Gerdau S.A. (GGB) reported disappointing third-quarter 2014 results. Net income came in at R$262 million (US$115.4 million), down 59.2% year over year. The year over year decline is attributable to meager revenue growth, which was more than offset by higher costs of sales, financial expenses and foreign currency translation losses.
Revenues
Gerdau’s net sales in the quarter grew 2% year over year to R$10,705.9 million (US$4,716.3 million).
The company operates its businesses under the following heads:
Revenues sourced from the Brazil BO (business operation) accounted for 33.2% of net revenue in the quarter, declining 10.3% year over year; while that from the North America BO, roughly 34.5% of net revenue, rose 7.3%. The Latin America BO contributed 13.3% of net revenue, edging up 0.1% year over year.
Revenues from Special Steel BO climbed 2.4% and accounted for 19.6% of net revenue. The newly added Iron Ore BO recorded a revenue increase of 63%, representing 1.9% of net revenue.
Crude steel production edged down 0.8% year over year to 4,472 million tons while shipments fell 4.5% to 4,558 million tons.
Margins
Gerdau’s cost of sales rose 5.3% year over year and as a percentage of net revenues, came in at 88.1% versus 85.4% in the year-ago quarter. The top-line improvement was more than offset by an increase in costs, contracting the gross margin by 270 basis points (bps) to 11.9%.
Selling expenses, as a percentage of revenue, inched down 10 bps to 1.6% while general and administrative expenses stood at 4.6%, down 10 bps year over year.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were R$1,224 million (US$539.2 million), down 13.4% year over year with a margin of 11.4% in the quarter. Operating margin was 6.2% versus 8.4% in the year-ago quarter.
Balance Sheet
Exiting third-quarter 2014, Gerdau had cash and cash equivalents of R$2,872.1 million (US$1,181.9 million), up 9.4% from R$2,626.1 million (US$1,193.7 million) in the preceding quarter. Long-term debt increased to R$16,130.5 million (US$6,638.1 million) from R$14,980.7 million (US$6,809.4 million) in second-quarter 2014.
Cash Flow
In nine months ended Sep 30, 2014, Gerdau generated cash of R$1,952.9 million (US$856.5 million) from its operating activities, down 39.1% year over year. Capital spending totaled R$1,593.6 million (US$698.9 million), declining 17% year over year.
During the period, Gerdau’s dividends and interest on capital payment amounted to R$339 million (US$148.7 million).
Gerdau currently has a market capitalization of $7.7 billion and carries a Zacks Rank #3 (Hold). Some better-ranked companies in the industry include United States Steel Corp. (X), LB Foster Co. (FSTR) and Mechel OAO (MTL). While United States Steel sports a Zacks Rank #1 (Strong Buy), both LB Foster and Mechel OAO carry a Zacks Rank #2 (Buy).
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