouro Branco mill
Production of long steel in Brazil
Production of specialty steel in Brazil
Retail sale of steel products in Brazil
Holding of 22% of the shares in Gerdau Internacional
Empreendimentos
Assets and liabilities spun-off from Gerdau Açominas to the other entities continue to be recorded at its cost
basis at Gerdau Açominas and no gain or loss has been recognized as result of this transaction.
2.8
Acquisitions
(a) Sipar Aceros S.A.
On September 15, 2005, the Company entered into an agreement to acquire an additional interest of 35.98% of
Sipar Aceros S.A (“Sipar Aceros”), a rolling steel mill located in Santa Fé, Argentina, on which the Company
already had a 38.46% interest. The company paid $16,687 in cash on September 15, 2005 and will pay an
additional amount of $23,947 during the next three years without interest on those additional payments. Total
consideration consideration for the purchase of such interest, considering the financed portion of the purchase
price at fair value, amounts to $37,340.
As a result of this acquisition, the Company obtained a controlling interest of 74.44%, and therefore Sipar
Aceros has been consolidated as from September 15, 2005. Previous to this date, this investment was accounted
for following the equity method.
F-13
GERDAU S.A.
This transaction was accounted under the purchase method, and a preliminary allocation of fair value of assets
and liabilities was performed which resulted in the recognition of goodwill of $11,446. Goodwill has been fully
allocated to “Sipar Aceros”, a component of the segment “South America (except Brazil)”, which represents a
reporting unit as defined by SFAS No. 142 “Goodwill and Intangible Assets”. The Company expects to finalize
the valuation of assets and liabilities acquired until December 31, 2005.
The following table summarizes the fair value of assets and liabilities acquired in this transaction and the
resulting goodwill
Current assets
Non-current assets
Current liabilities
Preliminary fair value of net assets acquired
% of interest acquired
Preliminary fair value of interest acquired on net assets
Purchase price consideration, at fair value
Preliminary determination of goodwill
72,560
49,630
(30,321)
(19,907)
71,962
35.98%
25,894
37,340
11,446
Under the terms of the agreements, some of the selling shareholders have options to sell additional shares of
Sipar Aceros to the Company.
(b) Diaco S.A.
On December 23, 2004, the Company reached an agreement with Mayaguez Group and Latin American
Enterprise Steel Holding (“LAESH”), majority shareholders of Diaco S.A. (“Diaco”) and Siderurgia del
Pacifico S.A. (“Sidelpa”) to buy shares owned by those investors in Diaco and Sidelpa. Diaco is the largest
producer of steel and rebar in Colombia.
Closing of the transactions was subject to several conditions precedent. Upon entering into the agreement, the
Company made a deposit of $68,500 in favor of certain trusts created for this transaction. Gerdau also has
committed to acquire additional shares of Diaco in a period no longer than eight years.
During September 2005 the conditions precedent were met including the execution by Diaco of a public offer in
the Colombian market to acquire shares owned by minority shareholders and the delisting of Diaco from the
stock exchange in Colombia. On September 30, 2005, the Company concluded all steps required to obtain a
57.11% voting and total interest in Diaco obtaining a controlling interest. As a result, Diaco shares acquired by
the Company were transferred from the trust to the Company, and the amount of $49,205 was transferred from
the trust to the sellers while an additional amount of $6,763 was paid in cash by the Company.
This transaction was accounted following the purchase method. The Company made a preliminar determination
of the fair value of assets and liabilities acquired on which an estimated fair value of property, plant and
equipment was determined. The Company will finalize the determination of the fair value of assets and
liabilities acquired until December 31, 2005. No goodwill resulted from this acquisition as result of the
preliminary determination of fair value of assets and liabilities. An excess of fair value of net assets over the
purchase price of $4,382 was determined which was subsequently allocated to reduce the value of property,
plant and equipment.
F-14
GERDAU S.A.
The table below summarizes the preliminary fair value of assets and liabilities acquired and the resulting
goodwill
Current assets
Non-current assets
Current liabilities
Preliminary fair value of net assets acquired
% of interest acquired
Preliminary fair value of interest acquired on net assets
Purchase price consideration, at fair value
Excess of purchase price over preliminary fair value of interest acquired on net assets
92,623
101,874
(60,912)
(27,916)
105,669
57.11%
60,349
55,967
4,382
As result of the conditions precedent being met Gerdau is also obligated to purchase an additional 40.27%
interest in Diaco in 2013. Gerdau has the option to anticipate such purchase by acquiring 50% of the additional
interest in March 2008 and March 2009. Settlement of the acquisition of the additional interest can be made in
cash or in shares of Gerdau at the option of the sellers. The terms of the agreement establishes a formula to
determine the purchase price which is based on a minimum amount plus interest over the period from December
2004 to the date of the acquisition, and an additional price based on changes in net equity of Diaco.
Conditions precedent related to the acquisition of an interest in Sidelpa have not been met at September 30,
2005.
2.9
Statement of cash flows
In prior years, the Company presented cash flows relating to trading securities as cash flows from investing
activities. These unaudited interim condensed consolidated financial statements reflect the cash flows from such
securities as operating cash flows. This change resulted in a decrease in operating cash flows for the threemonth and nine-month periods ended September 30, 2004 of $63,461 and $ 118,353, respectively with a
corresponding opposite effect on investing cash flows.
3
Inventories
September 30,
2005
2004
694,749
446,815
264,819
164,514
414,034
282,393
268,985
197,750
43,610
19,530
1,686,197
1,111,002
Finished products
Work in process
Raw materials
Packaging and maintenance supplies
Advances to suppliers of materials
F-15
December
31, 2004
648,069
255,862
488,326
176,501
25,360
1,594,118
GERDAU S.A.
4
Property, plant and equipment, net
September 30,
2005
2004
1,053,981
942,468
3,315,722
2,469,441
22,482
13,235
150,771
35,389
162,739
78,032
4,705,695
3,538,565
(2,138,279)
(1,490,117)
2,567,416
2,048,448
214,516
194,213
743,230
254,440
3,525,162
2,497,101
Buildings and improvements
Machinery and equipment
Vehicles
Furniture and fixtures
Other
Less: Accumulated depreciation
Land
Construction in progress
Total
December
31, 2004
899,419
2,797,614
14,174
35,803
96,386
3,843,396
(1,649,743)
2,193,653
222,534
374,014
2,790,201
As of September 30, 2005, machinery and equipment with a net book value of $357,304 was pledged as
collateral for long-term debt.
5
Debt and debentures
Short-term debt
Short-term debt consists of working capital loans and export advances, mainly denominated in U.S. dollars,
with average interest rates of 2.71% p.a. at September 30, 2005. Advances received against export commitments
are obtained from commercial banks with a commitment that the products be exported.
F-16
GERDAU S.A.
Long-term debt
Long-term debt consisted of the following:
Annual Interest
Rate % at
September 30, 2005
September 30,
2005
2004
December
31, 2004
Long-term debt, excluding debentures, denominated in Brazilian reais
Working capital
Financing for investments
Financing for machinery
3.40%
IGPM+4% to 8.5%
TJLP + 3.0% to 3.5%
252,430
10,292
159,119
16,266
226,208
10,629
239,349
4.74% to 5.00%
8.88%
4.26% to 6.80%
7.321% and 7.37%
4.26%
492,063
600,000
9,791
210,655
282,934
1,983
105
133,982
77,686
261,063
232,935
229,936
6,288
13,812
-
3,973
233,531
236,553
290,115
6,124
12,370
68,920
400,205
31,600
3,909
2,589,068
(389,430)
2,199,638
397,802
27,400
6,651
1,496,047
(271,232)
1,224,815
397,986
27
31,600
9,633
1,540,810
(260,294)
1,280,516
Long-term debt, excluding debentures, denominated in foreign
currencies
(a) Long-term debt of Gerdau, Gerdau Açominas, Gerdau Aços Longos,
Gerdau Aços Especiais, Comercial Gerdau, Sipar Aceros, Diaco and
Gerdau Aza S.A.
Working capital (US$)
Guaranteed Perpetual Senior Securities (US$)
Financing for machinery and others (US$)
Export Receivables Notes by Gerdau Açominas (US$)
Advances on exports (US$)
Working capital (Chilean pesos)
Financing for machinery (Chilean pesos)
Financing for working capital (Argentinean Pesos)
Financing for investments (US$)
(b) Long-term debt of Gerdau Ameristeel
5.40% to 9.24%
9.87%
4.08% to 7.29%
Senior notes, net of original issue discount (US$)
Senior Secured Credit Facility (Canadian dollar -Cdn$ and US$)
Industrial Revenue Bonds (US$)
Other
10.375%
1.74% to 6.38%
3.75% to 5.25%
Less: current portion
Long-term debt, excluding debentures, less current portion
IGPM (Índice Geral de Preços – Mercado – “General Index Price – Market”): Brazilian inflation index, computed by Fundação Getúlio
Vargas
TJLP (Taxa de Juros de Longo Prazo – “Long term interest rate”): Interest rate set by Government used to index long term loans granted by
BNDES – Banco Nacional de Desenvolvimento Econômico e Social.
Long-term debt, excluding debentures, denominated in Brazilian reais
Long-term debt denominated in Brazilian reais is indexed for inflation using the TJLP rate set by the
Government on a quarterly basis, or based on IGPM.
Long-term debt, excluding debentures, denominated in foreign currencies
(a) Gerdau, Gerdau Açominas, Gerdau Aços Longos, Gerdau Aços Especiais, Comercial Gerdau, Sipar
Aceros S.A., Diaco S.A. and Gerdau AZA S.A.
The debt agreements entered into by Gerdau Açominas, Gerdau Aços Longos, Gerdau Aços Especiais and
Comercial Gerdau contain covenants that require the maintenance of certain ratios, as calculated in accordance
with the consolidated financial statements of Gerdau S.A. prepared in accordance with Brazilian GAAP. The
covenants include several financial covenants including ratios on liquidity, total debt to EBITDA (earnings
before interest, taxes, depreciation and amortization, as defined in the respective debt agreements), debt service
coverage and interest coverage, amongst others. At September 30, 2005, the Company was in compliance with
all of its debt covenants.
F-17
GERDAU S.A.
Export Receivables Notes issued by Gerdau Açominas
On September 5, 2003, Gerdau Acominas concluded a private placement of the first tranche of Export Notes in
the amount of $105,000. The Export Notes bear interest of 7.37% p.a., with final due date in July 2010, and
have quarterly payments starting October 2005. On June 3, 2004 Gerdau Açominas S.A. also placed privately
the second tranche of its Export Notes for a notional amount of $128,000. This second tranche was placed with
a final maturity of 8 years (April 2012) and interest of 7.321% p.a. The notes have a quarterly amortization
schedule starting in July 2006.
Guaranteed Perpetual Senior Securities
On September 15, 2005, Gerdau S.A. concluded a private placement of US$ 600,000 8.875% interest bearing
Guaranteed Perpetual Senior Securities. Such bonds are guaranteed by the following operating companies of
Gerdau based in Brazil: Gerdau Açominas, Gerdau Aços Longos, Gerdau Aços Especiais and Comercial
Gerdau; The bonds do not have a stated maturity date but should be redeemed by Gerdau S.A. in the event of
certain specified events of default (as defined in the terms of the bonds) which are not fully under the control of
the Company. The Company has a call option to redeem these bonds at any moment after 5 years of placement
(September 2010). Interest payments are due on a quarterly basis, and each quarterly payment date is also a call
date after September 2010.
(b) Gerdau Ameristeel Debt
On June 27, 2003, Gerdau Ameristeel refinanced its debt by issuing $405,000 aggregate principal 10-3/8%
Senior Notes. The notes mature July 15, 2011 and were issued at 98% of face value. Gerdau Ameristeel also
entered into a new Senior Secured Credit Facility with a term of up to five years, which provides commitments
of up to $350,000. The borrowings under the Senior Secured Credit Facility are secured by the subsidiary’s
inventory and accounts receivable. The proceeds were used to repay existing indebtedness. At September 30,
2005, there was nothing drawn against this facility, and, based upon available collateral under the terms of the
agreement, approximately $289,300 was available under the Senior Secured Credit Facility.
The debt agreements contain covenants that require Gerdau Ameristeel to, among other things, maintain a
minimum fixed charge coverage ratio, a specified minimum level of tangible shareholders equity, a minimum
working capital ratio and limit the debt to equity ratio. In addition, if its business suffers a material adverse
change or if other events of default under the loan agreements are triggered, then pursuant to cross default
acceleration clauses, substantially all of the outstanding debt could become due and the underlying facilities
could be terminated. At September 30, 2005, Gerdau Ameristeel was in compliance with all of its debt
covenants
Debentures
Debentures as of September 30, 2005 include five outstanding issuances of Gerdau and convertible debentures
of Gerdau Ameristeel as follows:
F-18
GERDAU S.A.
September 30,
2005
2004
December
31, 2004
Issuance
Maturity
1982
1982
1982
1983
1990
2011
2012
2013
2014
2020
74,469
26,701
110,099
78,823
64,375
26,682
8,539
57,731
1,287
10,351
58,916
45,610
54,957
64,404
36,991
1997
2007
96,252
83,508
87,635
450,719
188,098
348,513
450,719
(1,593)
186,505
(2,645)
345,868
(2,916)
(2,678)
(1,125)
447,803
183,827
344,743
Debentures, denominated in Brazilian reais
Third series
Seventh series
Eighth series
Ninth series
Eleventh series
Debentures, denominated in Canadian dollars
Gerdau Ameristeel’s convertible debentures
Less debentures held by consolidated companies
eliminated on consolidation
Total
Less: current portion (presented under Other current
liabilities in the consolidated balance sheet)
Total debentures – long-term
Debentures issued by Gerdau
Debentures are denominated in Brazilian reais and bear variable interest at a percentage of the CDI rate
(Certificado de Depósito Interbancário, interbank interest rate). The annual average nominal interest rates were
18.64.%, 16.63% and 16.17% as of September 30, 2005 and 2004 and December 31, 2004, respectively.
Debentures issued by Gerdau AmeriSteel Corp.
The unsecured subordinated convertible debentures issued by Gerdau AmeriSteel Corp. bear interest at 6.5%
per annum, mature on April 30, 2007, and, at the holders' option, are convertible into Common Shares of
Gerdau AmeriSteel Corp. at a conversion price of Cdn$26.25 per share.
6
Commitments and contingencies
The Company is party to claims with respect to certain taxes, contributions and labor. Management believes,
based in part on advice from legal counsel, that the provision for contingencies is sufficient to meet probable
and reasonably estimable losses in the event of unfavorable rulings, and that the ultimate resolutions will not
have a significant effect on the consolidated financial position as of September 30, 2005, although they may
have a significant effect on results of future operations or cash flows.
The following table summarizes the contingencies and related judicial deposits:
Claims
Tax
Labor
Other
Contingencies
December
September 30,
2005
2004
31, 2004
87,892
22,799
1,177
111,868
60,498
13,969
2,536
77,003
F-19
66,237
18,676
2,805
87,718
Judicial deposits
December
September 30,
2005
2004
31, 2004
55,996
4,621
543
61,160
27,508
5,675
1,929
35,112
34,326
7,773
455
42,554
GERDAU S.A.
The amounts presented below for contingencies, provisions and related judicial deposits are as of September 30,
2005.
Probable losses on tax matters, for which a provision was recorded
All contingencies described in the section below correspond to instances where the Company is challenging the
legality of taxes and contributions. The description of the contingent losses includes a description of the tax or
contribution being challenged, the current status of the litigation as well as the amount of the probable loss
which has been provided.
•
$22,705 relates to a contingency for compulsory loans to Eletrobrás, the government-owned energy
company, the constitutionality of which is being questioned by the Company. In March 1995, the Federal
Supreme Court awarded a judgment against the tax payers. In relation to the Company’s proceedings,
some are pending decision, but the outcomes are already foreseeable, taking into consideration prior
decisions. The Company established a provision relating to “compulsory loans” taking into consideration
that, although the payment to Eletrobrás was made as a loan: (i) the reimbursement to the Company
would be in the form of shares of Eletrobrás, (ii) the conversion will be made based on the equity value
of the shares, and (ii) based on the current available information, the fair value of the shares of Eletrobrás
is substantially less than their book value.
•
$3,104 related to the unconstitutionality of the Social Investment Fund tax (“Fundo de Investimento
Social” --FINSOCIAL). Although the Federal Supreme Court has confirmed the constitutionality of the
collection of tax at the 0.5% rate, some proceedings are still pending judgment, most of them in the
Superior Courts.
•
$8,442 related to amounts for State Value Added Tax (“Imposto Sobre Circulação de Mercadorias e
Serviços” - ICMS), the majority of which is related to credit rights involving the Finance Secretary and
the State Courts of First Instance in the state of Minas Gerais.
•
$3,300 related to Social Contribution on Net Income (“Contribuição Social Sobre o Lucro”) (CSSL).
The amounts refer to challenges of the constitutionality of the contribution in 1989, 1990 and 1992.
Some proceedings are pending decision, most of them in the Superior Courts.
•
$8,997 related to Corporate Income Tax (“Imposto Renda de Pessoa Jurídica - IRPJ), for which
administrative appeals have been filed.
•
$13,209 on contributions due to social security which correspond to suits for annulment by the Company
with judicial deposits of virtually the whole amount involved, in progress in the Federal Court of First
Instance in the state of Rio de Janeiro. The amount provided also refers to lawsuits questioning the
position of the National Institute of Social Security ("Institutio Nacional da Seguridade Social" - INSS)
in terms of charging INSS contributions on profit sharing payments made by the subsidiary Gerdau
Açominas and several INSS assessments due to services contracted from third parties, in which the INSS
accrued debts related to the last ten years and assessed Gerdau Açominas as jointly responsible. The
assessments were kept administratively and challenged by Gerdau Açominas in annulment proceedings
with deposit in court of the amount being discussed, since the Company understands that the right to set
up part of the credits had expired, and that, in any event, the Company is not responsible.
•
$857 related to contributions for the Social Integration Program (“Programa de Integração Social” - PIS)
and $3,121 related to Social Contribution on Revenues (“Contribuição para o Financiamento da
Seguridade Social” - COFINS), in connection with lawsuits questioning the constitutionality of Law
9,718 which changed the calculation basis of these contributions. These suits are in progress in the
Federal Regional Court of the 2nd Region and the Federal Supreme Court.
F-20
GERDAU S.A.
•
$14,864 related to the Emergency Capacity Charge (“Encargo de Capacidade Emergencial” – ECE), as
well as $8,204 related to the Extraordinary Tariff Recomposition (“Recomposição Tarifária
Extraordinária – RTE), which are charges included in the electric energy bills of the Company’s plants.
According to the Company, these charges are of a tax nature and, as such, are incompatible with the
National Tax System provided in the Federal Constitution. For this reason, the constitutionality of this
charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First
Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná and Rio
Grande do Sul, as well as in the Federal Regional Courts of the 1st and 2nd Regions. The Company has
fully deposited in court the amount of the disputed charges.
•
$529 related to a lawsuit brought by the subsidiary Gerdau Açominas regarding the Government
Severance Indemnity Fund surcharges (“Fundo de Garantia por Tempo de Serviço” – FGTS), which
arose from the changes introduced by Complementary Law 110/01. Currently, the corresponding court
injunction is awaiting the judgment of the extraordinary appeal filed by the Company. The provided
amount is fully deposited in court.
•
$560 related to other processes of a tax nature, most of which is deposited in court.
Possible losses on tax matters for which no provision was recorded
There are other contingent tax liabilities, for which the probability of losses are possible or remote and,
therefore, are not recognized in the provision for contingencies. These claims are comprised by:
•
The Company is defendant in debt foreclosures filed by the State of Minas Gerais to demand ICMS
credits arising mainly from the sales of products to commercial exporters. The total amount of the
processes is $14,406. The Company did not set up a provision for contingency in relation to these
processes, since it considers this tax undue, because products for export are exempted from ICMS.
•
The Company and its subsidiary Gerdau Açominas are defendants in tax foreclosures filed by the state of
Minas Gerais, which demand ICMS credits on the export of semi-finished manufactured products. The
total amount demanded is $119,970. The Company did not set up a provision for contingency in relation
to these processes since it considers the tax undue, because the products do not fit in the definition of
semi-finished manufactured products defined by the federal complementary law and, therefore, are not
subject to ICMS.
•
The Federal Revenue Secretariat claims an amount of $33,311 related to transactions carried out by the
subsidiary Gerdau Açominas under the drawback concession granted by DECEX (Foreign Trade
Department) which would not be in conformity with the legislation. Gerdau Açominas filed a preliminary
administrative defense of the legality of the arrangement, which is pending judgment. Since the tax
assessment has not been finally confirmed, and considering that the arrangement that generated the
mentioned demand conforms with the criteria required for the drawback concession, and also that the
concession was granted after analysis by the legal administrative authority, Gerdau Acominas considers
an unfavorable outcome to be remote and, for this reason, did not set up a provision for the contingency.
•
The Company has entered, in June 12, 2000, into a tax refinancing program (REFIS), refinancing taxes
related to PIS and COFINS. It has been discussed in courts the legality of using third-party acquired tax
credits in the amount of $18,053, which were used to settle fines and interests incurred by the Company.
Brazilian tax authorities understand tax credits should be used primarily to settle each tax payer debts,
and allows transfer of only the remaining portion of those tax credits, but this understanding is based on a
resolution of the Management Committee of REFIS, and not established in law; therefore, Company
believes an unfavorable outcome is remote, and did not set up a provision for the contingency.
F-21
GERDAU S.A.
Unrecognized contingent tax assets
Management believes the realization of certain contingent assets is possible. However, no amount has been
recognized for these contingent tax assets that would only be recognized upon final realization of the gain:
•
Among them is a court-order debt security issued in 1999 in favor of the Company by the state of Rio de
Janeiro in the amount of $12,083 arising from an ordinary lawsuit regarding non-compliance with the
Loan Agreement for Periodic Execution in Cash under the Special Industrial Development ProgramPRODI. Due to the default by the State of Rio de Janeiro and the non-regulation of the Constitutional
Amendment 30/00, which granted the government a ten-year moratorium for the payment of securities
issued to cover court-order debt not related to food, there is no expectation of realization of this credit in
2005 or following years.
•
The Company has filed several ordinary proceedings related to the correction of the PIS calculation basis
under Complementary Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88
and 2449/88.
In addition to credits already recorded during 2004 as result of final favorable decisions by the courts
which are being used to settle other federal taxes, the Company received during the three months ended
March 30, 2005 a final non appealable favorable decision by the courts and recognized a tax credit for
$18,771 and a gain which is presented as a tax recovery under “Other operating income (expenses), net”
in the statement of income. The tax credits recognized will be used to settle income taxes, PIS and
COFINS taxes due during the next year.
The Company still has an open process for which expects to recover a credit of approximately $8,982.
•
Due to prior favorable decisions by the Courts, the Company and its subsidiaries Gerdau Açominas S.A.
and Margusa – Maranhão Gusa S.A. expect to recover IPI premium credits. Gerdau S.A. and its
subsidiary Margusa – Maranhão Gusa S.A. have filed administrative appeals, which are pending
judgment. With regard to the subsidiary Gerdau Açominas S.A., the claims were filed directly to the
courts and are pending decision. The Company estimates a credit in the amount of $177,303.
Labor contingencies
The Company is also defending labor proceedings, for which there is a provision as of September 30, 2005 of
$22,799. None of these lawsuits refers to individually significant amounts, and the lawsuits mainly involve
claims due to overtime, health and risk premiums, among others. The balances of deposits in court related to
labor contingencies, at June 30, 2005, totaled $4,621.
Other contingencies
The Company is also defending in court civil proceedings arising from the normal course of its operations and
has accrued $1,177 for these claims. Escrow deposits related to these contingencies, at September 30, 2005,
amount to $543. Other contingent liabilities with remote or possible chances of loss, involving uncertainties as
to their occurrence, and therefore, not included in the provision for contingencies, are comprised by:
•
An antitrust process involving Gerdau S.A. related to the representation of two civil construction
syndicates in the state of São Paulo that alleged that Gerdau S.A. and other long steel producers in Brazil
divide customers among them, violating the antitrust legislation. After investigations carried out by the
National Secretariat of Economic Law – (“Secretaria de Direito Econômico”- SDE) and based on public
hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier
opinion of the Secretariat for Economic Monitoring (“Secretaria de Acompanhamento Econômico” –
SEAE). On September 23, 2005 the Administrative Council for Economic Defense – (“Conselho
F-22
GERDAU S.A.
Administrativo de Defesa Econômica” – CADE), has issued an administrative decision against the
Company. The final administrative decision has not been published yet.
The Company had proposed a judicial injunction aiming to void the administrative decision, based on
formal irregularities during its instruction. If the administrative decision is considered voided, CADE
decision will be cancelled.
Prior to CADE decision, the Federal Public Ministry of Minas Gerais (“Ministério Público Federal de
Minas Gerais”) had presented a Public Civil Action, based on SDE opinion, without any new facts,
accusing the Company of involvement in activities that breach antitrust laws. The Company has
presented its defense on July 22, 2005.
Gerdau S.A. denies having engaged in any type of anti-competitive behavior and understands, based on
information available, including the opinion of its legal advisors, that the administrative process until
now includes many irregularities, some of which are impossible to resolve. The Company believes it has
not practiced any violation of anti-trust regulation, and based on opinion of its legal advisors believes in
a reversion of this unfavorable outcome.
•
There is a civil lawsuit filed against Gerdau Açominas S.A., regarding the termination of a contract for
the supply of slag and indemnities for losses and damages. The amount of the claim, at September 30,
2005, was approximately $15,472. Gerdau Açominas S.A. contested all bases for the lawsuit and filed a
counterclaim for the termination of the contract and indemnity for breach of contract. The judge declared
the contract to be terminated, since such demand was common to both parties. With regards to the
remaining discussion, the judge understood that both parties were at fault and judged unfounded the
requests for indemnity.
This ruling was sustained by the Court of Minas Gerais, and is based on expert opinion and interpretation
of the contract. The process is currently under the Court of Minas Gerais.
Gerdau Açominas S.A. expects that there is only a remote possibility of loss, since it is unlikely that the
previous ruling will be changed.
Concerning the rescission and the claim of indemnification of the supplier, the Court of Minas Gerais
sustained the decision to rescind the contract and accepted the appeal of Gerdau Açominas, to condemn
the supplier to pay the costs of slag removal, overruling the request of the supplier.
The supplier filed an appeal in the Superior Court of Justice. The appeal was refused and was followed
by an Instrument Appeal, which had its merit overruled, but was partially accepted, ordering the Court of
Minas Gerais to "point out which section of the contract was breached by the supplier". The Court of
Minas Gerais examined the matter again, as determined by the Superior Court of Justice. On March 15,
2005, the matter was solved, pointing clearly the breaching of contract by the supplier. The decision by
the court was based on examination of evidence and interpretation of the contract, circumstance that
reduces significantly the chances of success of new appeals by the supplier, and the reason why Gerdau
Açominas believes the probability of loss is remote.
F-23
GERDAU S.A.
Insurance claim
A civil lawsuit was filed by Sul América Cia Nacional de Seguros on August 4, 2003 against Gerdau Açominas
S.A. and Banco Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of
$15,472 to settle an indemnity claim, which was deposited in court. The insurer pleads uncertainty in relation to
whom payment should be made and alleges that the Company is resisting in receiving and settling it. The
lawsuit was contested by both the bank (which claimed having no right over the amount deposited, solving the
question raised by Sul América) and the Company (which claimed inexistence of uncertainty and justification to
refuse the payment, since the amount owed by Sul América is higher than stated). After this pleading, Sul
América claimed fault in the bank’s representation, and this matter is therefore already settled, which resulted
collection by Gerdau Açominas in December 2004 of the amount deposited by the insurer. The process is
expected to enter in the expert evidence phase, mainly for determine of the amount finally due.
The civil lawsuits arise from the accident on March 23, 2002 with the blast furnace regenerators of the
Presidente Arthur Bernardes mill, which resulted in stoppage of several activities, material damages to the steel
mill equipment and loss of profits. The equipment, as well as loss of profits arising from the accident, was
covered by an insurance policy. The report on the event, as well as the loss claim was filed with IRB - Brasil
Resseguros S.A., and the Company received an advance of $27,900 during 2002.
In 2002, a preliminary estimate of indemnities related to the coverage of loss of profits and material damages, in
the total amount of approximately $49,500, was recorded, based on the amount of fixed costs incurred during
the period of partial stoppage of the steel mill and on the expenses incurred to recover the equipment
temporarily. This estimate is close to the amount of the advance received, plus the amount proposed by the
insurance company as a complement for settling the indemnity. Subsequently, new amounts were added to the
discussion, as demonstrated in the Company’s appeal, although they were not recorded.
Based on the opinion of its legal advisors, management considers that losses from other contingencies are
remote, and that eventual losses would not have a material adverse effect on the consolidated financial position
of the Company, although it may have a material adverse effect on future consolidated results of operations or
its future cash flows.
7
7.1
Shareholders' equity
Share capital
As of September 30, 2005, 154,404,672 shares of Common stock and 290,657,361 shares of Preferred stock had
been issued. The share capital of the Company is comprised of Common shares and Preferred shares, all
without par value. The authorized capital of the Company is comprised of 400,000,000 Common shares and
800,000,000 Preferred shares. Only the Common shares are entitled to vote. There are no redemption provisions
associated with the Preferred shares. The Preferred shares have preferences in respect of the proceeds on
liquidation of the Company.
At a meeting of shareholders held on March 31, 2005, shareholders approved a bonus to both common and
preferred shareholders of 50 shares per 100 shares held, to be effective on April 11, 2005. The bonus resulted in
the issuance of 148,354,011 new shares (51,468,224 Common shares and 96,885,787 Preferred shares).
On April 11, 2005 an amount of R$ 1,735,657 thousand (equivalent to $673,178 at the exchange rate of April
11, 2005), recorded as of December 31, 2004 as part of a statutory reserve within Retained Earnings, was
capitalized.
At a meeting held on November 17, 2003, the Board of Directors of the Company authorized the acquisition of
shares of the Company. The shares held in treasury will be sold in the capital markets or cancelled.
F-24
GERDAU S.A.
At September 30, 2005, the Company held in treasury 3,045,695 preferred shares at a cost of $21,951
(2,359,800 preferred shares at September 30, 2004 and at December 31, 3004 at a cost of $15,256).
7.2
Dividends
On February 1, 2005, dividends were credited to shareholders in the amount of $107,301, as a complement of
the minimum statutory dividend of the fiscal year 2004. On May 5, 2005 and on August 15, 2005, dividends
were credited to shareholders in the amount of $79,664 and $91,634, respectively, as anticipation of the
minimum statutory dividend of the fiscal year 2005.
Brazilian corporations are permitted to distribute interest on equity, similar to a dividend distribution, which is
deductible for income tax purposes. The amount payable may not exceed 50% of the greater of net income for
the year or retained earnings, as measured under Brazilian Corporate Law. It also may not exceed the product of
the Taxa de Juros Longo Prazo (“TJLP”) (long-term interest rate) and the balance of shareholders' equity, as
measured under Brazilian Corporate Law.
Payment of interest on equity is beneficial to the Company when compared to making a dividend payment,
since it deducts a charge for income purposes. The related tax benefit is recorded in the consolidated statement
of income. Income tax is withheld from the stockholders relative to interest on equity at the rate of 15%.
8
Earnings per share (EPS)
Pursuant to SFAS No. 128, “Earnings per Share” the following tables reconciles net income to the amounts
used to calculate basic and diluted EPS. Computations of EPS presented below have been retroactively adjusted
to reflect stock bonus approved on March 31, 2005 to both common and preferred shareholders of 50 shares per
100 shares held.
Basic
Basic numerator
Dividends interest on equity declared
Allocated undistributed earnings
Allocated net income available to
Common and Preferred shareholders
Nine-month period ended September 30 2005
Nine-month period ended September 30, 2004
Common
Preferred
Total
(in thousands, except share and per share data)
Common
Preferred
Total
(in thousands, except share and per share data)
97,193
225,469
181,406
420,830
278,599
646,299
48,450
254,517
90,463
475,583
138,913
730,100
322,662
602,236
924,898
302,967
566,046
869,013
154,404,672
288,189,825
154,404,672
288,481,431
2.09
2.09
1.96
1.96
Basic denominator
Weighted-average outstanding shares, after
giving retroactive effect to the the stock
bonuses described above and deducting the
average tresuary shares (Note 7.1)
Earnings per share (in US$) – Basic
F-25
GERDAU S.A.
Three-month period ended September 30, 2005
Common
Preferred
Total
(in thousands, except per share data)
Basic numerator
Dividends (interest on equity) declared
Allocated undistributed earnings
Allocated net income available to
Common and Preferred shareholders
Basic denominator
Weighted-average outstanding shares, after
giving retroactive effect to the the stock
bonuses described above and deducting the
average tresuary shares (Note 7.1)
Earnings per share (in US$) – Basic
Common
Preferred
Total
(in thousands, except per share data)
31,968
80,927
59,666
150,712
91,634
231,639
15,644
145,382
29,209
271,452
44,853
416,834
112,895
210,378
323,273
161,026
300,661
461,687
154,404,672
287,729,012
154,404,672
288,297,561
0.73
0.73
1.04
1.04
Dilluted
September 30,
2005
2004
Diluted numerator
Allocated net income available to Common and Preferred shareholders
Net income allocated to preferred shareholders
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
options granted to acquire stock of Gerdau and option to settle in shares the
purchase price of an additional interest in Diaco
Net income allocated to common shareholders
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
option granted to acquire stock of Gerdau
Diluted denominator
Weighted - average number of shares outstanding
Common Shares
Preferred Shares
Weighted-average number of preferred shares outstanding
Potential increase in number of preferred shares outstanding:
as a result of option granted to acquire stock of Gerdau
as a result of option to settle in shares the purchase price of additional
interest in Diaco
Total
Total
Earnings per share – Diluted (Common and Preferred Shares)
F-26
September 30,
2005
2004
210,378
300,661
602,236
566,046
1,023
211,400
336
300,997
1,061
603,296
636
566,682
112,895
161,026
322,662
302,967
(1,023)
(336)
(1,061)
(636)
111,873
160,690
321,602
302,331
154,404,672
154,404,672
154,404,672
154,404,672
287,729,012
288,297,561
288,189,825
288,481,431
1,492,157
926,714
1,450,167
930,602
2,550,012
4,042,169
926,714
9,341
1,459,508
930,602
291,771,181
289,224,275
289,649,333
289,412,033
0.72
1.04
2.08
1.96
GERDAU S.A.
9
Derivative instruments
The use of derivatives by the Company is limited. Derivative instruments are used to manage clearly
identifiable foreign exchange and interest rate risks arising out of the normal course of business.
Gerdau and Gerdau Açominas
As part of its normal business operations Gerdau and Gerdau Açominas obtained U.S. dollar denominated debt
generally at fixed rates and are exposed to market risk from changes in foreign exchange and interest rates.
Changes in the rate of the Brazilian real against the U.S. dollar expose Gerdau and Gerdau Açominas to foreign
exchange gains and losses which are recognized in the statement of income and also to changes in the amount
of Brazilian reais necessary to pay such U.S. dollar denominated debt. Changes in interest rates on its fixed rate
debt expose Gerdau and Gerdau Açominas to changes in fair value on its debt. In order to manage such risks
Gerdau and Gerdau Açominas enter into derivative instruments, primarily cross-currency interest rate swap
contracts. Under the swap contracts, Gerdau and Gerdau Açominas have the right to receive on maturity United
States dollars plus accrued interest at a fixed rate and have the obligation to pay Brazilian reais at a variable rate
based on the CDI rate.
Although such instruments mitigate the foreign exchange and interest rate risks, they do not necessarily
eliminate them. The Company generally does not hold financial instruments for trading purposes.
All swaps entered into have been recorded at fair value and realized and unrealized losses are presented in the
consolidated statement of income.
The notional amount of such cross-currency interest rate swaps amounts to $22,116 ($157,461 as of September
30, 2004 and $58,204 as of December 31, 2004) and mature between December 2005 and March 2006 (October
2004 and March 2006 as of September 30, 2004 and January 2005 and March 2006 as of December 31, 2004)
with Brazilian reais interest payable which varies between 85.55% and 92,80% of CDI (between 85.50% and
106.00% of CDI as of September 30, 2004 and between 85.55% and 106.00% of CDI as of December 31,
2004). There are $23 of unrealized gains on theses swaps outstanding as of September 30, 2005 (nil as of
September 30, 2004) and unrealized losses amount to $10,344 ($15,160 as of September 30, 2004 and $14,775
as of December 31, 2004).
Gerdau Açominas also entered into interest rate swaps where its receives a fixed interest rate in U.S. dollars and
pays a variable interest rate based on LIBOR. The agreements have a notional value of $240,000 and expiration
date of November 2011. The aggregate fair value of this interest rate swap, which represents the amount that
would be paid if the agreements were terminated at September 30, 2005, is a gain of approximately $1,294.
Gerdau Ameristeel Corporation
In order to reduce its exposure to changes in the fair value of its Senior Notes, Gerdau Ameristeel entered into
interest rate swaps subsequent to the refinancing of its debt. The agreements have a notional value of $200,000
and expiration dates of July 15, 2011. Gerdau Ameristeel receives a fixed interest rate and pays a variable
interest rate based on LIBOR. The aggregate mark-to-market (fair value) of the interest rate agreements, which
represents the amount that would be paid if the agreements were terminated at September 30, 2005 was
approximately a loss $1,772 ($6,522 as of September 30, 2004 and $4,018 loss at December 31, 2004).
10
Segment information
There are no significant inter-segment sales transactions and the identifiable assets are trade accounts
receivable, inventories and property, plant and equipment.
F-27
GERDAU S.A.
The following segments correspond to the business units by which the Executive Committee manages its
operations:
Long Brazil
Net sales
2,598,920
Açominas Ouro
Branco
888,808
Adjustments and
reconciliations
South America
(except Brazil)
North America
356,854
3,517,239
Financial income (expenses), net
165,791
(31,923)
(4,401)
(44,122)
Net income
680,268
189,230
47,044
215,105
Capital expenditures
250,095
138,139
133,863
89,850
90,220
10,333
2,055,516
1,598,169
529,052
Identifiable assets
Total
7,361,821
85,345
(759,937)
Total as per
financial
statements
6,601,884
15,832
101,177
1,131,647
(206,749)
924,898
114,403
636,500
(90,038)
546,462
94,858
285,261
(77,960)
207,301
2,270,235
6,452,972
(321,539)
6,131,433
Long Brazil
Net sales
1,891,624
Açominas Ouro
Branco
669,151
South America
(except Brazil)
189,121
North America
2,393,478
Total
5,143,374
Financial expenses, net
(12,424)
(21,897)
(1,653)
(54,469)
(90,443)
Net income
324,648
226,299
47,381
271,257
869,585
Adjustments
and
reconciliations
406,723
11,803
(572)
Total as per
financial
statements
5,550,097
(78,640)
869,013
95,047
78,140
6,893
65,795
245,875
2,962
248,837
61,507
67,976
7,240
64,605
201,328
(26,365)
174,963
1,338,969
1,197,150
243,109
1,840,142
4,619,370
(225,521)
4,393,849
Identifiable assets
Long Brazil
Açominas Ouro
Branco
Adjustments and
reconciliations
South America
(except Brazil)
North America
113,289
1,090,851
Total
2,291,495
(98,180)
Total as per
financial
statements
Net sales
802,633
284,722
112,283
(11,767)
(1,005)
(13,879)
85,632
2,262
2,193,315
87,894
Net income
258,683
41,099
12,054
53,387
365,223
(41,950)
323,273
178,321
60,590
47,025
4,018
118,285
229,918
(51,597)
29,337
31,747
3,579
30,883
95,546
(34,133)
61,413
2,055,516
1,598,169
529,052
2,270,235
6,452,972
(321,539)
6,131,433
Identifiable assets
Long Brazil
Net sales
Net income
Açominas Ouro
Branco
802,633
669,151
77,562
(12,006)
136,996
128,710
South America
(except Brazil)
67,650
(271)
15,662
North America
786,372
Total
Adjustments
and
reconciliations
Total as per
financial
statements
2,325,806
(237,678)
(21,751)
43,534
(10,870)
2,088,128
32,664
133,231
414,599
47,088
461,687
45,369
4,018
1,920
24,161
75,468
22,285
97,753
20,898
15,531
2,125
18,584
57,138
(14,577)
42,561
1,338,969
1,197,150
243,109
1,840,142
4,619,370
(225,521)
4,393,849
Identifiable assets
Year-end December 31, 2004
Long Brazil
Identifiable assets
Açominas Ouro
Branco
South America
(except Brazil)
North America
Total
Adjustments
and
reconciliations
Total as per
financial
statements
244,149
100,155
10,310
435,752
790,366
(33,659)
756,707
1,649,495
1,311,979
251,790
2,309,948
5,523,212
(303,409)
5,219,803
The segment information above has been prepared under Brazilian GAAP and consistent with that presented at
the year end financial statements. Corporate activities performed for the benefit of the Group as a whole are not
separately presented and are included as part of the information of Long Brazil.
F-28
GERDAU S.A.
Geographic information about the Company presented following the same basis as the financial statement is as
follows with revenues classified by the geographic region from where the product has been shipped:
Brazil
South America
(except Brazil)
North
America
Total
Net sales
3,390,616
248,370
2,962,898
6,601,884
long lived assets
2,354,881
283,954
1,234,069
3,872,904
Brazil
South America
(except Brazil)
North
America
Total
Net sales
2,648,686
167,670
2,160,610
4,976,966
long lived assets
1,592,802
139,768
1,104,848
2,837,418
Brazil
South America
(except Brazil)
North
America
Total
Net sales
1,104,487
89,543
999,285
2,193,315
long lived assets
2,354,881
283,954
1,234,069
3,872,904
Brazil
Net sales
long lived assets
South America
(except Brazil)
North
America
Total
924,708
74,406
870,207
1,869,321
1,592,802
139,768
1,104,848
2,837,418
Long lived assets include property, plant and equipment, equity investments, investments at cost and goodwill.
11
Income tax reconciliation
A reconciliation of the income taxes in the statement of income to the income taxes calculated at the Brazilian
statutory rates follows:
September 30,
2005
2004
Income before taxes and minority interest
Brazilian composite statutory income tax rate
Income tax at Brazilian income tax rate
Permanent differences:
Foreign income having different statutory rates
Non-taxable income net of non-deductible expenses
Tax deductible goodwill recorded on statutory books
Reversion of valuation allowance
Benefit of deductible interest on equity paid to shareholders
Other, net
Income tax expense (benefit)
F-29
September 30,
2005
2004
493,968
34%
167,949
625,295
34%
212,601
1,481,746
34%
503,794
1,261,014
34%
428,745
(2,136)
27,961
(55,740)
(1,279)
(16,932)
119,823
(1,840)
432
(102,279)
(18,376)
9,743
100,281
(7,030)
(7,611)
(55,740)
(1,279)
(20,781)
411,353
(10,042)
(2,313)
(102,279)
(41,161)
(4,784)
268,166
GERDAU S.A.
12
Pension Plans
Gerdau and other related companies in the Conglomerate co-sponsor contributory pension plans (the “Brazilian
Plans”) covering substantially all employees based in Brazil. The Brazilian Plans consists of a plan for the
employees of Gerdau and its subsidiaries (“Gerdau Plan”) and one plan for the employees of Gerdau Açominas
and its subsidiaries (“Gerdau Açominas Plan”). The Brazilian Plans are mainly defined benefit plans with
certain limited defined contributions. Additionally, the Company's Canadian and American subsidiaries,
including Gerdau Ameristeel, sponsor defined benefit plans (the “North American Plans”) covering the majority
of their employees. Contributions to the Brazilian Plans and the North American Plans are based on actuarially
determined amounts.
The subsidiaries in North America currently provide specified health care benefits to retired employees.
Employees who retire after a certain age with specified years of service become eligible for benefits under this
unfunded plan.
The following tables summarize the pension benefits cost and postretirement medical benefit cost included in
the Company's consolidated statements of financial position:
Brazil plans
Three-month period
ended September 30,
2005
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition asset
Amortization of prior service cost
Recognized actuarial gain
Employees contributions
Net periodic benefit
September 30,
2004
2,633
8,108
(13,016)
(158)
225
(1,023)
(560)
(3,791)
1,680
5,490
(8,733)
(124)
122
(712)
(368)
(2,645)
2005
2004
7,263
22,362
(35,900)
(436)
621
(2,823)
(1,544)
(10,457)
5,050
16,501
(26,249)
(374)
366
(2,140)
(1,106)
(7,952)
North America plans
Pension Plan
Three-month period
ended September 30,
2005
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Recognized actuarial gain
2004
2,745
5,569
(5,244)
44
73
554
3,741
Net periodic cost
Nine-month period
ended September 30,
2,454
5,593
(5,239)
43
72
582
3,505
2005
2004
8,235
16,707
(15,732)
132
219
1,662
11,223
7,362
16,779
(15,717)
129
216
1,746
10,515
Other benefits
Three-month period
ended September 30,
2005
2004
Service cost
Interest cost
Recognized actuarial loss
Net periodic cost
F-30
Nine-month period
ended September 30,
2005
2004
283
538
(53)
8
232
546
(53)
7
849
1,614
(159)
24
696
1,638
(159)
21
776
732
2,328
2,196
GERDAU S.A.
13
Guarantee of indebtedness
(a)
Gerdau has provided a surety to Dona Francisca Energética S.A., in financing contracts which amount to
R$94,194 thousand (equivalent of $42,388 at period-end exchange rate). Under the surety, Gerdau guarantees
51.82% ($21,865) of such debt. This guarantee was established before December 2002, and, therefore, is not
covered by the accounting requirements of FASB Interpretation No. 45 ("FIN 45"). The guarantee may be
executed by lenders in the event of default by Dona Francisca Energética S.A.
(b)
Gerdau is the guarantor on Euro Commercial Papers of its subsidiary GTL Trade Finance Inc., in the
amount of $110,000, on loans of its subsidiary GTL Financial Corp in the amount of $35,087 and on Export
Receivables Notes of its subsidiary Gerdau Açominas S.A. amounting to approximately $233,000. Gerdau
Açominas, Gerdau Aços Longos, Gerdau Aços Especiais and Comercial Gerdau de Aços guarantee the US$
600,000 Perpetual Senior Securities issued by Gerdau S.A.
As the guarantees above are between a parent company (the Company) and its subsidiaries they are not subject
to the recognition provisions under FIN 45. These guarantees may be executed upon failure by the subsidiaries
or Gerdau satisfying their financial obligations.
(c)
Gerdau Açominas and Gerdau Aços Longos provides guarantees to Banco Gerdau S.A. that finance sales to
selected customers. These sales are recognized at the time the products are delivered. Under the vendor
program, the Company is the secondary obligor to the bank. At September 30, 2005 customer guarantees
provided by the company totaled $21,929. Since Banco Gerdau S.A., Gerdau Aços Longos S.A. and Gerdau
Açominas S.A. are under the common control of MG, this guarantee is not covered by the recognition
provisions of FASB Interpretation No 45 (“FIN 45”).
14
Subsequent event
(a)
On November 3, 2005, the Board of Directors credited dividends corresponding to the third quarter of 2005 to
the shareholders. The dividends have been paid on November 30, 2005 in the amount of R$ 0.45 per Common
and Preferred share (equivalent to $0.20 at the exchange rate of November 3, 2005). Such dividends are an
anticipation of the minimum statutory dividend for the fiscal year 2005.
(b)
On October 12, the Company concluded its third emission of Euro Commercial Paper in the amount of
US$200,000, with final due date on October 11, 2006 and bearing interest of 5.0% at year.
(c.)
On November 14, 2005 the Company entered into an agreement to acquire 40% of Corporación Sidenor S.A.
(“Sidenor”) , a Spanish steel producer with operations in Spain and Brazil. On the same the Santander Group
and executives of Sidenor entered into an agreement to purchase 40% and 20% of Sidenor, respectively.
Purchase price for the acquisition of 100% of Sidenor consists of a fixed price of Euro 443,820 plus a variable
price, to be paid only by the Company of Euro 19,500. Consumation of the transaction is subject to certain
conditions precedent including approval by appropriate regulatory authorities.
*
*
F-31
*

GERDAU S.A.

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