Condensed consolidated interim financial statements

as of June 30, 2021

GERDAU S.A.
CONSOLIDATED BALANCE SHEETS
In thousands of Brazilian reais (R$)
(Unaudited)
Note June 30, 2021 December 31, 2020
CURRENT ASSETS
Cash and cash equivalents 4 3,026,228 4,617,204
Short-term investments 4 2,611,586 3,041,143
Trade accounts receivable - net 5 5,785,443 3,737,270
Inventories 6 13,801,156 9,169,417
Tax credits 1,982,508 1,201,312
Income and social contribution taxes recoverable 456,626 1,051,584
Dividends receivable 12,712 -
Fair value of derivatives 14 8,395 -
Other current assets 629,785 591,523
28,314,439 23,409,453
NON-CURRENT ASSETS
Tax credits 749,250 664,045
Deferred income taxes 2,761,575 3,393,354
Related parties 16 95,254 134,354
Judicial deposits 15 1,826,253 1,825,791
Other non-current assets 516,939 590,864
Prepaid pension cost 3,964 39,196
Investments in associates and joint ventures 8 2,551,923 2,271,629
Goodwill 10 11,668,298 12,103,519
Leasing 783,844 815,311
Other Intangibles 516,963 622,578
Property, plant and equipment, net 17,103,345 17,252,915
38,577,608 39,713,556
TOTAL ASSETS 66,892,047 63,123,009
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements
GERDAU S.A.
CONSOLIDATED BALANCE SHEETS
In thousands of Brazilian reais (R$)
(Unaudited)
Note June 30, 2021 December 31, 2020
CURRENT LIABILITIES
Trade accounts payable 11 6,895,295 5,437,953
Short-term debt 12 247,029 1,424,043
Debentures 13 14,072 7,463
Taxes payable 835,337 600,089
Income and social contribution taxes payable 980,295 810,125
Payroll and related liabilities 696,361 591,653
Dividends payable - 510,348
Leasing payable 230,056 231,703
Employee benefits - 208
Environmental liabilities 169,250 125,992
Fair value of derivatives 14 3,829 971
Obligations with FIDC 17 45,943 944,513
Other current liabilities 858,312 797,082
10,975,779 11,482,143
NON-CURRENT LIABILITIES
Long-term debt 12 12,649,143 13,188,891
Debentures 13 2,895,917 2,894,954
Related parties 16 31,218 22,855
Deferred income taxes 56,000 61,562
Provision for tax, civil and labor liabilities 15 1,234,048 1,172,511
Environmental liabilities 137,720 171,102
Employee benefits 1,715,947 1,861,231
Obligations with FIDC 17 - 42,893
Leasing payable 603,100 624,771
Other non-current liabilities 452,800 514,886
19,775,893 20,555,656
EQUITY 18
Capital 19,249,181 19,249,181
Treasury stocks (152,973 ) (229,309 )
Capital reserves 11,597 11,597
Retained earnings 13,043,914 7,292,332
Transactions with non-controlling interests without change of control (2,870,825 ) (2,870,825 )
Other reserves 6,632,689 7,407,295
EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT 35,913,583 30,860,271
NON-CONTROLLING INTERESTS 226,792 224,939
EQUITY 36,140,375 31,085,210
TOTAL LIABILITIES AND EQUITY 66,892,047 63,123,009
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements
GERDAU S.A.
CONSOLIDATED STATEMENTS OF INCOME
In thousands of Brazilian reais (R$)
(Unaudited)
For the three-month period ended For the six-month period ended
Note June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
NET SALES 19,130,116 8,744,833 35,473,100 17,972,374
Cost of sales 21 (13,715,929 ) (8,026,768 ) (26,262,004 ) (16,398,848 )
GROSS PROFIT 5,414,187 718,065 9,211,096 1,573,526
Selling expenses 21 (168,421 ) (97,034 ) (323,814 ) (216,956 )
General and administrative expenses 21 (307,956 ) (209,415 ) (622,051 ) (459,870 )
Other operating income 21 37,564 639,724 200,420 663,279
Other operating expenses 21 (42,875 ) (245,997 ) (119,188 ) (248,425 )
Tax credits recovery 15 393,341 - 393,341 -
Impairment of financial assets 21 (125 ) (25,467 ) (5,161 ) (68,759 )
Equity in earnings of unconsolidated companies 8 236,979 (4,090 ) 385,938 6,400
INCOME BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES 5,562,694 775,786 9,120,581 1,249,195
Financial income 22 49,788 50,759 105,696 97,068
Financial expenses 22 (343,907 ) (390,326 ) (657,503 ) (715,748 )
Exchange variations, net 22 (115,402 ) 9,440 (127,271 ) 56,764
Tax credits monetary update 15 462,651 - 462,651 -
Gains (Losses) on financial instruments, net 22 4,750 197 3,591 720
INCOME BEFORE TAXES 5,620,574 445,856 8,907,745 687,999
Current 7 (1,140,752 ) (74,154 ) (1,884,568 ) (159,075 )
Deferred 7 (545,345 ) (56,379 ) (618,164 ) 7,749
Income and social contribution taxes (1,686,097 ) (130,533 ) (2,502,732 ) (151,326 )
NET INCOME 3,934,477 315,323 6,405,013 536,673
ATTRIBUTABLE TO:
Owners of the parent 3,916,551 315,272 6,367,890 531,897
Non-controlling interests 17,926 51 37,123 4,776
3,934,477 315,323 6,405,013 536,673
Basic earnings per share - preferred and common - (R$) 19 2.30 0.19 3.74 0.31
Diluted earnings per share - preferred and common - (R$) 19 2.29 0.18 3.72 0.31
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements
GERDAU S.A.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands of Brazilian reais (R$)
(Unaudited)
For the three-month period ended For the six-month period ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net income for the period 3,934,477 315,323 6,405,013 536,673
Items that may be reclassified subsequently to profit or loss
Other comprehensive income from associates and joint ventures (261,727 ) 81,325 (106,154 ) 306,942
Cumulative translation adjustment (2,745,927 ) 1,131,753 (815,629 ) 5,404,600
Unrealized Gains (Losses) on net investment hedge 1,226,312 (605,095 ) 310,665 (3,088,731 )
Unrealized Gains (Losses) on financial instruments, net of tax 3,702 3,418 1,461 (15,071 )
(1,777,640 ) 611,401 (609,657 ) 2,607,740
Items that will not be reclassified subsequently to profit or loss
Remeasurement of defined benefit pension plan, net of tax (26,078 ) - (26,078 ) -
(26,078 ) - (26,078 ) -
Other comprehensive income for the period, net of tax (1,803,718 ) 611,401 (635,735 ) 2,607,740
Total comprehensive income for the period, net of tax 2,130,759 926,724 5,769,278 3,144,413
Total comprehensive income attributable to:
Owners of the parent 2,141,185 922,316 5,750,357 3,089,612
Non-controlling interests (10,426 ) 4,408 18,921 54,801
2,130,759 926,724 5,769,278 3,144,413
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements
GERDAU S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
in thousands of Brazilian reais (R$)
(Unaudited)
Attributed to parent company's interest
Retained earnings Other Reserves
Capital Treasury stocks Capital Reserve Legal reserve Tax Incentives Reserve Investments and working capital reserve Retained earnings Operations with non-controlling interests Gains and losses on net investment hedge Gains and losses on financial instruments Cumulative translation adjustment Pension Plan Stock Option

Total parent

company's interest

Non-controlling interests Total Shareholder's Equity
Balance as of January 1, 2020 19,249,181 (242,542 ) 11,597 799,297 714,798 4,130,611 - (2,870,825 ) (6,367,200 ) (12,062 ) 11,762,809 (365,863 ) 145,900 26,955,701 217,426 27,173,127
2020 Changes in Equity
Net income - - - - - - 531,897 - - - - - - 531,897 4,776 536,673
Other comprehensive income (loss) recognized in the period - - - - - - - - (3,088,731 ) (15,071 ) 5,661,517 - - 2,557,715 50,025 2,607,740
Total comprehensive income (loss) recognized in the period - - - - - - 531,897 - (3,088,731 ) (15,071 ) 5,661,517 - - 3,089,612 54,801 3,144,413
Long term incentive plan cost recognized in the period - - - - - - - - - - - - (2,926 ) (2,926 ) (3 ) (2,929 )
Long term incentive plan exercised during the period - 12,754 - - - (3,506 ) - - - - - - - 9,248 - 9,248
Effects of interest changes in subsidiaries - - - - - - - - - - - - - - 1,364 1,364
Complementary dividends - - - - - (13 ) - - - - - - - (13 ) - (13 )
Dividends/interest on equity - - - - - - - - - - - - - - (63,837 ) (63,837 )
Balance as of June 30, 2020 (Note 18) 19,249,181 (229,788 ) 11,597 799,297 714,798 4,127,092 531,897 (2,870,825 ) (9,455,931 ) (27,133 ) 17,424,326 (365,863 ) 142,974 30,051,622 209,751 30,261,373
Balance as of January 1, 2021 19,249,181 (229,309 ) 11,597 908,946 887,590 5,495,796 - (2,870,825 ) (8,872,114 ) (14,034 ) 16,550,072 (417,904 ) 161,275 30,860,271 224,939 31,085,210
2021 Changes in Equity
Net income - - - - - - 6,367,890 - - - - - - 6,367,890 37,123 6,405,013
Other comprehensive income (loss) recognized in the period - - - - - - - - 310,665 1,461 (903,618 ) (26,041 ) - (617,533 ) (18,202 ) (635,735 )
Total comprehensive income (loss) recognized in the period - - - - - - 6,367,890 - 310,665 1,461 (903,618 ) (26,041 ) - 5,750,357 18,921 5,769,278
Long term incentive plan cost recognized in the period - - - - - - - - - - - - (157,073 ) (157,073 ) (61 ) (157,134 )
Long term incentive plan exercised during the period - 76,336 - - - 66,418 - - - - - - - 142,754 48 142,802
Effects of interest changes in subsidiaries - - - - - - - - - - - - - - (4,923 ) (4,923 )
Complementary dividends - - - - - - (527 ) - - - - - - (527 ) - (527 )
Dividends/interest on equity - - - - - - (682,199 ) - - - - - - (682,199 ) (12,132 ) (694,331 )
Balance as of June 30, 2021 (Note 18) 19,249,181 (152,973 ) 11,597 908,946 887,590 5,562,214 5,685,164 (2,870,825 ) (8,561,449 ) (12,573 ) 15,646,454 (443,945 ) 4,202 35,913,583 226,792 36,140,375

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

GERDAU S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of Brazilian reais (R$)
(Unaudited)
For the six-month period ended
Note June 30, 2021 June 30, 2020
Cash flows from operating activities
Net income for the period 6,405,013 536,673
Adjustments to reconcile net income for the period to net cash provided by operating activities:
Depreciation and amortization 21 1,279,329 1,168,158
Equity in earnings of unconsolidated companies 8 (385,938 ) (6,400 )
Exchange variation, net 22 127,271 (56,764 )
(Gains) Losses on financial instruments, net 22 (3,591 ) (720 )
Post-employment benefits 124,389 99,304
Stock based compensation 28,610 19,656
Income tax 7 2,502,732 151,326
Gains on disposal of property, plant and equipment, net 1,867 (12,677 )
Impairment of financial assets 5,161 68,759
Provision (reversal) of tax, civil, labor and environmental liabilities, net 63,101 76,019
Credit recovery, net (855,992 ) (457,185 )
Interest income on short-term investments (67,389 ) (53,004 )
Interest expense on debt and debentures 22 433,534 510,349
Interest on loans with related parties 16 (3,068 ) (3,634 )
(Reversal) Provision for net realizable value adjustment in inventory, net 6 (3,415 ) (36,296 )
9,651,614 2,003,564
Changes in assets and liabilities
Increase in trade accounts receivable (2,218,579 ) (309,921 )
Increase in inventories (5,033,866 ) (548,940 )
Increase (Decrease) in trade accounts payable 1,641,969 (611,673 )
(Increase) Decrease in other receivables (146 ) 185,477
Decrease in other payables (1,059,255 ) (39,031 )
Dividends from associates and joint ventures 13,863 11,805
Purchases of trading securities (998,343 ) (1,742,835 )
Proceeds from maturities and sales of trading securities 1,480,923 2,980,706
Cash provided by operating activities 3,478,180 1,929,152
Interest paid on loans and financing (470,441 ) (521,123 )
Interest paid on lease liabilities (32,091 ) (31,227 )
Income and social contribution taxes paid (856,536 ) (49,235 )
Net cash provided operating activities 2,119,112 1,327,567
Cash flows from investing activities
Purchases of property, plant and equipment 9 (1,000,723 ) (742,247 )
Proceeds from sales of property, plant and equipment, investments and other intangibles 14,178 18,598
Purchases of other intangibles (82,495 ) (62,076 )
Capital increase in joint ventures - (42,782 )
Net cash used in investing activities (1,069,040 ) (828,507 )
Cash flows from financing activities
Dividends and interest on capital paid (1,136,364 ) (70,483 )
Proceeds from loans and financing 310,027 1,927,216
Repayment of loans and financing (1,639,034 ) (1,297,055 )
Leasing payment (134,626 ) (120,917 )
Intercompany loans, net 50,531 (28,917 )
Net cash (used in) provided by financing activities (2,549,466 ) 409,844
Exchange variation on cash and cash equivalents (91,582 ) 513,105
(Decrease) Increase in cash and cash equivalents (1,590,976 ) 1,422,009
Cash and cash equivalents at beginning of period 4,617,204 2,641,652
Cash and cash equivalents at end of period 3,026,228 4,063,661

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 1 - GENERAL INFORMATION

Gerdau S.A. is a publicly traded corporation (sociedade anônima) with its corporate domicile in the city of São Paulo, Brazil. Gerdau S.A and subsidiaries (collectively referred to as the 'Company') is a leading producer of long steel in the Americas and one of the largest suppliers of special steel in the world. In Brazil, the Company also produces flat steel and iron ore, activities which expanded the product mix and made its operations even more competitive. The Company believes it is the largest recycler in Latin America and around the world it transforms each year millions of tons of scrap into steel, reinforcing its commitment to sustainable development of the regions where it operates. Gerdau is listed on the São Paulo, New York and Madrid stock exchanges.

The Condensed Consolidated Interim Financial Statements of the Company were approved by the Management on August 3, 2021.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

2.1 - Basis of Presentation

The Company's Condensed Consolidated Interim Financial Statements for the three-month and six-month periods ended on June 30, 2021 have been prepared in accordance with International Accounting Standard (IAS) Nº 34, which establishes the content of condensed interim financial statements. These Condensed Consolidated Interim Financial Statements should be read in conjunction with the Consolidated Financial Statements of Gerdau S.A., as of December 31, 2020, which were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board - IASB.

The preparation of the Condensed Consolidated Interim Financial Statements in accordance with IAS 34 requires Management to make accounting estimates. The Condensed Consolidated Interim Financial Statements have been prepared using the historical cost as its basis, except for the valuation of certain financial instruments, which are measured at fair value.

The accounting policies applied in this Condensed Consolidated Interim Financial Statements are the same as those applied in the Consolidated Financial Statements for the year ended December 31, 2020.

2.2 - New IFRS and Interpretations of the IFRIC (International Financial Reporting Interpretations Committee)

The issued and/or reviewed IFRS standards made by the IASB that are effective for the year started in 2021 had no impact on the Company's Financial Statements. In addition, the IASB issued/reviewed some IFRS standards, which have mandatory adoption for the year 2022 and/or after, and the Company is assessing the adoption impact of these standards in its Consolidated Financial Statements.

- Amendment to IAS 1 - Classification of liabilities as Current or Non-current. It clarifies aspects to be considered for the classification of liabilities as Current Liabilities or Non-current Liabilities. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2023. The Company does not expect material impacts on its Financial Statements.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

- Annual improvements in IFRS 2018-2020 standards. It changes the IFRS 1, addressing aspects of first-time adoption in a subsidiary; IFRS 9, addressing the 10% test criterion for reversing financial liabilities; IFRS 16, covering illustrative examples of leasing and IAS 41, covering aspects of measurement at fair value. These changes are effective for fiscal years beginning on/or after January 1, 2022. The Company does not expect material impacts on its Financial Statements.

- Amendment to IAS 16 - Property, plant and equipment: Result generated before reaching the expected conditions of use. It clarifies aspects to be considered for the classification of items produced before the asset is in the projected conditions of use. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2022. The Company does not expect material impacts on its Financial Statements.

- Amendment to IAS 37 - Onerous contract: Cost of fulfilling a contract. It clarifies aspects to be considered for the classification of costs related to the fulfillment of an onerous contract. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2022. The Company does not expect material impacts on its Financial Statements.

- Amendment to IFRS 3 - References to conceptual framework. It clarifies conceptual alignments of this standard with the IFRS conceptual framework. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2022. The Company does not expect material impacts on its Financial Statements.

- Amendment to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting Policies. It clarifies aspects to be considered in the disclosure of accounting policies. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2023. The Company does not expect material impacts on its Financial Statements.

- Amendment to IAS 8 - Definition of Accounting Estimates. It clarifies aspects to be considered in the definition of accounting estimates. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2023. The Company does not expect material impacts on its Financial Statements.

- Amendment to IFRS 16 - Leases. It clarifies aspects to be considered in rent concessions that have a direct relation with Covid-19 pandemic. This amendment to the standard is effective for fiscal years beginning on/or after April 1, 2021. The Company does not expect material impacts on its Financial Statements.

- Amendment to IAS 12 - Deferred Tax related to Assets and Liabilities arising from a Single Transaction. It clarifies aspects to be considered when recognizing deferred tax assets and liabilities related to taxable temporary differences and deductible temporary differences. This amendment to the standard is effective for fiscal years beginning on/or after January 1, 2023. The Company does not expect material impacts on its Financial Statements.

2.3 - Risk of disease outbreaks and health epidemics: Covid-19

The Covid-19 pandemic continues to impact global economic activity and represents the risk that the Company, employees, service providers, suppliers, customers and other business partners may be prevented from carrying out certain business activities for an indefinite period, including due to stoppages that may be requested or mandated by government officials or elected by companies as a preventive measure.

The Company is following all the Covid-19 pandemic prevention guidelines issued by the competent health agencies in the countries in which it operates. In this regard, the Company adopted a series of measures to mitigate the risk of transmission in the workplace, such as the recommendation of the home office, the creation of crisis committees and the cancellation of national and international trips and participation in external events. The Company also reinforces that the health and safety of people are non-negotiable values. The Company has been daily monitoring the evolution of the pandemic scenario and the impacts that this situation has on the routines of employees, their families and, also, for the business.

The nature of our business is complex and, in order to continue operating, much of our work cannot be done remotely. Therefore, our focus is to reduce the risk of the virus spreading through our operations, as operational continuity is essential for jobs, for neighboring communities and for the economies of the countries and regions where we operate. Our plants and offices, therefore, have contingency plans to deal with the ongoing impact of the pandemic, which will continue to be reviewed as the situation evolves.

The risks arising from outbreaks of diseases and epidemics, notably those arising from the Covid-19 pandemic, can contribute significantly to the deterioration of economic conditions in Brazil and globally and could, among other consequences, (i) negatively impact even more the global demand for steel or even lower market prices for products, which can result in a continuous reduction in the Company's sales, operating income and cash flows; (ii) make it more difficult or costly to obtain financing for operations or refinance debt in the future; (iii) impair the financial condition of some of the customers and suppliers; and (iv) reduce investment programs. The Company constantly monitors the risks of commodity prices, interest rates and exchange rates, credit risk management and capital management (note 14.c).

The Company believes that it has no evidence of any risk of operational continuity. However, changes that deteriorate the economic and business environment, or significant changes in the economy or financial market that result in increased risk perception or reduced liquidity and refinancing capacity, if manifested in a greater intensity than anticipated in the scenarios. contemplated by Management, may lead the Company to review its projections and, eventually, may affect the Company's ability to meet its obligations and / or lead to the recognition of losses due to the non-recoverability of its assets.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 3 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

3.1 - Subsidiaries

The Company did not have material changes of interest in subsidiaries for the period ended on June 30, 2021, when compared to those existing on December 31, 2020.

3.2 - Joint Ventures

The Company did not have material changes of interest in joint ventures for the period ended on June 30, 2021, when compared to those existing on December 31, 2020.

3.3 - Associate companies

The Company did not have material changes in interest in associate companies for the period ended on June 30, 2021, when compared to those existing on December 31, 2020.

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

Cash and cash equivalents

June 30, 2021 December 31, 2020
Cash 123,392 9,060
Banks and immediately available investments 2,902,836 4,608,144
Cash and cash equivalents 3,026,228 4,617,204

Immediately available investments include investments with maturity up to 90 days, immediate liquidity and low risk of fair value variation.

Short-term investments

June 30, 2021 December 31, 2020
Short-term investments 2,611,586 3,041,143

Short-term investments include Bank Deposit Certificates and marketable securities, which are stated at their fair value. Income generated by these investments is recorded as financial income.

NOTE 5 - ACCOUNTS RECEIVABLE

June 30, 2021 December 31, 2020
Trade accounts receivable - in Brazil 3,354,973 2,081,740
Trade accounts receivable - exports from Brazil 48,568 26,121
Trade accounts receivable - foreign subsidiaries 2,514,705 1,766,555
(-) Impairment of financial assets (132,803 ) (137,146 )
5,785,443 3,737,270

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Accounts receivable by aging are as follows:

June 30, 2021 December 31, 2020
Current 5,393,186 3,466,000
Past-due:
Up to 30 days 292,837 259,756
From 31 to 60 days 109,001 48,905
From 61 to 90 days 17,474 9,355
From 91 to 180 days 36,704 13,636
From 181 to 360 days 11,186 15,899
Above 360 days 57,858 60,865
(-) Impairment on financial assets (132,803 ) (137,146 )
5,785,443 3,737,270

NOTE 6 - INVENTORIES

June 30, 2021 December 31, 2020
Finished products 5,239,351 3,894,698
Work in progress 3,289,283 2,045,158
Raw materials 3,540,176 1,934,958
Storeroom supplies 780,262 786,401
Imports in transit 954,831 514,321
(-) Allowance for adjustments to net realizable value (2,747 ) (6,119 )
13,801,156 9,169,417

The allowance for adjustment to net realizable value of inventories, on which the provision and reversal of provision are registered with impact on cost of sales, is as follows:

Balance as of January 1, 2020 (39,308 )
Provision for the year (6,562 )
Reversal of adjustments to net realizable value 47,259
Exchange rate variation (7,508 )
Balance as of December 31, 2020 (6,119 )
Provision for the year (2,760 )
Reversal of adjustments to net realizable value 6,175
Exchange rate variation (43 )
Balance as of June 30, 2021 (2,747 )

NOTE 7 - INCOME AND SOCIAL CONTRIBUTION TAXES

In Brazil, income taxes include federal income tax (IR) and social contribution (CS), which represents an additional federal income tax. The statutory rates for income tax and social contribution are 25% and 9%, respectively, and are applicable for the periods ended on June 30, 2021 and 2020. The foreign subsidiaries of the Company are subject to taxation at rates ranging between 23.0% and 35.0%. The differences between the Brazilian tax rates and the rates of other countries are presented under 'Difference in tax rates in foreign companies' in the reconciliation of income tax and social contribution below.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

a) Reconciliations of income and social contribution taxes at statutory rates to amounts presented in the Statement of Income are as follows:

For the three-month period ended
June 30, 2021 June 30, 2020
Income before income taxes 5,620,574 445,856
Statutory tax rates 34 % 34 %
Income and social contribution taxes at statutory rates (1,910,995 ) (151,590 )
Tax adjustment with respect to:
- Difference in tax rates in foreign companies (252,247 ) 116,960
- Equity in earnings of unconsolidated companies 80,573 (1,391 )
- Interest on equity * (1,773 ) -
- Deferred tax assets not recognized 219,982 (87,595 )
- Tax credits and incentives 34,315 1,517
- Realization of deferred tax assets not recognized 122,451 3,300
- Other permanent differences, net 21,597 (11,734 )
Income and social contribution taxes (1,686,097 ) (130,533 )
Current (1,140,752 ) (74,154 )
Deferred (545,345 ) (56,379 )
For the six-month period ended
June 30, 2021 June 30, 2020
Income before income taxes 8,907,745 687,999
Statutory tax rates 34 % 34 %
Income and social contribution taxes at statutory rates (3,028,633 ) (233,919 )
Tax adjustment with respect to:
- Difference in tax rates in foreign companies 65,256 792,897
- Equity in earnings of unconsolidated companies 131,219 2,176
- Interest on equity * 73,693 -
- Deferred tax assets not recognized - (725,108 )
- Tax credits and incentives 58,374 2,626
- Realization of deferred tax assets not recognized 122,451 3,300
- Other permanent differences, net 74,908 6,702
Income and social contribution taxes (2,502,732 ) (151,326 )
Current (1,884,568 ) (159,075 )
Deferred (618,164 ) 7,749

(*) Brazilian Law 9,249/95 provides that a company may, at its sole discretion, consider dividends distributions to shareholders to be considered as interest on own capital - subject to specific limitations - which has the effect of a taxable deduction in the determination of income tax and social contribution. The limitation is the greater of (i) shareholders' equity multiplied by the TJLP (Long Term Interest Rate) rate or (ii) 50% of the net income in the fiscal year. This expense is not recognized for the purpose of preparing the financial statements and therefore does not impact net income.

b) Tax Assets not booked:

Due to the lack of expectation to use tax losses, negative social contribution base and deferred exchange variation arising from some operations in Brazil, the Company did not recognize a portion of tax assets of R$ 719,458 (R$ 764,845 on December 31, 2020), which do not have an expiration date. The subsidiaries abroad had R$ 1,132,153 (R$ 1,180,067 as of December 31, 2020) of tax credits on capital losses for which deferred tax assets have not been booked and which expire between 2029 and 2035 and also several tax losses of state credits in the amount of R$ 1,370,408 (R$ 1,623,459 as of December 31, 2020), which expire at various dates between 2021 and 2040.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 8 - INVESTMENTS

Investments in
North America 		Investments in
South America 		Investments in
Special Steel 		Investments in
Brazil 		Others Total
Balance as of January 01, 2020 681,807 748,392 224,201 11,473 146,526 1,812,399
Equity in earnings 23,494 99,913 8,900 (1,288 ) 21,550 152,569
Cumulative Translation Adjustment 165,479 195,286 (1,949 ) - - 358,816
Capital increase 42,782 - - - - 42,782
Dividends/Interest on equity (5,223 ) (67,546 ) - - (22,168 ) (94,937 )
Balance as of December 31, 2020 908,339 976,045 231,152 10,185 145,908 2,271,629
Equity in earnings 119,666 245,212 18,250 (3,708 ) 6,518 385,938
Cumulative Translation Adjustment (36,333 ) (70,526 ) 1,708 (1,440 ) 437 (106,154 )
Capital increase - - - 27,500 - 27,500
Dividends/Interest on equity (2,460 ) - (2,763 ) - (21,767 ) (26,990 )
Balance as of June 30, 2021 989,212 1,150,731 248,347 32,537 131,096 2,551,923

NOTE 9 - PROPERTY, PLANT AND EQUIPMENT

a) Summary of changes in property, plant and equipment - during the three-month period ended on June 30, 2021, acquisitions amounted to R$ 565,595 (R$ 270,659 as of June 30, 2020), and disposals amounted to R$ 15,721 (R$ 2,637 as of June 30, 2020). During the six-month period ended on June 30, 2021, acquisitions amounted to R$ 1,000,723 (R$ 742,247 as of June 30, 2020), and disposals amounted to R$ 16,045 (R$ 5,922 as of June 30, 2020).

b) Capitalized borrowing costs - borrowing costs capitalized during the three-month period ended on June 30, 2021 amounted to R$ 7,903 (R$ 5,899 as of June 30, 2020). During the six-month period ended on June 30, 2021 amounted to R$ 15,609 (R$ 13,491 as of June 30, 2020).

c) Guarantees - no property, plant and equipment were pledged as collateral for loans and financing on June 30, 2021 and December 31, 2020.

NOTE 10 - GOODWILL

The changes in goodwill are as follows:

Goodwill Accumulated
impairment losses 		Goodwill after
Impairment losses
Balance as of January 1, 2020 17,445,205 (7,975,894 ) 9,469,311
(+/-) Foreign exchange effect 4,976,383 (2,342,175 ) 2,634,208
Balance as of December 31, 2020 22,421,588 (10,318,069 ) 12,103,519
(+/-) Foreign exchange effect (890,528 ) 455,307 (435,221 )
Balance as of June 30, 2021 21,531,060 (9,862,762 ) 11,668,298

The amounts of goodwill by segment are as follows:

June 30, 2021 December 31, 2020
Brazil 373,135 373,135
Special Steels 3,685,537 3,828,841
North America 7,609,626 7,901,543
11,668,298 12,103,519

NOTE 11 - TRADE ACCOUNTS PAYABLE

June 30, 2021 December 31, 2020
Trade accounts payable - domestic market 4,578,238 3,941,924
Trade accounts payable - debtor risk 843,194 726,045
Trade accounts payable - intercompany 24,936 8,958
Trade accounts payable - imports 1,448,927 761,026
6,895,295 5,437,953

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

The Company has contracts with financial institutions in order to allow its suppliers to receive in advance their receivables through an operation called 'Trade accounts payable - debtor risk'. In this operation, the suppliers transfer the right to receive their receivables to a financial institution, which in turn, becomes the holder of the rights to the suppliers' receivables. The Company constantly monitors the composition of the portfolio and the conditions established with its suppliers, which have not resulted in significant changes in relation to what had been practiced historically.

NOTE 12 - LOANS AND FINANCING

Loans and financing are as follows:

Annual interest rate (*) June 30, 2021 December 31, 2020
Working capital 7.38 % 1,263,855 1,178,557
Financing of property, plant and equipment and others 3.33 % 111,064 333,797
Ten/Thirty Years Bonds 5.37 % 11,521,253 13,100,580
Total financing 12,896,172 14,612,934
Current 247,029 1,424,043
Non-current 12,649,143 13,188,891
Principal amount of the financing 12,735,789 14,413,188
Interest amount of the financing 160,383 199,746
Total financing 12,896,172 14,612,934

(*) Weighted average effective interest costs on June 30, 2021, which in a consolidated basis represents 5.56%

Loans and financing, denominated in Reais, are substantially adjusted at a fixed rate or indexed to the CDI (Interbank Deposit Certificates).

Summary of loans and financing by currency:

June 30, 2021 December 31, 2020
Brazilian Real (R$) 1,249,819 1,245,988
U.S. Dollar (US$) 11,532,819 13,366,946
Other currencies 113,534 -
12,896,172 14,612,934

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

June 30, 2021 December 31, 2020
2022(*) 19,716 5,210
2023 2,027,974 2,108,324
2024 1,629,496 1,813,225
2025 687,942 682,422
2026 on 8,284,015 8,579,710
12,649,143 13,188,891

(*) For the period as of June 30, 2021, the amounts represents payments from July 1, 2022 to December 31, 2022.

a) Credit Lines

In October 2019, the Company completed the renewal of the Global Credit Line in the total amount of US$ 800 million (equivalent to R$ 4,002 million as of June 30, 2021). The transaction aims to provide liquidity to subsidiaries in North America and Latin America, including Brazil. The companies Gerdau S.A., Gerdau Açominas S.A. and Gerdau Aços Longos S.A. provide guarantee for this transaction, which matures in October 2024. As of June 30, 2021, the outstanding balance of this credit facility was US$ 40 million (equivalent to R$ 200 million as of June 30, 2021).

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 13 - DEBENTURES

Quantity as of June 30, 2020
Issuance General Meeting Issued Held in treasury Maturity June 30, 2021 December 31, 2020
15th November, 9, 2018 1,500,000 - 11/21/2022 1,504,491 1,500,985
16th - A April, 25, 2019 600,000 - 05/06/2023 602,539 600,759
16th - B April, 25, 2019 800,000 - 05/06/2026 802,959 800,673
Total Consolidated 2,909,989 2,902,417
Current 14,072 7,463
Non-current 2,895,917 2,894,954

Maturities of long-term amounts are as follows:

June 30, 2021 December 31, 2020
2022 1,498,343 1,497,760
2023 599,175 598,960
2026 798,399 798,234
2,895,917 2,894,954

The debentures are denominated in Brazilian Reais, are nonconvertible, and pay variable interest as a percentage of the CDI - Interbank Deposit Certificate.

The average notional interest rate was 0.84% and 1.35% for the three-month and six-month periods ended on June 30, 2021, respectively (0.81% and 1.89% for the three-month and six-month periods ended on June 30, 2020, respectively).

NOTE 14 - FINANCIAL INSTRUMENTS

a) General considerations - Gerdau S.A. and its subsidiaries enter into transactions with financial instruments whose risks are managed by means of strategies and exposure limit controls. All financial instruments are recorded in the accounting books and presented as short-term investments, loans and financing, debentures, related-party transactions, fair value of derivatives, obligations with FIDC, other current assets, other non-current assets, other current liabilities and other non-current liabilities.

The Company has derivatives and non-derivative instruments, such as the hedge for some operations under hedge accounting. These operations are intended to protect the Company against exchange rate fluctuations on foreign currency loans and against interest rate fluctuations. These transactions are carried out considering direct active or passive exposures, without leverage.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

b) Fair value - the fair value of the aforementioned financial instruments is as follows:

June 30, 2021 December 31, 2020
Book Fair Book Fair
value value value value
Assets
Short-term investments 2,611,586 2,611,586 3,041,143 3,041,143
Related parties 95,254 95,254 134,354 134,354
Fair value of derivatives 8,395 8,395 - -
Other current assets 629,785 629,785 591,523 591,523
Other non-current assets 516,939 516,939 590,864 590,864
Liabilities
Loans and Financing 12,896,172 14,753,634 14,612,934 17,014,948
Debentures 2,909,989 2,856,253 2,902,417 2,775,619
Related parties 31,218 31,218 22,855 22,855
Fair value of derivatives 3,829 3,829 971 971
Obligations with FIDC (current liabilities) 45,943 45,943 944,513 944,513
Other current liabilities 858,312 858,312 797,082 797,082
Obligations with FIDC (non-current liabilities) - - 42,893 42,893
Other non-current liabilities 452,800 452,800 514,886 514,886

The fair values of Loans and Financing and Debentures are based on market premises, which may take into consideration discounted cash flows using equivalent market rates and credit rating. All other financial instruments, which are recognized in the Consolidated Financial Statements at their carrying amount, are substantially similar to those that would be obtained if they were traded in the market. However, because there is no active market for these instruments, differences could exist if they were settled in advance. The fair value hierarchy of the financial instruments above are presented in Note 14.g.

c) Risk factors that could affect the Company's and its subsidiaries' businesses:

Price risk of commodities: this risk is related to the possibility of changes in prices of the products sold by the Company or in prices of raw materials and other inputs used in the productive process. Since the Company operates in a commodity market, net sales and cost of sales may be affected by changes in the international prices of their products or materials. In order to minimize this risk, the Company constantly monitors the price variations in the domestic and international markets and may contract financial derivatives for protection.

Interest rate risk: this risk is related to the effect of interest rate fluctuations on the value of the Company's financial assets and liabilities or future cash flows and income. The Company evaluates its exposure to these risks: (i) comparing financial assets and liabilities denominated at fixed and floating interest rates and (ii) monitoring the variations of interest rates like Libor and CDI. Accordingly, the Company may enter into interest rate swaps in order to reduce this risk.

Exchange rate risk: this risk is related to the possibility of fluctuations in exchange rates affecting the amounts of financial assets or liabilities or future cash flows and income. The Company assesses its exposure to the exchange rate by measuring the difference between the amount of its assets and liabilities in foreign currency. The Company understands that its accounts receivable originated from exports, its cash and cash equivalents denominated in foreign currencies and its investments abroad are more than equivalent to its liabilities denominated in foreign currency. Since the management of these exposures occurs at each operation level, if there is a mismatch between assets and liabilities denominated in foreign currency, the Company may employ derivative financial instruments in order to mitigate the effect of exchange rate fluctuations.

Credit risk: this risk arises from the possibility of the Company not receiving amounts arising from sales to customers or investments made with financial institutions. In order to minimize this risk, the Company adopt the procedure of analyzing in details of the financial position of their customers, establishing a credit limit and constantly monitoring their balances. Regarding short-term investments, the Company invests solely in financial institutions with low credit risk, as assessed by rating agencies. In addition, each financial institution has a maximum limit for investment, determined by the Company's Credit Committee.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Capital management risk: this risk comes from the Company's choice in adopting a financing structure for its operations. The Company manages its capital structure, which consists of a ratio between the financial debts and its own capital (Equity) based on internal policies and benchmarks. The Key Performance Indicators (KPI) related to the 'Capital Structure Management' objective are: WACC (Weighted Average Cost of Capital), Net Debt/EBITDA (Earnings before interest, income tax, depreciation and amortization), Coverage Ratio of Net Financial Expenses (EBITDA/Net Financial Expenses) and Debt/Total Capitalization Ratio. Net Debt is formed by the principal of the debt reduced by cash, cash equivalents and short-term investments (notes 4, 12 and 13). Total Capitalization is formed by the Total Debt (composed of the principal of the debt) and the Equity (Note 18). The Company may change its capital structure, according to economic and financial conditions, in order to optimize its financial leverage and debt management. At the same time, the Company seeks to improve its ROCE (Return on Capital Employed) through the implementation of working capital management and an efficient program of investments in property, plant and equipment. In the long term, the Company seeks to remain within the parameters below, admitting occasional variations in the short term:

Net debt/EBITDA From 1.0 to 1.5 times
Gross debt limit R$ 12 billion
Average maturity more than 6 years

These key indicators are used to monitor objectives described above and may not necessarily be used as indicators for other purposes, such as impairment tests.

Liquidity risk: The Company's management policy of indebtedness and cash on hand is based on using the committed lines and the currently available credit lines with or without a guarantee in export receivables for maintaining adequate levels of short, medium, and long-term liquidity. The maturity of long-term loans and financing, and debentures are presented in Notes 12 and 13, respectively.

Sensitivity analysis:

The Company performed a sensitivity analysis, which can be summarized as follows:

Impacts on Statements of Income
Assumptions Percentage of change June 30, 2021 June 30, 2020
Foreign currency sensitivity analysis 5 % 20,966 51,744
Interest rate sensitivity analysis 10 bps 65,047 88,302
Sensitivity analysis of changes in prices of products sold 1 % 354,731 179,724
Sensitivity analysis of changes in raw material and commodity prices 1 % 198,872 114,550
Sensitivity analysis of Swap of interest rate 50bps - 114
Currency forward contracts 5 % 12,808 775
Commodity contracts 5 % 8,174 -

Foreign currency sensitivity analysis: As of June 30, 2021, the Company is mainly exposed to variations between the Real and the Dollar. The sensitivity analysis carried out by the Company considers the effects of a 5% increase or reduction between the Real and the Dollar in its non-hedged debt. In this analysis, if the Real appreciates against the Dollar, this would represent a gain of R$ 20,966 and R$ 2,762 after the effects arising from the net investment hedge described in note 14.f - (R$ 51,744 and R$ 2,762 on June 30, 2020, respectively). If the Real depreciates against the Dollar this would represent an expense of the same value. Due to the net investment hedge, the variations are minimized when the exchange variation and income tax accounts are analyzed.

The net amounts of trade accounts receivable and trade accounts payable denominated in foreign currency do not represent any relevant risk in the case of any fluctuation of exchange rates.

Interest rate sensitivity analysis: The interest rate sensitivity analysis made by the Company considers the effects of an increase or reduction of 10 basis point (bps) on the average interest rate applicable to the floating part of its debt. The calculated impact, considering this variation in the interest rate totals R$ 65,047 on June 30, 2021 (R$ 88,302 on June 30, 2020) and would impact the Financial expenses account in the Consolidated Statements of Income. The specific interest rates to which the Company is exposed are related to the loans, financing, and debentures presented in Notes 12 and 13, and are mainly comprised by Libor and CDI - Interbank Deposit Certificate.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Sensitivity analysis of changes in sales price of products and price of raw materials and other inputs used in production: The Company is exposed to changes in the price of its products. This exposure is associated with the fluctuation of the sale price of the Company's products and the price of raw materials and other inputs used in the production process, mainly for operating in a commodity market. The sensitivity analysis made by the Company considers the effects of an increase or of a reduction of 1% on both prices. The impact measured considering this variation in the price of products sold, considering the revenues and costs for the six-month period ended on June 30, 2021, totals R$ 354,731 (R$ 179,724 on June 30, 2020) and the variation in the price of raw materials and other inputs totals R$ 198,872 on June 30, 2021 (R$ 114,550 on June 30, 2020). The impact in the price of products sold and raw materials would be recorded in the accounts Net Sales and Cost of Sales, respectively, in the Consolidated Statements of Income. The Company does not expect to be more vulnerable to a change in one or more specific product or raw material.

Sensitivity analysis of interest rate swaps: The Company has exposure to interest rate swaps for some of its loans and financing. The sensitivity analysis calculated by the Company considers the effects of either an increase or a decrease of 50 bps in the interest curve for Pre x DI operations. These variations represent an income or expense of R$ 0 (R$ 114 on June 30, 2020). These effects would be recognized in the Consolidated Income Statement.

Sensitivity analysis of currency forward contracts: the Company has exposure to dollar forward contracts for some of its assets and liabilities. The sensitivity analysis carried out by the Company considers the effects of a 5% increase or decrease in the Dollar against the Peruvian Nuevo Sol, and its effects on the mark-to-market of these derivatives. A 5% increase in the Dollar against the Peruvian Nuevo Sol represents an income of R$ 12,808 (R$ 775 on June 30, 2020) and a 5% decrease in the Dollar against the Peruvian Nuevo Sol represents an expense of the same amount. On June 30, 2020 the Company still held derivatives in Dollars against the Argentine Peso. Forward contracts in Dollar/Nuevo Sol/Argentine Peso were intended to cover asset and liability positions in Dollars and the effects of the mark-to-market of these contracts were recorded in the Consolidated Statement of Income. Dollar forward contracts to which the Company is exposed are presented in note 14.e.

Sensitivity analysis of Commodity contracts: the Company is exposed to Coal forward contracts for part of its imports and liabilities. The sensitivity analysis carried out by the Company considers the effects of a 5% increase or decrease in the international coal price, and its effects on the mark-to-market of these derivatives. A 5% increase in the price of international coal represents income of R$ 8,174 (R$ 0 on June 30, 2020) and a 5% reduction in the Dollar against the Real represents an expense in the same amount. Coal forward contracts were intended to cover imports of this commodity, while the mark-to-market effects of these contracts were recorded in the Consolidated Statement of Income. The coal forward contracts to which the Company is exposed are presented in note 14.e.

d) Financial Instruments per Category

Summary of the financial instruments per category:

Financial asset at
amortized costFinancial asset at fair
value through proft or
lossTotal
June 30, 2021
Assets
Short-term investments - 2,611,586 2,611,586
Fair value of derivatives - 8,395 8,395
Related parties 95,254 - 95,254
Other current assets 629,785 - 629,785
Other non-current assets 456,939 60,000 516,939
Total 1,181,978 2,679,981 3,861,959
Financial result for the three-month period ended on June 30, 2021 (61,545 ) 27,799 (33,746 )
Financial result for the six-month period ended on June 30, 2021 583,399 77,910 661,309

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Liabilities Financial liability at fair
value through profit or
loss 		Financial liability at
amortized cost 		Total
Loans and financing - 12,896,172 12,896,172
Debentures - 2,909,989 2,909,989
Related parties - 31,218 31,218
Obligations with FIDC (current liabilities) - 45,943 45,943
Other current liabilities - 858,312 858,312
Other non-current liabilities - 452,800 452,800
Fair value of derivatives 3,829 - 3,829
Total 3,829 17,194,434 17,198,263
Financial result for the three-month period ended on June 30, 2021 (1,106 ) (225,967 ) (227,073 )
Financial result for the six-month period ended on June 30, 2021 (5,109 ) (869,036 ) (874,145 )
December 31, 2020
Assets 		Financial asset at
amortized cost 		Financial asset at fair
value through proft or
loss 		Total
Short-term investments - 3,041,143 3,041,143
Related parties 134,354 - 134,354
Other current assets 591,523 - 591,523
Other non-current assets 530,864 60,000 590,864
Total 1,256,741 3,101,143 4,357,884
Financial result for the three-month period ended on June 30, 2020 160,894 22,339 183,233
Financial result for the six-month period ended on June 30, 2020 553,204 55,341 608,545
Liabilities Financial liability at
fair value through
profit or loss 		Financial liability at
amortized cost 		Total
Loans and financing - 14,612,934 14,612,934
Debentures - 2,902,417 2,902,417
Related parties - 22,855 22,855
Obligations with FIDC (current liabilities) - 944,513 944,513
Other current liabilities - 797,082 797,082
Obligations with FIDC (non-current liabilities) - 42,893 42,893
Other non-current liabilities - 514,886 514,886
Fair value of derivatives 971 - 971
Total 971 19,837,580 19,838,551
Financial result for the three-month period ended on June 30, 2020 (103 ) (513,061 ) (513,164 )
Financial result for the six-month period ended on June 30, 2020 (103 ) (1,169,638 ) (1,169,741 )

On June 30, 2021, the Company has derivative financial instruments such as interest rate and currency swaps. These derivative financial instruments had their losses and/or realized and unrealized gains presented in the account gains (losses) with financial instruments, net in the Consolidated Statement of Income.

e) Operations with derivative financial instruments

Risk management objectives and strategies: In order to execute its strategy of sustainable growth, the Company implements risk management strategies in order to mitigate market risks.

The objective of the Company with derivative transactions is always related to mitigating market risks as stated in our policies and guidelines. The monitoring of the effects of these transactions is performed monthly by the Financial Risk Management Committee, which validates the mark to market of these transactions. All derivative financial instruments are recognized at fair value in the Consolidated Financial Statements of the Company.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Policy for use of derivatives: The Company is exposed to various market risks, including changes in exchange rates, interest rates and commodities prices. The Company uses derivatives and other financial instruments to reduce the impact of such risks on the fair value of its assets and liabilities or future cash flows and income. The Company has established policies to evaluate the market risks and to approve the use of derivative transactions related to these risks. The Company enters into derivative financial instruments solely to manage the market risks mentioned above and never for speculative purposes. Derivative financial instruments are used only when they have a related position (asset or liability exposure) resulting from business operations, investments and financing.

Policy for determining fair value: the fair value of derivative financial instruments is determined using models and other valuation techniques, including future prices and market curves.

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

The derivatives instruments can be summarized and categorized as follows:

Notional value Amount receivable Amount payable
Contracts Position June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
Currency forward contracts
Maturity in 2021 buyed in US$ US$ 64.0 milion US$ 9.9 milion 1,229 - (3,829 ) (971 )
Commodity Contracts
Maturity in 2021 buyed in US$ US$ 2.6 milion - 7,166 - - -
Total fair value of financial instruments 8,395 - (3,829 ) (971 )
June 30, 2021 December 31, 2020
Fair value of derivatives
Current assets 8,395 -
8,395 -
Fair value of derivatives
Current liabilities (3,829 ) (971 )
(3,829 ) (971 )
June 30, 2021 June 30, 2020
Net Income
Gains on financial instruments 8,700 823
Losses on financial instruments (5,109 ) (103 )
3,591 720
Other comprehensive income
Losses on financial instruments 1,461 (15,071 )
1,461 (15,071 )

f) Net investment hedge

The Company designated as hedge of part of its net investments in subsidiaries abroad the operations of Ten/Thirty Years Bonds. As a consequence, the effect of exchange rate changes on these debts has been recognized in the Statement of Comprehensive Income.

The exchange variation generated on the operations of Ten/Thirty Years Bonds in the amount of US$ 1.8 billion (designated as hedge) is recognized in the Statement of Comprehensive Income.

The Company demonstrated effectiveness of the hedge as of its designation dates and demonstrated the high effectiveness of the hedge from the contracting of each debt for the acquisition of these companies abroad, whose effects were measured and recognized directly in the Statement of Comprehensive Income as an unrealized gain, net of taxes, in the amount R$ 310,665 for the six-month period ended on June 30, 2021 (loss of R$ 3,088,731 for the six-month period ended on June 30, 2020).

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

The objective of the hedge is to protect, during the existence of the debt, the amount of part of the Company's investment in the subsidiaries abroad mentioned above against positive and negative changes in the exchange rate. This objective is consistent with the Company's risk management strategy. Prospective and retrospective tests demonstrated the effectiveness of these instruments.

g) Measurement of fair value:

The IFRS defines fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. The standard also establishes a three-level hierarchy for the fair value, which prioritizes information when measuring the fair value by the Company, to maximize the use of observable information and minimize the use of non-observable information. This IFRS describes the three levels of information to be used to measure fair value:

Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 available, where (unadjusted) quoted prices are for similar assets and liabilities in non-active markets, or other data that is available or may be corroborated by market data for substantially the full term of the asset or liability.

Level 3 - Inputs for the asset or liability that are not based on observable market data, because market activity is insignificant or does not exist.

As of June 30, 2021, the Company had some assets which the fair value measurement is required on a recurring basis. These assets include investments in private securities and derivative instruments.

The accounting balances of financial assets and liabilities of the Company, measured at fair value on a recurring basis and subject to disclosure requirements of IFRS 7 as of June 30, 2021 and December 31, 2020, are as follows:

Fair Value Measurements at Reporting Date Using
Balance per financial statements Quoted Prices in Non-Active Markets
for Similar Assets
(Level 2)
June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
Current assets
Short-term investments 2,611,586 3,041,143 2,611,586 3,041,143
Fair value of derivatives 8,395 - 8,395 -
Other current assets 629,785 591,523 629,785 591,523
Non-current assets
Related parties 95,254 134,354 95,254 134,354
Other non-current assets 516,939 590,864 516,939 590,864
3,861,959 4,357,884 3,861,959 4,357,884
Current liabilities
Short-term debt 247,029 1,424,043 247,029 1,424,043
Debentures 14,072 7,463 14,072 7,463
Fair value of derivatives 3,829 971 3,829 971
Obligations with FIDC 45,943 944,513 45,943 944,513
Other current liabilities 858,312 797,082 858,312 797,082
Non-current liabilities
Long-term debt 12,649,143 13,188,891 12,649,143 13,188,891
Debentures 2,895,917 2,894,954 2,895,917 2,894,954
Related parties 31,218 22,855 31,218 22,855
Obligations with FIDC - 42,893 - 42,893
Other non-current liabilities 452,800 514,886 452,800 514,886
17,198,263 19,838,551 17,198,263 19,838,551

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

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

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

Cash effects Non-cash effects
December 31, 2020 Received/(Paid)
from financing
activities 		Interest Payment Interest on loans,
financing and loans
with related parties 		Exchange
Variance and
others 		June 30, 2021
Related Parties, net (111,499 ) 50,531 - (3,068 ) - (64,036 )
Leasing payable 856,474 (134,626 ) (32,091 ) 32,091 111,308 833,156
Loans and Financing, Debentures and Fair value of derivatives 17,516,322 (1,329,007 ) (470,441 ) 435,534 (348,813 ) 15,801,595
Cash effects Non-cash effects
January 01, 2020 Received/(Paid)
from financing
activities 		Interest Payment Interest on loans,
financing and loans
with related parties 		Exchange
Variance and
others 		June, 30, 2020
Related Parties, net (95,445 ) (28,917 ) - (3,634 ) - (127,996 )
Leasing payable 804,269 (120,917 ) (31,227 ) 31,227 169,867 853,219
Loans and Financing, Debentures and Fair value of derivatives 16,047,021 630,161 (521,123 ) 510,349 4,308,711 20,975,119

NOTE 15 - PROVISIONS FOR TAX, CIVIL AND LABOR CLAIMS

The Company and its subsidiaries are party in judicial and administrative proceedings involving labor, civil and tax matters. Based on the opinion of its legal advisors, Management believes that the provisions recorded for these judicial and administrative proceedings are sufficient to cover probable and reasonably estimable losses from unfavorable court decisions and that the final decisions will not have significant effects on the financial position, operational results and liquidity of the Company and its subsidiaries.

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

I) Provisions

June 30, 2021 December 31, 2020
a) Tax provisions 760,001 706,104
b) Labor provisions 442,351 428,821
c) Civil provisions 31,696 37,586
1,234,048 1,172,511

a) Tax Provisions

Tax provisions refer mainly to discussions related to ICMS, IPI, social security contributions, offsetting of PIS and COFINS credits and incidence of PIS and COFINS on other revenues.

b) Labor Provisions

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

c) Civil Provisions

The Company is party to a group of civil, arbitration and/or administrative lawsuits involving various claims and the provision arises from unfavorable decisions and/or probable losses in the ordinary course of proceedings with the expectation of outflow of financial resources for the Company.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

The changes in the tax, labor and civil provisions are shown below:

June 30, 2021 December 31, 2020
Balance at the beginning of the year 1,172,511 809,299
(+) Additions 192,661 559,513
(+) Monetary correction 34,262 104,473
(-) Reversal of accrued amounts (164,141 ) (304,678 )
(+) Foreign exchange effect on provisions in foreign currency (1,245 ) 3,904
Balance at the end of period 1,234,048 1,172,511

II) Contingent liabilities for which provisions were not recorded

Considering the opinion of legal advisors and management's assessment, contingencies listed below have the probability of loss considered as possible (but not likely) and due to this classification, accruals have not been made in accordance with IFRS.

a) Tax contingencies

a.1) The Company and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A. have lawsuits related to the ICMS (state VAT) which are mostly related to credit rights and rate differences, whose demands totaled R$ 473,506.

a.2) The Company and certain of its subsidiaries in Brazil are parties to claims related to: (i) Imposto sobre Produtos Industrializados - IPI, substantially related to IPI credit on inputs, whose demands total the updated amount of R$ 371,838; (ii) PIS and COFINS, substantially related to disallowance of credits on inputs totaling R$ 1,228,153, (iii) social security contributions in the total of R$ 139,259 and (iv) other taxes, whose updated total amount is currently R$ 611,434.

a.3) The Company and its subsidiary Gerdau Aços Longos SA are parties to administrative proceedings related to Withholding Income Tax, levied on interest remitted abroad, linked to export financing formalized through 'Prepayment of Exports Agreements '(PPE) or' Advance Export Receipt '(RAE), in the updated amount of R$ 1,262,105, of which: (i) R$ 904,607 correspond to six lawsuits of the subsidiary Gerdau Aços Longos S.A. that are being processed at the administrative level, where currently two lawsuits recently judged unfavorably at the lower court (Federal Revenue Judgment Office - DRJ) are awaiting the filing of a Voluntary Appeal by the Company, a lawsuit is at the first instance of the Administrative Council for Tax Appeals (CARF) awaiting the judgment of the Voluntary Appeal filed by the Company, and, finally, another 3 lawsuits that are in the Superior Chamber of Tax Appeals (CSRF) of the CARF, for judgment of Special Appeals filed by the Company; and (ii) R$ 357,498 correspond to two lawsuits of Gerdau S.A., which are in the Superior Chamber of Tax Appeals (CSRF) of CARF, for judgment of Special Resources and Appeal filed by the Company.

a.4) The Company is party to administrative proceedings related to goodwill amortization pursuant to articles 7 and 8 of Law 9,532/97, from the basis of calculation of Corporate Income Tax (IRPJ) and Social Contribution on net income (CSLL), resulting from a corporate restructuring started in 2010. The updated total amount of the assessments is R$ 438,249, of which: (i) R$ 24,595 corresponds to a process in which the opposite Declaration Embargoes were rejected against the decision that granted the official appeal in favor of the National Treasury, and the Special Appeal filed by the Company is pending of judgment; (ii) R$ 199,459 corresponds to a lawsuit in which the Company impugnation was rejected by the Federal Revenue Judgment Office (DRJ) and filed a Voluntary Appeal with the Administrative Tax Appeals Council (CARF), which is pending of judgment; (iii) R$ 69,785 correspond to a lawsuit in which the Company had its challenge partially provided and filed a Voluntary Appeal with the Administrative Council for Tax Appeals (CARF), which is pending of judgment; and (iv) R$ 144,410 correspond to a Notice of Infraction received by the Company on December 2, 2019, against which it presented an Objection on December 27, 2019, deemed partially valid by the Federal Revenue Judgment Office (DRJ), pending judgment by the Council Administrative Tax Appeals (CARF) the Voluntary Appeal filed.

a.5)Gerdau S.A. (as successor of Gerdau Aços Especiais S.A.) and its subsidiary Gerdau Internacional Empreendimentos Ltda. are parties to administrative and judicial proceedings relating to IRPJ - Corporate Income Tax and CSLL - Social Contribution Tax, in the current amount of R$ 1,258,370. Such lawsuits relate to profits generated abroad, of which: (i) R$ 1,034,547 correspond to two lawsuits of the subsidiary Gerdau Internacional Empreendimentos Ltda. One of the lawsuits is pending in the lower court, awaiting judgment in the Tax Enforcement Embargoes opposed by the Company and another is pending in the Federal Regional Court of the 4th Region, where the appeals filed by the Company and the National Treasury will be judged in view of the partial judgment rendered in the Tax Execution Embargoes opposed by the Company; and (ii) R$ 223,823 correspond to a lawsuit involving Gerdau S.A. (as successor of Gerdau Aços Especiais S.A.), pending in the first instance awaiting judgment in the Tax Enforcement Embargoes opposed by the Company.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

a.6) Gerdau S.A. (by itself and as successor of Gerdau Aços Especiais S.A.) and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A. are parties to administrative and judicial proceedings relating to the disallowance of goodwill amortization generated in accordance with Article 7 and 8 of Law 9,532/97 - as a result of a corporate restructuring carried out in 2004/2005 - from the tax base of the Corporate Income tax - IRPJ and Social Contribution on Net Income - CSLL. The updated total amount of the assessments amounts to R$ 8,086,018, of which: (i) R$ 5,405,894 correspond to four lawsuits of Gerdau SA (as successor of Gerdau Aços Especiais S.A.) and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A., whose administrative discussion has already ended and are currently in the process of judicial collection, with the companies offering judicial guarantees, under precautionary measures, through Guarantee Insurance, and initiated the legal discussions in Embargoes to Execution, in the respective lawsuits, and in the Embargoes to Execution filed by Gerdau S.A. (as successor of Gerdau Aços Especiais S.A.), on April 8, 2021, in a judgment made at the Federal Regional Court of the 4th Region, the appeal filed by the National Treasury was dismissed, maintaining the sentence that dismissed the tax assessment; and also, in the Embargoes to Execution filed by the subsidiary Gerdau Aços Longos S.A. (as successor of Gerdau Comercial de Aços S.A.), the appeal filed by the National Treasury against the sentence that is pending of judgment by the Regional Federal Court of the 2nd Region that dismissed the tax assessment; (ii) R$ 319,936 corresponds to a lawsuit of the subsidiary Gerdau Aços Longos S.A., in which part of the debt whose administrative discussion has already ended and is under judicial discussion, and the appeal is pending of judgment by the Regional Federal Court of the 2nd Region filed by the National Treasury against the sentence that upheld the Embargoes to Execution and acknowledged the insubstantiation of the tax assessment; (iii) R$ 297,239 corresponds to a lawsuit filed by the subsidiary Gerdau Aços Longos S.A., in which part of the debt whose administrative discussion has ended is under judicial discussion, in which is pending of analysis the embargoes of opposition filed by the Company against the sentence that dismissed its Embargoes to Tax Enforcement; (iv) R$ 4,316 corresponds to a lawsuit filed by subsidiary Gerdau Aços Longos S.A., which is at the Superior Chamber of Tax Appeals (CSRF) of CARF to judge the Special Appeal filed by the Company; (v) R$ 68,395 correspond to a lawsuit of the subsidiary Gerdau Aços Longos S.A., whose administrative discussion ended, and which is pending at the lower court awaiting a decision in the Embargoes to Tax Enforcement filed by the Company; (vi) R$ 136,296 corresponds to a lawsuit filed by Gerdau S.A. (as successor of Gerdau Aços Especiais S.A.), which is in the Superior Chamber of Tax Appeals (CSRF) of CARF for judgment of the Special Appeal filed by the Company; (vii) R$ 152,758 corresponds to a lawsuit filed by the subsidiary Gerdau Aços Longos S.A., which is at the Superior Chamber of Tax Appeals (CSRF) of CARF to judge the Special Appeals filed by the Company and the National Treasury; (viii) R$ 108,061 corresponds to a lawsuit filed by Gerdau S.A. (as successor of Gerdau Aços Especiais S.A.), which is at the Superior Chamber of Tax Appeals (CSRF) of CARF for judgment of the Special Appeal filed by the Company; (ix) R$ 562,637 corresponds to a lawsuit filed by the subsidiary Gerdau Aços Longos S.A., which is pending in the first instance of the Administrative Council for Tax Appeals (CARF) awaiting judgment of the Voluntary Appeal filed by the Company; (x) R$ 490,574 pending before the first instance of the Administrative Council for Tax Appeals (CARF), which awaits judgment of the Voluntary Appeal filed by the Company; (xi) R$ 142,595 corresponds to a lawsuit of the subsidiary Gerdau Aços Longos S.A., separated from the process mentioned in item 'vii' above, and which is currently in the judicial collection phase, and pending of sentence the embargoes against the Tax Enforcement that were opposed by Company; and (xii) R$ 397,317 corresponds to a lawsuit of the subsidiary Gerdau Aços Longos S.A., separated from the lawsuit mentioned in item 'vii' above, and which the Company is preparing to start the judicial discussion.

The Company's tax advisors confirm that the procedures adopted by the Company regarding the tax treatment of profits earned abroad and the goodwill amortization, which led to the aforementioned lawsuits, have complied with the strict legality and, therefore, these lawsuits are classified as possible loss (but not likely).

Brazilian federal authorities and the judiciary branch are investigating certain issues relating to CARF proceedings, as well as specific political contributions made by the Company, with the purpose of determining whether the Company engaged in any illegal conduct. The Company previously disclosed that, in addition to its interactions with Brazilian authorities, the Company was providing information requested by the U.S. Securities and Exchange Commission ('SEC'). The Company has since been informed by the SEC's staff that it has closed its inquiry and therefore is not seeking any further information from the Company regarding these matters. The Company believes it is not possible at this time to predict the term or outcome of the proceedings in Brazil, and that there currently is not enough information to determine whether a provision for losses is required or any additional disclosures.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

b) Civil contingencies

b.1) A lawsuit arising from the request by two civil construction unions in the state of São Paulo alleging that Gerdau S.A. and other long steel producers in Brazil share customers, thus, violating the antitrust legislation. After investigations carried out by the Economic Law Department (SDE - Secretaria de Direito Econômico), the final opinion was that a cartel exists. The lawsuit was therefore forwarded to the Administrative Council for Economic Defense (CADE) for judgment, which resulted in a fine to the Company and other long steel producers, on September 23, 2005, an amount equivalent to 7% of gross revenues in the year before the Administrative Proceeding was commenced, excluding taxes (fine of R$ 245,070, updated by the judicial accountant on August 1, 2013 to R$ 417,820).

Two lawsuits challenge the investigation conducted by the Competition Defense System and its merits judgment, whose grounds are procedural irregularities, especially the production of evidence, based on an economic study, to prove the inexistence of a cartel. The Court, upon offer of bank guarantee letter, granted the suspension of the effects of CADE's decision. Both actions were dismissed, and their respective appeals were also rejected by the Federal Regional Court of the 1st Region. Against both decisions, appeals were lodged with the Superior Court of Justice and the Federal Supreme Court, after admissibility judgment, the appeal to the Superior Court of Justice was admitted and well as substitution of the guarantee offered by insurance guarantee in a decision of October 8, 2019.

In the same order in which the Vice president Judge gave suspensive effect to the Special Appeal, in order to change the guarantee, the Extraordinary Appeal was dismissed, on the grounds of violation of res judicata with recognized general repercussion. Against this decision, the Company filed an Internal Appeal for the TRF1 Plenary, which was dismissed. The Company awaits publication of the judgment to assess the feasibility of filing another appeal.

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

The Company denies having been engaged in any type of anti-competitive conduct and it is certain that it has not practiced the conduct attributed to it, understanding shared by its legal consultants, who consider it is possible to reverse its condemnation.

b.2) The Company and its subsidiaries are parties to other demands of a civil nature that collectively have a discussion amount of approximately R$ 350,195. For these demands, no accounting provision was recorded, since they were considered as possible losses, based on the opinion of its legal counsel.

c) Labor Contingencies

The Company and its subsidiaries are parties to other labor claims that together have an amount of approximately R$ 190,565. For these claims, no accounting provision was made, since these were considered as possible losses, based on the opinion of its legal counsel.

III) Judicial deposits

The Company has judicial deposits related to tax, labor and civil lawsuits as listed below:

June 30, 2021 December 31, 2020
Tax 1,609,203 1,597,995
Labor 82,333 95,234
Civil 134,717 132,562
1,826,253 1,825,791


The balance of judicial deposits as of June 30, 2021, in the amount of R$ 1,520,475, corresponds to judicial deposits made up to June 2017, referring to the same discussion on the inclusion of the ICMS in the tax base of PIS and COFINS, that awaits termination of the lawsuits before the Brazilian courts in order to be returned to the Company.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

The Company and its subsidiaries made judicial deposits and accounting provisions, which in turn were updated in accordance with the SELIC rate, which were referred to the unpaid amounts of PIS and COFINS since 2009, because the collection of which was fully suspended, due to the mentioned judicial deposits.

On March 15, 2017, the Brazilian Federal Supreme Court (STF - Supremo Tribunal Federal) ruled on a claim related to this matter, and by 6 votes to 4, concluded: 'The ICMS does not comprise the tax base for PIS and COFINS assessment purposes'. The STF decision, in principle, affects all the judicial proceedings in progress, due to its general repercussion. Some of these lawsuits already have a favorable final and unappealable decision.

The first of these became final on July 19, 2019, assuring to the Company: i) the right to recover undue payments before the proposed action, in the amount of R$ 122 million (R$ 79 million net of related expenses), and ii) the right to withdraw the judicial deposits made during the course of this action, which was made on September 16, 2019, in the amount of R$ 179 million. The Company recognized the gain when the decision was final and unappealable, considering for the purposes of calculation the exclusion of the ICMS informed in the invoices, and enabled its credit before the Federal Revenue Service of Brazil, which was granted, having started the offsetting procedures.

The second became final on December 18, 2019, assuring to the Company: i) the right to recover undue payments made before the filing of the lawsuit, as well as during its processing, in the amount of R$ 280 million (R$ 185 million net of related expenses), and ii) the right to withdraw judicial deposits made during the course of this action, which was made on May 27, 2020, in the amount of R$ 189 million. The Company recognized the gain when the decision was final and unappealable, considering for the purposes of calculation the exclusion of the ICMS informed in the invoices, as expressly recognized in the final and unappealable decision, and enabled its credit before the Federal Revenue Service of Brazil, which was granted, having started the compensation procedures.

The third became final on June 29, 2020, assuring to the Company: i) the right to recover undue payments made before the filing of the lawsuit, as well as during its processing, in the amount of R$ 147 million (R$ 135 million net of related expenses), and ii) the right to withdraw judicial deposits made during the course of this action in the amount of R$ 193 million. The Company recognized the gain when the decision was final and unappealable, considering for the purposes of calculation the exclusion of the ICMS informed in the invoices and awaits the withdrawal of judicial deposits and the qualification of its credit before the Federal Revenue Service of Brazil in order to start the offsetting procedures.

The fourth became final on November 18, 2020, assuring to the Company: i) the right to recover undue payments made before the filing of the lawsuit, as well as during its processing, in the amount of R$ 940 million (R$ 902 million, net of related expenses), and ii) the right to withdraw judicial deposits made during the course of this action in the amount of R$ 3 million. The Company recognized the gain when the decision was final and unappealable, considering for the purposes of calculation the exclusion of the ICMS informed in the invoices and authorized its credit with the Federal Revenue Service of Brazil, which was granted, having started the offsetting procedures.

The fifth became final on February 24, 2021, assuring to the Company the right to recover undue payments made before the filing of the lawsuit (undue in respect of period of January/2009 to April/2009), in the amount of R$ 73.5 million (R$ 45.8 million, net of related expenses). The Company recognized the gain when the decision was final and unappealable, considering for the purposes of calculation the exclusion of the ICMS informed in the invoices and authorized its credit with the Federal Revenue Service of Brazil, which was granted, having started the offsetting procedures.

The sixth became final on March 25, 2021, assuring to the Company the right to recover undue payments made before the filing of the lawsuit (undue in respect of period of January/2009 to April/2009), in the amount of R$ 5.7 million (R$ 3.6 million, net of related expenses). The Company recognized the gain when the decision was final and unappealable, considering for the purposes of calculation the exclusion of the ICMS informed in the invoices and it is preparing the documents to qualify its credit with the Federal Revenue Service of Brazil.

It is important to note that the Company also has two lawsuits for repetition of undue payment that are awaiting the respective final and unappealable decision. In such actions, the Company is seeking recognition of R$ 683 million (R$ 643 million, net of related expenses) referring to credits prior to the filing of lawsuits, as well as a writ of mandamus, whose estimated undue amount is of R$ 237 million (R$ 213 million, net of related expenses) which became final and unappealable on July 23, 2021, assuring to the Company the right to recover undue payments made during the period from December/2006 to December/2010.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

On May 13, 2021, the Federal Supreme Court ruled the Embargoes for Declaration that the National Treasury Attorney's Office had opposed, alleging that the Supreme Court's decision was silent on certain points, and requesting the modulation of the effects of the decision. In that judgment, the STF accepted, in part, the Embargoes for Declaration, to modulate the effects of the judgment whose production will take place after March 15, 2017 (date on which RE No. 574.706 was judged), except for lawsuits or administrative proceedings filed up to that date, and rejected the embargoes regarding the allegation of omission, obscurity or contradiction and, in the point related to the ICMS excluded from the calculation basis of the PIS-COFINS contributions, it signed the understanding that it is the ICMS informed in the invoice.

After this judgment, the concept of virtually certain for the purposes of the entry of economic benefits and recognition of the asset and the corresponding gain started to be demonstrated. Thus, even though the lawsuits pending judgment on June 30, 2021 have not yet become final and unappealable, the Company recognized in the 2nd quarter of 2021, with sufficient reliability, the amounts of tax credits to which it is entitled, net of related expenses, in the amount of R$ 856 million, of which R$ 393 million was recognized in the Tax Credits Recovery line and R$ 463 million recognized in the Tax Credits Monetary Update line. Such credits are related to (i) 2 unappealable repetition actions that still await the respective final and unappealable decision on June 30, 2021 and (ii) a writ of mandamus with final and unappealable occurred on July 23, 2021, assuring to the Company the right to recover undue payments made during the period from December/2006 to December/2010.

Due to the economic moment strongly impacted by the pandemic caused by Covid-19, as well as the fact that the procedural legislation expressly provides the equivalence of cash and guarantee insurance, the subsidiary Gerdau Aços Longos S.A. requested the replacement of the amounts deposited by it over the years regarding the Inclusion of ICMS in the tax base of PIS and COFINS for a guarantee insurance presented by the Company, in the amount of R$ 1.7 billion, which complies with all the requirements established by the PGFN (Attorney General of the National Treasury) and can be converted into income at any time, ensuring that the Public Treasury receives all the amounts that may eventually be due at the end of the process.

In the lower court decision, therefore, there was a decision to release the funds deposited by the Company. The Public Treasury appealed to the Court and obtained a decision reversing the release of the amounts. The Company, then, filed a complaint to settle divergence between the decision handed down by Federal Judge Ferreira Neves, member of the 4th Specialized Panel of the Federal Regional Court of the 2nd Region, in the case files of process nº 50003743-37.2020.4.02.0000, and the jurisprudence of the Supreme Court (Theme nº 69). With an initially favorable injunction, the decision was later suspended to await the statement by the National Treasury regarding the fine for bad faith litigation applied to the Company. After the manifestation, which did not bring any additional element in relation to the fine for bad faith litigation applied, the Minister understood that the Complaint was not applicable due to the lack of exhaustion of ordinary channels.

Regarding the fine for bad faith litigation, applied due to the allegation of alleged attempt to mislead the Judiciary, the Company informs that it has always manifested itself in the file with procedural good faith and is confident that this will be clarified during the process.

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

The Compulsory Loan, instituted by the Brazilian government in order to expand and improve the energy sector of the country was charged and collected from industrial consumers with monthly consumption equal or greater than to 2000kwh through the 'electricity bills' issued by the electric power distribution companies, was converted into credits to the taxpayers based on the annual value of these contributions made between 1977 and 1993. The legislation sets a maximum 20 years period to return the compulsory loan to the taxpayers, providing Eletrobrás the possibility of anticipating this return through the conversion of those loans in shares of its own issuance.

Prior to the conversion of the credits into shares, those credits were monetary corrected through an indexer and quantifier, called Standard Unit (SU). However, the compulsory loan was charged to the companies in their monthly electricity bills, consolidated during the year, and only indexed by the SU in January of the following year, resulting in a lack of monthly monetary correction during the years of collection, as well as interest. This procedure imputed to taxpayers' considerable financial losses, particularly during the periods when the monthly inflation rates stood at high levels. In order to claim the appropriate interest and monetary correction subtracted by the methodology applied by Eletrobrás, the Company (understood to be legally entities existing at the time and that later became part of Gerdau S.A.) filed lawsuits claiming credits resulting from differences on the monetary correction of principal, interest, default interest and other accessory amounts owed by Eletrobrás due to the compulsory loans.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

In 2015, cases involving representative amounts were definitively judged by the Superior Court of Justice - STJ favorable to the Company so that no further appeals against such decisions apply ('final judgment'). For claims with a final judgment, it yet remains the enforcement of ruling (or execution phase) where the actual amounts to be settled will finally be calculated. Obtaining favorable decisions represented by the final judgment mentioned above, suggests that an inflow of economic benefits may occur in the future.

The Company recognized in the 2nd quarter/2020 result, the amount of R$ 436 million (net of expenses incurred for its realization), corresponding to four processes that evolved into its closing and liquidation phase.

The Company still has other lawsuits pending before the Judiciary, dealing with the subject, with final and unappealable decisions on the merits, favorable to the Company, totaling approximately R$ 1,350 million. With regard to these processes, there are still substantial uncertainties on the timing, the way and the amount to be realized so that it is not yet practicable to reasonably determine that the realization of the gain arising from these decisions has reached a level of virtually certain and that the Company has control over such assets, which implies that such gains are not recorded until such conditions are demonstrably present.

NOTE 16 - RELATED-PARTY TRANSACTIONS

a) Intercompany loans
Maturity June 30, 2021 December 31, 2020
Assets
Joint Venture
Gerdau Corsa SAPI de C.V. January 1, 2022 95,254 117,092
Others
Fundação Gerdau - 17,262
95,254 134,354
Liabilities
Joint venture
Bradley Steel Processors Inc. August 1, 2022 (22,600 ) (22,855 )
Others
Fundação Gerdau December 31, 2022 (8,618 ) -
(31,218 ) (22,855 )
For the six-month period ended
June 30, 2021 June 30, 2020
Net financial income 3,068 3,634
b) Operations with related parties

During the three-month period ended on June 30, 2021, the Company, through its subsidiaries, performed commercial operations with some of its associate companies and joint ventures in sales of R$ 195,539 (R$ 173,579 as of June 30, 2020) and purchases in the amount of R$ 86,582 as of June 30, 2021 (R$ 28,931 as of June 30, 2020). The net balance totals R$ 108,957 as of June 30, 2021 (R$ 144,647 as of June 30, 2020). During the six-month period ended on June 30, 2021, the Company, through its subsidiaries, performed commercial operations with some of its associate companies and joint ventures in sales of R$ 386,165 (R$ 327,823 as of June 30, 2020) and purchases in the amount of R$ 146,227 as of June 30, 2021 (R$ 76,632 as of June 30, 2020). The net balance totals R$ 239,938 as of June 30, 2021 (R$ 251,192 as of June 30, 2020).

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Additionally , the Company recorded revenues of R$ 150 and R$ 300 in the three-month and six-month periods ended on June 30, 2021, respectively (R$ 129 and R$ 258 on June 30, 2020, respectively), derived from rental agreement.

Guarantees granted

Related Party Relationship Object Original Amount Maturity Balance as of June 30, 2021 Balance as of December 31, 2020
Gerdau Corsa S.A.P.I. de C.V. Joint-venture Financing Agreements 3,866,121 Oct/24 2,335,855 2,242,865
c) Price conditions and charges

Loan agreements between Brazilian companies carry interest based on the CDI (Interbank Deposit Certificate) and Libor rate plus exchange variance, when applicable. Sales of products and purchases of inputs are made under terms and conditions agreed between the parties.

d) Management compensation

The Company paid to its management salaries, benefits and variable compensation totaling R$ 13,324 for the three-month period ended on June 30, 2021 (R$ 1,751 for the three-month period ended on June 30, 2020) and R$ 21,958 for the six-month period ended on June 30, 2021 (R$ 9,221 for the six-month period ended on June 30, 2020).

The contributions for the defined contribution plan, related to the management of the Company, totaled R$ 483 for the three-month period ended on June 30, 2021 (R$ 370 on June 30, 2020) and R$ 964 for the six-month period ended on June 30, 2021 (R$ 817 on June 30, 2020).

The cost of social charges , related to the management of the Company, totaled R$ 5,371 for the three-month period ended on June 30, 2021 (R$ 1,791 on June 30, 2020) and R$ 9,242 for the six-month period ended on June 30, 2021 (R$ 6,661 on June 30, 2020).

The cost of long-term incentive plans recognized in income and attributable to key management (members of Board of Directors and executive officers) totaled R$ 4,542 during the three-month period ended on June 30, 2021 (R$ 4,855 for the three-month period ended on June 30, 2020) and R$ 9,192 during the six-month period ended on June 30, 2021 (R$ 9,388 for the six-month period ended on June 30, 2020).

e) Other information from related parties

The Company has contracted a convertible loan into equity interest with the company Brasil ao Cubo Construção modular Ltda., which is presented in the line of Other non-current assets, in the amount of R$ 60,000 on June 30, 2021. Contributions to the assistance entities Fundação Gerdau, Instituto Gerdau and Fundação Ouro Branco, classified as related parties, amounted R$ 30,104 (R$ 25,344 on June 30, 2020). The defined benefit pension plans and the post-employment health care benefit plan are related parties of the Company and the details of the balances and contributions have been presented in the Employee Benefit Note in the Company's annual Financial Statements.

NOTE 17 - OBLIGATIONS WITH FIDC - INVESTMENT FUND IN CREDIT RIGHTS

Part of the assets resulting from the favorable judgments of credits with Eletrobrás mentioned in Note 15 iv, were used to set up a Non Standardized Credit Right Investment Fund, constituted and duly authorized to operate by the Securities and Exchange Commission of Brazil ('FIDC NP Barzel'). On July 14, 2015, the single quota of that FIDC was sold in the acquisition of minority interests' transaction in subsidiaries of Gerdau S.A.

The Company assures the FIDC, through the transfer agreement price adjustments clause, minimum return on the transferred amount of the credit's rights on the lawsuits. However, where the amounts received in the lawsuits exceed the transferred amount, monetarily adjusted, the Company will be entitled to a percentage of that gain. Additionally, the Company has the right of first offer to repurchase those receivables in the event of sale by the Fund, in accordance with the contract subscribed. On April 5, 2021, the Fund decided to sell part of the credit rights and the Company exercised its right of first offer, acquiring such rights at their respective book values, upon payment of R$ 954,916. On June 30, 2021, the Company has the amount of R$ 45,943 recognized in the account 'Obligations with FIDC' in the Current liabilities (R$ 944,513 and R$ 42,893 on December 31, 2020, as Current Liabilities and Non-current liabilities, respectively).

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 18 - EQUITY

a) Capital - The Board of Directors may, without need to change the bylaws, issue new shares (authorized capital), including the capitalization of profits and reserves up to the authorized limit of 1,500,000,000 common shares and 3,000,000,000 preferred shares, all without nominal value. In the case of capital increase through subscription of new shares, the right of preference shall be exercised in up to 30 days, except in the case of a public offering, when the limit is not less than 10 days.

Reconciliation of common and preferred outstanding shares is presented below:

June 30, 2021 December 31, 2020
Common shares Preferred shares Common shares Preferred shares
Balance at the beginning of the period 571,929,945 1,129,231,487 571,929,945 1,127,010,827
Exercise of stock option - 4,414,905 - 2,220,660
Balance at the end of the period 571,929,945 1,133,646,392 571,929,945 1,129,231,487

On June 30, 2021, 573,627,483 common shares and 1,146,031,245 preferred shares are subscribed and paid up, with a total capital of R$ 19,249,181 (net of share issuance costs). Ownership of the shares is presented below:

Shareholders
June 30, 2021 December 31, 2020
Shareholders Common % Pref. % Total % Common % Pref. % Total %
Metalúrgica Gerdau S.A.* 557,898,901 97.3 - 0.0 557,898,901 32.4 557,898,901 97.3 2,147,800 0.2 560,046,701 32.6
Brazilian institutional investors 3,167,533 0.6 220,135,995 19.2 223,303,528 13.0 3,397,955 0.6 227,262,531 19.8 230,660,486 13.4
Foreign institutional investors 3,281,385 0.6 483,113,712 42.1 486,395,097 28.3 3,142,148 0.5 492,076,396 42.9 495,218,544 28.8
Other shareholders 7,582,126 1.3 430,396,685 37.6 437,978,811 25.5 7,490,941 1.3 407,744,760 35.6 415,235,701 24.1
Treasury stock 1,697,538 0.2 12,384,853 1.1 14,082,391 0.8 1,697,538 0.3 16,799,758 1.5 18,497,296 1.1
573,627,483 100.0 1,146,031,245 100.0 1,719,658,728 100.0 573,627,483 100.0 1,146,031,245 100.0 1,719,658,728 100.0

*Metalurgica Gerdau S.A. is the controlling shareholder of the Company and Frepar Participações S.A., Gepar Participações S.A., Jopar Participações S.A. and Klapar Participações S.A. are the ultimate controlling shareholders of the Company.

Preferred shares do not have voting rights and cannot be redeemed but have the same rights as common shares in the distribution of dividends and priority in the capital distribution in case of liquidation of the Company.

b) Treasury stocks

Changes in treasury shares are as follows:

June 30, 2021 December 31, 2020
Common R$ Preferred
shares 		R$ Common R$ Preferred
shares 		R$
Balance at the beginning of the period 1,697,538 557 16,799,758 228,752 1,697,538 557 19,020,418 241,985
Exercise of long-term incentive plan - - (4,414,905 ) (76,336 ) - - (2,220,660 ) (13,233 )
Balance at the end of the period 1,697,538 557 12,384,853 152,416 1,697,538 557 16,799,758 228,752

These shares will be held in treasury for subsequent cancelling or will service the long-term incentive plan of the Company and its subsidiaries or subsequently sold on the market. The average acquisition cost of the treasury preferred shares was R$ 12.31.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

c) Capital reserves - consists of premium on issuance of shares.

d) Retained earnings

I) Legal reserves - under Brazilian Corporate Law, the Company must transfer 5% of the annual net income determined on its statutory books in accordance with Brazilian accounting practices to the legal reserve until this reserve equals 20% of the paid-in capital. The legal reserve can be utilized to increase capital or to absorb losses but cannot be used for dividend purposes.

II) Tax incentive reserve - under Brazilian Corporate Law, the Company may transfer to this account part of net income resulting from government benefits which can be excluded from the basis for dividend calculation.

III) Investments and working capital reserve - consists of earnings not distributed to shareholders and includes the reserves required by the Company's by-laws. The Board of Directors may propose to the shareholders the transfer of at least 5% of the profit for each year determined in its statutory books in accordance with accounting practices adopted in Brazil to this reserve. Amounts can be allocated to the reserve only after the minimum dividend requirements have been met and its balance cannot exceed the amount of paid-in capital. It is also recognized in this account the difference between the average amount of the treasury stocks and transactional value of the share in the case of stock option exercised and assignment of preferred shares. The reserve can be used to absorb losses, if necessary, for capitalization, for payment of dividends or for the repurchase of shares.

e) Operations with non-controlling interests - correspond to amounts recognized in equity for changes in non-controlling interests.

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

NOTE 19 - EARNINGS PER SHARE (EPS)

Basic

For the three-month period ended on
June 30, 2021 June 30, 2020
Common Preferred Total Common Preferred Total
(in thousands, except share and per share data) (in thousands, except share and per share data)
Basic numerator
Allocated net income available to Common and Preferred shareholders 1,313,398 2,603,153 3,916,551 106,011 209,261 315,272
Basic denominator
Weighted-average outstanding shares, after deducting the average of treasury shares 571,929,945 1,133,563,761 571,929,945 1,128,960,152
Earnings per share (in R$) - Basic 2.30 2.30 0.19 0.19
For the six-month period ended on
June 30, 2021 June 30, 2020
Common Preferred Total Common Preferred Total
(in thousands, except share and per share data) (in thousands, except share and per share data)
Basic numerator
Allocated net income available to Common and Preferred shareholders 2,137,216 4,230,674 6,367,890 178,927 352,970 531,897
Basic denominator
Weighted-average outstanding shares, after deducting the average of treasury shares 571,929,945 1,132,150,022 571,929,945 1,128,245,551
Earnings per share (in R$) - Basic 3.74 3.74 0.31 0.31

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

Diluted

For the three-month period ended on
June 30, 2021 June 30, 2020
Diluted numerator
Allocated net income available to Common and Preferred shareholders
Net income allocated to preferred shareholders 2,603,153 209,261
Add:
Adjustment to net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long-term incentive plan 5,866 613
2,609,019 209,874
Net income allocated to common shareholders 1,313,398 106,011
Less:
Adjustment to net income allocated to common shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long-term incentive plan (5,866 ) (613 )
1,307,532 105,398
Diluted denominator
Weighted - average number of shares outstanding
Common Shares 571,929,945 571,929,945
Preferred Shares
Weighted-average number of preferred shares outstanding 1,133,563,761 1,128,960,152
Potential increase in number of preferred shares outstanding due to the long-term incentive plan 7,652,079 9,893,557
Total 1,141,215,840 1,138,853,709
Earnings per share - Diluted (Common and Preferred Shares) - in R$ 2.29 0.18
For the six-month period ended on
June 30, 2021 June 30, 2020
Diluted numerator
Allocated net income available to Common and Preferred shareholders
Net income allocated to preferred shareholders 4,230,674 352,970
Add:
Adjustment to net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long-term incentive plan 11,467 1,118
4,242,141 354,088
Net income allocated to common shareholders 2,137,216 178,927
Less:
Adjustment to net income allocated to common shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of the long-term incentive plan (11,467 ) (1,118 )
2,125,749 177,809
Diluted denominator
Weighted - average number of shares outstanding
Common Shares 571,929,945 571,929,945
Preferred Shares
Weighted-average number of preferred shares outstanding 1,132,150,022 1,128,245,551
Potential increase in number of preferred shares outstanding due to the long-term incentive plan 9,192,519 10,690,358
Total 1,141,342,541 1,138,935,909
Earnings per share - Diluted (Common and Preferred Shares) - in R$ 3.72 0.31

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 20 - LONG-TERM INCENTIVE PLANS

Restricted Shares and Performance Shares Summary:

Balance as of January 1, 2020 13,018,407
Granted 3,146,696
Canceled (1,777,100 )
Exercised (1,918,669 )
Balance as of December 31, 2020 12,469,334
Granted 1,880,189
Canceled (1,563,367 )
Exercised (4,318,893 )
Balance as of June 30, 2020 8,467,263

The Company recognizes the cost of the long-term incentive plan through Restricted Shares and Performance Shares based on the fair value of the options granted on the grant date during the vesting period of each grant. The grace period for the year is 3 years for grants made as from 2017 and 5 years for grants made up to 2016. The costs with long-term incentive plans recognized in the income statement in the three-month period ended on June 30, 2021 was R$ 17,391 (R$ 10,713 on June 30, 2020). The costs with long-term incentive plans recognized in the income statement in the six-month period ended on June 30, 2021 was R$ 28,610 (R$ 19,656 on June 30, 2020).

As of June 30, 2021 the Company has a total of 12,384,853 preferred shares in treasury and, according to note 18, these shares may be used for serving this plan.

NOTE 21 - EXPENSES BY NATURE

The Company opted to present its Consolidated Statement of Income by function. As required by IAS 1, the Consolidated Statement of Income by nature is as follows:

For the three-month periods ended For the six-month periods ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Depreciation and amortization (630,498 ) (611,529 ) (1,279,329 ) (1,168,158 )
Labor expenses (1,719,595 ) (1,270,126 ) (3,410,531 ) (2,670,977 )
Raw material and consumption material (10,437,903 ) (5,600,991 ) (19,887,231 ) (11,455,018 )
Freight (927,934 ) (544,123 ) (1,684,914 ) (1,104,695 )
Other expenses/income (481,812 ) 61,812 (869,793 ) (330,731 )
Tax credits recovery 393,341 - 393,341 -
(13,804,401 ) (7,964,957 ) (26,738,457 ) (16,729,579 )
Classified as:
Cost of sales (13,715,929 ) (8,026,768 ) (26,262,004 ) (16,398,848 )
Selling expenses (168,421 ) (97,034 ) (323,814 ) (216,956 )
General and administrative expenses (307,956 ) (209,415 ) (622,051 ) (459,870 )
Other operating income 37,564 639,724 200,420 663,279
Other operating expenses (42,875 ) (245,997 ) (119,188 ) (248,425 )
Impairment of financial assets (125 ) (25,467 ) (5,161 ) (68,759 )
Tax credits recovery 393,341 - 393,341 -
(13,804,401 ) (7,964,957 ) (26,738,457 ) (16,729,579 )

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 22 - FINANCIAL INCOME

For the three-month periods ended For the six-month periods ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Income from short-term investments 31,913 22,037 69,210 54,039
Interest income and other financial incomes 17,875 28,722 36,486 43,029
Financial income total 49,788 50,759 105,696 97,068
Interest on debts (219,304 ) (282,494 ) (433,534 ) (510,349 )
Monetary variation and other financial expenses (124,603 ) (107,832 ) (223,969 ) (205,399 )
Financial expenses total (343,907 ) (390,326 ) (657,503 ) (715,748 )
Exchange variations, net (115,402 ) 9,440 (127,271 ) 56,764
Tax credits monetary update 462,651 - 462,651 -
Gains (Losses) on financial instruments, net 4,750 197 3,591 720
Financial result, net 57,880 (329,930 ) (212,836 ) (561,196 )

NOTE 23 - SEGMENT REPORTING

Information by business segment:
For the three-month periods ended
Brazil Operation North America Operation South America Operation Special Steels Operation Eliminations and Adjustments Consolidated
June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020
Net sales 8,940,247 3,561,214 6,611,677 3,978,694 1,307,633 554,243 2,649,820 892,745 (379,261 ) (242,063 ) 19,130,116 8,744,833
Cost of sales (5,442,545 ) (3,148,236 ) (5,419,150 ) (3,729,719 ) (1,002,218 ) (470,863 ) (2,243,111 ) (908,178 ) 391,095 230,228 (13,715,929 ) (8,026,768 )
Gross profit 3,497,702 412,978 1,192,527 248,975 305,415 83,380 406,709 (15,433 ) 11,834 (11,835 ) 5,414,187 718,065
Selling, general and administrative expenses (186,208 ) (106,639 ) (136,577 ) (98,525 ) (33,068 ) (23,256 ) (50,831 ) (37,096 ) (69,693 ) (40,933 ) (476,377 ) (306,449 )
Other operating income (expenses) 4,422 16,554 4,205 25,401 5,941 1,242 3,455 9,953 (23,334 ) 340,577 (5,311 ) 393,727
Tax credits recovery - - - - - - - - 393,341 - 393,341 -
Impairment of financial assets (1,942 ) (8,539 ) - (14,966 ) (229 ) (709 ) 1,066 (1,253 ) 980 - (125 ) (25,467 )
Equity in earnings of unconsolidated companies (2,418 ) 84 96,351 (7,865 ) 132,871 (644 ) 8,704 (1,298 ) 1,471 5,633 236,979 (4,090 )
Operational income (Loss) before financial income (expenses) and taxes 3,311,556 314,438 1,156,506 153,020 410,930 60,013 369,103 (45,127 ) 314,599 293,442 5,562,694 775,786
Finacial result, net (128,566 ) (100,162 ) (44,333 ) (72,218 ) (86,658 ) (10,469 ) (58,440 ) (53,520 ) 375,877 (93,561 ) 57,880 (329,930 )
Income (Loss) before taxes 3,182,990 214,276 1,112,173 80,802 324,272 49,544 310,663 (98,647 ) 690,476 199,881 5,620,574 445,856
Income and social contribution taxes (804,180 ) (51,603 ) (264,830 ) (28,888 ) (86,483 ) (11,331 ) (71,479 ) 22,639 (459,125 ) (61,350 ) (1,686,097 ) (130,533 )
Net income (Loss) 2,378,810 162,673 847,343 51,914 237,789 38,213 239,184 (76,008 ) 231,351 138,531 3,934,477 315,323
Supplemental information:
Net sales between segments 379,261 200,973 - 18,819 - - - 22,271 - - 379,261 242,063
Depreciation/amortization 318,642 274,900 142,558 189,581 49,948 36,821 119,350 110,227 - - 630,498 611,529
Information by business segment:
For the six-month periods ended
Brazil Operation North America Operation South America Operation Special Steels Operation Eliminations and Adjustments Consolidated
June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020 		June 30,
2021 		June 30,
2020
Net sales 15,823,429 6,975,495 12,499,631 7,944,706 2,756,534 1,253,360 5,079,940 2,330,218 (686,434 ) (531,405 ) 35,473,100 17,972,374
Cost of sales (9,928,588 ) (6,156,859 ) (10,571,624 ) (7,378,129 ) (2,064,320 ) (1,064,494 ) (4,387,883 ) (2,315,627 ) 690,411 516,261 (26,262,004 ) (16,398,848 )
Gross profit 5,894,841 818,636 1,928,007 566,577 692,214 188,866 692,057 14,591 3,977 (15,144 ) 9,211,096 1,573,526
Selling, general and administrative expenses (356,457 ) (237,519 ) (291,048 ) (214,027 ) (68,532 ) (53,452 ) (109,388 ) (84,481 ) (120,440 ) (87,347 ) (945,865 ) (676,826 )
Other operating income (expenses) 5,148 18,015 11,344 35,964 8,569 9,815 47,352 33,707 8,819 317,353 81,232 414,854
Tax credits recovery - - - - - - - - 393,341 - 393,341 -
Impairment of financial assets (3,316 ) (33,329 ) (3,576 ) (30,276 ) (617 ) (906 ) 1,368 (4,248 ) 980 - (5,161 ) (68,759 )
Equity in earnings of unconsolidated companies (3,708 ) (271 ) 119,666 (25,438 ) 245,212 18,799 18,250 2,553 6,518 10,757 385,938 6,400
Operational income (Loss) before financial income (expenses) and taxes 5,536,508 565,532 1,764,393 332,800 876,846 163,122 649,639 (37,878 ) 293,195 225,619 9,120,581 1,249,195
Finacial result, net (231,484 ) (207,823 ) (95,214 ) (79,649 ) (123,610 ) (11,894 ) (114,693 ) (99,990 ) 352,165 (161,840 ) (212,836 ) (561,196 )
Income (Loss) before taxes 5,305,024 357,709 1,669,179 253,151 753,236 151,228 534,946 (137,868 ) 645,360 63,779 8,907,745 687,999
Income and social contribution taxes (1,339,111 ) (94,100 ) (406,083 ) (80,997 ) (185,153 ) (36,141 ) (128,447 ) 36,074 (443,938 ) 23,838 (2,502,732 ) (151,326 )
Net income (Loss) 3,965,913 263,609 1,263,096 172,154 568,083 115,087 406,499 (101,794 ) 201,422 87,617 6,405,013 536,673
Supplemental information:
Net sales between segments 603,738 470,707 16,515 25,445 16,297 - 49,884 35,253 - - 686,434 531,405
Depreciation/amortization 628,319 535,393 311,663 350,160 102,470 69,225 236,877 213,380 - - 1,279,329 1,168,158
June 30,
2021		 December 31
, 2020		 June 30,
2021		 December 31,
2020		 June 30,
2021		 December 31,
2020		 June 30,
2021		 December 31,
2020		 June 30,
2021		 December 31,
2020		 June 30,
2021		 December 31
, 2020
Investments in associates and joint ventures 32,537 10,186 989,212 908,338 1,150,730 976,046 248,348 231,152 131,096 145,907 2,551,923 2,271,629
Total assets 25,149,621 21,099,735 19,267,985 18,583,439 6,412,682 5,448,922 11,203,451 11,233,676 4,858,308 6,757,237 66,892,047 63,123,009
Total liabilities 8,372,630 7,469,541 5,172,359 5,261,820 1,980,169 1,360,098 2,154,867 1,994,575 13,071,647 15,951,765 30,751,672 32,037,799

The main products by business segment are:

Brazil Operation: rebar, bars, shapes, drawn products, billets, blooms, slabs, wire rod, structural shapes and iron ore.

North America Operation: rebar, bars, wire rod, light and heavy structural shapes.

South America Operation: rebar, bars and drawn products.

Special Steel Operation: stainless steel, round, square and flat bars, wire rod.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

The column of eliminations and adjustments includes the elimination of sales between segments and corporate expenses in the context of the Condensed Consolidated Interim Financial Statements.

The Company's geographic information with net sales classified according to the geographical region where the products were shipped is as follows:

Information by geographic area:
For the three-month periods ended
Brazil Latin America (1) North America (2) Consolidated
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net sales 9,613,177 3,713,654 1,933,819 715,378 7,583,120 4,315,801 19,130,116 8,744,833

(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

Information by geographic area:
For the six-month periods ended
Brazil Latin America (1) North America (2) Consolidated
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net sales 17,233,612 7,384,350 3,771,759 1,607,069 14,467,729 8,980,955 35,473,100 17,972,374
June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
Total assets 31,008,064 28,752,629 8,089,864 7,042,462 27,794,119 27,327,918 66,892,047 63,123,009

(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

IFRS require that the Company disclose the net sales per product and country unless the information is not available and the cost to obtain it would be excessive. Accordingly, management does not consider this information useful for its decision-making process, because it would entail aggregating sales for different markets with different currencies, subject to the effects of exchange differences. Steel consumption patterns and the pricing dynamics of each product or group of products in different countries and different markets within these countries are poorly correlated, and thus the information would not be useful and would not serve to conclude on historical trends and progresses. In light of this scenario and considering that the information on net sales by product and country is not maintained on a consolidated basis and the cost to obtain net sales per product and country would be excessive compared to the benefits that would be derived from this information, the Company is not presenting the breakdown of net sales by product and country.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of June 30, 2021

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

(Unaudited)

NOTE 24 - IMPAIRMENT OF ASSETS

The impairment test of goodwill and other long-lived assets is tested based on the analysis and identification of facts or circumstances that may involve the need to perform the impairment test. The Company performs impairment tests of goodwill and other long-lived assets, based on projections of discounted cash flows, which take into account assumptions such as: cost of capital, growth rate and adjustments applied to flows in perpetuity, methodology for working capital determination, investment plans, and long-term economic-financial forecasts.

To determine the recoverable amount of each business segment, the Company uses the discounted cash flow method, taking as basis, financial and economic projections for each segment. The projections are updated to take into consideration any observed changes in the economic environment of the market in which the Company operates, as well as premises of expected results and historical profitability of each segment.

The impairment test of goodwill allocated to the business segments is carried out annually in December and it is anticipated if events or circumstances indicate that it is necessary. In the test carried out in the year 2020, the Company carried out a sensitivity analysis of the discount rate and perpetuity growth rate using the analysis of the scenario described above, given its potential impacts on cash flows, where an increase of 0.5% in the cash flow discount rate for each segment would result in an recoverable amount exceeding the carrying amount as shown below: a) North America: exceeding the carrying amount by R$ 4,589 million; b) Special Steels: exceeded the book value by R$ 1,568 million; c) South America: exceeded the book value by R$ 3,757 million; and d) Brazil: exceeded the book value by R$ 11,348 million. On the other hand, a decrease of 0.5 % in the perpetuity growth rate of the cash flow of each business segment would result in a recoverable amount exceeding the book value as shown below: a) North America: exceeded the book value by R$ 4,914 million; b) Special Steels: exceeded the book value by R$ 1,754 million; c) South America: exceeded the book value by R$ 3,867 million; and d) Brazil: exceeded the book value by R$ 11,809 million.

The Company concluded that there are no indications that demand the performance of the impairment test of goodwill and other long-lived assets for the period ended on June 30, 2021.

The Company will maintain over 2021 its constant monitoring of the steel market in order to identify any deterioration, significant drop in demand from steel consuming sectors (notably automotive and construction), stoppage of industrial plants or activities relevant changes in the economy or financial market that result in increased perception of risk or reduction of liquidity and refinancing capacity. Although the projections made by the Company provide a challenging scenario, events that impact economic environment and business, if manifested in a greater intensity than that anticipated in the assumptions made by management, may lead the Company to revise its projections of value in use and eventually result in impairment losses.

NOTE 25 - SUBSEQUENT EVENTS

I) On August 2, 2021, the Company proposed the anticipation of the mandatory minimum dividend on income of the current fiscal year, stipulated in its Bylaws, to be paid in the form of dividends, which will be calculated and credited on the shareholding interest owned on August 16, 2021, in the amount of R$ 921.0 million (R$ 0.54 per common and preferred share), with payment on August 26, 2021, which was submitted and approved by the Board of Directors on August 3, 2021.

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Gerdau SA published this content on 04 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 August 2021 21:48:43 UTC.