FORM 6-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

Dated November 7, 2018

Commission File Number 1-14878

GERDAU S.A.

(Exact Name as Specified in its Charter)

N/A

(Translation of Registrant’s Name)

Av. das Nações Unidas, 8,501 — 8° andar

São Paulo, São Paulo - Brazil CEP 05425-070

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o No x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 7, 2018

	GERDAU S.A.


	By:	/s/ Harley Lorentz Scardoelli
	Name:	Harley Lorentz Scardoelli
	Title:	Investor Relations Director

EXHIBIT INDEX

Exhibit		Description of Exhibit

99.1		GERDAU S.A. Condensed consolidated interim financial statements as of September 30, 2018

Exhibit 99.1

GERDAU S.A.

Condensed consolidated interim financial statements

as of September 30, 2018

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

In thousands of Brazilian reais (R$)

(Unaudited)

	Note	September 30, 2018	December 31, 2017

CURRENT ASSETS
Cash and cash equivalents	4	2,795,196	2,555,338
Short-term investments
Held for Trading	4	679,994	821,518
Trade accounts receivable - net	5	4,193,568	2,798,420
Inventories	6	9,124,052	6,701,404
Tax credits		471,553	402,429
Income and social contribution taxes recoverable		412,290	487,633
Unrealized gains on financial instruments	13	49,478	—
Assets held for sale		3,982,273	3,745,634
Other current assets		461,216	469,737
		22,169,620	17,982,113

NON-CURRENT ASSETS
Tax credits		37,013	30,841
Deferred income taxes		3,610,574	3,054,393
Unrealized gains on financial instruments	13	805	—
Related parties	15	41,506	51,839
Judicial deposits	14	2,126,690	2,051,181
Other non-current assets		519,448	542,973
Prepaid pension cost		14,505	1,149
Investments in associates and jointly-controlled entities	8	1,472,356	1,280,299
Goodwill	10	9,409,197	7,891,142
Other Intangibles		910,466	972,089
Property, plant and equipment, net		15,806,794	16,443,742
		33,949,354	32,319,648
TOTAL ASSETS		56,118,974	50,301,761

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	September 30, 2018		December 31, 2017
CURRENT LIABILITIES
Trade accounts payable		4,149,641		3,179,954
Short-term debt	11	2,177,261		2,004,341
Taxes payable		408,522		284,101
Income and social contribution taxes payable		204,355		70,242
Payroll and related liabilities		608,692		443,859
Employee benefits		463		253
Environmental liabilities		38,626		21,928
Unrealized losses on financial instruments	13	2,368		—
Liabilities held for sale		985,181		1,084,032
Other current liabilities		575,993		625,410
		9,151,102		7,714,120

NON-CURRENT LIABILITIES
Long-term debt	11	15,976,808		14,457,315
Debentures	12	38,575		47,928
Related parties	15	1,433		—
Deferred income taxes		266,132		82,686
Unrealized losses on financial instruments	13	—		1,267
Provision for tax, civil and labor liabilities	14	898,725		827,883
Environmental liabilities		74,760		63,263
Employee benefits		1,566,822		1,424,611
Obligations with FIDC	16	918,933		1,135,077
Other non-current liabilities		463,451		653,670
		20,205,639		18,693,700
EQUITY	17
Capital		19,249,181		19,249,181
Treasury stocks		(186,909	)	(76,085	)
Capital reserves		11,597		11,597
Retained earnings		4,813,798		3,315,374
Operations with non-controlling interests		(2,870,825	)	(2,870,831	)
Other reserves		5,532,721		4,015,965
EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT		26,549,563		23,645,201

NON-CONTROLLING INTERESTS		212,670		248,740

EQUITY		26,762,233		23,893,941

TOTAL LIABILITIES AND EQUITY		56,118,974		50,301,761

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 nine-month period ended
	Note	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017

NET SALES		12,835,621		9,476,204		35,259,776		27,100,721

Cost of sales	20	(10,973,599	)	(8,501,724	)	(30,413,955	)	(24,535,643	)

GROSS PROFIT		1,862,022		974,480		4,845,821		2,565,078

Selling expenses	20	(141,254	)	(130,887	)	(449,254	)	(402,630	)
General and administrative expenses	20	(277,071	)	(265,667	)	(820,449	)	(853,853	)
Other operating income	20	63,674		87,416		153,380		227,350
Other operating expenses	20	(55,701	)	(55,770	)	(124,340	)	(93,472	)
Results in operations with subsidiaries	20	(177,627	)	—		(228,948	)	(72,478	)
Reversal of contingent liabilities, net	14	—		—		—		929,711
Equity in earnings of unconsolidated companies	8	(2,589	)	(29,172	)	38,937		(32,411	)

INCOME BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES		1,271,454		580,400		3,415,147		2,267,295

Financial income	21	57,134		53,192		122,420		179,106
Financial expenses	21	(401,244	)	(409,698	)	(1,154,539	)	(1,326,715	)
Exchange variations, net	21	(114,400	)	101,653		(509,673	)	80,302
Reversal of monetary update of contingent liabilities, net	21	—		—		—		369,819
Gain and losses on financial instruments, net	21	16,996		777		44,051		(7,829	)

INCOME BEFORE TAXES		829,940		326,324		1,917,406		1,561,978

Current	7	(118,198	)	(51,632	)	(418,642	)	(197,559	)
Deferred	7	78,775		(129,839	)	438,453		(319,505	)
Income and social contribution taxes		(39,423	)	(181,471	)	19,811		(517,064	)

NET INCOME		790,517		144,853		1,937,217		1,044,914

ATTRIBUTABLE TO:
Owners of the parent		784,910		134,774		1,920,527		1,025,138
Non-controlling interests		5,607		10,079		16,690		19,776
		790,517		144,853		1,937,217		1,044,914

Basic earnings per share - preferred and common - (R$)	18	0.46		0.08		1.13		0.60

Diluted earnings per share - preferred and common - (R$)	18	0.46		0.08		1.12		0.60

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 nine-month period ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Net income for the period	790,517		144,853		1,937,217		1,044,914
Items that may be reclassified subsequently to profit or loss
Other comprehensive income (losses) from associates and jointly-controlled entities	57,645		(91,701	)	202,259		(31,252	)
Cumulative translation adjustment	572,180		(812,385	)	3,211,552		(476,589	)
Recycling of cumulative translation adjustment to net income	—		—		(413,694	)	(76,430	)
Unrealized (Losses) Gains on net investment hedge	(373,480	)	351,945		(1,792,505	)	210,716
Unrealized Gains (Losses) on cash flow hedges	1,631		(6,290	)	13,305		(12,868	)
	257,976		(558,431	)	1,220,917		(386,423	)
Items that will not be reclassified subsequently to profit or loss
Remeasurement on defined benefit pension plan	13,403		—		13,403		—
	13,403		—		13,403		—

Other comprehensive income (loss), net of tax	271,379		(558,431	)	1,234,320		(386,423	)

Total comprehensive income (loss) for the year, net of tax	1,061,896		(413,578	)	3,171,537		658,491

Total comprehensive income (loss) attributable to:
Owners of the parent	1,050,018		(415,193	)	3,122,797		640,244
Non-controlling interests	11,878		1,615		48,740		18,247
	1,061,896		(413,578	)	3,171,537		658,491

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, 2017	19,249,181	(98,746	)	11,597	628,228	611,531	2,523,448		—		(2,873,335	)	(4,404,436	)	16,323		8,532,065		(357,072	)	189,352		24,028,136		246,517		24,274,653
2017 Changes in Equity
Net income	—	—		—	—	—	—		1,025,138		—		—		—		—		—		—		1,025,138		19,776		1,044,914
Other comprehensive income (loss) recognized in the period	—	—		—	—	—	—		—		—		210,654		(12,820	)	(582,728	)	—		—		(384,894	)	(1,529	)	(386,423	)
Total comprehensive income (loss) recognized in the period	—	—		—	—	—	—		1,025,138		—		210,654		(12,820	)	(582,728	)	—		—		640,244		18,247		658,491
Long term incentive plan cost recognized in the period	—	—		—	—	—	—		—		—		—		—		—		—		(13,353	)	(13,353	)	(12	)	(13,365	)
Long term incentive plan exercised during the period	—	22,257		—	—	—	(2,919	)	—		—		—		—		—		—		—		19,338		32		19,370
Effects of interest changes in subsidiaries	—	—		—	—	—	—		—		—		—		—		—		—		—		—		(705	)	(705	)
Dividends/interest on equity	—	—		—	—	—	—		(34,184	)	—		—		—		—		—		—		(34,184	)	(1,644	)	(35,828	)
Balance as of September 30, 2017 (Note 17)	19,249,181	(76,489	)	11,597	628,228	611,531	2,520,529		990,954		(2,873,335	)	(4,193,782	)	3,503		7,949,337		(357,072	)	175,999		24,640,181		262,435		24,902,616

Balance as of January 1, 2018	19,249,181	(76,085	)	11,597	628,228	611,531	2,075,615		—		(2,870,831	)	(4,552,984	)	4,972		8,841,450		(472,458	)	194,985		23,645,201		248,740		23,893,941
2018 Changes in Equity
Net income	—	—		—	—	—	—		1,920,527		—		—		—		—		—		—		1,920,527		16,690		1,937,217
Other comprehensive income (loss) recognized in the period	—	—		—	—	—	—		—		—		(1,792,231	)	13,175		2,967,999		13,327		—		1,202,270		32,050		1,234,320
Total comprehensive income (loss) recognized in the period	—	—		—	—	—	—		1,920,527		—		(1,792,231	)	13,175		2,967,999		13,327		—		3,122,797		48,740		3,171,537
Effects of IFRS 9 adoption	—	—		—	—	—	—		—		—		—		(10,085	)	—		—		—		(10,085	)	(65	)	(10,150	)
Effects of IAS29 adoption in the subsidiary of Argentina	—	—		—	—	—	—		—		—		—				343,044		—		—		343,044		274		343,318
Assignment of preferred shares	—	11,622		—	—	—	7,362		—		—		—		—		—		—		—		18,984		—		18,984
Treasury stocks	—	(149,711	)	—	—	—	—		—		—		—		—		—		—		—		(149,711	)	(327	)	(150,038	)
Long term incentive plan cost recognized in the period	—	—		—	—	—	—		—		—		—		—		—		—		(18,473	)	(18,473	)	(88	)	(18,561	)
Long term incentive plan exercised during the period	—	27,265		—	—	—	(4,000	)	—		—		—		—		—		—		—		23,265		77		23,342
Effects of interest changes in subsidiaries	—	—		—	—	—	—		—		6		—		—		—		—		—		6		(79,838	)	(79,832	)
Dividends/interest on capital	—	—		—	—	—	—		(425,465	)	—		—		—		—		—		—		(425,465	)	(4,843	)	(430,308	)
Balance as of September 30, 2018 (Note 17)	19,249,181	(186,909	)	11,597	628,228	611,531	2,078,977		1,495,062		(2,870,825	)	(6,345,215	)	8,062		12,152,493		(459,131	)	176,512		26,549,563		212,670		26,762,233

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 nine-month period ended
	Note	September 30, 2018		September 30, 2017

Cash flows from operating activities
Net income for the period		1,937,217		1,044,914
Adjustments to reconcile net income for the period to net cash provided by operating activities:
Depreciation and amortization	20	1,387,888		1,568,676
Equity in earnings of unconsolidated companies	8	(38,937	)	32,411
Exchange variation, net	21	509,673		(80,302	)
(Gains)/Losses on financial instruments, net	21	(44,051	)	7,829
Post-employment benefits		144,352		151,141
Long term incentive plan		34,452		27,176
Income and social contribution taxes	7	(19,811	)	517,064
Gains on disposal of property, plant and equipment, net		(27,873	)	(65,119	)
Results in operations with subsidiaries	3.4	228,948		72,478
Allowance for doubtful accounts		17,316		3,362
Provision for tax, labor and civil claims		71,281		(130,500	)
Reversal of contingent liabilities, net	14	—		(929,711	)
Interest income on trading securities		(34,572	)	(63,928	)
Interest expense on loans	21	880,825		1,033,700
Reversal of monetary update of contingent liabilities, net	14	—		(369,819	)
Interest on loans with related parties	15	(194	)	—
Provision (Reversal) for net realizable value adjustment in inventory, net	6	6,591		(16,410	)
		5,053,105		2,802,962
Changes in assets and liabilities
Increase in trade accounts receivable		(1,115,101	)	(735,663	)
Increase in inventories		(2,386,479	)	(759,921	)
Increase in trade accounts payable		621,748		541,916
Increase in other receivables		(123,985	)	(248,244	)
(Decrease) Increase in other payables		(711,211	)	7,843
Dividends from associates and joint ventures		49,139		30,822
Purchases of trading securities		(1,063,386	)	(1,966,491	)
Proceeds from maturities and sales of trading securities		974,303		1,245,247
Cash provided by operating activities		1,298,133		918,471

Interest paid on loans and financing		(798,922	)	(1,042,937	)
Income and social contribution taxes paid		(216,823	)	(89,697	)
Net cash provided (used) in operating activities		282,388		(214,163	)

Cash flows from investing activities
Additions to property, plant and equipment	9	(834,834	)	(602,054	)
Proceeds from sales of property, plant and equipment, investments and other intangibles		1,776,326		550,069
Additions to other intangibles		(42,147	)	(25,555	)
Capital increase in joint venture		—		(178,670	)
Net cash provided (used) in investing activities		899,345		(256,210	)

Cash flows from financing activities
Purchase of treasury shares		(149,711	)	—
Dividends and interest on capital paid		(378,343	)	(36,023	)
Proceeds from loans and financing		964,216		784,222
Repayment of loans and financing		(1,706,231	)	(1,956,214	)
Intercompany loans, net		11,961		6,120
Net cash used in financing activities		(1,258,108	)	(1,201,895	)

Exchange variation on cash and cash equivalents		316,233		(128,121	)

Increase (Decrease) in cash and cash equivalents		239,858		(1,800,389	)
Cash and cash equivalents at beginning of period		2,555,338		5,063,383
Cash and cash equivalents at end of period		2,795,196		3,262,994

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 September 30, 2018

(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 November 6, 2018.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

2.1 - Basis of Presentation

The Company’s Condensed Consolidated Interim Financial Statements for the three and nine-month periods ended on September 30, 2018 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, 2017, 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.

According to note 3.4, the Company started to present assets and liabilities of entities held for sale in specific lines of the balance sheet of assets held for sale and liabilities held for sale.

Changes in accounting policies

Except as described below, 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, 2017. The Company initially adopted IFRS 15 - Revenues from Contracts with Customers and IFRS 9 - Financial Instruments, as of January 1, 2018.

a) IFRS 15 - Revenue from contract with customers. IFRS 15 establishes a comprehensive framework for determining whether, when, and by how much revenue is recognized. It replaces IAS 18 - Revenues and related interpretations. The Company adopted IFRS 15 using the cumulative effect method, however, this adoption did not generate any change in amounts previously recognized as revenue, given the non-relevance of the change in the standard for the Company. Consequently, the information presented for the year 2017, or quarterly information for that year, have not been restated and, thus, the information for the 2017 financial year is still presented as disclosed in accordance with IAS 18 and related interpretations. Revenues are currently recognized when the products are delivered to the customer, and the performance obligation is fulfilled at that time.

b) IFRS 9 - Financial instruments. IFRS 9 establishes requirements to recognize and measure financial assets, financial liabilities and certain contracts for the purchase or sale of non-financial items. This standard replaces IAS 39 - Financial Instruments: Recognition and Measurement.

In relation to the classification and measurement of financial assets and liabilities, IFRS 9 largely retains the requirements in IAS 39 for the classification and measurement of financial liabilities, however it eliminates the following categories of IAS 39 for financial assets: held for maturity, loans and receivables and available for sale.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

The adoption of IFRS 9 did not have a significant effect on the Company’s accounting policies related to financial liabilities and derivative financial instruments (for derivatives that are used as hedging instruments). The impact of IFRS 9 on the Classification and Measurement of Financial Assets is described below. Under IFRS 9, at the initial recognition, a financial asset is classified in the following categories of amortization: at amortized cost or at fair value through other comprehensive income or at fair value through profit or loss. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its characteristics of contractual cash flows.

The following accounting policies apply to the subsequent measurement of financial assets:

· Financial assets measured at fair value through profit or loss: these assets are subsequently measured at fair value. Net income, including interest, is recognized directly in income.

· Financial assets at amortized cost: these assets are measured subsequently to the amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized directly in income. Any gain or loss on derecognition is recognized in profit or loss.

· Financial assets measured at fair value through other comprehensive income: these assets are subsequently measured at fair value. Interest income calculated using the effective interest method, exchange gains and losses and impairment are recognized in the income statement. Other net income is recognized in other comprehensive income. In derecognition, the accumulated result in other comprehensive income is reclassified to the income statement.

Note 13.d discloses the measurement categories of IFRS 9 for each class of financial assets and liabilities of the Company on January 1, 2018 and on September 30, 2018.

In relation to the Impairment of Financial Assets, IFRS 9 replaces the “loss incurred” model of IAS 39 with an expected credit loss model. The new impairment model applies to financial assets measured at amortized cost. Under IFRS 9, credit losses are recognized earlier than under IAS 39.

The Company measures the provision for loss in an amount equal to the expected loss of credit for life. In determining whether the credit risk of a financial asset has increased significantly since the initial recognition and in estimating the expected credit losses, the Company considers reasonable and bearable information that is relevant and available without undue cost or effort. This includes quantitative and qualitative information and analysis, based on the Company’s historical experience, credit assessment and considering forward-looking information. The provision for credit risks was calculated based on the credit risk analysis, which includes the history of losses, the individual situation of the clients, the situation of the economic group to which they belong, the real guarantees for debits and the evaluation of the consultants and is considered sufficient to cover possible losses on amounts receivable, in addition to a prospective assessment that takes into account the change or expectation of change in economic factors that affect the expected credit losses, which will be determined based on probabilities weighted.

The Company’s impact of the adoption of IFRS 9 on January 1, 2018, due to the increase in the Allowance for doubtful accounts were R$ (14,103).

Hyperinflation in Argentina

In July 2018, considering that the accumulated inflation in the last three years in Argentina was over 100%, the application of the Financial Reporting in Hyperinflationary Economies (IAS 29) is now required. In accordance with IAS 29, non-monetary assets and liabilities, Equity and the statement of income of subsidiaries operating in highly inflationary economies are adjusted by the change in the general purchasing power of the currency, applying a general price index. As a result of that, the Company applied the concepts of IAS 29 to its subsidiaries in Argentina. The non-monetary assets and liabilities recorded at historical cost and the Equity of the subsidiaries in Argentina were updated for inflation. The statements of income for the three and nine-month periods of 2017, and the respective balance sheets of the subsidiaries in Argentina, were not restated.

The impacts of hyperinflation resulting from changes in general purchasing power up to June, 30 2018 were reported as equity adjustment and the impacts of changes in general purchasing power as from July 1, 2018 were reported as financial result in the statements of income of the Company. As a result of the above effects as of September 30, 2018, the Company recognized R$ 343,318 in its equity, net of tax effects, and in its consolidated statements of income, the amounts of R$ 13,012 in the financial result, and R$ (7,432) in the deferred income tax result.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

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

The IASB has issued and/or reviewed some IFRS standards, which have mandatory adoption for the year 2019 and/or after. The Company is assessing the adoption impact of these standards in its Consolidated Financial Statements.

· IFRS 16 - Lease. Establishes aspects of recognition, measurement and disclosure of leases. This standard is effective for fiscal years beginning on or after January 1, 2019. The Company is in evaluation process of impacts on its financial statements of the adoption of the standard.

· IFRIC 23 — Uncertainty over Income Tax Treatments. Establishes aspects of recognition and measurement of the IAS 12 when there are uncertainties about the treatment of income tax related to tax assets or liabilities and current or deferred taxes, based on taxable income, tax losses, taxable bases, unused tax losses, unused tax credits and tax rates. This interpretation is effective for fiscal years beginning on or after January 1, 2019. The Company is evaluating the impacts on its Financial Statements, however, no material impact is expected in the Company’s Financial Statements.

· Amendment of IAS 19 - Changes in the plan in cases of curtailment or settlement. Clarifies aspects of measurement and recognition in the result of the effects of curtailments and settlements in employee benefit plans. This change in the standard is effective for years beginning on or after January 1, 2019. The Company does not expect significant impacts on possible future events of curtailments and settlements in employee benefit plans.

· Amendment of IFRS 3 - Definition of business. Clarifies aspects for the definition of business, in order to clarify when a transaction must have accounting treatment of business combination or acquisition of assets. This change in the standard is effective for years beginning on or after January 1, 2020. The Company does not expect significant impacts on possible future events of business combinations or acquisition of assets.

· Amendment of IAS 1 and IAS 8 - Definition of material. Clarifies definition of material to the framework of the accounting standard where this concept is applicable. These changes are effective for years beginning on or after January 1, 2020. The Company does not expect material impacts on its Financial Statements.

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 September 30, 2018, when compared to those existing on December 31, 2017, except by the conclusion of sale of its operation in Chile, as presented in note 3.4.

3.2 - Joint Ventures

The Company did not have material changes of interest in joint ventures for the period ended on September 30, 2018, when compared to those existing on December 31, 2017.

3.3 — Associate companies

The Company did not have material changes in interest in associate companies for the period ended on September 30, 2018, when compared to those existing on December 31, 2017.

3.4 — Gains and losses on assets held for sale and sales of interest in subsidiaries

On February 14, 2018, the Company announced the sale of its two hydroelectric plants in Goiás for R$ 835 million to Kinross Brasil Mineração, a wholly owned subsidiary of Kinross Gold Corporation. The Caçu and Barra dos Coqueiros plants, inaugurated in 2010, have a total installed capacity of 155 MW. On July 31, 2018 the Company concluded the sale of these two hydroelectric plants.

On March 30, 2018, the Company completed the sale of its wire rod mill located in Beaumont, Texas, and the Beaumont Wire Products and Carrollton Wire Products processing units for Optimus Steel LLC for US$ 99.5 million (equivalent to

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

R$ 330.7 million). The mill has a melt shop with the capacity to produce approximately 700,000 short tons of steel per year and is capable of rolling wire rod and rebar in roll.

On June 29, 2018, the Company concluded the sale of 100% of the shares of Aza Participações SpA and its subsidiaries, Gerdau AZA SA; Aceros Cox SA; Armacero - Matco SA; and Salomon Sack S.A., for the group of Chilean investors formed by Ingeniería e Inversiones Limitada; Inversiones Reyosan SpA; Los Andes SA de Inversiones and Matco Cables SpA. This sale includes three production plants with an installed capacity of 520 thousand tons of long recycled steel per year and its distribution network in Chile, which were presented until the conclusion of the sale within the South American segment. The economic value of the transaction corresponds to US$ 154.1 million (equivalent to R$ 594.2 million on the date of the conclusion of the sale). This movement is aligned with the Company’s asset optimization process, focusing on profitability and reducing its financial leverage.

On August 24, 2018, the Company signed an agreement to sell its participation interest in Gerdau Hungria KFT Y CIA Sociedad Regular Colectiva, a subsidiary of the Company located in Spain and owner of 98,89% of Gerdau Steel India Ltd. shares, to Blue Coral Investment Holdings Pte. Ltd and Mountainpeak Investment Holdings Ltd.. The transaction perimeter involves 100% of the operations and assets in India, including the special steels industrial unit located in Tadipatri, with annual installed capacity of 250 thousand tonnes of crude steel and 300 thousand tonnes of rolled steel. The enterprise value of the transaction corresponds to US$ 120 million (equivalent to R$ 490.2 million on the signing date of the agreement), subject to the typical adjustments. The consummation of the transaction is subject to typical settlement conditions and is expected to occur by the end of 2018. The transaction will enable Gerdau to focus more on managing its strategic assets in the Americas, where its key markets, Brazil and the United States, are located. The Company started to present assets and liabilities of these units separately from other operations, in specific lines of the balance sheet of assets held for sale and liabilities held for sale. On October 31, 2018, the Company concluded the sale of these interests, as presented in note 24.

As a result of the transactions above, together with the measurement of the change for the period ended on September 30, 2018 of the net assets classified as held for sale at the lower of their book value and fair value less costs to sell, the Company recognized an expense of R$ 228.9 million in the line of Gains and losses on assets held for sale and sales of interests in subsidiaries in its Income Statement.

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

Cash and cash equivalents

	September 30, 2018	December 31, 2017
Cash	8,186	10,439
Banks and immediately available investments	2,787,010	2,544,899
Cash and cash equivalents	2,795,196	2,555,338

Short-term investments

	September 30, 2018	December 31, 2017
Held for trading	679,994	821,518
Short-term investments	679,994	821,518

Held for Trading

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

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

NOTE 5 — ACCOUNTS RECEIVABLE

	September 30, 2018		December 31, 2017
Trade accounts receivable - in Brazil	1,573,331		1,265,431
Trade accounts receivable - exports from Brazil	190,660		139,162
Trade accounts receivable - foreign subsidiaries	2,584,866		1,525,466
(-) Allowance for doubtful accounts	(155,289	)	(131,639	)
	4,193,568		2,798,420

NOTE 6 - INVENTORIES

	September 30, 2018		December 31, 2017
Finished products	4,001,168		3,026,556
Work in progress	1,847,935		1,302,152
Raw materials	2,235,638		1,703,013
Storeroom supplies	630,492		298,100
Imports in transit	421,362		375,139
(-) Allowance for adjustments to net realizable value	(12,543	)	(3,556	)
	9,124,052		6,701,404

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 01, 2017	(28,813	)
Provision for the year	(26,545	)
Reversal of adjustments to net realizable value	46,740
Loss of control by joint venture creation	392
Assets held for sale	881
Exchange rate variation	3,789
Balance as of December 31, 2017	(3,556	)
Provision for adjustments to net realizable value	(13,645	)
Reversal of adjustments to net realizable value	7,054
Exchange rate variation	(1,409	)
Assets held for sale	(987	)
Balance as of September 30, 2018	(12,543	)

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 September 30, 2018 and 2017. The foreign subsidiaries of the Company are subject to taxation at rates ranging between 21.0% and 34.0%. 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.

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

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

	For the three-month period ended
	September 30, 2018		September 30, 2017
Income (Loss) before income taxes	829,940		326,324
Statutory tax rates	34	%	34	%
Income and social contribution taxes at statutory rates	(282,180	)	(110,951	)
Tax adjustment with respect to:
- Difference in tax rates in foreign companies	117,245		(61,854	)
- Equity in earnings of unconsolidated companies	(880	)	(9,919	)
- Interest on equity *	82,106		28
- Tax credits and incentives	2,960		(9,279	)
- Tax deductible goodwill recorded in statutory books	5,106		—
- Realization of deferred tax assets not recognized	29,337		—
- Other permanent differences, net	6,883		10,504
Income and social contribution taxes	(39,423	)	(181,471	)
Current	(118,198	)	(51,632	)
Deferred	78,775		(129,839	)

	For the nine-month period ended
	September 30, 2018		September 30, 2017
Income before income taxes	1,917,406		1,561,978
Statutory tax rates	34	%	34	%
Income and social contribution taxes at statutory rates	(651,918	)	(531,073	)
Tax adjustment with respect to:
- Difference in tax rates in foreign companies	449,624		(7,181	)
- Equity in earnings of unconsolidated companies	13,239		(11,020	)
- Interest on equity *	128,398		84
- Tax credits and incentives	8,785		5,783
- Tax deductible goodwill recorded in statutory books	15,320		—
- Realization of deferred tax assets not recognized	37,806		—
- Other permanent differences, net	18,557		26,343
Income and social contribution taxes	19,811		(517,064	)
Current	(418,642	)	(197,559	)
Deferred	438,453		(319,505	)

(*) The 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 equity — subject to specific limitations - which has the effect of a taxable deduction in the determination of income tax and social contribution. The limitation considers 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 financial reporting purposes and thus it does not impact accounting profit.

b) Tax Assets not booked:

Due to the lack of expectation of usage, the Company has not recorded a portion of tax assets arising from its operations in Brazil of R$ 275,832 (R$ 312,741 as of December 31, 2017), and negative basis of social contribution in subsidiaries, which do not have an expiration date. The subsidiaries abroad had R$ 431,244 (R$ 360,152 as of December 31, 2017) of tax credits on capital losses for which deferred tax assets have not been booked and which expire between 2020 and 2037 and also several tax losses of state credits in the amount of R$ 1,578,958 (R$ 1,137,548 as of December 31, 2017), which expire at various dates between 2018 and 2038.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

NOTE 8 — INVESTMENTS

	Joint Ventures									Associate companies
	Joint Ventures North America		Gerdau Corsa S.A.P.I. de C.V.		Gerdau Metaldom Corp.		Gerdau Summit Aços Fundidos e Forjados S.A. (note 3.2)		Diaco S.A.	Dona Francisca Energética S.A.		Corsa Controladora S.A. de C.V.		Total
Balance as of January 01, 2017	56,492		-19,269		404,522		—		—	90,796		266,303		798,844
Equity in earnings	5,725		(110,773	)	33,505		15,460		8,048	19,971		(6,533	)	(34,597	)
Cumulative Translation Adjustment	5,081		(33,078	)	(7,606	)	—		1,346	—		17,512		(16,745	)
Capital increase	—		178,670		—		184,187		—	—		—		362,857
Joint venture creation	—		—		—		—		145,084	—		—		145,084
Contingent price complement	—		—		—		—		—	65,500		—		65,500
Dividends/Interest on equity	(14,050	)	—		—		—		—	(26,594	)	—		(40,644	)
Balance as of December 31, 2017	53,248		15,550		430,421		199,647		154,478	149,673		277,282		1,280,299
Equity in earnings	5,234		(55,274	)	32,600		15,706		24,363	16,750		(442	)	38,937
Cumulative Translation Adjustment	9,694		(9,710	)	98,125		(17	)	41,601	—		62,566		202,259
Dividends/Interest on equity	—		—		(31,359	)	—		—	(17,780	)	—		(49,139	)
Balance as of September 30, 2018	68,176		(49,434	)	529,787		215,336		220,442	148,643		339,406		1,472,356

NOTE 9 — PROPERTY, PLANT AND EQUIPMENT

a) Summary of changes in property, plant and equipment — during the three-month period ended on September 30, 2018, acquisitions amounted to R$ 319,031 (R$ 170,204 as of September 30, 2017), and disposals amounted to R$ 725,056 (R$ 385 as of September 30, 2017). During the nine-month period ended on September 30, 2018, acquisitions amounted to R$ 834,834 (R$ 602,054 as of September 30, 2017), and disposals amounted to R$ 1,023,288 (R$ 693,251 as of September 30, 2017).

b) Capitalized borrowing costs — borrowing costs capitalized during the three-month period ended on September 30, 2018 amounted to R$ 6,211 (R$ 10,448 as of September 30, 2017). Borrowing costs capitalized during the nine-month period ended on September 30, 2018 amounted to R$ 18,810 (R$ 38,315 as of September 30, 2017).

c) Guarantees — property, plant and equipment have been pledged as collateral for loans and financing in the amount of R$ 600,885 as of September 30, 2018 (R$ 609,116 as of December 31, 2017).

NOTE 10 — GOODWILL

The changes in goodwill are as follows:

	Goodwill		Accumulated impairment losses		Goodwill after Impairment losses
Balance as of January 01, 2017	15,059,838		(5,589,822	)	9,470,016
(+/-) Foreign exchange effect	242,510		(169,979	)	72,531
(-) Impairment (note 23)	—		(849,438	)	(849,438	)
(-) Assets held for sale (note 3.4)	(801,967	)	—		(801,967	)
Balance as of December 31, 2017	14,500,381		(6,609,239	)	7,891,142
(+/-) Foreign exchange effect	2,946,138		(1,428,083	)	1,518,055
Balance as of September 30, 2018	17,446,519		(8,037,322	)	9,409,197

The amounts of goodwill by segment are as follows:

	September 30, 2018	December 31, 2017
Brazil	373,135	373,135
Special Steels	2,950,007	2,487,364
North America	6,086,055	5,030,643
	9,409,197	7,891,142

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

NOTE 11 — LOANS AND FINANCING

Loans and financing are as follows:

	*Annual interest rate ()**		September 30, 2018	December 31, 2017
Working capital	6.72	%	2,487,268	2,739,258
Financing of property, plant and equipment and others	15.36	%	1,498,655	2,108,216
Ten/Thirty Years Bonds	5.84	%	14,168,146	11,614,182
Total financing			18,154,069	16,461,656
Current			2,177,261	2,004,341
Non-current			15,976,808	14,457,315

Principal amount of the financing			17,803,486	16,207,120
Interest amount of the financing			350,583	254,536
Total financing			18,154,069	16,461,656

(*) Weighted average effective interest costs on September 30, 2018.

Loans and financing denominated in Brazilian Reais are indexed at fixed rates or to the following indicators: the TJLP (long-term interest rate), CDI (Interbank Deposit Certificate), the IGP-M (general market price index, a Brazilian inflation rate measured by Fundação Getúlio Vargas) and IPCA (Extended National Consumer Price Index).

Summary of loans and financing by currency:

	September 30, 2018	December 31, 2017
Brazilian Real (R$)	2,393,687	2,710,308
U.S. Dollar (US$)	15,543,107	13,333,669
Other currencies	217,275	417,679
	18,154,069	16,461,656

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

	September 30, 2018	December 31, 2017
2019(*)	70,917	873,274
2020	3,457,210	3,158,211
2021	2,018,742	1,730,177
2022	124,695	147,715
2023	2,188,867	1,815,610
2024 on	8,116,377	6,732,328
	15,976,808	14,457,315

(*) For the period as of September 30, 2018, the amounts represents payments from October 1, 2019 to December 31, 2019.

a) Principal funding in 2018

In March 2018, the subsidiary Gerdau Açominas obtained a loan of R$ 400 million from Banco do Brasil, maturing on April 28, 2019 and clause of export verification obligations.

In April 2018, the subsidiaries Gerdau Açominas S.A. and Gerdau Aços Longos S.A. obtained a loan of R$ 400 million from Citibank S.A. with guarantee from Gerdau S.A. and maturing on April 15, 2019.

b) Monitoring indexes

Only operations with BNDES include the Company’s contract established debt ratios. In the event of a possible breach of the indicator at the annual measurement, the Company enters into a curing period and a subsequent warranties renegotiation, not characterizing the possibility of a default event.

c) Guarantees

All loans contracted under the FINAME/BNDES program, totaling R$ 95.6 million on September 30, 2018, are guaranteed by the assets (property, plant and equipment) being financed.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

d) Credit Lines

In June 2009, the Company and some of its subsidiaries in Brazil, obtained a pre-approved credit line with BNDES in the total amount of R$ 1.5 billion to be used for the revamp and modernization of several areas, an increase in the production capacity of certain product lines, investment in logistics and energy generation, and also environmental and sustainability projects. The funds are made available at the time each subsidiary starts its specific investment and presents to BNDES the evidence of the investment made. The interest rate for this credit line is determined at the time of each disbursement, and is composed by indexes linked to of TJLP + 2.16% p.a. As of September 30, 2018, the outstanding balance of this credit facility was R$ 280.8 million.

In October 2017, the Company completed the renewal and reduction of the volume of the Senior Unsecured Global Working Capital Credit Agreement, a US$ 800 million revolving credit line to provide liquidity to its subsidiaries. The line is divided into two tranches, of which US$ 200 million is allocated to North American subsidiaries and US$ 600 million to subsidiaries in Latin America, including Brazil. The companies Gerdau S.A., Gerdau Açominas S.A. and Gerdau Aços Longos S.A. provide a guarantee and the operation expires in October 2020. As of September 30, 2018, the amount disbursed in this line was US$ 95 million (R$ 380.4 million as of September 30, 2018).

NOTE 12 — DEBENTURES

		Quantity as of September 30, 2018
Issuance	General Meeting	Issued	Held in treasury	Maturity	September 30, 2018	December 31, 2017
3rd- A and B	May 27,1982	144,000	140,959	06/01/2021	19,821	21,377
7th	July 14, 1982	68,400	68,265	07/01/2022	1,139	1,333
8th	November 11, 1982	179,964	178,409	05/02/2023	8,571	14,557
9th	June 10, 1983	125,640	125,245	09/01/2024	3,333	4,900
11th - A and B	June 29, 1990	150,000	149,286	06/01/2020	5,711	5,761
Total Consolidated					38,575	47,928

Non-current					38,575	47,928

Maturities of long-term amounts are as follows:

	September 30, 2018	December 31, 2017
2020	5,711	5,761
2021	19,821	21,377
2022	1,139	1,333
2023	8,571	14,557
2024 on	3,333	4,900
	38,575	47,928

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 6.65% p.a. and 9.93% p.a. on September 30, 2018 and December 31, 2017, respectively.

The Company has guarantees provided by the parent entity for debentures of the 7ª, 8ª, 9ª and 11ª issuances.

NOTE 13 - 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 cash and cash equivalents, short-term investments, trade accounts receivable, trade accounts payable, Loans and financing, debentures, related-party transactions, unrealized gains on financial instruments, unrealized losses on financial instruments, judicial deposits, other current assets, other non-current assets, obligations with FIDC, 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 non-speculative in nature and intended to protect the company against exchange rate fluctuations on foreign currency loans and against interest rate fluctuations.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

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

	September 30, 2018		December 31, 2017
	Book	Fair	Book	Fair
	value	value	value	value
Assets
Cash and cash equivalents	2,795,196	2,795,196	2,555,338	2,555,338
Short-term investments	679,994	679,994	821,518	821,518
Trade accounts receivable	4,193,568	4,193,568	2,798,420	2,798,420
Related parties	41,506	41,506	51,839	51,839
Unrealized gains on derivatives	50,283	50,283	—	—
Judicial deposits	2,126,690	2,126,690	2,051,181	2,051,181
Other current assets	461,216	461,216	469,737	469,737
Other non-current assets	519,448	519,448	542,973	542,973
Liabilities
Trade accounts payable	4,149,641	4,149,641	3,179,954	3,179,954
Loans and Financing	18,154,069	18,232,051	16,461,656	17,102,512
Debentures	38,575	38,575	47,928	47,928
Related parties	1,433	1,433	—	—
Unrealized losses on financial instruments	2,368	2,368	1,267	1,267
Obligations with FIDC	918,933	918,933	1,135,077	1,135,077
Other current liabilities	575,993	575,993	625,410	625,410
Other non-current liabilities	463,451	463,451	653,670	653,670

The fair values of Loans and Financing 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.

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.

Interest rate risk: this risk arises from the effects of the fluctuations in interest rates applied to the Company’s financial liabilities or assets and 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 and liabilities in foreign currencies or of 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 believes that the accounts receivables 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 subsidiaries adopt the procedure of analyzing in details the financial position of their customers, establishing a credit limit and constantly monitoring their balances. Regarding cash investments, the Company invests solely in financial institutions with low credit risk, as assessed

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

by rating agencies. In addition, each financial institution has a maximum limit for investment, determined by the Company’s Credit Committee.

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 KPIs (Key Performance Indicators) related to the objective “Capital Structure Management” are: WACC (Weighted Average Cost of Capital), Net Debt/ EBITDA, Net Financial Expenses Coverage Ratio (Ebitda/Net Financial expenses), and Indebtedness/Equity Ratio. The Net Debt is composed of the outstanding principal of the debt, less cash, cash equivalents and short-term investments (notes 4, 11 and 12). The total capitalization is formed by Total Debt (composed by the outstanding principal of the debt) and Equity (note 17). The Company may change its capital structure, as economic and financial conditions to optimize its financial leverage and its debt management. At the same time, the Company seeks to improve its ROCE (Return on Capital Employed) by implementing a working capital management and an efficient program of capital expenditures. In the long-term, the Company seeks to remain between the parameters below, admitting specific short-term variations:

WACC	between 10% to 13% a year
Net debt/EBITDA	less or equal to 2.5 times
Net Financial Expenses Coverage Ratio	greater or equal to 5.5 times
Debt/Equity Ratio	less than or equal to 60%

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, financing, and debentures are presented in Notes 11 and 12, respectively.

Sensitivity analysis:

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

Impacts on Statements of Income

Assumptions	Percentage of change		September 30, 2018	September 30, 2017
Foreign currency sensitivity analysis	5	%	176,222	180,019
Interest rate changes sensitivity analysis	10	bps	68,963	53,612
Sensitivity analysis of changes in prices of products sold	1	%	352,598	271,007
Sensitivity analysis of changes in raw material and commodity prices	1	%	225,719	171,609
Interest rate and Foreign currency Swaps	10bps/5	%	16,293	6,022
Interest rate Swaps	50	bps	497	—
Sensitivity analysis of NDF’s (Non Deliverable Forwards)	5	%	—	3,035
Currency options contract (zero cost collar)	5	%	781	—

Foreign currency sensitivity analysis: As of September 30, 2018, the Company is mainly exposed to variations between the Brazilian real and US Dollar. The sensitivity analysis made by the Company considers the effects of an increase or a reduction of 5% between the Brazilian real and the US Dollar on debts that are not hedged. The impact calculated considering such variation in the foreign exchange rate totals R$ 178,964 and R$ 106,579 after the effects of changes in the net investment hedge described in note 13.f (R$ 180,019 and R$ 94,406 as of September 30, 2017, respectively) and represents income if appreciation of the Brazilian real against the US Dollar occurs or an expense in the case of a depreciation of the Brazilian real against the US Dollar, however due to the net investment hedge these effects would be mitigated when considered the income tax and exchange rate variance accounts.

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

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

calculated impact, considering this variation in the interest rate totals R$ 68,923 as of September 30, 2018 (R$ 53,612 as of September 30, 2017) and would affect 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 11 and 12, and are mainly comprised by Libor and CDI — Interbank Deposit Certificate.

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 net income and costs of the nine-month period ended on September 30, 2018, totals R$ 352,598 (R$ 271,007 as of September 30, 2017) and the variation in the price of raw materials and other inputs totals R$ 225,719 as of September 30, 2018 (R$ 171,609 as of September 30, 2017). 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 and foreign currency swaps: the Company has exposure to interest rate and currency swaps for some of its loans and financing. The sensitivity analysis calculated by the Company considers the effects of a 10 bps increase or decrease in the interest rate curve and 5% in the exchange rate and its impacts on the mark-to-market of the swaps for Cross Currency Swap operations, and 50 bps on the interest curve for Pre x DI operations. These effects represent an income or expense of R$ 16,791 (R$ 6,022 as of September 30, 2017). These effects would be registered in the statement of comprehensive income. The interest rate swaps to which the Company is exposed to are presented in note 13.e.

Sensitivity analysis of forward contracts: the Company has no exposure to forward contracts. Therefore, no sensitivity analysis was performed on September 30, 2018 (income or expenses of R$ 3,035 on September 30, 2017, considering that in this position we had operations of the US Dollar against the Brazilian Real and the Chilean Peso).

Sensitivity analysis of currency options contract (Zero cost collar): the Company has exposure to currency option contracts (Zero Cost Collar) for some of its assets. The sensitivity analysis calculated by the Company considers the effects of a 5% increase or decrease of the US Dollar against the Brazilian Real and its effects on the mark-to-market of these derivatives. An increase of 5% of the US Dollar against the Brazilian Real represents an expense of R$ 781 (R$ 0 on September 30, 2017). The effects of the mark-to-market of these contracts were recorded in the Consolidated Statement of Income. The options contracts that the Company is exposed are presented in note 13.e.

d) Financial Instruments per Category

Summary of the financial instruments per category:

September 30, 2018 Assets	Financial asset at amortized cost	Financial asset at fair value through proft or loss	Financial asset at fair value through other comprehensive income	Total
Cash and cash equivalents	—	2,795,196	—	2,795,196
Short-term investments	—	679,994	—	679,994
Unrealized gains on financial instruments	—	—	50,283	50,283
Trade accounts receivable	4,193,568	—	—	4,193,568
Related parties	41,506	—	—	41,506
Judicial Deposits	2,126,690	—	—	2,126,690
Other current assets	461,216	—	—	461,216
Other non-current assets	519,448	—	—	519,448
Total	7,342,428	3,475,190	50,283	10,867,901
Financial result for the three-month period ended on September 30, 2018	145,306	32,936	—	178,242
Financial result for the nine-month period ended on September 30, 2018	499,890	96,312	—	596,202

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

(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
Trade accounts payable	—		4,149,641		4,149,641
Loans and Financing	—		18,154,069		18,154,069
Debentures	—		38,575		38,575
Related parties	—		1,433		1,433
FIDC Obligation	—		918,933		918,933
Other current liabilities	—		575,993		575,993
Other non-current liabilities	—		463,451		463,451
Unrealized losses on financial instruments	2,368		—		2,368
Total	2,368		24,302,095		24,304,463
Financial result for the three-month period ended on September 30, 2018	171		(619,927	)	(619,756	)
Financial result for the nine-month period ended on September 30, 2018	(9,549	)	(2,084,394	)	(2,093,943	)

January 1, 2018 Assets	Financial asset at amortized cost		Financial asset at fair value through proft or loss	Total
Cash and cash equivalents	—		2,555,338	2,555,338
Short-term investments	—		821,518	821,518
Trade accounts receivable	2,798,420		—	2,798,420
Related parties	51,839		—	51,839
Judicial deposits	2,051,181		—	2,051,181
Other current assets	469,737		—	469,737
Other non-current assets	462,735		80,238	542,973
Total	5,833,912		3,457,094	9,291,006
Financial result for the three-month period ended on September 30, 2017	(24,675	)	23,273	(1,402	)
Financial result for the nine-month period ended on September 30, 2017	99,495		75,024	174,519

Liabilities	Financial liability at fair value through profit or loss		Financial liability at amortized cost		Total
Trade accounts payable	—		3,179,954		3,179,954
Loans and financings	—		16,461,656		16,461,656
Debentures	—		47,928		47,928
Related parties	—		—		—
FIDC Obligation	—		1,135,077		1,135,077
Other current liabilities	—		625,410		625,410
Other non-current liabilities	—		653,670		653,670
Unrealized losses on financial instruments	1,267		—		1,267
Total	1,267		22,103,695		22,104,962
Financial result for the three-month period ended on September 30, 2017	(11	)	(252,663	)	(252,674	)
Financial result for the nine-month period ended on September 30, 2017	(11,156	)	(868,680	)	(879,836	)

As of September 30, 2018, the Company has derivative financial instruments such as currency swaps and currency options contracts in US Dollar. Part of these instruments are classified as cash flow hedges and their effectiveness can be measured, having their unrealized losses and /or gains recognized in Other Comprehensive Income. The other derivative financial instruments have their realized and unrealized losses and/or gains presented in the account “Gains and losses on 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 Company’s objective in contracting derivative transactions is always related to mitigating market risks as stated in our policies and guidelines. All current derivative instruments are reviewed monthly by the Financial Risks Committee, which validates the fair value of such instruments. All gains and losses on derivative instruments are recognized at fair value in the Consolidated Financial Statements of the Company

Policy for use of derivatives: The Company is exposed to various market risks, including changes in exchange rates, commodities prices and interest rates. The Company uses derivatives and other financial instruments to reduce the impact

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

of such risks on the fair value of its assets and liabilities or in future cash flows and results. 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.

Currency options contracts

The Company contracted options operations (Zero Cost Collar) to mitigate the risk of exchange variation on the portion of its assets denominated in US Dollars. These operations consist of the purchase of a put option and the sale of a call option in the same underlying asset, without receiving or paying the net premium. The counterparties to these operations are financial institutions with low credit risk.

Swap Contracts

The Company has contracted Cross Currency Swaps operations, whether or not qualified as cash flow hedge, through which it receives a variable interest rate based on Libor and/or a fixed US dollar rate and pays a fixed interest rate or floating currency based on the local currency. The company also contracted the Pre x DI swap operation, through which it receives a fixed interest rate and pays a floating interest rate, both in local currency. The counterparties to these operations are financial institutions with low credit risk.

The derivatives instruments can be summarized and categorized as follows:

		Notional value				Amount receivable		Amount payable
Contracts		September 30, 2018		December 31, 2017		September 30, 2018	December 31, 2017	September 30, 2018		December 31, 2017
Cross currency swap
Maturity at 2018	INR 10.17%	—		US$	40.0 million	—	—	—		(1,267	)
Maturity at 2018	CDI 90.10%	R$	111.6 million	—		8,869	—	—		—
Maturity at 2019	CDI 111.50%	R$	230.5 million	—		40,609	—	—		—

Interest rate swap

Maturity in 2020	CDI 111.50%	R$	50.0 million	—		805	—	—		—

Zero cost collar

Maturity in 2018		US$	5 million	—		—	—	(2,368	)	—

Total fair value of financial instruments						50,283	—	(2,368	)	(1,267	)

Prospective and retrospective tests demonstrated the effectiveness of the instruments qualified as cash flow hedge.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

	September 30, 2018		December 31, 2017
Unrealized gains on financial instruments
Current assets	49,478		—
Non-current assets	805		—
	50,283		—
Unrealized losses on financial instruments
Current liabilities	(2,368	)	—
Non-current liabilities	—		(1,267	)
	(2,368	)	(1,267	)

	September 30, 2018		September 30, 2017
Net Income
Gains on financial instruments	53,600		9,881
Losses on financial instruments	(9,549	)	(17,710	)
	44,051		(7,829	)
Other comprehensive income
Losses on financial instruments	13,305		(12,868	)
	13,305		(12,868	)

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. Therefore, 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$ 2.4 billion (designated as hedges) is recognized in Other Comprehensive Income, while the exchange rate on the portion of US$ 0.3 billion (not designated as hedges) is recognized in income. Additionally, the Company opted to designate as hedge of the net investment in foreign operations its financing operations held by the subsidiary Gerdau Açominas SA, in the amount of US$ 0.1 billion, which were made in order to provide part of the funds to purchase these investments abroad.

The Company has proven the effectiveness of the hedge from its designation dates and demonstrated high effectiveness of the hedge as from the debt hiring for acquisition of these companies abroad, whose effects were measured and recognized directly in Other Comprehensive Income as an unrealized loss in the amount of R$ 373,480 and R$ 1,792,505 for the three and nine-month periods ended on September 30, 2018, respectively (gains of R$ 351,945 and R$ 210,716 for the three and nine-month periods ended on September 30, 2017, respectively).

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 mentioned above against positive and negative oscillations 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:

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. 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.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

As of September 30, 2018, the Company had some assets that the fair value measurement is required on a recurring basis. These assets include investments in private securities and derivative instruments.

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 September 30, 2018 and December 31, 2017, are as follows:

	Fair Value Measurements at Reporting Date Using
			Quoted Prices Active Markets for Identical Assets (Level 1)		Quoted Prices in Non-Active Markets for Similar Assets (Level 2)
	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017

Current assets
Cash and cash equivalents	2,795,196	2,555,338	—	—	2,795,196	2,555,338
Short-term investments - Held for Trading	679,994	821,518	10,563	238,008	669,431	583,510
Trade Accounts receivable	4,193,568	2,798,420	—	—	4,193,568	2,798,420
Unrealized gains on financial instruments	49,478	—	—	—	49,478	—
Other current assets	461,216	469,737	—	—	461,216	469,737

Non-current assets
Related parties	41,506	51,839	—	—	41,506	51,839
Unrealized gains on financial instruments	805	—	—	—	805	—
Judicial deposits	2,126,690	2,051,181	—	—	2,126,690	2,051,181
Other non-current assets	519,448	542,973	—	—	519,448	542,973
	10,867,901	9,291,006	10,563	238,008	10,857,338	9,052,998

Current liabilities
Trade accounts payable	4,149,641	3,179,954	—	—	4,149,641	3,179,954
Short-term debt	2,177,261	2,004,341	—	—	2,177,261	2,004,341
Unrealized losses on financial instruments	2,368	—	—	—	2,368	—
Other current liabilities	575,993	625,410	—	—	575,993	625,410

Non-current liabilities
Long-term debt	15,976,808	14,457,315	—	—	15,976,808	14,457,315
Debentures	38,575	47,928	—	—	38,575	47,928
Related parties	1,433	—	—	—	1,433	—
Unrealized losses on financial instruments	—	1,267	—	—	—	1,267
FIDC Obligation	918,933	1,135,077	—	—	918,933	1,135,077
Other non-current liabilities	463,451	653,670	—	—	463,451	653,670
	24,304,463	22,104,962	—	—	24,304,463	22,104,962

h) Changes in liabilities arising from financing activities:

The Company demonstrates below the changes in the liabilities of Cash Flow from financing activities, of the Statement of Cash Flows:

			Cash effects				Non-cash effects
	December 31, 2017		Received/(Paid) from financing activities		Interest Payment		Interest on loans, financing and loans with related parties		Exchange Variance and others		September 30, 2018
Related Parties, net	(51,839	)	11,961		—		(194	)	(1	)	(40,073	)
Loans and Financing, Debentures and Unrealized Gains and Losses on financial instruments	16,510,851		(742,015	)	(798,922	)	880,825		2,293,990		18,144,729

			Cash effects				Non-cash effects
	January 01, 2017		Received/(Paid) from financing activities		Interest Payment		Interest on loans, financing and loans with related parties	Exchange Variance and others		September 30, 2017
Related Parties, net	(57,541	)	6,120		—		—	—		(51,421	)
Loans and Financing, Debentures and Unrealized Gains and Losses on financial instruments	20,576,866		(1,171,992	)	(1,042,937	)	1,033,700	(719,941	)	18,675,696

NOTE 14 — 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.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

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 sufficient to cover expected probable losses. The balances of the provisions are as follows:

I) Provisions

	September 30, 2018	December 31, 2017
a) Tax provisions	356,563	257,621
b) Labor provisions	496,728	517,329
c) Civil provisions	45,434	52,933
	898,725	827,883

a) Tax Provisions

The Company and its subsidiaries are parties to lawsuits related to the exclusion of the ICMS from the tax base for contributions to PIS and COFINS, with respect to which the Company 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 of the judicial proceedings in progress, due to its general repercussion. However, after the publication of the decision on October 02, 2017, the Attorney of the National Treasury filed an appeal, claiming that the decision of the Supreme Court was silent on certain points, and requested a modulation of the decision effects, which may limit its effects to the taxpayers.

Pursuant to paragraph 14 of IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, a provision is recognized only when “it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation”, among other requirements. On March 31, 2017 the Company, based on (i) the conclusion of this judgment by the STF (sitting en banc) in Extraordinary Appeal No. 574,706/RG with general repercussion, which ruled that the inclusion of the ICMS in the PIS and COFINS calculation tax base was unconstitutional, and (ii) the accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS), reversed the aforementioned accounting provision, through the recognition of R$ 929,711 in the line Reversal of contingent liabilities, net (Operational result) and R$ 369,819 in the line Reversal of monetary update of contingent liabilities, net (Financial Result), in its income statement. The Company’s decision is supported by the position of its legal advisors who, when reassessing the likelihood of loss in the ongoing lawsuits related to the matter, concluded that the probability of loss, as to the merits of these lawsuits, became remote as of the date of the enactment of this decision.

The Company emphasizes, however, that in view of the possibility that the STF may understand that the modulation mechanism necessarily applies to its decision, and that the application of such a mechanism could limit the effects of the same, a revaluation of the risk of loss associated with the aforementioned lawsuits may be required, pursuant to paragraph 59 of IAS 37. Accordingly, depending on the terms of the modulation, as defined by the STF, such revaluation may result in the need to record new provisions in connection with this matter in the future.

The balance of judicial deposits as of September 30, 2018, in the amount of R$ 1,745,902, referring to the same discussion on the inclusion of the ICMS in the tax base of PIS and COFINS, awaits termination of the relevant lawsuits before the Brazilian courts in order to be returned to the Company.

The other tax provisions refer substantially to the discussions regarding the offset of PIS credits and the incidence of PIS and COFINS on other revenues.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

b) Labor Provisions

The Company and its subsidiaries are party to labor claims. None of these claims involves individually significant amounts and corresponds mainly to overtime pay, additional night work, hours in itinere, health hazard premium, and hazardous duty premium, indemnity for occupational accidents, occupational illness and moral damages, among others.

c) Civil Provisions

The Company and its subsidiaries are also a party to civil lawsuits arising in the normal course of its business, which totaled as of September 30, 2018 the amount shown as provision liabilities.

II) Contingent liabilities for which provisions were not recorded

Considering the opinion of legal advisors and management’s assessment, contingencies listed below have chance 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 other lawsuits related to the ICMS (state VAT) which are mostly related to credit rights and rate differences, whose demands totaled R$ 612,145.

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$ 313,462; (ii) PIS and COFINS, substantially related to non-approval of compensation of credits on inputs totaling R$ 956,730, (iii) social security contributions in the total of R$ 87,451 and (iv) other taxes , whose updated total amount is currently R$ 589,025.

a.3) The Company and its subsidiary Gerdau Aços Longos SA are parties to three administrative proceedings related to Withholding Income Tax, levied on interest remitted abroad, linked to export financing formalized through “Prepayment of Exports Agreements “(PPE) or” Prepayment of Exports “(RAE), in the updated amount of R$ 408,243, of which: (i) R$ 124,571 corresponds to a lawsuit of the subsidiary Gerdau Aços Longos, which had its Voluntary Appeal judged at the first instance of the Administrative Council of Tax Appeals (CARF), which was dismissed by the quality vote, by means of the judgment published on September 3, 2018, in the face of which the Company objected Embargoes of Declaration, which awaits judgment;; (ii) R$ 131,777 corresponds to a lawsuit filed by the subsidiary Gerdau Aços Longos, which was challenged and dismissed and filed a Voluntary Appeal at the first instance of CARF, on August 28, 2018, which is pending of judgment; and; (iii) R$ 151,895, corresponds to a lawsuit filed by the Company, which was challenged and dismissed and filed a Voluntary Appeal at the first instance of CARF, on August 31, 2018, which is pending of judgment.

a.4) The Company (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$ 1,191,437. Such proceedings relate to profits generated abroad, of which (i) R$ 1,015,467 correspond to two lawsuits of the subsidiary Gerdau Internacional Empreendimentos Ltda., of which (i.a) R$ 981,195 correspond to a lawsuit whose administrative discussion has already been closed and are currently in Fiscal Execution, in relation to which the Company filed Execution Embargoes, which are pending of judgment by the first instance and (i.b) R$ 34,272 are remaining from a notice originally of R$ 372,213 and correspond to a suit partially provided by the Superior Court of Tax Appeals (CSRF), in a decision published on May 25, 2017 and has already become final; currently the process is awaiting proceedings by the first instance of the Administrative Council of Tax Appeals (CARF), for analysis of matters not previously analyzed, as determined by the CSRF decision; and (ii) R $ 175,970 corresponds to a lawsuit filed by the Company, which had its Voluntary Appeal adjudicated by the first instance of CARF, which was dismissed, reason why a Special Appeal was filed with the Superior Court of Tax Appeals (CSRF). This Special Appeal had a partial follow-up and the Company filed a regimental grievance in order to obtain a total follow-up, currently awaiting its respective judgment.

a.5) The Company (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 proceedings relating to the disallowance of the deductibility of goodwill 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 total updated amount of the proceedings is R$ 7,002,546, of which (i) R$ 5,089,310 correspond to four proceedings involving the Company and its subsidiaries Gerdau Aços Longos S.A. and Gerdau Açominas S.A., for which

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

administrative discussions already ended and are currently in the judicial collection stage; and the Companies obtained injunctive relief to permit it to offer a judicial guarantee using a liability insurance policy, for judicial discussions on Embargoes to Execution in the respective proceedings, and in the Embargoes to Execution filed by the Company (as successor of Gerdau Aços Especiais S.A.), on May 17, 2018, a judgment was rendered dismissing the fiscal launch, in the face of which the National Treasury filed an appeal and the Company presented the respective counter-arguments; (ii) R$ 622,682 correspond to a lawsuit filed by the subsidiary Gerdau Aços Longos SA, which had its Voluntary Appeal judged at the first instance of CARF on September 18, 2018, which was given partial relief and it is pending of publication of the judgment, in the light of which the Company will take the appropriate measures; (iii) R$ 253,281 correspond to a lawsuit filed by the subsidiary Gerdau Aços Longos SA, which had a Voluntary Appeal rejected by the first instance of CARF, which is why a Special Appeal was filed in the CSRF, which was partially dispatched by an order of which it became aware on July 6, 2018 and in the face of which it filed Regimental Grievance, which is awaiting judgment; (iv) R$ 294,173 correspond to a lawsuit filed by the subsidiary Gerdau Aços Longos SA, which had its Voluntary Appeal rejected, which is why a Special Appeal was filed, which was partially dispatched by an order of which it became aware on June 29, 2018 and in the face of which a regimental grievance was filed, by decision of which it became aware on September 25, 2018; the Company is currently awaiting judgment of its Special Appeal in so far as it is known and awaits collection of the amounts corresponding to the part in which its Special Appeal was not known, in order to adopt the appropriate judicial measures; (v) R$ 127,156 correspond to a lawsuit filed by the Company (as successor to Gerdau Aços Especiais SA), which had its Voluntary Appeal rejected by the first instance of CARF, which is why a Special Appeal was filed, by an order of which it became aware on September 12, 2018 and in the face of which it filed a regimental grievance that awaits judgment; (vi) R$ 99,520 corresponds to a lawsuit filed by the Company (as successor to Gerdau Aços Especiais SA), which was rejected as unfounded, by decision of which it became aware on September 17, 2018 and in the face of which it will bring a Voluntary Appeal to the first instance of CARF within the legal term; and (vii) R$ 516,423 correspond to a lawsuit filed by the subsidiary Gerdau Aços Longos S.A., which is awaiting judgment of its objection filed on August 14, 2018.

The Company’s legal advisors confirm that the procedures adopted by the Company with respect to the tax treatment of profits abroad and the deductibility of goodwill were strictly legal, and, therefore, the likelihood of loss with respect to said proceedings is possible (but not likely).

In connection with the so-called Operation Zelotes and other matters, 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. In addition to its interactions with Brazilian authorities, the Company is providing information requested by the U.S. Securities and Exchange Commission (“SEC”) regarding these matters.

Furthermore, as previously disclosed, the Company retained outside counsel, reporting to a Special Committee of the Board of Directors, to investigate certain matters relating to CARF proceedings and ultimately political donations by Company entities. That investigation by outside counsel has now been concluded and its results have been reported to the Board of Directors and the SEC.

The Company believes it is not possible at this time to predict the duration or outcome of the proceedings in Brazil or the Company’s communications with the SEC, and that there currently is not enough information to determine whether a provision for losses is required or to disclose any contingency.

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

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

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 01, 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. Sentences were handed down for the dismissal of the actions and both are found in appeal phase.

With respect to the first lawsuit, filed in 2003, in which irregularities are questioned in the administrative proceeding, the Federal Regional Court of the first Region rendered an unfavorable decision to the Company. Against this decision, appeals were directed to the Superior Court of Justice and to the Federal Supreme Court, which are still awaiting admissibility analysis by the Court. With regard to the second lawsuit, filed in 2006, in which the nullity of the CADE judgment is questioned, the Federal Regional Court of the first Region issued a recent unfavorable decision to the Company. Due to procedural defect and omission in the respective judgment, there were opposing Embargoes of Declaration, which are still awaiting judgment by the Federal Regional Court of the first Region. 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 believes based on information available, including the opinion of its legal counsel, that it is possible that the decision will be reverted.

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$ 222,679. For these demands, no accounting provision was recorded, since they were considered as possible losses, based on the opinion of its legal advisors.

c) Administrative proceeding — Brazilian Securities Commission (CVM)

On July 14, 2015, the Company acquired non-controlling interests in the following companies: Gerdau Aços Longos S.A. (4.77%), Gerdau Açominas S.A. (3.50%), Gerdau Aços Especiais S.A. (2.39%) and Gerdau América Latina Participações S.A. (4.90%), having as counterparties Itaú Unibanco S.A. and ArcelorMittal Netherlands BV. This transaction was approved by the Board of Directors of Gerdau S.A. by unanimous vote of the directors on July 13, 2015, based on the market opportunity and the analysis that the prices were appropriate considering: economic evaluations conducted by independent report, the financial instruments used, the payment terms, capturing value through a more concentrated cash flow and long-term vision for the Company. The Company, in compliance with CVM requests for the clarification on the acquisition, disclosed that the decision to its acquisition had exclusively business purpose and was duly considered and unanimously approved by the Board of Directors. The terms and conditions for the acquisition considered long-term market prospects. On October 21, 2016, Metalúrgica Gerdau S.A. and certain directors and former directors of Gerdau S.A. filed a defense for the administrative proceeding brought by CVM on the acquisition of non-controlling interests in the subsidiaries, in the sense that the operation was businesslike justified, as above stated. There is no estimate for a final decision of the matter. Metalúrgica Gerdau S.A. believes that, currently, there is not enough information to disclose or determine if a provision for losses is required.

III) Judicial deposits

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

	September 30, 2018	December 31, 2017
Tax	1,943,703	1,883,562
Labor	137,041	128,849
Civil	45,946	38,770
	2,126,690	2,051,181

IV) Contingent Asset - 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 superior to 2000kwh through the “electricity bills” issued by the electric power distribution companies, was converted into credits to the

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

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, moratory and other accessory amounts owed by Eletrobrás due to the compulsory loans, totaling approximately R$ 1,260 million. Recently, particularly in 2015, processes 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. However, 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 15 - RELATED-PARTY TRANSACTIONS

a) Intercompany loans

	September 30, 2018		December 31, 2017
Assets
Joint Venture
Gerdau Corsa SAPI de C.V.	7,901		7

Others
Fundação Gerdau	33,605		51,832
	41,506		51,839

Liabilities
Parent company
Metalúrgica Gerdau S.A.	(38	)	—

Joint Venture
Diaco S.A.	(1,395	)	—
	(1,433	)	—

	For the nine-month period ended
	September 30, 2018	September 30, 2017
Net financial loss	194	—

b) Operations with related parties

During the three and nine-month periods ended on September 30, 2018, the Company, through its subsidiaries, performed commercial operations with some of its associate companies and joint ventures in sales of R$ 448,925 and R$ 1,106,325, respectively (R$ 257,928 and R$ 499,148 as of September 30, 2017, respectively) and purchases in the amount of R$

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

43,800 and R$ 92,559 as of September 30, 2018, respectively (R$ 37,616 and R$ 99,157 as of September 30, 2017, respectively). The net balance totals R$ 1,013,765 as of September 30, 2018 (R$ 399,991 as of September 30, 2017).

During the three and nine-month periods ended on September 30, 2018, the Company, through its subsidiaries, performed transactions with controlling shareholders, directly or indirectly, mainly of guarantees provided by the controlling in guarantees of debentures, on which the Company pays a fee of 0.95 % p.a. on the amount guaranteed. The effect of these transactions was an expense of R$ 45 and R$ 151 for the three and nine-month periods ended on September 30, 2018 (R$ 125 and R$ 676 on September 30, 2017). Additionally , the Company recorded revenues of R$ 111 and R$ 334 in the three and nine-month periods (R$ 200 and R$ 616 on September 30, 2017), derived from rental agreement.

Guarantees granted

Related Party	Relationship	Object	Original Amount	Maturity	Balance as of September 30, 2018	Balance as of December 31, 2017
GTL Trade Finance Inc.	Subsidiary	30-year Bond	1,118,000	Apr/44	2,001,950	1,654,000
Diaco S.A.	Joint-venture	Financing Agreements	137,700	Aug/18	—	128,019
Armacero-Matco S.A., Salomon Sack S.A.	Subsidiary	Financing Agreements	214,793	Aug/18	—	226,700
Gerdau Holding Inc.	Subsidiary	10-year Bond	2,188,125	Jan/20	2,041,172	1,711,649
Gerdau Trade Inc.	Subsidiary	10-year Bond	2,117,750	Jan/21	1,884,924	1,570,546
Gerdau Corsa S.A.P.I. de C.V.	Joint-venture	Financing Agreements	1,895,041	Jan/19 - Dec/21	2,237,323	1,797,856
Gerdau Summit Aços Fundidos e Forjados S.A.	Joint-venture	Financing Agreements	130,164	Aug/25	41,233	6,550
GTL Trade Finance Inc., Gerdau Holdings Inc.	Subsidiary	10-year Bond	2,606,346	Apr/24	3,669,807	3,031,974
Sipar Aceros S.A.	Subsidiary	Financing Agreements	207,150	Sep/19 - Sep/21	28,627	85,920
Gerdau Trade Inc.	Subsidiary	10-year Bond	1,501,275	Apr/23	2,169,333	1,792,291
Gerdau Trade Inc.	Subsidiary	10-year Bond	2,129,985	Oct/27	2,602,535	2,150,200
Gerdau Steel India Ltd.	Subsidiary	Financing Agreements	229,435	Oct/18 - Feb/19	286,574	287,690
Gerdau Açominas S.A.	Subsidiary	Financing Agreements	4,429,703	Apr/19 - Feb/21	2,470,237	2,158,271
Gerdau Ameristeel US. Inc.	Subsidiary	Bond 25 yers	103,596	Oct/37	204,199	168,708
Gerdau Ameristeel US. Inc.	Subsidiary	Bond 30 yers	46,460	May/37	92,090	76,084
Gerdau Aços Longos S.A.	Subsidiary	Financing Agreements	243,334	Apr/19 - Dec/30	242,716	282,534
Gerdau Aços Longos S.A.	Subsidiary	Financing Agreements	7,007	Dec/18	7,007	7,007
Siderurgica Zuliana, C.A.	Subsidiary	Financing Agreements	50,010	Dec/18	—	33,080
Gerdau Aços Longos S.A.; Gerdau Açominas S.A.	Subsidiary	Financing Agreements	770,000	Jul/18	—	478,729
Gerdau Ameristeel Corporation; Gerdau Ameristeel US Inc.; Gerdau Macsteel Inc.; Comercial Gerdau Bolivia S.A.; Gerdau Metaldom S.A.; Sipar Aceros S.A.; Gerdau Hungria Holdings LLC; Aceros Corsa S.A. de C.V.; Gerdau Corsa S.A.P.I de C.V.; Gerdau GTL México S.A. de C.V.; Sidertul S.A. de C.V.; Steelchem Trading Corporation; Empresa Siderúrgica Del Perú S.A.A.; Gerdau Hungria Y CIA, S.R.C and Gerdau Laisa S.A.	Subsidiary and Joint-venture	Financing Agreements	—	Oct/20	382,333	178,200

c) Debentures

Debentures are held by parent companies, directly or indirectly, in the amount of R$ 0 as of September 30, 2018 (R$ 348 as of December 31, 2017), which corresponds to 0 debentures (63 as of December 31, 2017).

d) 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.

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

e) Management compensation

The Company paid to its management salaries, benefits and variable compensation totaling R$ 14,737 and R$ 32,404 for the three and nine-month periods ended on September 30, 2018, respectively (R$ 8,432 and R$ 25,157 for the three and nine-month periods ended on September 30, 2017, respectively). The contributions for the defined contribution plan, related to the management of the Company, totaled R$ 406 and R$ 1,216 for the three and nine-month periods ended on September 30, 2018, respectively (R$ 291 and R$ 867 on September 30, 2017, respectively).

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$ 6,315 and R$ 17,835 during the three and nine-month periods ended on September 30, 2018, respectively (R$ 3,603 and R$ 10,930 for the three and nine-month periods ended on September 30, 2017, respectively).

NOTE 16 - OBLIGATIONS WITH FIDC - INVESTMENT FUND IN CREDIT RIGHTS

Part of the assets resulting from the favorable judgments of credits with Eletrobras mentioned in Note 14 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”), whose fair value at the FIDC Inception date was R$ 800 million. The single quota of this FIDC was sold in 2015 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 credits 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 substantial 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 to the contract subscribed, and has the amount of R$ 918,933 recognized in the account “Obligations with FIDC” as of September 30, 2018 (R$ 1,135,077 as of December 31, 2017). On July 31, 2018, the Fund decided to divest part of the receivables and the Company exercised its right of first offer, acquiring these rights at their respective carrying amounts, through the payment of R$ 286,472.

NOTE 17 — 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:

	September 30, 2018			December 31, 2017
	Common shares	Preferred shares		Common shares	Preferred shares
Balance at the beginning of the period	571,929,945	1,137,327,184		571,929,945	1,137,018,570
Acquisition of Treasury shares	—	(10,000,000	)	—	—
Exercise of stock option	—	1,569,144		—	308,614
Assignment of preferred shares	—	1,309,336		—	—
Balance at the end of the period	571,929,945	1,130,205,664		571,929,945	1,137,327,184

On September 30, 2018, 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:

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

	Shareholders
	September 30, 2018						December 31, 2017
Shareholders	Common	%	Pref.	%	Total	%	Common	%	Pref.	%	Total	%
Metalúrgica Gerdau S.A.*	557,898,901	97.3	95,469,922	8.3	653,368,823	38.0	557,898,901	97.3	95,471,131	8.3	653,370,032	38.0
Brazilian institutional investors	281,788	0.0	129,038,799	11.3	129,320,587	7.5	254,785	0.0	155,227,424	13.5	155,482,209	9.0
Foreign institutional investors	7,737,249	1.4	412,570,748	36.0	420,307,997	24.5	7,254,556	1.3	708,109,387	61.8	715,363,943	41.6
Other shareholders	6,012,007	1.0	493,126,195	43.0	499,138,202	29.0	6,521,703	1.1	178,519,242	15.6	185,040,945	10.8
Treasury stock	1,697,538	0.3	15,825,581	1.4	17,523,119	1.0	1,697,538	0.3	8,704,061	0.8	10,401,599	0.6
	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 and Stichting Gerdau Johannpeter is the ultimate controlling shareholder 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 also priority in the capital distribution in case of liquidation of the Company.

b) Treasury stocks

Changes in treasury shares are as follows:

	September 30, 2018						December 31, 2017
	Common	R$	Preferred shares		R$		Common	R$	Preferred shares		R$
Balance at the beginning of the period	1,697,538	557	8,704,061		75,528		1,697,538	557	9,012,675		98,189
Repurchase of shares	—	—	10,000,000		149,711		—	—	—		—
Exercise of stock option	—	—	(1,569,144	)	(27,265	)	—	—	(308,614	)	(22,661	)
Assignment of preferred shares	—	—	(1,309,336	)	(11,622	)	—	—	—		—
Balance at the end of the period	1,697,538	557	15,825,581		186,352		1,697,538	557	8,704,061		75,528

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$ 11.78.

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.

g) Dividends - The Company credited dividends to its shareholders in the amounts presented below:

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

Period

Nature

R$/share

Outstanding shares
(thousands)

Credit

Payment

Amount

1st quarter

Interest

0.08

1,701,894

05/21/2018

06/01/2018

136,151

2nd quarter

Interest

0.14

1.702.095

08/21/2018

08/31/2018

238.294

The dividends credited during the period is composed of (i) anticipation of minimum statutory dividend and/or (ii) pre-existing retained earnings, based on adjusted net income.

NOTE 18 — EARNINGS PER SHARE (EPS)

Basic

	For the three-month period ended on
	September 30, 2018			September 30, 2017
	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	263,755	521,155	784,910	45,098	89,676	134,774

Basic denominator
Weighted-average outstanding shares, after deducting the average of treasury shares	571,931,352	1,130,081,616		571,929,945	1,137,255,451

Earnings per share (in R$) — Basic	0.46	0.46		0.08	0.08

	For the nine-month period ended on
	September 30, 2018			September 30, 2017
	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	645,261	1,275,266	1,920,527	343,100	682,038	1,025,138

Basic denominator
Weighted-average outstanding shares, after deducting the average of treasury shares	571,932,795	1,130,342,166		571,929,945	1,136,921,213

Earnings per share (in R$) — Basic	1.13	1.13		0.60	0.60

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

Diluted

	For the three-month period ended on
	September 30, 2018		September 30, 2017
Diluted numerator
Allocated net income available to Common and Preferred shareholders
Net income allocated to preferred shareholders	521,155		89,676
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	2,086		416
	523,241		90,092

Net income allocated to common shareholders	263,755		45,098
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	(2,086	)	(416	)

	261,669		44,682

Diluted denominator
Weighted - average number of shares outstanding
Common Shares	571,931,352		571,929,945
Preferred Shares
Weighted-average number of preferred shares outstanding	1,130,081,616		1,137,255,451
Potential increase in number of preferred shares outstanding due to the long term incentive plan	13,570,954		15,933,560
Total	1,143,652,570		1,153,189,011

Earnings per share — Diluted (Common and Preferred Shares) - in R$	0.46		0.08

	For the nine-month period ended on
	September 30, 2018		September 30, 2017
Diluted numerator
Allocated net income available to Common and Preferred shareholders
Net income allocated to preferred shareholders	1,275,266		682,038
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	5,555		3,051
	1,280,821		685,089

Net income allocated to common shareholders	645,261		343,100
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	(5,555	)	(3,051	)

	639,706		340,049

Diluted denominator
Weighted - average number of shares outstanding
Common Shares	571,932,795		571,929,945
Preferred Shares
Weighted-average number of preferred shares outstanding	1,130,342,166		1,136,921,213
Potential increase in number of preferred shares outstanding due to the long term incentive plan	14,781,941		15,334,022
Total	1,145,124,107		1,152,255,235

Earnings per share — Diluted (Common and Preferred Shares) - in R$	1.12		0.60

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

NOTE 19 — LONG-TERM INCENTIVE PLANS

a) Restricted Shares and Performance Shares Plan:

Balance as of January 01, 2017	20,433,491
Granted	3,170,952
Forfeited	(1,901,782	)
Exercised	(2,727,577	)
Balance on December 31, 2017	18,975,084
Granted	2,396,922
Forfeited	(1,534,766	)
Exercised	(3,501,227	)
Quantity on September 30, 2018	16,336,013

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 and nine-month periods ended on September 30, 2018 were R$ 13,416 and R$ 34,452, respectively (R$ 6,503 and R$ 18,896 on September 30, 2017, respectively).

As of September 30, 2018 the Company has a total of 15,825,581 preferred shares in treasury and, according to note 17, these shares may be used for serving this plan.

b) Stock Options Plan:

	September 30, 2018			December 31, 2017
	Number of shares		Average exercise price in the year	Number of shares		Average exercise price in the year
			R$			R$
Available at beginning of the year	292,391		18.16	569,115		16.64
Options Exercised	(33,499	)	14.86	—		—
Options Forfeited	(243,412	)	18.62	(276,724	)	15.11
Available at the end of the period	15,480		16.57	292,391		17.91

The average market price of the share on September 30, 2018 was R$ 15.72 (R$ 11.19 on December 31, 2017).

Exercise price	Quantity	Average period of grace (in years)	Average exercise price	Number exercisable on September 30, 2018*
			R$
R$ 17.42	10,754	0.4	15.68	10,754
R$ 18.58	4,726	4.3	18.58	4,726
	15,480			15,480

*The total of options vested that are exercisable on September 30, 2018 is 15,480 (57,668 on December 31, 2017).

NOTE 20 — 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:

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

	For the three-month periods ended				For the nine-month periods ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Depreciation and amortization	(477,827	)	(514,443	)	(1,387,888	)	(1,568,676	)
Labor expenses	(1,517,311	)	(1,355,330	)	(4,330,146	)	(4,131,630	)
Raw material and consumption material	(8,201,881	)	(6,054,165	)	(22,571,910	)	(17,160,918	)
Freight	(776,580	)	(577,788	)	(2,124,011	)	(1,674,420	)
Other expenses/income	(410,352	)	(364,906	)	(1,240,663	)	(1,122,604	)
Reversal of contingent liabilities, net	—		—		—		929,711
Results in operations with subsidiaries	(177,627	)	—		(228,948	)	(72,478	)
	(11,561,578	)	(8,866,632	)	(31,883,566	)	(24,801,015	)

Classified as:
Cost of sales	(10,973,599	)	(8,501,724	)	(30,413,955	)	(24,535,643	)
Selling expenses	(141,254	)	(130,887	)	(449,254	)	(402,630	)
General and administrative expenses	(277,071	)	(265,667	)	(820,449	)	(853,853	)
Other operating income	63,674		87,416		153,380		227,350
Other operating expenses	(55,701	)	(55,770	)	(124,340	)	(93,472	)
Reversal of contingent liabilities, net	—		—		—		929,711
Results in operations with subsidiaries	(177,627	)	—		(228,948	)	(72,478	)
	(11,561,578	)	(8,866,632	)	(31,883,566	)	(24,801,015	)

NOTE 21 — FINANCIAL INCOME

	For the three-month periods ended				For the nine-month periods ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Income from short-term investments	17,521		22,485		44,123		72,177
Interest income and other financial incomes	39,613		30,707		78,297		106,929
Financial income total	57,134		53,192		122,420		179,106

Interest on debts	(310,581	)	(329,928	)	(880,825	)	(1,033,700	)
Monetary variation and other financial expenses	(90,663	)	(79,770	)	(273,714	)	(293,015	)
Financial expenses total	(401,244	)	(409,698	)	(1,154,539	)	(1,326,715	)

Exchange variations, net	(114,400	)	101,653		(509,673	)	80,302
Reversal of monetary update of contingent liabilities, net	—		—		—		369,819
Gains and Losses on derivatives, net	16,996		777		44,051		(7,829	)
Financial result, net	(441,514	)	(254,076	)	(1,497,741	)	(705,317	)

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

NOTE 22 — 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
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Net sales	4,390,425		3,243,858		5,753,188		4,003,295		907,610		929,718		2,305,050		1,647,886		(520,652	)	(348,553	)	12,835,621		9,476,204
Cost of sales	(3,602,181	)	(2,878,139	)	(5,155,108	)	(3,810,617	)	(762,480	)	(800,269	)	(1,976,681	)	(1,360,261	)	522,851		347,562		(10,973,599	)	(8,501,724	)
Gross profit	788,244		365,719		598,080		192,678		145,130		129,449		328,369		287,625		2,199		(991	)	1,862,022		974,480
Selling, general and administrative expenses	(137,001	)	(135,694	)	(158,101	)	(137,291	)	(23,041	)	(42,367	)	(55,738	)	(41,711	)	(44,444	)	(39,491	)	(418,325	)	(396,554	)
Other operating income (expenses)	9,024		1,110		(886	)	6,809		1,205		3,852		2,927		3,153		(4,297	)	16,722		7,973		31,646
Results in operations with subsidiary	—		—		—		—		—		—		—		—		(177,627	)	—		(177,627	)	—
Equity in earnings of unconsolidated companies	—		—		(20,045	)	(43,997	)	4,680		6,831		7,296		3,070		5,480		4,924		(2,589	)	(29,172	)
Operational income (Loss) before financial income (expenses) and taxes	660,267		231,135		419,048		18,199		127,974		97,765		282,854		252,137		(218,689	)	(18,836	)	1,271,454		580,400
Finacial result, net	(101,552	)	(139,269	)	(10,976	)	(6,637	)	(42,127	)	(13,284	)	(36,401	)	(30,391	)	(250,458	)	(64,495	)	(441,514	)	(254,076	)
Income (Loss) before taxes	558,715		91,866		408,072		11,562		85,847		84,481		246,453		221,746		(469,147	)	(83,331	)	829,940		326,324
Income and social contribution taxes	(138,806	)	(18,203	)	(79,362	)	23,776		(21,890	)	(37,490	)	(59,315	)	(61,953	)	259,950		(87,601	)	(39,423	)	(181,471	)
Net income (Loss)	419,909		73,663		328,710		35,338		63,957		46,991		187,138		159,793		(209,197	)	(170,932	)	790,517		144,853

Supplemental information:
Net sales between segments	464,748		302,757		24,002		15,002		1,413		1,723		30,489		29,071		—		—		520,652		348,553

Depreciation/amortization	231,166		226,452		136,279		170,073		23,063		32,180		87,319		85,738		—		—		477,827		514,443

	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Investments in associates and joint ventures	—		—		358,147		346,080		750,229		584,898		215,336		199,647		148,644		149,674		1,472,356		1,280,299
Total assets	17,837,493		17,051,262		18,503,747		14,872,755		4,570,456		5,208,265		10,229,747		8,834,041		4,977,531		4,335,438		56,118,974		50,301,761
Total liabilities	10,623,932		9,592,948		4,180,264		3,315,546		1,141,805		1,711,963		2,831,841		2,753,091		10,578,899		9,034,272		29,356,741		26,407,820

Information by business segment:

	For the nine-month periods ended
	Brazil Operation				North America Operation				South America Operation				Special Steels Operation				Eliminations and Adjustments				Consolidated
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Net sales	11,799,313		9,088,141		15,592,648		11,530,776		2,982,412		2,900,768		6,169,999		4,620,184		(1,284,596	)	(1,039,148	)	35,259,776		27,100,721
Cost of sales	(9,669,955	)	(8,046,348	)	(14,250,069	)	(11,036,742	)	(2,529,936	)	(2,551,121	)	(5,250,645	)	(3,939,607	)	1,286,650		1,038,175		(30,413,955	)	(24,535,643	)
Gross profit	2,129,358		1,041,793		1,342,579		494,034		452,476		349,647		919,354		680,577		2,054		(973	)	4,845,821		2,565,078
Selling, general and administrative expenses	(417,096	)	(412,339	)	(475,908	)	(432,078	)	(105,348	)	(145,189	)	(141,569	)	(130,102	)	(129,782	)	(136,775	)	(1,269,703	)	(1,256,483	)
Other operating income (expenses)	9,548		6,362		15,546		16,902		(6,449	)	10,349		6,922		11,044		3,473		89,221		29,040		133,878
Results in operations with subsidiary	—		—		—		—		—		—		—		—		(228,948	)	(72,478	)	(228,948	)	(72,478	)
Reversal of contingent liabilities, net	—		—		—		—		—		—		—		—		—		929,711		—		929,711
Equity in earnings of unconsolidated companies	—		—		(50,435	)	(80,561	)	56,963		24,349		15,706		9,257		16,703		14,544		38,937		(32,411	)
Operational income (Loss) before financial income (expenses) and taxes	1,721,810		635,816		831,782		(1,703	)	397,642		239,156		800,413		570,776		(336,500	)	823,250		3,415,147		2,267,295
Finacial result, net	(314,460	)	(438,128	)	(32,906	)	(30,013	)	(156,358	)	(45,876	)	(92,456	)	(96,303	)	(901,561	)	(94,997	)	(1,497,741	)	(705,317	)
Income (Loss) before taxes	1,407,350		197,688		798,876		(31,716	)	241,284		193,280		707,957		474,473		(1,238,061	)	728,253		1,917,406		1,561,978
Income and social contribution taxes	(351,614	)	(45,554	)	(167,605	)	105,339		(68,033	)	(85,215	)	(164,465	)	(140,108	)	771,528		(351,526	)	19,811		(517,064	)
Net income (Loss)	1,055,736		152,134		631,271		73,623		173,251		108,065		543,492		334,365		(466,533	)	376,727		1,937,217		1,044,914

Supplemental information:
Net sales between segments	1,154,466		914,082		65,207		45,582		4,967		4,833		59,956		74,651		—		—		1,284,596		1,039,148

Depreciation/amortization	663,105		683,410		383,032		514,123		75,673		113,782		266,078		257,361		—		—		1,387,888		1,568,676

	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Investments in associates and joint ventures	—		—		358,147		346,080		750,229		584,898		215,336		199,647		148,644		149,674		1,472,356		1,280,299
Total assets	17,837,493		17,051,262		18,503,747		14,872,755		4,570,456		5,208,265		10,229,747		8,834,041		4,977,531		4,335,438		56,118,974		50,301,761
Total liabilities	10,623,932		9,592,948		4,180,264		3,315,546		1,141,805		1,711,963		2,831,841		2,753,091		10,578,899		9,034,272		29,356,741		26,407,820

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

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.

The column of eliminations and adjustments includes the elimination of sales between segments, corporate expenses, gains and losses on assets held for sale and sales of interest in subsidiaries, reversal of contingent liabilities, net, reversal of monetary update of contingent liabilities, net 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)		Asia		Consolidated
	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017
Net sales	4,841,973	3,501,049	1,072,264	1,136,500	6,733,398	4,678,608	187,986	160,047	12,835,621	9,476,204

	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017
Total assets	25,545,946	23,872,075	5,515,263	6,009,394	24,256,369	19,629,950	801,396	790,342	56,118,974	50,301,761

(1) Does not include operations of Brazil

(2) Does not include operations of Mexico

Information by geographic area:

	For the nine-month periods ended
	Brazil		Latin America (1)		North America (2)		Asia		Consolidated
	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017
Net sales	12,828,357	9,650,278	3,616,511	3,469,167	18,249,565	13,573,787	565,343	407,489	35,259,776	27,100,721

	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017
Total assets	25,545,946	23,872,075	5,515,263	6,009,394	24,256,369	19,629,950	801,396	790,342	56,118,974	50,301,761

(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 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 is not maintained on a consolidated basis and the cost to obtain net sales per product 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.

NOTE 23 — 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 goodwill impairment test allocated to business segments is performed annually in December, also being performed at interim reporting dates if events or circumstances indicate possible impairment. In the test performed for the year ended on 2017, the Company performed a sensitivity analysis in the assumptions of discount rate and perpetuity growth rate, due to the potential impact in the discounted cash flows, therefore, an increase of 0.5% in the discount rate to discount the cash flow of each segment would result in recoverable amounts that are below the book value and/or that exceeded the book value as shown below: a) North America: below book value of R$ 506 million; b) Special Steel: exceeded book value by R$ 3,422 million; c) South America: exceeded book value by R$ 265 million; and d) Brazil: exceeded the book value by R$ 999 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 below the book value and / or that exceeded the book value as shown below:

GERDAU S.A.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

as of September 30, 2018

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

(Unaudited)

a) North America: below the book value by R$ 310 million; b) Special Steel: exceeded the book value by R$ 3,596 million; c) South America: exceeded the book value by R$ 318 million; and d) Brazil: exceeded the book value by R$ 1,254 million.

The Company concluded that there are no indications that an impairment test of goodwill and other long-lived assets for the period ended on September 30, 2018 is required.

The Company will maintain over 2018 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 24 - SUBSEQUENT EVENTS

I) On October 31, 2018, the Company concluded the sale of its participation interest in Gerdau Hungria KFT Y CIA Sociedad Regular Colectiva, a subsidiary of the Company located in Spain and owner of 98.89% of Gerdau Steel India Ltd. shares, to Blue Coral Investment Holdings Pte. Ltd and Mountainpeak Investment Holdings Ltd, as announced to the market on August 27, 2018. This sale involves 100% of the operations and assets in India, including the special steel industrial unit located in Tadipatri, with annual installed capacity of 250 thousand tonnes of crude steel and 300 thousand tonnes of rolled steel.

II) On November 5, 2018, the Company concluded the sale to Commercial Metals Company (CMC) of four U.S. rebar mills and rebar fabrication locations. The sale includes the steel mills in Jacksonville, FL, Knoxville, TN, Rancho Cucamonga, CA, and Sayreville, NJ, as well as all of Gerdau’s U.S. rebar fabrication facilities. The transaction was originally announced on January 2, 2018, for US$ 600 million, as well as an approximately US$ 100 million estimated working capital adjustment. The purchase price is subject to a further customary purchase price adjustment as described in the Purchase Agreement. The cash received will be used to reduce financial leverage.

III) On November 5, 2018, 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 November 21, 2018, in the amount of R$ 221.2 million (R$ 0.13 per common and preferred share), with payment on December 3, 2018, which was submitted and approved by the Board of Directors on November 6, 2018.

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