Financial Statements Electro Aço Altona S.A.

Transcription

1 Financial Statements Electro Aço Altona S.A. and 2011 with Independent Auditor s Report on Financial Statements prepared in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS)

2 Financial statements and 2011 Contents Independent auditor s report on financial statements... 3 Audited financial statements Balance sheets... 5 Income statements... 7 Statements of comprehensive income... 8 Statements of changes in equity... 9 Statements of cash flows Statements of value added

3 Edifício Califórnia Center Rua Dr. Amadeu da Luz, 100 8º Andar - Conj.801- Centro Blumenau- SC Tel:(5547) Fax: (5547) A free translation from Portuguese into English of Independent Auditor s Report on financial statements in accordance with accounting practices adopted in Brazil INDEPENDENT AUDITOR S REPORT ON FINANCIAL STATEMENTS The Board of Directors, Officers and Shareholders Electro Aço Altona S/A We have audited the accompanying financial statements of Electro Aço Altona S/A ( Company ), comprising the balance sheet as at and the related income statement, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting practices and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting practices adopted in Brazil, and with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the Company s financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.

4 An audit also includes evaluating the appropriateness of accounting practices used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Electro Aço Altona S/A as at, and its financial performance and its cash flows for the year then ended in accordance with accounting practices adopted in Brazil, and with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). Statements of value added We have also audited the statement of value added for the year ended December 31, 2012, the presentation of which is required by Brazilian Corporation Law for publiclyheld companies, and as supplementary information under IFRS, whereby no statement of value added presentation is required. These statements have been subject to the same auditing procedures previously described and, in our opinion, are presented fairly, in all material respects, in relation to the overall financial statements. Blumenau (SC), March 20, Ernst & Young Terco Auditores Independentes S.S. CRC-2-SP /O-6 S- SC Marcos Antonio Quintanilha Accountant CRC 1 SP /O 3 T SC

5 A free translation from Portuguese into English of financial statements prepared in accordance with accounting practices adopted in Brazil Electro Aço Altona S/A Balance sheets and 2011 Assets Note 12/31/ /31/2011 Current assets Cash and cash equivalents 4 7,714 12,942 Trade accounts receivable 5 35,612 28,842 Inventories 6 24,298 20,736 Taxes recoverable 7 9,635 7,005 Other accounts receivable 3,348 2,512 Prepaid expenses Total current assets 80,874 72,198 Noncurrent assets Post-employment benefit plan s actuarial assets (health care) 11.c 1,091 1,420 Judicial deposits 11.b Taxes recoverable 7 2,377 2,432 Other accounts receivable Property, plant and equipment 8 167, ,175 Intangible assets Total noncurrent assets 173, ,811 Total assets 254, ,009

6 Electro Aço Altona S/A Balance sheets and 2011 Liabilities and equity Note 12/31/ /31/2011 Current liabilities Loans and financing 10 30,392 26,318 Trade accounts payable 5,814 7,985 Tax Recovery Program (REFIS) 16 2,279 2,298 Taxes and contributions 14 1,325 1,752 Tax incentive (PRODEC) ,878 Leasing Advances from customers 2,617 2,260 Accrued vacation pay and charges 5,196 4,667 Other accounts payable 2,581 2,283 Total current liabilities 50,650 51,168 Noncurrent liabilities Loans and financing 10 16,712 9,904 Tax Recovery Program (REFIS) 16 99,443 98,554 Deferred income and social contribution taxes 18.a 21,233 20,753 Taxes and contributions Leasing Tax incentive (PRODEC) Provision for contingencies 11.a 1, Post-employment benefit plan (health care) 11.c Other accounts payable Total noncurrent liabilities 140, ,401 Equity 12 Capital 8,594 8,594 Legal reserve Equity valuation adjustments 52,238 54,133 Income reserves 2,196 - Retained earnings (accumulated losses) - (7,287) Total equity 63,144 55,440 Total liabilities and equity 254, ,009 See accompanying notes. 6

7 Electro Aço Altona S/A Income statements Years ended and 2011 (In thousands of reais, except earnings per share) Note 12/31/ /31/2011 Net operating income , ,191 Cost of goods sold 24 (134,236) (126,226) 49,547 45,965 Gross profit Operating expenses Selling expenses 24 (11,466) (11,143) General and administrative expenses 24 (18,379) (15,982) Other operating expenses 21 (2,198) (690) Net operating expenses (32,043) (27,815) Income before financial income (expenses) 17,504 18,150 Financial expenses 22 (8,683) (9,589) Financial income 22 3,096 3,953 Financial income (expenses), net (5,587) (5,636) Income before income and social contribution taxes 11,917 12,514 Income and social contribution taxes 18.b (3,956) (3,816) Net income before management profit sharing 7,961 8,698 Management profit sharing 12 (257) - Net income for the year 7,704 8,698 Basic and diluted earnings per share in Reais (R$) See accompanying notes. 7

8 Electro Aço Altona S/A Statements of comprehensive income Years ended and 2011 (In thousands of reais, except earnings per share) Note 12/31/ /31/2011 Net income for the period 7,704 8,698 Other comprehensive income - - Comprehensive income 7,704 8,698 See accompanying notes. 8

9 Electro Aço Altona S/A Statements of changes in equity Periods ended and 2011 Note Capital Legal reserve Income reserve Income to be allocated Retained earnings (accumulate d losses) Equity valuation adjustments Total Balances at December 31, , (17,555) 55,703 46,742 Realization of equity valuation ,570 (1,570) - adjustments Net income for the year ,698-8,698 Balances at December 31, , (7,287) 54,133 55,440 Net income for the year ,704-7,704 Realization of equity valuation 12 adjustments ,895 (1,895) - Legal reserve (116) - - Dividends to be proposed 12-2,196 (2,196) - - Balances at 12 8, ,196-52,238 63,144 See accompanying notes. 9

10 Electro Aço Altona S/A Statements of cash flows Years ended and /31/ /31/2011 CASH FLOWS FROM OPERATING ACTIVITIES Pre-tax income 11,917 12,514 Income and social contribution taxes (3,956) (3,816) Profit sharing (257) - Net income for the period 7,704 8,698 Adjustments to reconcile net income with cash generated by operating activities: Depreciation and amortization 9,398 8,532 Depreciation and amortization written off (889) - Interest and financial charges on loans 2,850 3,499 Proceeds from fixed asset and investment disposals CHANGES IN ASSETS AND LIABILITIES (Increase) decrease in assets Trade accounts receivable (6,807) (6,976) Inventories (3,562) (495) Sundry advances (153) 1,197 Other assets (1,961) (3,156) Increase (decrease) in liabilities Trade accounts payable (2,172) (32) Taxes payable (2,969) (1,002) Labor and social charges (71) 268 Other liabilities 687 (1,323) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,342 9,210 CASH FLOWS FROM INVESTING ACTIVITIES Additions to fixed and intangible assets (18,474) (11,782) Elimination from fixed and intangible assets 3, NET CASH USED IN INVESTING ACTIVITIES (15,389) (11,527) CASH FLOWS FROM FINANCING ACTIVITIES Loans and financing obtained (repaid) 7,819 (947) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,819 (947) INCREASE IN CASH AND CASH EQUIVALENTS (5,228) (3,264) CASH AND CASH EQUIVALENTS At beginning of period 12,942 16,206 At end of period 7,714 12,942 INCREASE IN CASH AND CASH EQUIVALENTS (5,228) (3,264) See accompanying notes. 10

11 Electro Aço Altona S/A Statements of value added Periods ended and /31/ /31/2011 Revenues 202, ,323 Sales of goods, products and services 200, ,168 Operating revenue 2,405 1,155 Inputs acquired from third parties (including taxes) Costs of products, goods and services sold, materials, energy, third-party services and operating expenses (97,344) (90,591) Gross value added 105,402 97,732 Retentions Depreciation and amortization (8,509) (8,532) Net value added generated by the Company 96,893 89,200 Financial income 3,096 3,953 Total value added to be distributed 99,989 93,153 Value added distribution Employees 54,938 47,217 Direct compensation 39,794 35,101 Benefits 11,253 8,527 FGTS 3,891 3,589 Management Profit sharing Taxes 23,833 25,459 Federal 21,721 23,435 State 1,862 1,857 Municipal Debt remuneration 13,257 11,779 Interest and exchange variation 13,257 11,779 Profits 7,704 8,698 Net income for the year 7,704 8,698 See accompanying notes. 11

12 1. Operations ELECTRO AÇO ALTONA S.A. is a publicly-held Company headquartered in Blumenau, Santa Catarina State, Brazil, the business purpose of which is the production and industrial processing in the metal casting and machining sectors and supply of cast carbon steel parts, (low, medium and high) alloy steels and iron alloys for special uses. The Vision, Mission and Values are part of management s daily routine. By innovating and investing in knowledge and technology, the Company is one of the world s leaders in metal casting and machining, renowned for its high quality processes and respect for its people - it was the world s first steel casting company to achieve the international SA 800 certification, in addition to ISO 9001:2008 and other certifications. The Company works on cast components supplied to industries referred to as repetitive, and to order. Its supply to repetitive industries comprises products or parts and pieces and even sets of parts to assemblers, denominated as self-propellers. Production is to order, with the supply of crude steel or machined parts separately or as part of subsets, or as components of complete equipment. Whether repetitive or made to order, all parts are manufactured in accordance with specifications, projects and international technical standards, from customers in the domestic and foreign markets. For years to date, the Company has been committed to transforming steel into applications that foster global development, focusing on a Vision consisting of Being a byword for excellence in the global metal casting market. 2. Summary of significant accounting practices These financial statements were approved by the Company s Board of Directors on March 20, Significant accounting practices adopted in the preparation of these financial statements are defined below. These practices were consistently applied in all the years presented. The financial statements were prepared considering several valuation bases used in accounting estimates. Accounting estimates involved in the preparation of the financial statements were based on objective and subjective factors, as well as management s professional judgment to determine the adequate amount to be recorded in the financial statements. Significant items involving accounting estimates are losses on trade accounts receivable and inventory losses; deferred income and social contribution taxes; provision for contingencies and measurement of financial instruments at fair value. 12

13 Settlement of transactions involving these estimates may result in amounts significantly different from those recorded in the financial statements due to the probabilistic treatment inherent to the estimate process. The Company reviews its estimates and assumptions at least on an annual basis. The financial statements were prepared and are presented in accordance with accounting practices adopted in Brazil, which comprise specific rules from Brazilian Securities and Exchange Commission (CVM) and pronouncements from Brazilian FASB (CPC), which are in conformity with international accounting standards issued by the International Accounting Standards Board ( IASB ). 2.1 Translation of foreign-currency denominated transactions The financial statements are presented in Brazilian Reais (R$), which is the Company s functional currency. Transactions and balances Transactions in foreign currency are initially recorded at the exchange rate to the functional currency of transaction date. Monetary assets and liabilities denominated in foreign currency are translated at the exchange rate to functional currency of balance sheet date, and all translation differences are recorded in the income statement. 2.2 Revenue recognition Revenue is recognized to the extent that it is probable that economic benefits will be generated for the Company and it may be reliably measured. Revenue is measured based on the fair value of consideration received, excluding discounts, rebates and taxes or charges on sales. The Company evaluates revenue transactions in accordance with specific criteria to determine whether it is operating as agent or principal and concluded that it is operating as principal in all of its revenue contracts. The following specific revenue recognition criteria must also be met: Product sales Revenue from product sales is recognized when the significant risks and rewards from title to products are transferred to buyer, which usually takes places upon delivery thereof. Service rendering Revenue from services is recognized based on the service rendered. When services may not be reliably measured, revenue is recognized only to the extent in which expenses incurred may be recovered. 13

14 Interest income For all financial instruments stated at amortized cost, and financial assets earning interest, classified as available for sale, financial income or financial expenses are recorded using the effective interest rate, which exactly discounts future estimated cash payments or receipts along the estimated life of the financial instrument or a shorter period, when applicable, to the net book value of the financial asset or liability. Interest income is included in financial income account, in the income statement. 2.3 Taxes Income and social contribution taxes current Current tax assets and liabilities of last year and prior years are stated at expected recoverable or payable value to the tax authorities. The tax rates and tax legislation considered to calculate the amount are those in force or substantially in force at balance sheet date. Deferred taxes Deferred tax assets are recognized for all deductible temporary differences, unused tax credits and tax losses, to the extent it is probable that taxable income will be available to allow deductible temporary differences to be realized and unused tax credits and tax losses to be used. Deferred tax liabilities are recognized for all temporary tax differences, when applicable. The book value of deferred tax assets is reviewed every balance sheet date and written off to the extent it is no longer probable that taxable income will be available to allow deferred tax asset to be used, whether in full or in part. Deferred tax assets and liabilities are stated at the tax rate expected to be applicable in the year in which the asset will be realized or the liability settled, based on the tax rates (and tax legislation) in force at balance sheet date, and are presented net when there is a legal or constructive right to offset them against tax liabilities and deferred taxes relate to the same taxed entity and are subject to the same tax authorities. Sales taxes Revenues, expenses and assets are recognized net of sales taxes, except: when sales taxes incurred on the purchase of goods or services are not recoverable from the tax authorities, case in which sales taxes are recognized as part of asset cost of acquisition or of the expense item, as applicable; when the amounts receivable and payable are presented together with the amount of sales taxes; and 14

15 the net amount of sales taxes, recoverable or payable, is included as a component of the amounts receivable or payable in the balance sheet. Revenue from sales is subject to the following taxes and contributions and statutory rates: Social Contribution Tax on Gross Revenue for Social Integration Program (PIS): 1.65% Social Contribution Tax on Gross Revenue for Social Security Financing (COFINS): 7.6% State VAT (ICMS): 7% to 18% Service Tax (ISS): 2% to 5% Federal VAT (IPI): 8% to 15% Revenues are stated in the income statement net of taxes. 2.4 Financial instruments (i) Financial Assets Initial recognition and measurement Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, investments held to maturity or financial assets available for sale, as applicable. The Company determines classification of its financial assets upon initial recognition thereof, when it becomes a party to the contractual provisions of the instrument. Financial assets are initially recognized at fair value, increased, in the case of investments not stated at fair value through profit or loss, by transaction costs that are directly attributable to financial asset purchase. The Company s financial assets include cash and cash equivalents, trade accounts receivable and other accounts receivable, loans and other receivables. The Company s financial assets are classified as financial assets at fair value through profit or loss and loans and receivables. Subsequent measurement Subsequent measurement of financial assets depends on their classification, which may be as follows: 15

16 Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets initially stated at fair value through profit or loss. Financial assets are classified as held for trading if acquired with the objective of sale within short term. Financial assets at fair value through profit or loss are presented in the balance sheet at fair value, with the corresponding gains or losses recognized in the income statement. Loans and receivables Loans and receivables are non-derivative financial assets, with fixed or calculable payments, not quoted in an active market. After initial measurement, these financial assets are recorded at amortized cost, using the effective interest rate method, less impairment. Amortized cost is calculated taking into consideration any discount or premium on the acquisition and charges or costs incurred. Amortization of the effective interest rate method is included in financial income line of the income statement. Impairment is recognized as financial expense in the income statement. Derecognition (write-off) A financial asset (or, as applicable, a part of a financial asset or part of a group of similar financial assets) is written off when: The rights to receive cash flows from the asset expire; The Company has transferred its rights to receive cash flows from the asset or assumed an obligation to fully pay the cash flows received, without significant delay, to a third party by operation of an onlending agreement; and (a) the Company has substantially transferred all the risks and rewards of the asset, or (b) the Company has not transferred or substantially retained all the risks and rewards related to the asset, but has transferred control over the asset. (ii) Impairment of financial assets The Company evaluates at balance sheet date whether there is any objective evidence that the financial asset or group of financial assets are not recoverable. A financial asset or group of financial assets are considered not to be recoverable if and only if there is objective evidence of no recoverability as a result of one or more events that have taken place after initial recognition of the asset ( a loss event incurred) and this loss event has an impact on the estimated future cash flow of the financial asset or of the Company from financial assets that may be reasonably estimated. Evidence of impairment may include indication that the borrowers are going 16

17 through significant financial hardship, their probable bankruptcy or another type of financial reorganization, default or delay on payment of interest or principal and when there is indication of a measurable decrease in estimated future cash flow, such as changes in maturity or financial condition related to defaults. (iii) Financial liabilities Initial recognition and measurement Financial liabilities are classified as financial liabilities at fair value through profit or loss and loans and financing. The Company determines the classification of its financial liabilities upon their initial recognition. Financial liabilities are initially recognized at fair value and, in the case of loans and financing, are increased by directly related transaction cost. The Company s financial liabilities include trade accounts payable and other accounts payable, secured accounts (current account with overdraft facilities), loans and financing and financial guarantee contracts. Subsequent measurement of loans and financing After initial recognition, interest-bearing loans and financing are subsequently measured at amortized cost, using the effective interest rate method. Gains and losses are recognized in the income statement upon write-off of the liabilities, as well as during the amortization process by the effective interest rate method. Derecognition (Write-off) A financial liability is written-off when the obligation is revoked, cancelled or expires Trade accounts receivable Trade accounts receivable are recorded for the billed amount, adjusted to present value as applicable, including direct taxes payable by the Company. The allowance for doubtful accounts is set up for an amount considered sufficient by management to cover any losses on accounts receivable. Breakdown of this account is presented in Note 5. 17

18 2.6. Inventories Inventories are carried at the lower of acquisition or production cost or net realizable value. The costs to bring each product to its current location and condition are recorded as follows: (i) Raw materials cost of acquisition based on average cost; and (ii) Finished products and work in process cost of direct materials and labor and a proportional portion of general indirect manufacturing expenses based on normal operating capacity, excluding loan costs. Net realizable value corresponds to the sales price in the normal course of business, less estimated completion costs and estimated necessary selling costs. Breakdown of this account is presented in Note Present value adjustment of assets and liabilities Non-current monetary assets and liabilities are monetarily restated and, therefore are adjusted to present value. Present value adjustment of current monetary assets and liabilities is calculated and only recorded if considered significant in relation to the overall financial statements. For purposes of recording and relevance determination, present value adjustment is calculated taking into consideration the contractual cash flows and explicit and sometimes implicit interest rate, of the corresponding assets and liabilities. At year end the Company assessed the impact of applying the concept of present value in its accounts receivable and payable, and identified that adjustments, if any, would be insignificant; accordingly, the Company chose not to show the impact of present value on its balance sheet Property, plant and equipment These are stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if applicable. The referred to cost includes the cost of replacement of part of property, plant and equipment and loan costs of long term construction projects, when the recognition criteria are met. When significant parts of property, plant and equipment are replaced, the Company recognizes these parts as individual assets with specific useful life and depreciation. Likewise, when a significant inspection is made, its cost is recognized in the book value of property, plant and equipment, if the recognition criteria are met. All the remaining repair and maintenance costs are recognized in the income statement, when incurred. The present value of the expected cost of asset decommissioning after use thereof is included in the cost of the asset if the criteria for recognition of a provision are met. The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Gains or losses, if any, arising therefrom are the difference between the net disposal proceeds and the carrying amount of the asset, and are classified in the income statement for the year in which the asset is derecognized. 18

19 The net book value and useful life of the assets as well as the depreciation methods are reviewed at year end, and adjusted prospectively, when applicable. At January 1, 2010, the Company reviewed useful life of its property, plant and equipment, having changed the depreciation rate of certain assets as from said date Leasing The determination of whether an arrangement is, or contains, a lease is based on the substantive aspects regarding the use of a specific asset or assets or the right to use an asset, at inception date. Finance leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the income statement. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognized as an operating expense in the income statement on a straight-line basis over the lease term Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, if any. The Company has no internally generated intangible assets. The useful lives of the Company s intangible assets are assessed as finite. 19

20 Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the income statement in the expense category consistent with the function of the intangible assets Impairment of non-financial assets Management annually reviews the net book value of assets in order to evaluate events or changes in economic, operating or technological circumstances that may indicate impairment losses. Where such evidence is identified, and the carrying amount of an asset exceeds its recoverable amount, an impairment provision is recognized and the carrying amount is written down to its recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s (CGU) fair value less costs to sell and its value in use. In assessing an asset s value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the weighted average cost of capital for the industry where the cash-generating unit operates. Fair value less costs to sell is determined considering, whenever possible, outright sale agreements in arm s length transactions between knowledgeable and willing parties less costs of disposal; if no outright sale agreements can be identified, this will be based on the market price of an active market or the price of the most recent transaction involving similar assets. At the reporting dates no circumstances were identified indicating the need for an impairment provision Related parties Purchases and sales of inputs and products are made under conditions and terms agreed by the parties, as disclosed in Note Post-employment benefit plan (health care) The Company sponsors a post employment health care plan for its officers. Funding of these benefits is on a cash basis. The cost of benefits granted by the defined benefit plan is established using the method prescribed by CVM Ruling No. 600 of

21 Actuarial commitments with the plan are provisioned following the procedures prescribed by CPC 33, based on actuarial calculations, prepared annually by independent actuaries. In addition, other actuarial assumptions are used, such as estimated evolution of health plan costs, biologic and economic hypotheses and also historic data on expenses incurred and contributions to the plan by employees (Note 11.c). In the defined benefit plan, actuarial and investment risks are fully or partially borne by the sponsoring entity. As such, cost accounting requires measurement of the plan s liabilities and expenses, there being a possibility of actuarial gains and losses, thereby resulting in the recognition of a liability, when the amount of actuarial liabilities exceeds the amount of the benefit plan s assets, or of an asset, when the amount of assets exceeds the amount of the plan s liabilities. In the latter hypothesis, the asset will only be recognized when there is evidence that it may actually reduce the sponsoring entity s contributions or that it will be reimbursable in the future. The outside-the-corridor actuarial gains or losses recognized in the Company s profit or loss corresponds to the excess divided by the average remaining time of service of the plan beneficiaries. The corridor deferral mechanism corresponds to the greater of: (1) 10% of the present value of the total actuarial liabilities of the defined benefit plan; and (2) 10% of the fair value of the plan s assets. The Company recognizes actuarial gains/losses within the year in which the actuarial calculation was made, as permitted by CVM Ruling No. 600/2009. The Company s contributions to health insurance plans sometimes continue being made after the employee s retirement. As such, the Company s liabilities to retirees are measured at actuarial present value of the contributions that will be made over the estimated participation period of the plan s payees and beneficiaries. These liabilities are measured and recognized using the same criteria as the defined benefit plans. The actuarial assets recognized in the balance sheet (Note 11.c) refer to the fair value of the plan s assets, to be compulsorily realized until the end of the plan. 21

22 2.15. Cash and cash equivalents Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investing or any other purposes. The Company considers cash equivalents to be short-term investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Thus, an investment normally qualifies as a cash equivalent if it has a short-term maturity, e.g. three months or less, from the date of acquisition Provisions General Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions for litigation and legal proceedings The Company is a party to various legal and administrative proceedings, arising in the normal course of its business. Provisions are recognized for all contingencies in connection with legal proceedings for which it is likely that a cash outflow will be required to settle the contingency/obligation and a reasonable estimate can be made. The assessment of the probability of loss includes an analysis of available evidence, the hierarchy of laws, available case law, recent court rulings and their relevance in the legal system, as well as the opinion of outside legal advisors. The provisions are reviewed and adjusted to take into account changes in circumstances, such as the applicable statute of limitations, outcomes of tax inspections, or additional exposures that may be identified based on new issues or court rulings New accounting pronouncements Some new IASB accounting procedures and IFRIC interpretations have been published and/or reviewed and their adoption is optional or mandatory for financial years beginning on or after January 1, The Company s management assessed these new procedures and interpretations and does not anticipate a material impact from their first-time adoption on the Company s financial statements. These new procedures and interpretations are described below: 22

23 IFRS 7 Financial Instruments: Emphasizes the interaction between quantitative and qualitative elements in disclosures of financial risks. Additionally, some new IASB accounting procedures and IFRIC interpretations have been published and/or reviewed, but were not effective at the Company s reporting date. The Company will adopt these standards when they become effective: IAS 1 Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income - The amendments to IAS 1 change the grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, net gain on hedge of net investment, exchange differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale financial assets) would be presented separately from items that will never be reclassified (for example, actuarial gains and losses on defined benefit plans). The amendment affects presentation only and has no impact on the Company s financial position or performance. The amendment becomes effective for annual periods beginning on or after January 1, 2013 and will therefore be applied in the Company s first annual report after becoming effective. IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 - These amendments clarify the meaning of currently has a legally enforceable right to set-off. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Company s financial position, performance or disclosures, and become effective for annual periods beginning on or after January 1, IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 - These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognized financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will become effective for annual periods beginning on or after January 1,

24 IFRS 9 Financial Instruments: Classification and Measurement - IFRS 9, as issued, reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after January 1, 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to January 1, In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Company s financial assets, but will not have an impact on classification and measurements of financial liabilities. The Company will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements - IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also addresses the issues raised in SIC-12 Consolidation -Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. Based on the preliminary analyses performed, IFRS 10 is not expected to have any impact on the currently held investments of the Company. This standard becomes effective for annual periods beginning on or after January 1, IFRS 12 Disclosure of Interests in Other Entities - IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures is also required, but has no impact on the Company s financial position or performance. This standard becomes effective for annual periods beginning on or after January 1, IFRS 13 Fair Value Measurement - IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard becomes effective for annual periods beginning on or after January 1, The Company initially believes that adopting these new pronouncements will have no significant impacts on its financial statements. There are no other 24

25 standards or interpretations issued and not yet adopted that may, based on management s opinion, have a significant impact on the Company s result of operations and financial position as reported. 3. Significant accounting judgments, estimates and assumptions Judgments The preparation of the Company s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities, at the reporting date. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of applying the Company s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the financial statements: Estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. Impairment of non-financial assets An impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions, conducted at arm s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. 25

26 Taxes Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. At December 31, 2012 and December 31, 2011, the Company did not identify any matter requiring the recognition of tax provisions and currently there are no audits in progress by the tax authorities. Differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective domicile of the Company. Deferred tax assets are recognized for unused tax losses and temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Pension benefits The cost of post-employment medical benefits is determined using actuarial valuations. An actuarial valuation involves making various assumptions regarding discount rates, expected return on plan assets, future salary increases, mortality rates and future pension increases. The defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Fair value of financial instruments When the fair value of financial assets and financial liabilities recorded in the balance sheet cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. 26

27 Provisions for litigation and legal proceedings Provisions are recognized for civil and labor cases. The assessment of the probability of loss includes an analysis of available evidence, the hierarchy of laws, available case law, recent court rulings and their relevance in the legal system, as well as the opinion of outside legal advisors. The provisions are reviewed and adjusted to take into account changes in circumstances, such as the applicable statute of limitations, outcomes of tax inspections, or additional exposures that may be identified based on new issues or court rulings. 4. Cash and cash equivalents 12/31/ /31/2011 Cash and cash equivalents 1, Short-term investments 6,258 12,628 TOTAL 7,714 12,942 At, short-term investments comprised readily redeemable shortterm investment funds, earning 101% of CDI. 5. Trade accounts receivable 12/31/ /31/2011 Domestic customers 14,180 11,102 Foreign customers 21,927 18,243 (-) Present value adjustment (266) (320) (-) Allowance for doubtful accounts (229) (183) TOTAL 35,612 28,842 a) Changes in the allowance for doubtful accounts are as follows: 12/31/ /31/2011 Balance at the beginning of the year (183) (454) Additions (46) - Recovery/ realization Balance at the end of the year (229) (183) 27

28 b) Financial cycle: 12/31/ /31/2011 Trade notes falling due within 30 days 18,134 9,293 Trade notes falling due after more than 30 days 13,085 17,006 Trade notes overdue up to 30 days 2,506 1,210 Trade notes overdue above 30 days 2,382 1,333 Total 36,107 28, Inventories 12/31/ /31/2011 Finished products 3,663 1,889 Work in process 14,880 13,177 Raw material 1,501 1,430 Ancillary materials 2,462 2,437 Other materials 1,515 1,440 Consignment goods TOTAL 24,298 20,736 Insurance was taken out for inventories based on the amounts and risk involved. At and 2011, no provision for obsolete or slow-moving inventories was necessary. 7. Taxes recoverable 12/31/ /31/2011 IRPJ, CS, IPI, PIS, COFINS 8,624 7,595 ICMS, PIS, COFINS on fixed assets 3,388 1,842 12,012 9,437 Current 9,635 7,005 Non-current 2,377 2,432 Tax credits will be realized by the Company through refund and/or offset against taxes and contributions. Management does not expect losses on realization of these tax credits. 28

29 8. Property, plant and equipment a) Changes in property, plant and equipment : Own land and buildings Machinery, equipment, vehicles, casts and moulds Furniture and fixtures Construction in progress Other fixed assets Leasing Total Cost: At December 31, , ,548 4,311 11,679 2,300 2, ,131 Additions 2,613 9, , ,157 Transfers 6,861 6,757 - (13,841) Write-offs (1,964) (1,047) (52) - - (22) (3,085) At 116, ,553 4,521 3,590 2,300 2, ,203 Depreciation At December 31, 2011 (21,306) (90,432) (2,877) - (744) (1,597) (116,956) Depreciation (1,599) (6,793) (365) - (183) (232) (9,172) Transfers Write-offs At (22,905) (96,433) (3,206) - (927) (1,768) (125,239) Carrying amount At December 31, ,937 58,116 1,434 11,679 1, ,175 At 93,848 67,120 1,315 3,590 1, ,964 Fixed assets were provided in guarantee, in the amount of R$ 57 million, in connection with REFIS program. In 2010, the Company carried out a valuation of its property, plant and equipment at deemed cost through an equity valuation entity. To determine deemed cost, the independent appraisers followed the recommendations from NBR , , of the Brazilian Association of Technical Standards (ABNT) and also considering the criteria proposed by the Brazilian Institute of Appraisals and Engineering Expert Examinations (IBAPE). Based on the procedures carried out, useful lives were determined, which were applied at and December 31, 2011, as follows: PP&E classification Buildings and improvements Machinery and equipment Furniture and fixtures Other fixed assets Average useful life 25 years 18 years 9 years 4 years 29

30 9. Intangible assets a) Changes in intangible assets : Software Costs: At December 31, ,944 Additions 317 At 3,261 Amortization: At December 31, 2011 (2,421) Amortization (225) At (2,646) At December 31, At 615 The Company applies a 5-year finite useful live to its intangible assets. 10. Loans and financing Type Annual charges 12/31/ /31/2011 Current 30,392 26,318 Advance on foreign 8,786 11,631 exchange contracts - ACC 6.5% p.a. Working capital CDI+0.80 to 1.2% p.m. 18,513 14,161 Finimp GCB696/10 U$+7.40% p.a Finame / BNDES 5.50% p.a. 2, Noncurrent 16,712 9,904 Working capital CDI+1.2% p.m. 9,745 9,288 Finimp GCB 696/10 U$ % p.a Finame / BNDES 5.50% p.a. 6, Total 47,104 36,222 Local currency 29,941 13,319 Foreign currency 17,163 22,903 Aging list of noncurrent loans and financing: 12/31/ , , , Total 47,104 30

31 The Company s bank loans are guaranteed by sureties from Werner (Company shareholder) as described in Note 17.a and pledge of machinery and equipment. Furthermore, these loans are not subject to covenants. 11. Provisions for litigation and legal proceedings 11.a) Provisions for contingencies The Company is a party to administrative and legal proceedings involving labor and tax claims. A provision for contingencies was recognized for cases involving probable losses, as follows: 12/31/2012 Additions Write-offs 12/31/2011 Labor claims (76) 378 Tax claims , (76) 738 Labor claims The Company is a defendant in labor claims mainly involving disputes about health and risk exposure, among others. Based on the history of payments and the opinion of the legal advisors, the provision of R$ 694 thousand at (R$ 378 at December 31, 2011) is considered sufficient to cover probable losses. Furthermore, there are ongoing labor claims amounting to R$ 727, for which no provision was set up based on the opinion of the Company s legal advisors, namely, that the likelihood of winning these claims is possible or probable. 11.b) Provisions for judicial deposits The Company recorded judicial deposits in assets, broken down as follows: 12/31/2012 Additions Write-offs 12/31/2011 Labor claims (4)

32 11.c) Actuarial reserves By the end of 2010, the Company implemented the post-employment benefit plan to its employees and ex-employees, guaranteeing life health insurance to anyone who is a Manager or an Executive Officer, are 65 years old, and to Directors of the Board who are 75 years old, provided that they have worked as employee, Officer or Director of the Board for 30 years running, with no employment relationship established between them and the Company. In 2011, by resolution of the Board of Trustees, the rules for granting the postemployment benefit changed, reducing the minimum age from 65 to 55 years for Manager or Executive Officer, and from 75 to 65 for Directors of the Board, thereby increasing the actuarial liabilities. The provision recognized was supported by an actuarial study and the plan valuation was based on the projected unit credit method. At December 31, 2012 and 2011, the actuarial assets and liabilities are summarized below: Actuarial assets and liabilities Present value of actuarial liabilities 1,618 1,804 Fair value of the plan s assets (1,091) (1,420) Unrecognized actuarial gain Unrecognized past service cost (140) (587) Net actuarial (assets)/liabilities at year-end Reconciliation of actuarial liabilities 1 Liabilities at the beginning of the year (1,804) (871) 2 Current service cost (40) (35) 3 Interest on actuarial liabilities (175) (89) 4 Benefits paid over the year 16-5 Actuarial (gain)/loss on liabilities 389 (809) 6 Liabilities at year-end (1,618) (1,804) Reconciliation of the fair value of assets 1 Fair value of assets at the beginning of the year 1,420-2 Expected yields for the year 12-3 Contributions made by the sponsoring entity over the year Contributions made by the members over the year Benefits paid over the year (16) - 6 Actuarial gain/(loss) on assets (483) 1,407 7 Fair value of assets at year-end 1,091 1,420 32

33 Projected expenses for years 2012 and 2011: Projected (revenue)/expense components Current service cost Interest on actuarial liabilities Expected yields for the year (107) - 4 Amortization of actuarial (gains)/losses (21) - 5 Amortization of past service cost Projected (revenue)/expense Reconciliation of actuarial gains and losses Reconciliation of unrecognized actuarial (gains) / losses 1 Net actuarial (gain) / loss not recognized at the beginning of the year Actuarial (gain) / loss on present value of liabilities Actuarial (gain) / loss on asset value and adjustments (506) (1,407) 4 Net actuarial (gain) / loss not recognized at year-end 477 (598) Actuarial assumptions adopted by the Company in 2012 and 2011: Economic Assumptions: Discount rate to actuarial liabilities as of December % p.a. 5.55% p.a. Expected return on the plan s assets 9.87% p.a. 10.0%p.a. Increase in medical costs due to age advance 3.00% p.a. 3.00% p.a. Estimated benefit increase 5.30% p.a. 4.00% p.a. Inflation rate 5.30% p.a. 4.00% p.a. Average medical cost 1,442 1,200 Demographic Assumptions Biometric mortality table AT 2000 AT Expected payments of future benefits by Electro Aço Altona projected by outside actuaries: Projection Next twelve years Total

34 12. Equity a) Capital Capital is fully held by shareholders domiciled in Brazil, and comprises 2,250 thousand registered shares with no par value, including 975 thousand common shares and 1,275 thousand preferred shares. Capital may be increased on the terms of article 168 of Law No. 6404/76, through a Board of Directors resolution, limited to 2,925 thousand shares, with issue of up to 675 thousand preferred shares of the same existing class. b) Income reserves Legal reserve The legal reserve is recognized at a rate of 5% of net income reported at yearend after profit sharing deductions, pursuant to article 193 of Law No. 6404/76, limited to 20% of total capital. Management profit sharing A 10% share of the remaining profit will be allocated to members of management, calculated in accordance with articles 153 and 190 of Law No. 6404, to which they will be entitled only after minimum dividends have been paid. For the purpose of financial statements, as defined in the Corporate Accounting Manual, this amount is deducted from net income for the year as Profit sharing, shown under income taxes. Profits to be allocated The remaining balance of retained earnings at, totaling R$2.196, was allocated to the reserve for undistributed profits. Final allocation of such amount will be decided at the Shareholders Meeting to be held on April 29, /31/2012 Accumulated losses (7,287) Net income for the year (considering management profit sharing) 7,961 Equity valuation 1,895 Remaining retained earnings 2,569 Management profit sharing (10%) (257) Base for legal reserve 2,312 Legal reserve (5%) (116) Net income attributable to shareholders 2,196 Minimum compulsory dividends (25%) 549 Net income to be allocated 1,647 34

35 c) Shareholders compensation The Company s bylaws determine the distribution of minimum dividends equivalent to 25% of net income for the year, adjusted in accordance with article 202 of Law No. 6404/ Leasing The Company entered into lease agreements with Banco Safra Leasing S/A, for modernization of the machining sector and the IT department (IBM Storage server), with balances payable being shown below: 12/31/ /31/2011 Contracts Maturity Current Noncurrent Current Noncurrent /31/ /23/ (-) Present value adjustment (9) - (81) (13) Financial charges posted to the income statement total R$ 272 thousand (R$ 339 thousand at December 31, 2011). 14. Taxes and contributions Taxes and contributions payable are broken down as follows: 12/31/ /31/2011 INSS FGTS Withholding income tax Sesi, Senai and other Income and social contribution taxes payable ,435 1,995 Current 1,325 1,752 Noncurrent On September 17, the Federal Government approved Executive Order No. 563, passed into Law No The Company qualifies for some benefits defined in the Plan, such as: a) decrease in payroll taxes; b) REINTEGRA. 35

36 15. State Tax Incentive (PRODEC) The Company obtained from Santa Catarina State the tax incentive within the scope of the Santa Catarina State Development Program (PRODEC), created in order to foster industrial growth in the State, according to summary contract No. 003/06, published in the Santa Catarina State Official Gazette on April 7, This incentive involves providing the Company with ICMS credits to be used as the Company increases ICMS amounts payable arising from its activities that qualify for the Program. Such tax credits will reduce up to 60% of increased ICMS amounts payable by the Company, and may be used within 120 months from the grant date. The credits used monthly will be returned after 48 months, and the total benefit term may be extended to 168 months. Benefit amortization is through the payment of the credit used, plus interest of 4% p.a. and monetary restatement by reference to the UFIR variation. The Company was granted total ICMS credits of R$ 47 million, including R$ 8,500 granted in the first phase. In 2008, there was an amendment to the initial contract referring to the approval of amounts of the first phase, with an increase of R$ 6,859, thus the PRODEC program incentive to be used totaled R$ 15,359. Of this amount, the Company has used R$ 6,584 thousand to date. The Company used the tax benefit, which including restatement aggregates the following amounts: 12/31/2012 Amortization Restatement 12/31/2011 PRODEC 851 (2,946) 375 3, (2,946) 375 3,422 The aging list of amounts classified in noncurrent liabilities is as follows: 12/31/ Total 851 Payments in connection with the term extension defined in the program were recorded by the Company at in the amount of R$ 5,965 thousand. 36

37 16. Federal Tax Recovery Program (REFIS) Supported by Law No dated April 10, 2000, Company management filed in February 2000 its application to participate in the Tax Recovery Program (REFIS). Amortization of the consolidated liability, as defined in the REFIS program, has been regularly made on the basis of 1.2% of adjusted gross revenue since March The debt balance has been restated by reference to TJLP variation. Considering the expected growth in Company revenue (payment base), this liability is expected to be settled by mid Pledge of fixed assets items was provided in guarantee under REFIS program. In adhering to the REFIS program, lawyer fees attributed to the defeated party initially arbitrated in tax debt collection proceedings by INSS were included in the installment payment program, on a 10% basis. The law that introduced the REFIS program established, however, legal costs and fees attributable to defeated party of 1%. In order to reduce the amount of fees initially consolidated under REFIS program, the Company s tax advisors requested in all INSS debt collection proceedings the reduction of fees to 1%, in accordance with MP No. 303/06. The Company is also discussing at the administrative level the undue inclusion of supposed income and social contribution taxes not paid in 1990 and 1991, years in which the Company did not record taxable profit. This matter generates a difference between the amount recorded by the Company and the REFIS statement of approximately R$ 2,003 at. The liability related to REFIS program is as under: 12/31/2012 Amortization Restatement 12/31/2011 REFIS 101,722 (2,460) 3, , ,722 (2,460) 3, , Related parties Commercial transactions, retention of services, loans and borrowings between related parties and management compensation are described as follows. a) Guarantees The Company s bank loans raised in 2011 and 2012 are being regularly and timely repaid and are guaranteed by machinery, equipment and sureties. The Company entered into an agreement with Werner (Company s shareholder) to provide remunerated guarantee, up to the limit of R$ 80 million. At December 31, 2012, the amount of guaranteed operations entered into by the Company aggregates R$ 54.5 million. In 2012, the Company paid the guarantor the amount of R$ 784 thousand (R$ 1,017 thousand at December 31, 2011), recorded in the income statement in "Other operating expenses". 37

38 b) Key management personnel compensation The Company s management is composed of the Board of Directors with one chairman and four directors (and their alternates), and the Executive Board with one Chief Executive and Investor Relations Officer and one Managing Officer. The Company has a Supervisory Board with three members and their alternates. Management and Supervisory Board members received compensation in the amount of R$ 4,482 thousand, with social security charges of R$ 889 thousand, for their services, totaling R$ 5,317 thousand in compensation paid in Officers receive additional corporate benefits such as health and dental care, life insurance and private pension plan, among others. The Company did not pay its key management personnel other types of remuneration; such as a) long term benefits; b) severance benefits and c) post-employment benefits, except as described in Note 11.c. 18. Income and social contribution taxes a) Deferred taxes The Company records deferred income and social contribution taxes as follows: 12/31/ /31/2011 Deferred tax assets Temporary differences Tax losses 4,743 6,318 5,678 7,134 Deferred tax liabilities Fair value of property, plant and equipment (deemed cost) - CPC 27 26,911 27,887 26,911 27,887 Noncurrent liabilities 21,233 20,753 i) Deferred income tax on temporary additions and tax losses Deferred tax assets and liabilities referring to both income tax and social contribution tax were determined in accordance with Technical Pronouncement CPC 32, approved by CVM Ruling No. 371/02 and CVM Rule No. 599/09 that address income taxes. 38

39 ii) Estimated realization term Management estimates that deferred assets arising from temporary differences will be realized in proportion to the realization of contingencies, losses and projected obligations. In relation to deferred tax assets calculated on income and social contribution tax losses, management estimates that they will be realized over the next four years (see timetable below). At, the Company accumulates income tax losses totaling R$ 13,476 (R$ 18,134 at 12/31/2011) and social contribution tax losses totaling R$ 15,259 (R$ 19,831 at 12/31/2011), which generated deferred income tax credits of R$ 3,369 (R$ 4,534 at 12/31/2011) and deferred social contribution tax credits of R$ 1,374 (R$ 1,784 at 12/31/2011). These deferred taxes assets were recorded based on the studies prepared by management. These studies are based on expected generation of future taxable income, considering the budget and business plan as of 12/31/2011, reviewed and approved by Company management, in accordance with CVM Ruling No Management expects that these deferred tax credits will be realized as follows: Estimated Year offset , , , Total 4,743 b) Reconciliation of income and social contribution tax expense Reconciliation of income and social contribution tax expense recorded in the income statement is as follows: 12/31/ /31/2011 Pretax income 11,917 12,514 IR/CS at 34% (4,052) (4,255) (Exclusions)/additions Permanent differences (96) 235 Other Total (3,956) (3,816) 39

40 19. Insurance The Company has insurance policies for relevant cash amounts against multiple risks such as civil liability, loss of profits and other risks as shown below: Assets, liabilities and interests covered Type Sum insured (R$ thousand) Effective until Directors & Officers Civil Liability - D&O Multiple perils - portable machinery and equipment Life - D&O Life - Coordinators Accidental financial loss caused by management Portable machinery and equipment theft/breakdown Compensation to D&O in case of death, accident or disability Compensation to Coordinators in case of death, accident or disability 5,000 3/16/2013 1,395 1/27/2013 2,197 10/25/2013 1,430 5/4/2013 International Cargo - Import Cargo transportation insurance - import operations Price shown on bills/invoices 9/1/2013 General Civil Liability Facilities - plants, offices and distribution centers Accidental injury, damage and/or pain and suffering caused to third parties Fire and damage to buildings, facilities, machinery and equipment 13,800 8/8/ ,000 5/5/2013 Loss of profits Vehicles Environmental Civil Liability Loss of revenue due to accidents Theft, accident and passenger death/disability Accidental damage to the environment 56,882 5/5/ /20/2013 5,000 8/3/2013 The scope of our auditor s work does not include expressing an opinion on the sufficiency of the insurance coverage, whose adequacy was determined and assessed by the Company s management. 40

41 20. Financial instruments In accordance with CVM Rule No. 604, dated November 19, 2009, which approved CPCs 38, 39 and 40, and CPC Guidance OCPC 03, of November 19, 2009, which revoked CVM Rule No. 566, of December 17, 2008, the Company carried out a valuation of its financial instruments recorded in the annual information at December 31, 2012 and December 31, 2011, arriving at the following book and market values: Book value Market value 12/31/ /31/ /31/ /31/2011 Cash and cash equivalents 7,714 12,942 7,714 12,942 Trade accounts receivable 35,612 28,842 35,612 28,842 Trade accounts payable 5,814 7,985 5,814 7,985 Loans and financing 47,104 36,222 47,104 36,222 The risk factors of financial instruments are substantially as follows: (i) Financial risks Currency risk In order to mitigate currency risk, the Company monitors its financial exposure to balance its financial assets and liabilities within the limits established by management. Interest rate risk This risk arises from the possibility that the Company will incur losses due to fluctuation in interest rates or other debt indices increasing financial expenses on loans and financing raised in the market, or reducing financial income from shortterm investments. The Company permanently monitors market interest rates in order to evaluate the need of hedge against the interest rate risk. Derivative financial instruments The Company does not have outstanding derivative financial instruments at. (ii) Operating risks Credit risk This refers to the possibility that the Company will not to receive amounts resulting from sales or loans from financial institutions generated by short-term investments. In order to mitigate the risk from sales operations, the Company adopts the practice of analyzing the financial situation of its customers, in order to establish a credit limit and permanently monitor their debt balance. The Company only makes short-term investments with highly rated banks. 41

42 21. Other operating income (expenses), net 12/31/ /31/2011 Other income Expense recovery Other revenues 1, ,405 1,155 Other expenses Losses on sales (197) (1,017) Guarantee contracts (784) (483) Other extraordinary items (3,622) (345) (4,603) (1,845) Other operating income (expenses), net (2,198) (690) In 2012, the main change in other income refers to the recognition of the REINTEGRA program (R$ 1,530 thousand), a tax benefit extended to exporters. The group of accounts other expenses includes, as other extraordinary items, the result from recalculating ICMS matching credits (R$ 3,213 thousand), a tax benefit extended to recycling companies. 22. Financial income and expenses 12/31/ /31/2011 Financial income Short-term investment yields 1,380 1,762 Present value adjustments (PVA) 1,716 2,191 3,096 3,953 Financial expenses Charges (4,861) (4,722) Interest incurred - REFIS (3,451) (3,259) Exchange loss (371) (1,608) (8,683) (9,589) Financial income (expenses), net (5,587) (5,636) 42

43 23. Segment information and reconciliation of net revenue The Company operates only in the steel mill industry, manufacturing and selling cast steel products. The tools used by us to evaluate the performance of our operations for operating, managerial, commercial or administrative purposes consider the following assumptions: a) Our production lines operate separately in the categories of products manufactured; namely repetitive and made to order; and b) In the plant, these categories are sometimes separated in the production lines but others they are not, therefore management administers the result from the overall business operations on a combined basis. Revenue information at: 12/31/2012 Revenue Total Demand Domestic Market Foreign Market Repetitive 98,334 25, ,720 60% Made to order 44,178 39,707 83,885 40% Gross revenue 142,512 65, , % Deductions (21,416) (2,406) (23,822) Taxes (18,603) - (18,603) Returns and rebates (1,342) (1,638) (2,980) PVA (1,471) (768) (2,239) Net Operating Income 121,096 62, ,783 12/31/2011 Revenue Total Demand Domestic Market Foreign Market Repetitive 99,500 24, ,874 63% Made to order 37,439 33,799 71,238 37% Gross revenue 136,939 58, , % Deductions (21,466) (1,455) (22,921) Taxes (16,352) - (16,352) Returns and rebates (2,926) (558) (3,484) PVA (2,188) (897) (3,085) Net Operating Income 115,473 56, ,191 43

44 Net income information Geographic regions: Steel casts - YTD 2012 Steel casts - YTD 2011 Repetitive To order Total Repetitive To order Total National 85,302 35, ,097 84,295 31, ,473 Latin America 1,870 12,822 14, ,464 13,912 North America 21,469 19,481 40,950 21,042 10,847 31,889 Europe 89 5,965 6,054-8,643 8,643 Asia ,274-2,274 Total 109,720 74, , ,473 64, , Expenses by nature As required by CPC 26 and IAS 1, expenses by nature are detailed as follows: Cost 12/31/ /31/2011 Direct inputs (47,024) 35.0% (52,158) 41.3% Indirect materials (8,451) 6.3% (7,414) 5.9% Personnel (44,138) 32.9% (40,610) 32.2% Third party services (10,287) 7.7% (8,396) 6.6% Other (24,336) 18.1% (17,648) 14.0% Total (134,236) 100% (126,226) 100% Selling expenses 12/31/ /31/2011 Commissions (5,363) 46.8% (4,845) 43.5% Freight (1,336) 11.6% (1,249) 11.2% Materials (48) 0.4% (43) 0.4% Labor (2,392) 20.9% (2,605) 23.4% Third party services (541) 4.7% (487) 4.4% Other (1,786) 15.6% (1,914) 17.1% Total (11,466) 100% (11,143) 100% Administrative expenses 12/31/ /31/2011 Materials (290) 1.6% (320) 2.0% Labor (5,412) 29.4% (4,997) 31.2% Equipment lease (199) 1.1% (177) 1.1% Fees and charges (5,371) 29.2% (5,133) 32.1% Third party services (3,253) 17.7% (2,421) 15.2% Other (3,854) 21.0% (2,934) 18.4% Total (18,379) 100% (15,982) 100% * * * * * * * * * * * * * * * * * * * * * 44

45 Electro Aço Altona S/A Publicly-held company CNPJ nº / IE nº Rua Eng.º Paul Werner, 925 CEP Blumenau SC - Brazil MANAGEMENT DISCUSSION AND ANALYSIS Shareholders, Customers, Suppliers and Financial Institutions We hereby submit to your appreciation the Financial Statements for the year ended, with a report of the Board of Directors, a report of Independent Auditors and a report of the Supervisory Board highlighting the relevant facts for the period. Message from Management The results obtained in 2012 signals a business recovery, albeit modest, with the year being considered a period of progress in sales and especially in business and operational excellence. The growth of economic activities in Brazil strengthens the sense of gradual improvement in the pace of investments. In the international scenario, uncertainties remain, and, in a seemingly less aggressive picture, depict an environment of a long and difficult recovery. Growth has proven to be quite challenging due to a number of factors, relating both to market and operating aspects, thus leading to productivity levels below expectations in terms of sales and earnings for the last quarter. However, actions taken in close pursuit of business viability through profitability, adjusting costs and adopting prices dictated by the market in our industry, have been our main focus. Aware of the trends, we designed the operation strategy, ensuring business continuity and growth, as well as compliance with the requirements of environmental, occupational safety and tax legislation. Innovation and process improvements are key factors to generate results, being imperative in obtaining greater competitiveness by increasing productivity, reducing costs and providing excellent services to our customers. To this end, we organized a department 45

46 Thousand tons fully dedicated to innovation. Kaizen and Six Sigma methodologies have been consolidated in the Company's management, enabling significant productivity gains and cost savings. All this results from a synergic, trained and qualified team. In light of this, we strictly complied with the training program, and promoted the attendance of many employees in relevant events in Brazil and abroad. Currency appreciation represents a key driver for exporters. Brazil has adopted a policy on foreign exchange control aiming to stabilize the Real / Dollar ratio. This currency devaluation level results mainly from the international crisis itself and the measures adopted by the government to increase competitiveness of our exports and improve the balance of trade. For 2013 is expected to be a promising year, reporting growth over Some sectors in our industry signal a recovery, although moderate and gradual. The energy industry is expected to resume new investments in order to meet new demands. The sub-salt oil industry is becoming a reality, unveiling a time of investments and recovery of the shipbuilding industry. Investments in infrastructure cannot stop, as logistic costs hinder our competitiveness. A slight devaluation of the real alone improves our competitiveness, thus ensuring a greater share in the international market, despite the European crisis, and banking on U.S. growth. We believe we will increase our share in the international market because of our strategic positioning in the chosen markets both in the United States and in Europe. The demand for and the prices of commodities recovered in 2012, allowing continued growth in the oil & gas, agriculture and mining industries. The plan has been designed, with trends to be continually monitored, since we may be influenced by agents beyond our will and control, and we may have to adopt contingency measures. We will continue to adjust the Company to the actions defined in the Strategic Plan. Overall Consolidated Performance for Operations a) Production / Markets The efforts made were reflected in increased production, which continued to grow at a rate of 1.6% over the previous year. We are confident, as there is a growth perspective of around 5% for 2013 as compared to ,0 14,0 12,0 10,0 8,0 6,0 13,6 Total Tons 12,2 12,41,6% 11,9% 10,9 67,7% 6,5-52,2% 4,0 2,0 0,0 46

47 R$ million R$ million R$ million Thousand tons Thousand tons We observed the changes in relation to Brazilian production of cast steel in 2012, which decreased over The production of cast steel in Brazil, according to data from ABIFA (Brazilian Foundry Association), decreased by 12.9 thousand tons or 4.8%. The Company's position in the domestic market has expanded; in 2012 its share was 4.9%, a 1.8% increase over Brasil Steel Production - Brazil vs. Altona (Year) 0 166,4 4,1% 235,3 264,9 252,0 6,7 11,0 12,2 12, Altona Altona s % share According to the same source, Brazilian exports decreased by 23.1% year over year; the Company s exports decreased 14.1%. The Company s share in the Brazilian market was 9.9% Steel Export - Brazil vs. Altona (Year) 0 34,8 36,5 41,6 32,0 5,7% 2,0 8,1% 8,9% 9,9% 3,0 3,7 3, b) Revenue Brasil Altona Altona s % share Gross revenue increased R$ 12.5 million, or 6.4%, over Net income was R$ 7.7 million for the year, an 11.4% decrease in relation to Domestic revenue increased by R$ 5.6 million or 4.1%. Growth expressed in tons was 7.6% over In the second half of 2012, currency rates substantially favored revenue performance in the foreign market, with a significant effect on the Company s share expressed in tons, of some 25.0% of the total for 2012, equivalent to R$ 6.9 million or 11.9% in relation to ,0 250,0 200,0 150,0 100,0 50,0 0,0 240,4 Change in Gross Revenue Total 143,8 171,7 19,4% -40,2% 195,1 13,6% 207,6 6,4% 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 Change in Gross Revenue Doemstic Market 170,7 136,9 142,5 122,3 87,1 4,1% 11,9% 40,4% -49% 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 Change in Gross Revenue Foreign Market 69,7 65,1 56,8-18,5% 49,4-13% 58,2 17,8% 11,9% 47

48 R$ Thousand R$/Kg % of Total Highly complex products with greater value added, characterizing as made to order, gained market share, from 36.8% in 2011 to 40.4% in Change in Repetivive vs. Made to Order Products 55,0% 67,5% 44,8% 36,8% 40,4% The 3.6 percentage point increase is due to positive aspects in the domestic market, especially the energy and off-shore segments. 55,2% 63,2% 45,0% 59,6% 32,5% Repetitivo Sob-Encomenda Change in Average Price NOI 20,0 18,8 The ratio of products classified as made to order had a positive impact on the increase in the average selling price. Although modest, the 4.9% increase allowed covering for inflation effects. 15,0 10,0 5,0 0,0 14,6 28,8% 13,4-28,7% 14,1 14,8 5,2% 4,9% c) Costs: Adequacy and Capacity Building Costs per ton remained stable, with a downtrend, from 73.3% in 2011 to 73.0% in Six Sigma and Lean Manufacturing methodologies are used in operating activities, and are important instruments to reduce the Cost of Goods Sold (COGS). CoGS and AVERAGE UNIT PRICE 75,9% 74,7% 73,3% 73,0% 69,6% CPV Por Tonelada The great efforts undertaken by the CPV (% s/rol) Company for preparing and implementing action plans, aligned with the strategic planning and monitored by corporate budget, resulted in increased profitability. Preço Médio ROL Innovation and process improvements were the main growth factors and key to maintaining competitiveness. 48

49 Programs underlying the sustainability plan, such as occupational safety, cost savings, innovation and technology, personnel development and environment, are different ways to improve continuous management efforts that are implemented, thus allowing our growth. Keeping certifications already obtained such as ISO 9001:2008 (BVC), ISO / TS 16949:2002, SA 8000 (Social Accountability 8000) is a practice, and procedures to obtain OHSAS and ISO are ongoing. d) Human Resources The importance of strengthening company employee relationships was critical. Aware of the evolution of global competitiveness, the Company improved actions or programs designed for safety, cost savings, innovation, personnel development and environment. We continually empower the process engineering and application department in order to implement more effective processes to favor our customers, improving our competitiveness and profitability. These expenditures are essential in the preliminary processes of casting projects and result in significant quality and cost reduction gains. Variable compensation increased more than 17.0% due to amounts paid as profit sharing (PPR Program). We made significant social investments in in fixed compensation, healthcare and dental care, health insurance, meals, transportation, training, safety, trainee program etc. - which represented an expense of R$ 55.2 million. As for occupational safety, we kept all investments and programs aimed at zeroing work-related accidents. e) Value Added In 2012, our value added generated net wealth of some R$ 99.9 million, allocated among its various elements and contributions, as summarized in the chart. Taxes, charges, contributions Allocation of Value Added (R$ Million) Interest on debt R$ 23,8 Interest on equity R$ 13,2 RR$ 7,7 R$ 55,2 Person f) Earnings Our operating income before financial income and expenses was positive on the order of 9.5% of the net operating income (NOI). The company s ability to generate operating cash flow, stated as EBIT, was R$ 17.5 million, covering 3.2 times our net financial result for the period. The supply of new highly value added products, especially for emerging markets and also for the most demanding markets such as Europe and the United States, contributed to increased contribution margin and productivity. These efforts resulted in an increase in our equity, accumulating profits with a view to returning capital invested by our shareholders. 49

50 R$ Million R$ Million 31,5 Earnings before financial effects (EBIT) - R$million 15,4 15,2 18,2 17,5 80,0 60,0 40,0 20,0 0,0-20,0-40,0-60,0-80,0 Equity vs. Profit/Loss 55,4 63,1 39,9 46,7-46,2-22,8 2, ,3-19,9-31,3-29,2-54,9 Patrimonio Liquido Prejuizo Acumulado/Lucros a destinar 2 Investments Acquisitions of machinery and equipment, and expansions to expand production capacity, leverage productivity. These investments totaled R$ 18.5 million in 2012, representing 10.1% of NOI. 80,0 60,0 40,0 20,0 0,0 Change in accumulated investments 24,0 30,1 41,9 53,7 72,2 The most significant investments were: i) installation of a modern 4-ton induction furnace, which will increase productivity and reduce the cost of direct production materials, aiming at cleaner production, in line with the environmental policy; ii) acquisition and installation of three machining centers operating at full capacity; iii) acquisition of a grinding manipulator, which has driven large production and productivity gains; and iv) acquisition of a core blower for the molding department for increased capacity, productivity and quality installation is completed. There are other minor, but not less important, investments, all focusing on improved customer service. Environment-related investments are continuous. We completed installation of ETA- Altona, our own water treatment system, and we consolidated the effective installation of the foundry s exhaustion system. An assumption adopted in strategic planning involves prioritizing investments without hindering our paying ability. 50