Parent company and consolidated financial statements at December 31, 2017 and report of independent auditors
(A free translation of the original in Portuguese)
Independent auditor's report
To the Board of Directors and Stockholders Votorantim Cimentos S.A.
Opinion
We have audited the accompanying parent company financial statements of Votorantim Cimentos S.A. (the "Company" or “Parent Company”), which comprise the balance sheet as at December 31, 2017 and the statements of income, comprehensive income (loss), changes in equity and cash flows for the year then ended, as well as the accompanying consolidated financial statements of Votorantim Cimentos S.A. and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2017 and the consolidated statements of income, comprehensive income (loss), changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Votorantim Cimentos S.A. and of Votorantim Cimentos S.A. and its subsidiaries as at December 31, 2017, and the financial performance and the cash flows for the year then ended, as well as the consolidated financial performance and the cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Basis for opinion
We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Parent Company and Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiaries in accordance with the ethical requirements established in the Code of Professional Ethics and Professional Standards issued by the Brazilian Federal Accounting Council, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers, Al. Dr. Carlos de Carvalho, 417 – 10º andar, Curitiba, PR, Brasil 80410‐180, Caixa Postal 699 T: (41) 3883‐1600, F: (41) 3322‐6514, www.pwc.com/br
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Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the Matters current period. These matters were addressed in the context of our audit of the parent company and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate Why it is a Key Audit opinion on these matters. Matter
Our audit for the year ended December 31, 2017 was planned and How the executed considering that the operations of the Company and its matter was subsidiaries did not had any significant changes in relation to the to the addressed prior year. In this context, the Key Audit Matters, as well as our audit approach, have remained substantially aligned with prior year, except for the exclusion of the matter related to the securitization of receivables from the Company's subsidiary, as it was related to an event of the year ended on December 31, 2016.
Why it is a Key Audit Matter How the matter was addressed in the audit
Assessment of impairment of goodwill (Notes 16 and 18) In this respect, we obtained an understanding of The Company has goodwill based on the the existing key controls for this area and tested expectation of future profitability from business them. We also assessed the methodology that combinations made in prior years totaling R$ management used to identify the CGUs. In 3,138,865 thousand (R$ 3,043,951 recorded in addition, we assessed the reasonableness of the Intangible assets and R$ 94,914 thousand recorded Company's main assumptions, including the in Investments). discount rate used to determine the value in use or the fair value less cost to sell, when applicable, and During 2017, management recognized a provision the growth rates for prices and volumes, by for impairment in the amount of R$ 47,981 comparing them with available economic and thousand, as a result of the reduction in economic industry-related estimates. Furthermore, with the activity in Brazil and a decrease in sales volumes in support of our experts, we tested the mathematical some Cash Generating Units, and the amount of R$ accuracy of the calculations and data for the main 228,487 thousand as a result of the sale of the assumptions used in the cash flow estimates. operations in China. We used sensitivity analyses involving the main For the Cash-Generating Units (“UGCs”) to which assumptions used in order to assess whether the the goodwill has been ascribed, to determine that individual or cumulative changes would lead to recoverable value, which is the higher of the fair impairment losses that significantly exceeded those value, net of selling expenses, and the value in use, recorded by the Company. involve critical judgements by the Company's management. The recoverable value is sensitive to After performing these audit procedures, we changes in assumptions related to cement price considered that the methodology used by fluctuations, customer portfolio management, management is consistent with the methodology operating expenses, and determination of the adopted in prior years, and that the disclosures are appropriate discount rates, among other supported by data and information obtained assumptions used in the calculations. Adverse through our procedures.
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Why it is a Key Audit Matter How the matter was addressed in the audit economic and market conditions may significantly affect these assumptions.
Realization of deferred income tax and social contribution tax assets (Notes 13 and 21) The Company and its subsidiaries have recorded In this respect, we obtained an understanding of deferred tax assets arising from income tax and the key controls that the Company uses to calculate social contribution losses as well as credits from and record the tax credits and tested these controls, income tax and social contribution recoverable. as well as the templates used to estimate the future These credits are recorded to the extent taxable profits, which were subject to Company’s management considers that it will generate future Board of Directors approval. taxable profits that are sufficient for the utilization of these credits. We counted on the support of our specialists in tax matters and in company valuations to test the We focused on this area in our audit because calculations of the credits in relation to the management’s assessment of the realization of templates and critical assumptions used by these credits requires important and subjective management. We compared these assumptions judgments to determine the future taxable bases for with macroeconomic information available in the the utilization of these amounts. market and compared the information from these projections with budgets approved by the Company's governance bodies. In addition, we analyzed the realization periods considered in the Company's historical data and studies in order to test the adequacy and the consistency of these realization estimates in relation to those used in prior years. Finally, we assessed the disclosures related to the recognition of these tax credits.
We consider that the criteria and assumptions that management adopted to determine the tax credits are reasonable in all relevant aspects in the context of the financial statements.
Provisions and contingent liabilities (Note 22)
At December 31, 2017, the Company and its In this respect, we determined whether the subsidiaries had recorded provisions calculated procedures adopted by management to calculate based on probable losses estimated in the the provisions and their related disclosures were in respective proceedings. The Company and its compliance with the related accounting policy. subsidiaries also have tax, civil, and labor Furthermore, we obtained confirmation from the proceedings in progress for which no provisions external legal advisors regarding the likelihood of were recorded in the financial statements because loss for the major proceedings and the
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Why it is a Key Audit Matter How the matter was addressed in the audit management considered the likelihood of losses quantification of the amounts estimated as possible arising from these proceedings as only possible, and probable losses. We counted on the support of based on the opinion of the Company's internal and our tax specialists to assess the reasonableness of external legal advisors. estimates prepared by management and its internal and external legal advisors for certain proceedings, Management applies critical judgments to considering their progress and the existing case law, determine the likelihood of positive outcomes for when applicable. proceedings in progress as well as to estimate the probable losses, since these matters depend on We consider that the criteria and assumptions used future events that management is not able to by management to determine the provisions and control. In this context, the progress of these the disclosures in the related explanatory notes are proceedings in the different applicable levels can consistent with the information received during our differ from the results estimated by the Company audit. and its internal and external legal advisors, taking into account that changes in court directives or in case law may significantly affect management's estimates.
Other matters
Statements of Value Added
The parent company and consolidated Statements of Value Added for the year ended December 31, 2017, prepared under the responsibility of the Company's management and presented as supplementary information for IFRS purposes, were submitted to audit procedures performed in conjunction with the audit of the Company’s financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in Technical Pronouncement CPC 09 - "Statement of Value Added". In our opinion, these Statements of Value Added have been properly prepared in all material respects, in accordance with the criteria established in the Technical Pronouncement, and are consistent with the parent company and consolidated financial statements taken as a whole.
Other information accompanying the parent company and consolidated financial statements and the auditor's report
The Company’s management is responsible for the other information that comprises the Management Report, which is expected to be received after the date of this report.
Our opinion on the parent company and consolidated financial statements does not cover the Management Report, and we do not express any form of audit conclusion thereon.
In connection with the audit of the parent company and consolidated financial statements, our responsibility is to read the Management Report, when made available to us, and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
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Responsibilities of management and those charged with governance for the parent company and consolidated financial statements
Management is responsible for the preparation and fair presentation of the parent company and consolidated financial statements in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the parent company and consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the financial reporting process of the Company and its subsidiaries.
Auditor’s responsibilities for the audit of the parent company and consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the parent company and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the parent company and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our
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auditor’s report to the related disclosures in the parent company and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the parent company and consolidated financial statements, including the disclosures, and whether these financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.4
Curitiba, February 27, 2018
PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 "F"
Maurício Colombari Contador CRC 1SP195838/O-3
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Contents
Parent company and consolidated financial statements
Balance sheet ...... 9 Statement of income ...... 10 Statement of comprehensive income ...... 11 Statement of changes in equity ...... 12 Statement of cash flows ...... 13 Statement of value added ...... 14
Notes to the parent company and consolidated financial statements
1 General information ...... 15 1.1 Main events occurred in 2017 ...... 15 2 Presentation of the financial statements and summary of accounting practices ...... 18 2.1 Basis of preparation ...... 18 2.2 Consolidation ...... 19 2.3 Restatement of comparative figures ...... 22 2.4 Foreign currency translation ...... 23 2.5 Statement of cash flows ...... 23 2.6 Statement of value added ...... 24 3 Changes in accounting policies and disclosures ...... 24 4 Critical accounting estimates and judgments ...... 27 5 Environmental risk management ...... 28 6 Financial risk management ...... 28 6.1 Financial risk factors ...... 28 6.1.1 Derivative financial instruments ...... 31 6.1.2 Fair value of financial instruments and derivatives...... 33 6.1.3 Hedging of net investments in foreign entities ...... 35 6.1.4 Sensitivity analysis ...... 36 6.1.5 Capital management ...... 38 7 Financial instruments by category ...... 38 8 Credit quality of financial assets ...... 42 9 Cash and cash equivalents ...... 43 10 Financial investments ...... 43 11 Trade receivables ...... 44 12 Inventories ...... 46 13 Taxes recoverable ...... 47 14 Related parties ...... 48 15 Other assets ...... 51 16 Investments ...... 52 17 Property, plant and equipment ...... 58 18 Intangible assets ...... 63 19 Borrowings ...... 68 20 Confirming payables transactions ...... 77 21 Current and deferred income tax and social contribution ...... 77 22 Provision ...... 80 23 Use of public assets ...... 88 24 Pension plan ...... 89 25 Stockholders’ equity ...... 93 26 Revenue ...... 96 27 Expenses by nature ...... 97 28 Employee benefit expenses ...... 97 29 Other operating income (expenses), net ...... 98 30 Financial results, net ...... 98 31 Tax benefits ...... 99 32 Insurance ...... 99 33 Assets and liabilities classified as held for sale ...... 100 34 Information by operating segments ...... 102 35 Events after the reporting period ...... 104
Votorantim Cimentos S.A.
Balance sheet Years ended December 31 In thousands of reais
Parent company Consolidated Parent company Consolidated Assets Note 2017 2016 2017 2016 Liabilities and stockholders' equity Note 2017 2016 2017 2016
Current assets Current liabilities Cash and cash equivalents 9 202.971 828.620 2.721.669 2.312.499 Borrowings 19 1.354.858 1.392.828 1.665.908 952.164 Financial investments 10 1.670.224 1.246.281 1.952.112 1.798.438 Derivative financial instruments 6.1.1 63.841 200.601 64.607 200.601 Derivative financial instruments 6.1.1 1.166 Confirming payables 20 267.673 318.227 643.531 601.236 Trade receivables 11 355.264 349.590 878.904 838.425 Trade payables 479.975 224.405 1.178.363 1.112.627 Inventories 12 378.560 435.132 1.357.695 1.448.083 Salaries and social charges 168 .472 162.386 376.396 394.184 Taxes recoverable 13 196.509 497.128 292.517 621.998 Taxes payable 142.798 83.171 326.246 226.999 Advances to suppliers 25.720 2.895 63.016 81.535 Advances from customers 6 .665 5.951 30.886 26.705 Dividends receivable 14 30.374 3.189 11.098 7.252 Dividends payable 14 165.715 245.028 167.273 246.900 Other assets 15 41.486 59.686 245.153 240.989 Use of public assets 23 31.278 30.908 Other liabilities 199.587 282.914 351.997 439.588 2.901.108 3.422.521 7.523.330 7.349.219 2.849.584 2.915.511 4.836.485 4.231.912
Assets classified as held for sale 33 4.526 Liabilities related to assets held for sale 33 3.596
2.901.108 3.422.521 7.527.856 7.349.219 2.849.584 2.915.511 4.840.081 4.231.912
Non-current assets Non-current liabilities Long-term receivables Borro wings 19 8.568.332 11.117.742 11.967.499 14.528.217 Derivative financial instruments 6.1.1 85.187 85.187 Derivative financial instruments 6.1.1 316.776 316.776 Taxes recoverable 13 549.871 133.404 704.876 305.706 Deferred income tax and social contribuition 21 552.367 496.311 Deferred income tax and social contribuition 21 536.821 415.860 727.636 1.012.585 Related parties 14 1.015.367 523.215 175.033 52.965 Related parties 14 85.170 121.677 64.320 73.061 Provision 22 755.935 488.401 1.087.663 843.932 Judicial deposits 22 469.629 132.469 676.460 204.661 Payables to investees 16 44.242 Other assets 15 51.416 49.848 394.088 571.864 Use of public assets 23 446.928 470.518 Pension liabilities 24 180.000 177.527 1.692.907 938.445 2.567.380 2.253.064 Other liabilities 91.359 95.054 226.200 255.750
Investments in associates and joint ventures 16 11.593.479 12.634.104 695.240 1.034.131 10.430.993 12.585.430 14.635.690 17.141.996 Property, plant and equipment 17 4.947.689 5.034.429 12.425.037 12.642.268 Intangible assets 18 672.562 755.734 5.464.149 5.954.090 Total liabilities 13.280.577 15.500.941 19.475.771 21.373.908
17.213.730 18.424.267 18.584.426 19.630.489 Stockholders' equity 25 Capital 5.430.875 3.730.875 5.430.875 3.730.875 Retained earnings 2.681.567 3.221.648 2.681.567 3.221.648 Other comprehensive income 414.726 331.769 414.726 331.769
Total equity attributable to owners of the parent 8.527.168 7.284.292 8.527.168 7.284.292
Non-controlling interests 676.723 574.572
Total stockholders' equi ty 8.527.168 7.284.292 9.203.891 7.858.864
Total assets 21.807.745 22.785.233 28.679.662 29.232.772 Total liabilities and stockholders' equity 21.807.745 22.785.233 28.679.662 29.232.772
The accompanying notes are an integral part of these parent company and consolidated financial statements. 9 of 104 Votorantim Cimentos S.A.
Statement of income Years ended December 31 In thousands of reais, unless otherwise stated
Parent company Consolidated Note 2017 2016 2017 2016 Restated (Note 2.3) Continuing operations Net revenue from goods sold and services rendered 26 4.137.036 4.718.039 11.103.780 11.923.738 Cost of goods sold and services rendered 27 (3.034.970) (3.379.769) (8.357.261) (8.814.655) Gross profit 1.102.066 1.338.270 2.746.519 3.109.083
Operating income (expenses) Selling 27 (753.345) (727.184) (1.133.116) (1.062.970) General and administrative 27 (476.468) (475.398) (811.801) (904.829) Other operating income (expenses), net 29 (574.522) 234.531 (197.394) 343.075 (1.804.335) (968.051) (2.142.311) (1.624.724) Operating profit (loss) before equity results and net financial results (702.269) 370.219 604.208 1.484.359
Results of investees Equity in the results of associates and joint ventures 16 (d) 917.131 798.164 157.124 120.571 Realization of other comprehensive income of investees 1 .1 (b) 3.457 25.007 3.457 44.133 920.588 823.171 160.581 164.704 Financial results, net 30 Financial income 480.883 727.387 660.702 872.236 Financial expenses (1.344.377) (1.455.242) (1.577.245) (1.652.022) Derivative financial instruments (169.431) (761.492) (169.031) (770.015) Exchange variations, net (104.158) 575.185 (205.004) 552.144 (1.137.083) (914.162) (1.290.578) (997.657)
Profit (loss) before income tax and social contribution (918.764) 279.228 (525.789) 651.406
Income tax and social contribution 21 Current 86.897 182.957 (163.608) (81.745) Deferred 149.976 (92.208) 10.829 (117.565)
Profit (loss) for the year from continuing operations (681.891) 369.977 (678.568) 452.096
Discontinued operations Profit (loss) from discontinued operations 33 (c) 58.969 (28.067)
Net profit (loss) for the year (681.891) 369.977 (619.599) 424.029
Net profit (loss) attributable to the owners of the parent (681.891) 369.977 (681.891) 369.977 Net profit attributable to non-controlling interests 62.292 54.052
Net profit (loss) for the year (681.891) 369.977 (619.599) 424.029
Weighted average number of shares, thousands 6.594.613 6.126.939 6.594.613 6.126.939
Basic and diluted earnings (losses) per thousand shares, reais (103,40) 60,39 (103,40) 60,39
From continuing operations Basic and diluted earnings (losses) per thousand shares, reais (103,40) 60,39 (112,34) 64,97
From discontinued operations Basic and diluted earnings (losses) per thousand shares, reais 8,94 (4,58)
The accompanying notes are an integral part of these parent company and consolidated financial statements. 10 of 104 Votorantim Cimentos S.A.
Statement of comprehensive income Years ended December 31 In thousands of reais
Parent company Consolidated Note 2017 2016 2017 2016
Net income (loss) for the year (681.891) 369.977 (619.599) 424.029 Other components of comprehensive income for the year to be subsequently reclassified to the statement of income Currency translation of investees abroad 25 (d) 299.828 (2.223.182) 329.272 (2.338.648) Hedge accounting of net investments in foreign operations, net of income tax and social contribution 6.1.3 (181.685) 1.003.811 (181.685) 1.003.811 Hedge accounting of net investments in foreign operations - VCNA 16 (d) 96.355 96.355 Realization of other comprehensive income of investees 1 (b) and (d) (136.393) (25.007) (136.393) (44.133) Loss due to change in interests in investees 16 (d) (30.406) Interest in other comprehensive income of investees 19.386 (2.628) 13.389 Other componets of comprehensive income that will not be subsequently reclassified to the statement of income Remeasurement of retirement benefits 24 (c) 4.852 (19.637) 4.852 (19.637) Other comprehensive income (loss) for the year 82.957 (1.275.035) 109.773 (1.385.218) Total comprehensive income (loss) for the year (598.934) (905.058) (509.826) (961.189)
Comprehensive income (loss) from Continuing operations (598.934) (905.058) (568.795) (933.122) Discontined operations 33 (c) 58.969 (28.067) (598.934) (905.058) (509.826) (961.189) Comprehensive income (loss) attributable to Owners of the parent (598.934) (905.058) Non-controlling interests 89.108 (56.131) (509.826) (961.189)
The accompanying notes are an integral part of these parent company and consolidated financial statements. 11 of 104 Votorantim Cimentos S.A.
Statement of changes in equity Years ended December 31 In thousands of reais
Attributable to owners of the parent Income reserves Retained earnings Other Total Profit (accumulated comprehensive Non-controlling stockholders' Note Capital Tax incentive Legal retention losses) income Total interests equity At January 1, 2016 2.730.875 1.102.531 510.723 1.317.730 1.606.804 7.268.663 683.295 7.951.958 Comprehensive loss for the year Net income for the year 369.977 369.977 54.052 424.029 Other comprehensive loss 25 (d) (1.275.035) (1.275.035) (110.183) (1.385.218) 369.977 (1.275.035) (905.058) (56.131) (961.189) Contributions by and distributions to stockholders Capital increase 1.000.000 1.000.000 1.000. 000 Allocation of net income for the year Regonition of tax incentive reserve 25 (a) (v) and 29 97.529 (97.529) Capital reduction (232) (232) Legal reserve 25 (a) (iv) 18.499 (18.499) Dividends approved (R$ 0.01 per share) (79.313) (79.313) (52.360) (131.673) Profit retention 25 (a) (iv) 174.636 (174.636) 1.000.000 97.529 18.499 174.636 (369.977) 920.687 (52.592) 868.095
At December 31, 2016 3.730.875 1.200.060 529.222 1.492.366 331.769 7.284.292 574.572 7.858.864
At January 1, 2017 3.730.875 1.200.060 529.222 1.492.366 331.769 7.284.292 574.572 7.858.864 Comprehensive income for the year Net income (loss) for the year (681.891) (681.891) 62.292 (619.599) Other comprehensive income 25 (d) 82.957 82.957 26.816 109.773 (681.891) 82.957 (598.934) 89.108 (509.826) Contributions by and distributions to stockholders Capital increase 1.1 (e) 1.700.000 1.700.000 4 1.700.004 Increase in non-controlling interest - VCEAA 16 (d) 62.497 62.497 62.497 124.994 Decrease in non-controlling interests (6) (6) Allocation of net income (loss) for the year Recognition of tax incentive reserve 25 (a) (v) and 29 70.472 (70.472) Reversal of tax incentive reserve 1 .1 (h) (110.936) 110.936 Reversal of dividends approved 25 (c) 79.313 79.313 79.313 Dividends approved (49.45 2) (49.452) Offset of loss for the year 25 (a) (iv) (641.427) 641.427 1.700.000 (40.464) (499.617) 681.891 1.841.810 13.043 1.854.853
At December 31, 2017 5.430.875 1.159.596 529.222 992.749 414.726 8.527.168 676.723 9.203.891
The accompanying notes are an integral part of these parent company and consolidated financial statements. 12 of 104 Votorantim Cimentos S.A.
Statement of cash flows Years ended December 31 In thousands of reais
Parent company Consolidated Note 2017 2016 2017 2016 Cash flow from operating activities Income (loss) before income tax and social contribution (918.764) 279.228 (525.789) 651.406 Income (loss) from discontinued operations 33 (c) 58.969 (28.067) Adjustments of items that do not represent changes in cash and cash equivalents Depreciation, amortization and depletion 27 374.703 415.380 991.076 1.015.230 Equity in the results of associates and joint ventures 16 (b) (917.131) (798.164) (157.124) (120.571) Realization of other comprehensive income of investees 1 (b) and (d) (136.393) (25.007) (136.393) (44.133) Impairment provision (reversal) of property, plant and equipment, net 17 (5.550) (22.249) 12.219 Impairment provision (reversal) of intangible assets, net 18 (29) (1.729) (4.705) 8.681 Impairment of goodwill 276.468 68.172 276.468 81.980 Net loss (gain) on disposal of property, plant and equipment and intangible assets (6.244) 693 (9.895) (87.051) Net loss (gain) on sale of investment (15.855) (296.915) (230.909) (296.915) Allowance for doubtful accounts, net of reversals 11.705 22.351 21.167 24.415 Constitution (reversal) of provision for civil, labor, tax and environmental lawsuits and ARO 63.317 24.273 7.338 14.700 Constitution (reversal) of provision for obsolete inventories (10.117) 9.197 (6.059) 11.386 Net finance result 846.794 925.101 1.275.162 814.724 Other non-cash items (91.684) 22.451 227.470 (114.153) (523.230) 639.481 1.764.527 1.943.851 Decrease (increase) in assets Trade receivables (16.510) (24.120) (47.525) 760.439 Inventories 66.689 7.886 96.447 137.610 Taxes recoverable 47.182 22.504 (69.689) 23.111 Related parties 257.425 (119.216) 261.284 (129.822) Judicial deposits (48.454) (59.366) (64.535) (86.390) Other receivables and other assets (6.193) 87.525 (316.707) (59.574) Increase (decrease) in liabilities Trade payables 255.570 (25.540) 65.736 (136.444) Salaries and social charges 6.086 (17.554) (17.788) (34.625) Advances from customers 714 (89) 4.181 (10.320) Taxes payable 68.047 (10.913) 198.042 (85.377) Payments of tax, civil and labor lawsuits (30.683) (11.127) (72.018) (41.423) Other accounts payable and other liabilities (137.576) 27.801 (95.593) 46.609 Cash from operating activities (60.933) 517.272 1.706.362 2.327.645 Interest paid (856.519) (1.108.547) (1.047.887) (1.249.977) Income tax and social contribution paid (199.436) (240.450)
Net cash provided by (used in) operating activities (917.452) (591.275) 459.039 837.218 Cash flow from investing activities Financial investments (192.070) 520.143 124.383 183.401 Proceeds from disposals of property, plant and equipment and intangible assets 13.202 27.981 115.178 220.115 Proceeds from disposals of investments 150.198 565.970 1.936.701 636.970 Dividends received 664.595 66.071 67.093 67.623 Acquisitions of property, plant and equipment (247.482) (350.543) (1.146.287) (1.864.578) Acquisitions of intangible assets 18 (312) (817) (2.098) (7.529) Cash effect of capital reductions (increases) in investees 1 (a) 731.674 275.228 Net cash provided by (used in) investing activities 1.119.805 1.104.033 1.094.970 (763.998) Cash flow from financing activities New borrowings 19 (d) 500.678 798.900 640.680 4.317.683 Payments of borrowings 19 (d) (2.837.474) (2.767.863) (3.010.948) (5.675.728) Derivative financial instruments 6.1.2 (537.780) (211.825) (537.780) (220.348) Capital increase 1.1 (e) 1.700.000 1.000.000 1.700.000 1.000.000 Dividends paid to non-controlling stockholders (49.766) (10.386) Related parties 346.574 (32.479) (8.551) 11.579 Net cash used in financing activities (828.002) (1.213.267) (1.266.365) (577.200)
Increase (decrease) in cash and cash equivalents (625.649) (700.509) 287.644 (503.980) Decrease in cash resulting from the relassification of assets held for sale (26.206) Effect of exchange rate changes 147.732 (219.173) Cash and cash equivalents at the beginning of the year 828.620 1.529.129 2.312.499 3.035.652 Cash and cash equivalents at the end of the year 202.971 828.620 2.721.669 2.312.499 Main non-cash transactions Reversal of dividends approved 25 (c) 79.313 79.313 Distribution of VCEAA's share premium 613.491 835.377 Settlement of bond with VCEAA's share premium (613.491) (835.377) Settlement of PERT debts not affecting cash 1.1 (g) (245.423) (248.417)
The accompanying notes are an integral part of these parent company and consolidated financial statements. 13 of 104 Votorantim Cimentos S.A.
Statement of value added Years ended December 31 In thousands of reais
Parent company Consolidated Note 2017 2016 2017 2016 Revenue Sales of products and services (less sales returns and rebates) 5,534,851 6,395,390 13,012,798 14,155,974 Other operating income 65,614 379,238 190,883 552,297 Allowance for doubtful accounts, net of reversals 11 (e) (11,705) (22,351) (21,167) (24,415) 5,588,760 6,752,277 13,182,514 14,683,856
Inputs acquired from third parties Raw materials and other production inputs (2,275,229) (2,261,088) (4,968,747) (5,114,524) Materials, energy, oustourced services and other (1,044,831) (994,810) (2,287,188) (2,294,927) Impairment provision for advances to suppliers, property, plant and equipment, intangible and other assets 29 (276,439) (60,893) (21,027) (102,880) (3,596,499) (3,316,791) (7,276,962) (7,512,331)
Gross value added 1,992,261 3,435,486 5,905,552 7,171,525
Depreciation, amortization and depletion 27 (374,703) (415,380) (991,076) (1,015,230)
Net value added generated by the Company 1,617,558 3,020,106 4,914,476 6,156,295
Value added received through transfer Equity in the results of investees 920,588 823,171 160,581 164,704 Financial income and exchange gains 803,452 1,816,484 1,001,284 2,043,685 1,724,040 2,639,655 1,161,865 2,208,389
Total value added to be distributed 3,341,598 5,659,761 6,076,341 8,364,684
Distribution of value added Personnel and social charges Direct remuneration 28 (b) 433,699 450,537 1,318,573 1,410,728 Pension plan 24 (c) 19,870 14,747 Social charges 28 (b) 231,659 243,426 402,438 421,028 Benefits 28 (b) 140,955 150,612 300,547 305,680 806,313 844,575 2,041,428 2,152,183
Taxes and contributions Federal 315,158 346,655 704,162 782,846 State 1,026,739 1,170,070 1,501,017 1,657,216 Municipal 10,313 15,754 11,592 17,311 Deferred taxes (149,976) 92,208 (10,829) 117,565 1,202,234 1,624,687 2,205,942 2,574,938
Third-party capital remuneration Financial expenses and exchange losses 1,940,535 2,730,646 2,291,862 3,041,342 Rentals 74,407 89,876 156,708 172,192 2,014,942 2,820,522 2,448,570 3,213,534
Own capital remuneration Non-controlling interests 62,292 54,052 Dividends 79,313 79,313 Reinvested profits (loss) (681,891) 290,664 (740,860) 318,731 Income (loss) from discontinued operations 33 (c) 58,969 (28,067) (681,891) 369,977 (619,599) 424,029
Value added distributed 3,341,598 5,659,761 6,076,341 8,364,684
The accompanying notes are an integral part of these parent company and consolidated financial statements. 14 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
1 General information
Votorantim Cimentos S.A. (the "Company" or "VCSA") and its subsidiaries are principally engaged in the following activities: the production and sale of a wide portfolio of heavy building materials, which includes cement, aggregates, ready-mix concrete, mortar and other building materials, as well as raw materials and byproducts, similar and related products; research, mining and processing of mineral reserves in connection with its cement producing activities; transportation, distribution and importing, co-processing of alternative fuels for energy generation; and holding investments in other companies. The Company is a corporation headquartered in the city and State of São Paulo, Brazil. The Company and its subsidiaries operate in all regions of Brazil, as well as in North America and South America, Europe, Asia and Africa.
The Company is directly controlled by Votorantim S.A. ("VSA"), a privately held company headquartered in the city and State of São Paulo, Brazil, that is the holding company of the Votorantim companies and is fully controlled by the Ermírio de Moraes family.
1.1 Main events occurred in 2017
(a) Distribution of share premium and dividends of subsidiary Votorantim Cimentos EAA Inversiones S.L. (“VCEAA”)
In January 2017, VCEAA's management approved the following events: (i) capital reduction in its subsidiary Votorantim Cement North America Inc. (“VCNA”) amounting to USD 30 million, reducing VCNA’s capital from USD 1,113 million to USD 1,083 million, and (ii) partial distribution of VCEAA's share premium, amounting to EUR 278 million (R$ 937,579), which had as a counterpart the cancellation of R$ 613,491 of the portion of the bonds from the Company itself which had been acquired by VCEAA in prior years, and the residual amount of R$ 324,088 was settled in cash.
In October 2017, VCEAA’s management approved, as the controlling shareholder of VCNA, capital reductions in the total amount of USD 110 million, and VCNA’s capital was reduced from USD 1,083 million to USD 973 million. Considering the capital reduction of VCNA, the Company approved the distribution of dividends of VCEAA, its direct subsidiary, in the total amount in Euros equivalent to USD 110 million (R$ 360,486).
In November 2017, VCEAA’s management approved the distribution of extraordinary dividends to the Company, in the amount in Euros equivalent to USD 12.5 million (R$ 34,983).
In December 2017, VCEAA’s management approved the distribution of extraordinary dividends to the Company, in the amount in Euros equivalent to USD 2.5 million (R$ 8,228).
The Company used these resources for early debt prepayment.
(b) Liquidation and merger of subsidiaries Lux Cem International S.A. (“Lux Cem”) and Seacrown do Brasil Comércio, Importação e Participações S.A. (“Seacrown”)
In February 2017, the Company liquidated the subsidiary Lux Cem, merging its negative net assets and, consequently, wrote off the amount of R$ 3,457 related to the exchange variation on investments abroad, recognized under "Realization of other comprehensive income of investees".
In November 2017, the Company merged the subsidiary Seacrown, as well as its negative net assets appraised at R$ 3,322. With the merger, the shares of Seacrown were extinguished without increase in the Company’s capital, since it was the holder of the total shares of Seacrown. The merger was carried out aiming at the rationalization of administrative costs and optimization of the Company’s corporate structure.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Sale of one share of the Company
On April 1, 2017, Votorantim S.A. sold to VP Gestão Ltda. one preferred share of the Company. As a result of this transaction, VP Gestão Ltda. became, jointly with VSA, a shareholder of the Company.
(d) Sale of assets and liabilities related to China operations
In the first half of 2017, VCEAA sold its assets and liabilities related to the operations Suzhou Nanda Cement Co. Ltd., Hua Wo Cement Co. Ltd. - (Shandong) and Hua Wo Cement Co. Ltd. - (Huai’an), located in China. In October 2017, VCEAA sold all the shares representing the capital of Hua Wo (Zaozhuang) Cement Co. Ltd. and Liyand Dongfang Cement Co Ltd.. As a result, VCEAA recognized a loss on the disposal of the investment in the amount of R$ 139,364, under “Discontinued operations” (Note 34 (a)), and the realization of the exchange gain on these investments abroad in the amount of R$ 59,687, recognized under “Realization of other comprehensive income of investees” in discontinued operations (Note 33 (c)).
As a result of the sale of this indirect investment, the Company also proportionally wrote off the goodwill and exchange gain on this investment abroad in the amount of R$ 228,487 and R$ 73,249, respectively, both recognized under “Other operating income (expenses), net” (Note 29) in the parent company, and under “Other operating income (expenses), net” and “Realization of other comprehensive income of investees”, respectively, in discontinued operations (Note 33 (c)) in the consolidated.
(e) Company’s capital increase
On June 29, 2017, the shareholders approved a capital increase of the Company by R$ 700,000, through subscription and payment by the shareholder VSA of 578,512,397 common shares.
On December 14, 2017, the shareholders approved a capital increase of the Company by R$ 1,000,000, through subscription and payment by the shareholder VSA of 781,250,000 common shares. With such capital increase, the Company’s fully subscribed and paid-up capital is R$ 5,430,875, comprising 7,186,129,975 common shares and 300,571,428 preferred shares.
(f) Reversal of provision related to the exclusion of ICMS from the calculation basis of PIS and COFINS
In the second quarter of 2017, the Company and its subsidiaries reversed the provision related to the exclusion of ICMS from the calculation basis of PIS and COFINS, based on the conclusion of the judgment of general repercussion of the Supreme Federal Court (“STF”). The net result of this reversal amounted to R$ 213,565 and R$ 297,430 in the parent company and consolidated, respectively (Note 22 (c) (iii)).
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(g) Joining of the Special Tax Regularization Program (“PERT”)
In the second half of 2017, the Company and its subsidiaries joined the PERT, which included the debts to the Brazilian Federal Revenue Office (“RFB”) and the Office of the Attorney General of the National Treasury (“PGFN”) as per Law 13,496 of October 24, 2017. The accounting impacts are shown below:
Parent company Consolidated 12/31/2017 12/31/2017 PERT (Special Tax Regularization Program) Principal 96.559 99.443 Fines and charges, net of reductions 110.915 111.108 Interest, net of reductions 142.408 142.548 Payment in five installments (i) (78.728) (78.949) 271.154 274.150
Tax credits used for settlement Company's income tax and social contribution losses up to 2015 (Note 21 (e)) (122.610) (125.604) Associates' income tax and social contribution losses up to 2015 (Note 14 (b) and (c)) (122.813) (122.813) (245.423) (248.417)
Amount of tax debits provisioned included in the PERT Principal (Note 22 (c)) 47.360 50.244 Monetary restatement (Note 22 (c)) 67.250 68.833 114.610 119.077
Net impact on profit or loss Other operating income (expenses), net (Note 29) (104.094) (104.287) Net financial results (Note 30 (b)) (75.159) (73.715) Income tax and social contribution (Note 21 (c)) (56.020) (56.020) (235.273) (234.022)
(i) The joining of the program considered a cash payment equivalent to 20% of the consolidated debt, without reductions for the parent company and 5% for subsidiaries, in five installments payable from August to December 2017, and the remaining amount was paid as follows: (i) for the debts managed by the RFB - with credits on tax losses; and (ii) for the debts managed by the PGFN - payment in one single installment with the deductions in January 2018, amounting to R$ 25,731.
(h) Credits Recovery Program of the State of Mato Grosso - REFIS-MT Program
In the third quarter of 2017, the Company signed an agreement with the Prosecutor’s Office of the State of Mato Grosso aiming to adjust and ratify the ICMS tax benefits related to the construction of the Cuiabá plant and the expansion and modernization of the Nobres plant. The agreement aimed to provide legal certainty to the Company’s operations in the State and ratified tax benefits granted until March 2024.
In the agreement the Company acknowledged that it made investments higher than the amount forecast in the respective terms of granting of tax benefits. However, divergences in legal interpretation resulted in tax assessment notices, which required the settlement of pending tax issues, through a payment to the State amounting to R$ 236,854 in September 2017.
The Company also undertook to increase the social investments in the State in the total amount of R$ 15,000, of which R$ 13,500 was also paid in September 2017 to a state development fund for incentives to small entrepreneurs and R$ 1,500 to the municipality of Nobres, which will benefit from an important project in the health area developed in partnership with Instituto Votorantim, which includes the construction of two population health centers and the acquisition of two vehicles (one ambulance and another for transportation of patients). To settle this agreement, the Company joined the credits recovery program of the State of Mato Grosso (the “REFIS-MT Program”).
The Company also reversed the tax incentive reserve previously recognized, corresponding to the portion of the ICMS tax incentive in the State of Mato Grosso. The accounting impacts are shown below:
17 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Parent company and consolidated 12/31/2017 Credit Recovery Program of the State of Mato Grosso Cash payment 236.854 Deposit to FUNDEIC 13.500 Health Project in Nobres (State of Mato Grosso - MT) 1.500 251.854
Net impact on profit or loss Other operating income (expenses), net (Note 29) (211.628) Net financial results (Note 30 (b)) (40.226) (251.854)
Impact on stockholders' equity Reversal of tax incentive reserve 110.936
(i) Sale of assets and liabilities related to operations in the States of Florida and California
On October 1, 2017, the subsidiary VCNA and Anderson Columbia Group (“Anderson Columbia”) entered into an agreement for the sale of all shares representing the capital of the operations in the states of Florida and California, which include VCNA Prestige Concrete Products Inc., VCNA Prestige Gunite Inc. (including its wholly-owned subsidiary Sacramento Prestige Gunite Inc.) and its 50% interest in Suwanee American Cement LLC (“SAC”) and in Sumter Cement Co. LLC.
In November 2017, the sale was completed and the Company recognized a gain on the disposal of the investment amounting to USD 173,703 (R$ 562,571). The income tax on this transaction was USD 66,122 (R$ 214,148), resulting in a net gain of USD 107,581 (R$ 348,423), recognized under “Discontinued operations” (Note 34 (a)).
(j) Sale of interests in Cementos Bio Bio S.A. (“Bio Bio”) and in Guanaco Inversiones Ltda. (“Guanaco”)
In October 2017, the subsidiary Votorantim Cimentos Chile S.A. (“VCC”) was partially spun-off, aiming at the creation of a new company named Guanaco Inversiones Ltda., which received through the spin- off the 13.1% interest held by VCC in Bio Bio. In November 2017, the Company sold all the shares of Guanaco and recognized a net gain of R$ 15,855 (Note 29). In the same period, VCC also sold the remaining shares it held in Bio Bio, equivalent to a 3.6% interest in such company, and recognized a net gain of R$ 3,993 (Note 29).
2 Presentation of the financial statements and summary of accounting practices
2.1 Basis of preparation
(a) Parent company and consolidated financial statements
The financial statements have been prepared in accordance with accounting practices adopted in Brazil, effective as of December 31, 2017, including the pronouncements issued by the Brazilian Accounting Pronouncements Committee (“CPC”), as well as according to the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee (“IFRIC”) interpretations, and disclose all (and only) the applicable significant information related to the financial statements, which is consistent with the information used by management in the performance of its duties.
The financial statements have been prepared under the historical cost convention, which in the case of certain assets and liabilities, including derivative instruments, is measured at fair value.
The accounting policies applied to the financial statements are consistent with those adopted and disclosed in the financial statements of prior years. Accounting policies of subsidiaries, associates and
18 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
joint ventures are changed where necessary to ensure consistency with the policies adopted by the Company.
The significant accounting policies for the understanding of the financial statements were included in the respective notes, with a summary of the basis of recognition and measurement used by the Company.
The preparation of financial statements requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.
The Company voluntarily discloses its statement of value added, in accordance with accounting practices adopted in Brazil applicable to listed companies, which is presented as an integral part of the financial statements. Under international standards, this statement is presented as additional information notwithstanding the set of financial statements.
(b) Approval of the parent company and consolidated financial statements
The issue of these financial statements was authorized by the Company’s Board of Directors on February 27, 2018.
2.2 Consolidation
The Company consolidates all the entities which it controls, that is, when it is exposed to or has rights to variable returns from its involvement with the investee and has the ability to direct the significant activities of the investee.
The subsidiaries included in this consolidation are described in Note 2.2 (g).
(a) Subsidiaries
The Company controls an entity when it is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which the Company obtains control, until the date that control ceases. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
In the parent company financial statements the financial information of subsidiaries is recognized using the equity accounting method.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Transactions with non-controlling interests
The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the proportion acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded directly in equity, in “Profit retention reserve”.
(c) Loss of control of subsidiaries
When the Company ceases to have control, any retained interest is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The amounts previously recognized in other comprehensive income are reclassified to profit or loss.
(d) Associates and joint arrangements
Joint arrangements are accounted for in the financial statements in a manner consistent with the Company's contractual rights and obligations. Therefore, the assets, liabilities, revenues and expenses related to its interests in joint operations are individually accounted for in its financial statements.
Investments in associates and joint ventures are accounted for using the equity method and are initially recognized at cost.
The Company’s investments in associates and joint ventures includes goodwill identified on acquisition, net of any accumulated impairment loss.
Dilution gains and losses arising on investments in associates and joint ventures are recognized in the statement of income.
(e) Discontinued operations
A discontinued operation is a component of a business of the Company which comprises operations and cash flows that can be clearly separated from the Company, that either has been disposed of or is classified as held for sale, and:
(i) represents either a separate major line of business or a geographical area of operations;
(ii) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
(iii) is a subsidiary acquired exclusively with a view to resale.
The classification as a discontinued operation occurs on its disposal, or when the operation meets the criteria to be classified as held for sale, if this occurs earlier.
When an operation is classified as a discontinued operation, the comparative statements of income and comprehensive income are restated as if the operation had been discontinued since the beginning of the comparative period, as mentioned in Note 2.3 (a).
(f) Transactions eliminated on consolidation
Balances and transactions between Company entities and any unrealized income or expenses derived from transactions between Company entities, are eliminated. Unrealized gains arising from transactions with investees recognized under the equity method are eliminated against the investment in the proportion of the Company's interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
20 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(g) Main companies included in the consolidated financial statements
Percentage of total and voting capital Place of operation and 2017 2016 incorporation Main activity Votorantim Cimentos S.A. and subsidiaries Votorantim Cimentos N/NE S.A. - "VCNNE" 100,00 100,00 Brazil Cement Silcar Empreendimentos Comércio e Participações Ltda. 100,00 100,00 Brazil Holding Votorantim Cementos Chile Ltda. - "VCC" 100,00 100,00 Chile Holding Acariúba Mineração e Participação Ltda. 100,00 100,00 Brazil Holding Pedreira Pedra Negra Ltda. 100,00 100,00 Brazil Aggregates Fazenda São Miguel Ltda. 100,00 100,00 Brazil Forest Calmit Industrial Ltda. 100,00 100,00 Brazil Holding Lidermac Indústria e Comércio Ltda. 100,00 100,00 Brazil Aggregates Minerações e Construções Ltda. 100,00 100,00 Brazil Aggregates Interávia Transportes Ltda. 100,00 100,00 Brazil Transportation CRB Operações Portuárias S.A. 100,00 100,00 Brazil Port Seacrown do Brasil, Comércio, Importação e Participações S.A. (Note 1.1 (b)) 100,00 Brazil Holding Lux Cem International S.A. (Note 1.1 (b)) 100,00 Luxembourg Holding
Votorantim Cement North America Inc. and subsidiaries 100,00 100,00 Rosedale Securities Limited 100,00 100,00 Canada Holding St. Marys Cement Inc. (Canadá) 100,00 100,00 Canada Cement VCNA Nova Scotia ULC 100,00 100,00 Canada Holding Votorantim Cement North America Inc. - "VCNA" 100,00 100,00 Canada Holding Sacramento Prestige Gunite Inc. (Note 1.1 (i)) 100,00 USA Concrete St. Marys Cement Inc. (US) 100,00 100,00 USA Cement VCNA Prairie Aggregate Holdings Illinois Inc. 100,00 100,00 USA Aggregates VCNA Praire LLC 100,00 100,00 USA Concrete VCNA Prestige Concrete Products Inc. (Note 1.1 (i)) 100,00 USA Concrete VCNA Prestige Gunite Inc. (Note 1.1 (i)) 100,00 USA Concrete VCNA US Inc. 100,00 100,00 USA Holding Votorantim Cimentos North America Inc. 100,00 100,00 USA Holding
Votorantim Cimentos EAA Inversiones S.L and subsidiaries Itacamba Cemento S.A. 66,67 66,67 Bolivia Cement Votorantim Macau – Investment Company, Limited 80,00 80,00 China Holding Cementos Antequera S.A. 84,67 84,67 Spain Cement Cementos Cosmos S.A. 99,87 99,87 Spain Cement Votorantim Cement Trading S.L. 100,00 100,00 Spain Trading Votorantim Cimentos EAA Inversiones S.L. - "VCEAA" 100,00 100,00 Spain Holding Yacuces S.L. 51,00 51,00 Spain Holding Shree Digvijay Cement Company Limited 73,36 73,36 India Cement Asment De Temara S.A. 62,62 62,62 Morocco Cement Societe Les Ciments de Jbel Oust - CJO 100,00 100,00 Tunisia Cement Votorantim Çimento Sanayi ve Ticaret A. ğ. 99,87 99,87 Turkey Cement Yibitas Yozgat Isci Birligi Insaat Malzemeleri Ticaret ve Sanayi A.S. 82,96 82,96 Turkey Cement Cementos Artigas S.A. 51,00 51,00 Uruguay Cement
Joint operations and joint ventures Bot-Duff Resources Inc. (i) 50,00 Canada Operational Great Lakes Slag Inc. 50,00 50,00 Canada Slag production Votorantim Overseas Trading Operations IV Limited. - "VOTO IV" 50,00 50,00 Cayman Islands Trading
Exclusive investments funds Odessa Multimercado Crédito Privado 100,00 100,00 Brazil Finance Fundo de Invetimento Pentágono VC Multimercado - Crédito Privado 100,00 100,00 Brazil Finance
(i) The interest in the company was sold in the second half of 2017.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
2.3 Restatement of comparative figures
(a) Discontinued operations
In accordance with IFRS 5/CPC 31 - Non-current assets held for sale and discontinued operation, the Company reclassified the China operations (Note 1.1 (d)) and the operations in the states of Florida and California (USA) (Note 1.1 (i)) from continuing operations to discontinued operations at December 31, 2017. Accordingly, the consolidated balances of the statement of income have been changed in relation to the amounts previously presented in the financial statements at December 31, 2016, issued on March 2, 2017. The changes are necessary to reflect appropriately the balances of operations.
The table below presents the effects of these reclassifications:
December 31, 2016 Effect of reclassification of operations in the Effect of States of Florida and reclassification of Original balance California China operations Restated Continuing operations Net revenue from goods sold and services rendered 12.696.658 (603.699) (169.221) 11.923.738 Cost of goods sold and services rendered (9.578.311) 572.092 191.564 (8.814.655) Gross profit (loss) 3.118.347 (31.607) 22.343 3.109.083
Operating income (expenses) Selling (1.090.700) 24.794 2.936 (1.062.970) General and administrative (926.226) 9.826 11.571 (904.829) Other operating income (expenses), net 354.311 (1.534) (9.702) 343.075 (1.662.615) 33.086 4.805 (1.624.724) Operating profit before equity results and net financial results 1.455.732 1.479 27.148 1.484.359
Results of investees Equity in the results of associates and joint ventures 133.583 (13.012) 120.571 Realization of other comprehensive income on disposal of investments 44.133 44.133 177.716 (13.012) 164.704 Financial results, net Financial income 872.412 (59) (117) 872.236 Financial expenses (1.674.566) 4.812 17.732 (1.652.022) Derivative financial instruments (770.015) (770.015) Exchange variations, net 561.210 (9.066) 552.144 (1.010.959) 4.753 8.549 (997.657)
Profit (loss) before taxes 622.489 (6.780) 35.697 651.406
Income tax and social contribution Current (82.941) 1.078 118 (81.745) Deferred (119.232) (2.169) 3.836 (117.565)
Profit (loss) for the period from continuing operations 420.316 (7.871) 39.651 452.096
Discontinued operations Profit (loss) from discontinued operations 3.713 7.871 (39.651) (28.067)
Net profit for the year 424.029 424.029
Net profit attributable to the owners of the parent 369.977 369.977 Net profit attributable to non-controlling interests 54.052 54.052
Net profit for the year 424.029 424.029
Weighted average number of shares, thousands 6.126.939 6.126.939 6.126.939 6.126.939
Basic and diluted earnings per thousand shares, reais 60,39 60,39
From continuing operations Basic and diluted earnings (loss) per thousand shares, reais 59,78 (1,28) 6,47 64,97
From discontinued operations Basic and diluted earnings (loss) per thousand shares, reais 0,61 1,28 (6,47) (4,58)
Due to these reclassifications, some changes in the balance sheet accounts may not reconcile to the balances in the statement of income for 2016.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
2.4 Foreign currency translation
(a) Functional and presentation currency
The Company’s functional currency and also its presentation currency is the Brazilian reais (R$).
(b) Transactions and balances
Foreign currency transactions are translated into reais. Foreign currency transactions are translated into reais using the foreign exchange rates prevailing at the dates of the transactions or the dates of valuation when items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income, except when recognized in equity as a hedge of a net investment.
(c) Company entities with a different functional currency
The results and financial position of all the Company entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(ii) Income and expenses for each statement of income are translated at average foreign exchange rates;
(iii) All resulting foreign exchange differences are recognized as a separate component of equity, in the account "Other comprehensive income".
The amounts presented in cash flow are extracted from the translated movements of the assets, liabilities, income and expenses, as detailed above.
On consolidation, foreign exchange differences arising from the translation of the net investment in foreign operations, and of borrowing and other foreign currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is partially disposed of or sold, foreign exchange differences that were recorded in equity are recognized in the statement of income as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate, except for those acquired prior to Law 11,638/07, when the recording in reais was permitted.
Below are the functional currencies defined for the significant foreign subsidiaries:
Company Country Functional currency Main activity Votorantim Cement North America Inc. - "VCNA" Canada US Dollar Holding Votorantim Cimentos EAA Inversiones S.L - "VCEAA" Spain Euro Holding Itacamba Cementos S.A. - "Itacamba" Bolivia Boliviano Cement Cementos Artigas S.A. - "Artigas" Uruguay Uruguayan peso Cement
2.5 Statement of cash flows
The cash flows present the changes in cash and equivalents during the year in the operating, investing and financing activities. Cash and cash equivalents include highly liquid short-term investments, that is, investments with maturities in the short-term as from the acquisition date.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
The cash flows from operating activities are presented based on the indirect method. The profit before taxes is adjusted for the effects of non-cash transactions, for the effects of any deferrals or for the recording on an accruals basis of past or future operating cash receipts or payments, and for the effects of income or expenses items associated with the cash flows from investing or financing activities.
All income and expenses resulting from non-cash transactions, attributable to investing and financing activities, are eliminated. Interest received or paid is classified as operating cash flows.
2.6 Statement of value added
The statement of value added is based on macroeconomic assumptions, aiming at presenting, after elimination of the amounts that represent double counting, the portion of the Company’s contribution in the formation of the Gross Domestic Product (GDP). This statement presents how much value is added by the Company to the inputs acquired from third parties and that are sold or consumed during a given period.
This statement provides information of an economic and social nature and offers the possibility of a better evaluation of the entity’s activities within the society it belongs.
In its first part, it must present the detailed wealth created by the entity, which includes the revenue from sales of products and services, the cost of sales and services, materials, energy and outsourced services, depreciation, amortization and depletion, as well as the value added received through transfer, as a result of the equity in the results of investees, financial income and other income. The second part of the statement must present in detail the distribution of the wealth created by the entity, which includes direct remuneration and social charges, taxes and contributions, third-party capital remuneration and own capital remuneration.
3 Changes in accounting policies and disclosures
3.1 New standards not yet adopted
The amendments to existing standards described below were published and are mandatory for subsequent accounting periods, that is, starting January 1, 2018. There was no early adoption of these standards or amendments by the Company.
There are no standards, amendments to standards and interpretations other than those mentioned below that are not yet effective that would be expected to have a material impact of their application on its future financial statements:
3.1.1 CPC 48/ IFRS 9 - "Financial instruments: Recognition and measurement"
(a) Main issues introduced by the standard - effective from January 1, 2018
This new standard addresses three aspects of the accounting for financial instruments: classification and measurement, impairment, and hedge accounting. IFRS 9 has the objective of replacing IAS 39 - “Financial Instruments: Recognition and Measurement””.
(i) Classification and measurement
This standard brings a new assessment for the classification and measurement of financial instruments, which will be defined based on the contractual cash flows and the entity’s business model, and introduces a new classification of financial asset, at fair value through other comprehensive income.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(ii) Impairment
IFRS 9 defines that an entity shall measure an expected credit loss from the initial recognition of the financial asset. This standard brings the possibility of the Company performing this estimate based on a general approach, which requires the monitoring of any significant increase in the credit risk, or based on a simplified approach.
(iii) Hedge accounting
IFRS 9 introduces three requirements for hedge effectiveness:
(i) There is an economic relationship between the hedged item and the hedging instrument;
(ii) The effect of the credit risk does not dominate the changes in values that result from the economic relationship; and
(iii) The hedge ratio of the hedging relationship is the same as the one resulting from the quantity of the hedged item that the entity hedges and the quantity of the hedging instrument that the entity uses to hedge this quantity of the hedged item.
The standard also requires a prospective assessment of the expectations on the hedge effectiveness.
In addition, solely for the cash flow hedge accounting there is a change regarding the concept of the time value of money, which will no longer be considered as a component of the transaction and will affect the equity (other comprehensive income) with the adoption of IFRS 9.
(b) Impacts of the adoption
The Company will adopt the new standard from its effective date. Accordingly, during 2017 the Company performed an analysis of the impact of the three aspects of IFRS 9:
(i) Classification and measurement
The Company has already analyzed the classification of its financial assets based on the three new categories: amortized cost, fair value through other comprehensive income and fair value through profit or loss. The Company does not expect a material impact on its balance sheet or equity when applying the classification and measurement requirements.
(ii) Impairment
The Company will apply the simplified approach to recognize the expected credit loss on trade receivables. The method adopted to calculate the provision for impairment is based on a risk matrix, which was recognized based on the history of losses for all aging list and prospective data, including considering the receivables still to fall due.
The analysis made by the Company estimated an increase in the allowance for doubtful accounts by R$ 2,344 in the parent company and R$ 6,791 in the consolidated beginning on January 1, 2018.
(iii) Hedge accounting
The Company analyzed the economic relationship, credit risk and hedge ratio of the current net investment hedge transactions and concluded that these will continue to qualify for hedge accounting with the adoption of IFRS 9. Since this standard does not change the general principles of effective hedge accounting, there will be no impact as a result of the adoption of IFRS 9.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
3.1.2 CPC 47/IFRS 15 – Revenue from Contracts with Customers
(a) Main issues introduced by the standard - effective on January 1, 2018
This standard introduces a comprehensive approach to determine the revenue measurement and when it should be recognized.
In accordance with IFRS 15, revenue shall be recognized when: (i) there is a contract approved in writing or verbally; (ii) the performance obligation of the contract is identified; (iii) it is possible to determine the transaction price and allocate the performance obligation; and (iv) the performance obligation is satisfied.
IFRS 15 supersedes the current revenue recognition standards, including CPC 30 (IAS 18) Revenue, CPC 17 (IAS 11) Construction Contracts and CPC 30 (IFRIC 13) Customer Loyalty Programmes.
(b) Impacts of the adoption
The Company completed the assessment of the potential impact of the adoption of IFRS 15 on its financial statements, as follows:
(i) Cement, aggregates, mortar and limes
The revenues from sales of cement, aggregates, mortar and limes are currently recognized when the products are delivered to the customer, considered as the time when the risks and benefits are transferred and the revenue and costs can be reliably measured.
The contracts with customers arising from these sales have a performance obligation, which is the delivery of the product to the customer in accordance with the technical specifications established in the contract. Therefore, the recognition of revenues from these products shall occur at the time the performance obligation is met, that is, at the delivery of the product to the customer within the technical specifications established in the contract.
Considering the above, no impact on the measurement and recognition of revenue from cement, aggregates, mortar and limes was identified on the adoption of IFRS 15.
(ii) Ready-mix concrete
The Company provides concrete-pouring services in accordance with the technical specifications of the Brazilian Association of Technical Standards (“ABNT NBR”) and the concrete resistance established in the contract with the customer. If the service of a single contract with the customer is rendered in different periods, the revenue is recognized proportionate to the service rendered individually in the period.
In accordance with IFRS 15, the revenue shall be recognized by performance obligation satisfied. In the concrete-pouring services, two performance obligations are identified, which are the service rendering and the assurance of the concrete according to the resistance established in the contract.
The Company performed an analysis of the timing when the performance obligations are satisfied and, as such timings are relatively similar, the Company does not expect impacts on the timing of revenue recognition for these services.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
3.1.3 IFRS 16 – Leases
(a) Main issues introduced by the standard - effective from January 1, 2019
IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. The standard introduces a single accounting model for leases in the balance sheet for lessees, where the lessees are required to recognize a lease liability reflecting future lease payments and a “right to use the asset” for virtually all lease agreements, except for short-term leases and low-value assets. The lessor accounting remains similar to the current standard, that is, the lessors continue to classify the leases as finance or operating leases.
This standard supersedes the existing lease standards, including CPC 06 (IAS 17) Leases and ICPC 03 (IFRIC 4, SIC 15 and SIC 27) Supplementary Aspects of Lease Transactions.
(b) Impacts of the adoption
The Company has started the assessment of the potential impact on its financial statements. In this initial assessment, the need to recognize assets and liabilities for its operating leases of machinery and equipment, light and heavy vehicles, properties and land was identified. In addition, the nature of the expenses related to these leases will be changed, because IFRS 16 replaces the operating lease expense with depreciation expense of the right to use the asset and interest expense with the adjustment of lease liabilities.
The Company has not yet quantified the impact of the adoption of IFRS 16 on its assets and liabilities.
The Company will apply IFRS 16 on January 1, 2019 and expects to disclose the quantitative effect of the adoption and its transition approach before that date.
4 Critical accounting estimates and judgments
Based on assumptions, the Company makes estimates concerning the future. By definition, accounting estimates and judgments are continually reviewed and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are recognized prospectively.
The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are described in the following Notes:
(i) Fair values of financial instruments and derivatives (Note 6.1.2 (a));
(ii) Trade receivables (Note 11 (b));
(iii) Property, plant and equipment (Note 17 (b));
(iv) Intangible assets (Note 18 (b));
(v) Current and deferred income tax and social contribution (Note 21 (b));
(vi) Provision (Note 22 (b));
(vii) Pension plan (Note 24 (b)).
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
5 Environmental risk management
The Company and its subsidiaries and associates operate in various segments and consequently, their activities are subject to local, state, national and international environmental laws and regulations, treaties and conventions, regarding the regulation of activities, establishing measures of mitigation, compensation, management and monitoring, including those that regulate the obligations of the owner of the venture and/or activity relating to environmental protection. The violations of the environmental regulations in force expose the violator(s) to administrative assessments, such as significant fines and penalties, and may require technical measures or investment to ensure the compliance with the mandatory environmental standards.
The Company reviews periodically its environmental risk assessment and addresses the risks, either through risk mitigation actions or cost estimation actions to clear the risks identified.
6 Financial risk management
6.1 Financial risk factors
The Company’s activities expose it to a variety of financial risks: (a) market risk (including currency and interest rate risk); (b) credit risk; and (c) liquidity risk.
In spite of the consolidation of results in reais, the products and services offered by the Company are denominated in several currencies due to its global positioning that, therefore, can cause potential risks of currency mismatches between revenues and costs. The Company has loans linked to different indexes and currencies, which may have an impact on its cash flow.
In order to mitigate the adverse effects of each of these risk factors, the Company and its subsidiaries adopted the financial policy of Votorantim Cimentos, approved by the Board of Directors, in order to establish governance and macro guidelines in the financial risk management process, as well as metrics for measurement and monitoring. The purpose of this process is to protect the cash flow against adverse financial market events, such as fluctuations in prices, exchange rates and interest rates and against adverse credit events of financial counterparties. In addition, this process aims to manage leverage and other financial or operating exposures in line with the criteria of rating agencies for companies with an investment grade. The financial policy of Votorantim Cimentos intends to preserve the liquidity of the Company and its subsidiaries, diversify the financing sources, provide unrestricted access to the capital markets at competitive costs and generate value for shareholders.
The following financial instruments may be taken out in order to hedge and manage risks: conventional swaps, call options, put options, collars, futures contracts (currencies, interest rates or commodities) and forward contracts known as Non-Deliverable Forwards (currencies, interest rates or commodities) . Strategies that include simultaneous purchases and sales of options will be authorized only when they do not result in a net short position in the volatility of the underlying asset. The Company does not enter into transactions involving financial instruments for speculative purposes and any other instrument requires the approval of the Board of Directors.
(a) Market risk
(i) Foreign exchange risk
Foreign exchange risk is the exposure of the Company and its subsidiaries to significant fluctuations in currencies, which comprise the commercial, operational and financial relationships and, consequently, have an impact on its cash flows or results.
The Company has certain investments in foreign operations, in which net assets are exposed to foreign exchange risk. Foreign exchange exposure arising from the Company’s interest in foreign operations is
28 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
managed primarily through borrowings in the same currency of these investments, classified as hedge accounting of net investment, as described in Note 6.1.3 (b).
We present below the balances of assets and liabilities indexed to foreign currency at the end of the reporting period:
Parent company Consolidated Note 2017 2016 2017 2016 Assets denominated in foreign currency Cash and cash equivalents 9 (b) 4,441 2,406,199 1,321,772 Financial investments 10 (b) 248,107 424,404 Derivative financial instruments 6.1.1 (b) 85,187 1,166 85,187 Trade receivables 4,583 4,895 464,161 431,328 Related parties 17,307 17,392 30,666 32,655 21,890 111,915 3,150,299 2,295,346
Liabilities denominated in foreign currency Borrowings (i) 6,440,113 8,676,256 9,859,224 11,382,473 Derivative financial instruments 6.1.1 (b) 63,841 517,377 64,607 517,377 Confirming payables 20 334,289 239,407 Trade payables 3,046 549 613,034 885,448 Related parties 881,896 509,709 45,361 43,962 7,388,896 9,703,891 10,916,515 13,068,667
Net exposure (7,367,006) (9,591,976) (7,766,216) (10,773,321)
(i) Funding costs are not considered in these amounts.
(ii) Cash flow and fair value interest rate risk
The interest rate risk arises from fluctuations in each of the main interest rate indexes arising from borrowing transactions, and financial investments, which may have an impact on the payments and receipts of the Company and its subsidiaries. Borrowings at fixed rates expose the Company and its subsidiaries to fair value interest rate risk.
(b) Credit risk
Derivative financial instruments and financial investments (cash allocation) create exposure to credit risk of counterparties and financial issuers. The Company has a policy of working with issuers that have, at least, a rating from one of the following rating agencies: Fitch Ratings, Moody’s or Standard & Poor’s. The minimum rating required for counterparties is AA- (or Aa3) or a global rating scale equivalent to or better than BBB- (or Baa3) (Note 8). For countries where issuers do not meet the minimum ratings previously described, the criteria used include the criteria approved by the Board of Directors.
The exposure limit of the Company and its subsidiaries to each financial counterparty is determined by the financial policy of Votorantim Cimentos and is linked to the rating and the balance sheet of the institution.
The credit quality of financial assets is disclosed in Note 8. The ratings disclosed in this Note always represent the most conservative ratings of the agencies in question.
The pre-settlement risk methodology is used to assess counterparty risks on derivatives transactions. This methodology consists in determining, through Monte Carlo simulations, the value at risk associated to the non-compliance with the financial commitments defined in the contract for each counterparty.
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Liquidity risk
The liquidity risk is managed by means of the financial policy of Votorantim Cimentos, which aims to ensure the availability of sufficient funds to honor the Company’s short-term commitments. One of the main tools for measuring and monitoring liquidity is the cash flow projection, considering a period of 12 months from the reference date.
The table below analyzes the Company's main financial liabilities by maturity, corresponding to the remaining period in the balance sheet up to the contractual maturity. The derivative financial liabilities are considered in the analysis when their contractual maturity is essential to understanding temporary cash flow.
The amounts included in the table represent the undiscounted contractual future cash flow; these amounts may not reconcile directly with the amounts in the balance sheet.
Parent company Less than 1 Between 1 Between 2 Between 5 Over 10 Note year and 2 years and 5 years and 10 years years Total At December 31, 2017 Borrowings (i) (ii) 1,751,208 618,798 3,903,664 3,918,422 7,530,834 17,722,926 Derivative financial instruments 6.1.1 (b) 63,841 63,841 Confirming payables 20 267,673 267,673 Trade payables 479,975 479,975 Dividends payable 14 (b) 165,715 165,715 Related parties 54,868 534,160 558,052 1,147,080 2,783,280 1,152,958 4,461,716 3,918,422 7,530,834 19,847,210 At December 31, 2016 Borrowings (i) (iii) 2,199,208 1,145,057 5,822,706 5,886,278 7,691,356 22,744,605 Derivative financial instruments 200,601 137,229 179,547 517,377 Confirming payables 20 318,227 318,227 Trade payables 224,405 224,405 Dividends payable 14 (b) 245,028 245,028 Related parties 48,160 55,017 593,416 696,593 3,235,629 1,337,303 6,595,669 5,886,278 7,691,356 24,746,235
Consolidated Less than 1 Between 1 Between 2 Between 5 Over 10 Note year and 2 years and 5 years and 10 years years Total At December 31, 2017 Borrowings (i) (ii) 2,226,720 1,135,433 5,482,665 6,315,662 7,530,834 22,691,314 Derivative financial instruments 6.1.1 (b) 64,607 64,607 Confirming payables 20 643,531 643,531 Trade payables 1,178,363 1,178,363 Dividends payable 14 (c) 167,273 167,273 Related parties 175,033 175,033 Use of public assets 31,246 32,073 108,583 230,472 689,571 1,091,945 Pension plan 41,494 45,159 124,316 1,453,248 1,664,217 4,353,234 1,387,698 5,715,564 7,999,382 8,220,405 27,676,283
At December 31, 2016 Borrowings (i) (iii) 2,564,329 1,544,316 7,517,791 6,928,595 9,367,302 27,922,333 Derivative financial instruments 6.1.1 (b) 200,601 137,229 179,547 517,377 Confirming payables 20 601,236 601,236 Trade payables 1,112,627 1,112,627 Dividends payable 14 (c) 246,900 246,900 Related parties 52,965 52,965 Use of public assets 30,908 32,765 110,926 235,444 778,652 1,188,695 Pension plan 44,291 47,162 138,485 1,503,420 1,733,358 4,800,892 1,814,437 7,946,749 8,667,459 10,145,954 33,375,491
(i) Does not consider the fair value adjustment of Resolution 4131 transactions.
(ii) The “Up to 1 year” portion consists of R$ 700,000, R$ 160,675 and R$ 234,883 related to early repayments of debentures, Resolution 4131 loans and borrowings with BNDES, respectively, that occurred in January 2018, as described in Note 35 (b), (d) and (e)
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(iii) The “Up to 1 year” portion consists of R$ 150,000 and R$ 121,983 related to early repayments of debentures and development agency loans, respectively, in January 2017, as described in Note 34 (b) and (c) the financial statements at December 31, 2016.
6.1.1 Derivative financial instruments
(a) Accounting policies
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value, changes of which are recognized in the statement of income under “Derivative financial instruments”.
All derivative transactions were carried out in the over-the-counter market.
Hedging program for interest rates in US Dollars - derivative financial instruments contracted to adjust the Company’s exposure to the London Interbank Offered Rate (“LIBOR”) (arising from loans in US Dollars indexed to LIBOR floating rates) to ensure compliance with the parameters established by the policy. The risk is mitigated through swaps.
Hedging program for exchange rate exposure – hedging instruments contracted for the purpose of hedging the cash flow in reais against foreign exchange exposure. The risk is mitigated through the purchase/sale of US Dollar, Euro and other currencies forward contracts.
Hedging program for foreign currency-denominated debts – hedging instruments contracted for the purpose of hedging the cash flow in local currency. The risk is mitigated through cross currency swaps.
31 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Effect of derivatives on the balance sheet
Parent company and consolidated Principal Fair value 2017 2016 Total (net Total (net Average Average Current Current between assets between assets Programs Currency 2017 2016 rate/price FWD term (days) assets liabilities and liabilities) and liabilities) Hedging of foreign exchange exposure USD forward (BRL/USD) USD 451.000 3.27 BRL/USD 5 (21.178) (21.178)
Debt hedge LIBOR floating rate vs. CDI floating rate swap USD 550.000 (384.458) USD fixed rate vs. CDI floating rate swap USD 50.000 50.000 101.9% CDI 24 (42.663) (42.663) (47.732) Total parent company (63.841) (63.841) (432.190)
Hedging instruments for foreign exchange exposure Turkish lira forward (TRY/USD) USD 26.024 3.79 TRY/USD 22 1.166 (766) 400 Total consolidated 1.166 (64.607) (63.441) (432.190)
All derivative transactions shown above have fair value maturity in 2018. (c) Effect of derivatives on the financial result and cash flow
Parent company and consolidated 2017 2016
Fair value Fair value Programs Currency Principal adjustment Realized loss Total Principal adjustment Realized loss Total Hedging of foreign exchange exposure USD forward (BRL/USD) USD 451,000 (21,178) (9,089) (30,267) (11,879) (11,879) EUR forward (BRL/EUR) EUR (931) (931) (78,377) (78,377)
Debt hedge LIBOR floating rate vs. CDI floating rate swap USD - 384,458 (512,897) (128,439) 550,000 (515,559) (104,815) (620,374) USD fixed rate vs. CDI floating rate swap USD 50,000 5,069 (14,863) (9,794) 50,000 (34,108) (16,754) (50,862) Total parent company 368,349 (537,780) (169,431) (549,667) (211,825) (761,492)
Foreign exchange hedge Euro forward (USD/EUR) EUR (8,523) (8,523) Turkish lira forward (TRY/USD) USD 26,024 400 400 Total consolidated 368,749 (537,780) (169,031) (549,667) (220,348) (770,015)
(i) The amount of R$ 512,897 refers to the settlement of swap related to borrowings according to Resolution 4131, settled in 2017, as mentioned in Note 19 (h) - (v, vii, viii, ix, x and xi).
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Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
6.1.2 Fair value of financial instruments and derivatives
(a) Critical accounting estimates and judgments
The fair values of financial instruments that are not traded in an active market are determined by using valuation techniques. The Company uses judgment to select among a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.
(b) Analysis
The main asset and liability financial instruments are described below, as well as the assumptions used for their measurement.
The Company discloses fair value measurements based on the hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices)
Specific valuation techniques used to measure assets and liabilities at fair value include:
(i) Quoted market prices or quotations from financial institutions or brokers for similar instruments;
(ii) The fair value of interest rate swaps calculated at the present value of the estimated future cash flows based on the yield curves adopted by the market;
(iii) The fair value of future foreign exchange contracts determined based on future exchange rates at the reporting date, with the resulting amount discounted to present value;
(iv) Analysis of discounted cash flow.
33 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Parent company Note Fair value measured based on 2017 Valuation technique Price quoted in an supported by active market observable prices Level 1 Level 2 Fair value Assets Cash and cash equivalents 9 (b) 202,971 202,971 Financial investments 10 (b) 928,473 741,751 1,670,224 1,131,444 741,751 1,873,195
Liabilities Borrowings 19 (b) 6,615,547 3,825,505 10,441,052 Derivative financial instruments 6.1.1 (b) 63,841 63,841 6,615,547 3,889,346 10,504,893
Parent company Note Fair value measured based on 2016 Valuation technique Price quoted in an supported by active market observable prices Level 1 Level 2 Fair value Assets Cash and cash equivalents 9 (b) 153,774 674,846 828,620 Financial investments 10 (b) 747,411 498,870 1,246,281 Derivative financial instruments 6.1.1 (b) 85,187 85,187 901,185 1,258,903 2,160,088
Liabilities Borrowings 19 (b) 6,107,822 5,925,620 12,033,442 Derivative financial instruments 6.1.1 (b) 517,377 517,377 6,107,822 6,442,997 12,550,819
Consolidated Note Fair value measured based on 2017 Valuation technique Price quoted in an supported by active market observable prices Level 1 Level 2 Fair value Assets Cash and cash equivalents 9 (b) 2,487,935 233,734 2,721,669 Financial investments 10 (b) 930,826 1,021,286 1,952,112 Derivative financial instruments 6.1.1 (b) 1,166 1,166 3,418,761 1,256,186 4,674,947
Liabilities Borrowings 19 (a) 8,710,776 5,547,229 14,258,005 Derivative financial instruments 6.1.1 (b) 64,607 64,607 8,710,776 5,611,836 14,322,612
Consolidated Note Fair value measured based on 2016 Valuation technique Price quoted in an supported by active market observable prices Level 1 Level 2 Fair value Assets Cash and cash equivalents 9 (b) 1,338,764 973,735 2,312,499 Financial investments 10 (b) 759,698 1,038,740 1,798,438 Derivative financial instruments 6.1.1 (b) 85,187 85,187 2,098,462 2,097,662 4,196,124
Liabilities Borrowings 19 (a) 7,385,935 7,701,399 15,087,334 Derivative financial instruments 6.1.1 (b) 517,377 517,377 7,385,935 8,218,776 15,604,711
34 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
6.1.3 Hedging of net investments in foreign entities
(a) Accounting policies
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in equity in the account "Other comprehensive income". The gain or loss relating to the ineffective portion is recognized immediately in the statement of income. Gains and losses accumulated in equity are included in the statement of income when the foreign investment is realized or sold.
(b) Analysis
The Company evaluates the effectiveness of its investment hedge transactions on a quarterly basis, both prospectively and retrospectively.
The Company designated as a hedging instrument its debt denominated in Euros at an amount of EUR 570 million (R$ 2,263,755) (December 31, 2016 - EUR 749 - R$ 2,576,538) with respect to the investment in its subsidiary VCEAA, which has the Euro as its functional currency.
The foreign exchange loss on the translation of debts, net of income tax and social contribution, recognized in the account “Other comprehensive income” at December 31, 2017, amounted to R$ 192,702 (December 31, 2016 – net gain of R$ 404,198) (Note 25 (d)). Also, as an effect during 2017, a gain of R$ 3,311 (December 31, 2016 - R$ 85,707) was recognized under “Exchange variations, net”, in the Company’s financial result, net of income tax and social contribution, due to the exchange variation of the hedging instrument (debt in Euro) generated by the repurchase of bonds in Euros through its subsidiary VCEAA.
The Company designated its debt denominated in US dollars, except for its Resolution 4131 borrowings, at an amount of US$ 1,275 million (R$ 4,219,047) (December 31, 2016 – USD 1,393 million – R$ 4,540,329), as a hedging instrument of the investment in its subsidiary VCNA.
The hedged item considers only the VCNA investments originated in USD since this is a company domiciled in Canada which has subsidiaries with transactions in the functional currency of the US Dollar and subsidiaries with transactions in the functional currency of the Canadian Dollar.
The foreign exchange gain on the translation of debts, net of income tax and social contribution, recognized under “Other comprehensive income” at December 31, 2017, amounted to R$ 11,017 (December 31, 2016 – R$ 599,613) (Note 25 (d)). Also as an effect during 2017, a loss of R$ 12,235 was recognized under “Exchange variations, net”, in the Company’s finance result, net of income tax and social contribution, due to the fact that the exchange rate variation of the hedging instrument (debts in US Dollars) in the last quarter was higher than the exchange rate variation of the hedged item, due to the capital reduction made in October 2017 (Note 1.1 (a)).
In 2017, the subsidiary VCNA designated part of its debt denominated in US Dollars, amounting to USD 500 million, as a hedging instrument of the investment in its North-American subsidiary VCNA US Inc. The foreign exchange gain on the translation of debts, net of income tax and considering the rate of 25% of Canada, recognized under “Other comprehensive income” at December 31, 2017, amounted to USD 30.2 million (R$ 96,355).
35 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
6.1.4 Sensitivity analysis
The main risk factors that have an impact on the pricing of the financial instruments, cash and cash equivalents, financial investments, borrowings, related parties and derivative financial instruments are the exposure to the fluctuations of the US Dollar, Euro, Bolivian bolivianos, Turkish lira and Argentine peso, the CDI and USD onshore interest rates. The scenarios for these factors are prepared using market data and specialized sources, according to the Company's governance.
The scenarios as at December 31, 2017 are described below:
Scenario I - considers a change in yield curves indicative pricing as at December 31, 2017, according to the base scenario defined by Management for March 31, 2018.
Scenario II - considers a change of + or -25% in the yield curves as at December 31, 2017.
Scenario III - considers a change of + or -50% in the yield curves as at December 31, 2017.
36 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Parent company Impacts on P&L Impacts on comprehensive income Scenario I Scenarios II and III Scenario I Scenarios II and III
Cash and cash equivalents Borrowings and related Principal of derivative Changes from Results of Results of Risk factor and financial investments (i) parties (i) financial instruments Currency 12/31/2017 scenario I -25% -50% +25% +50% scenario I -25% -50% +25% +50% Foreign exchange rate USD (ii) 4,648,852 501,000 USD -3.81% 66,978 438,931 877,862 (438,931) (877,862) 160,933 1,054,762 2,109,523 (1,054,762) (2,109,523) EUR 2,600,571 EUR -5.41% 18,223 84,204 168,408 (84,204) (168,408) 122,478 565,939 1,131,878 (565,939) (1,131,878)
Interest rates BRL - CDI 1,871,460 3,100,000 1,657,308 BRL 0 bps 21,298 42,599 (21,296) (42,590) Dollar onshore interest rate 501,000 USD 3 bps 5 370 739 (370) (740)
Consolidated Impacts on P&L Impacts on comprehensive income Scenario I Scenarios II and III Scenario I Scenarios II and III
Cash and cash equivalents Borrowings and related Principal of derivative Changes from Results of Results of Risk factor and financial investments (i) parties (i) financial instruments Currency 12/31/2017 scenario I -25% -50% +25% +50% scenario I -25% -50% +25% +50% Foreign exchange rate USD (ii) 1,921,013 6,308,921 527,024 USD -3.81% 65,804 431,232 862,463 (431,232) (862,463) 152,139 997,126 1,994,251 (997,126) (1,994,251) EUR 195,373 2,934,334 EUR -5.41% 153 708 1,417 (708) (1,417) 148,035 684,032 1,368,063 (684,032) (1,368,063) BOB 17,047 396,046 BOB -2.42% 9,181 94,750 189,500 (94,750) (189,500) TRY 129,155 267,099 TRY 0.40% 516 (32,289) (64,577) 32,289 64,577 (1,066) 66,775 133,549 (66,775) (133,549) ARS 7,378 ARS 0.83% 62 (1,845) (3,689) 1,845 3,689
Interest rates BRL - CDI 2,014,442 3,100,000 1,688,535 BRL 0 bps 18,835 37,673 (18,833) (37,665) Dollar onshore interest rate 501,000 USD 3 bps 5 370 739 (370) (740)
(i) The balances presented in this Note do not reconcile with the Notes on “Cash and cash equivalents”, “Financial investments”, “Related parties” and “Borrowings”, since the analysis covered only the most significant currencies.
(ii) Considers currency basket.
37 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
6.1.5 Capital management
In order to maintain or adjust the Company’s capital structure, management can make, or may propose to the stockholders when their approval is required, adjustments to the amount of dividends paid to stockholders, return capital to stockholders, issue new shares or sell assets to reduce, for example, debt.
The Company monitors its capital on the basis of the leverage ratio. This ratio corresponds to net debt divided by adjusted EBITDA. Net debt is calculated as total borrowings less cash and cash equivalents, derivative financial instruments and financial investments. The adjusted EBITDA is calculated from net income, plus/less financial income and expenses, plus income tax and social contribution, plus depreciation, amortization and depletion, less equity in the results of investees, plus dividends received from investees and less exceptional non-cash items (non-cash items considered by management as exceptional are excluded from the adjusted EBITDA measurement).
Exceptional items basically represent gains/losses on acquisitions and disposals, impairment and dividends received from investees (Note 34 (a)).
The net debt/adjusted EBITDA ratio at December 2017 and 2016 is summarized as follows:
Cosolidated Note 2017 2016 Borrowings 19 (b) 13,633,407 15,480,381 Cash and cash equivalents 9 (b) (2,721,669) (2,312,499) Financial investments 10 (b) (1,952,112) (1,798,438) Derivative financial instruments 6.1.1 (b) 63,441 432,190 Net debt - (A) 9,023,067 11,801,634 Adjusted EBITDA - (B) 34 (a) 1,762,315 2,373,177 Financial leverage ratio - (A/B) 5.12 4.97
7 Financial instruments by category
(a) Classification, recognition and measurement
The Company and its subsidiaries classify their financial assets based on the purpose for which the financial assets were acquired and determine their classification upon initial recognition, in the following categories:
(i) Financial assets at fair value through profit or loss
These are financial assets held for trading acquired mainly for the purposes of selling in the short term. These financial assets are measured at fair value, and the changes are recognized in the statement of income for the year.
(ii) Financial instruments at amortized cost
These are financial instruments held for the purpose of receiving contractual cash flows, with payments related exclusively to principal and interest. The instruments under this classification are measured at amortized cost.
38 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(iii) Loans and receivables
These are non-derivative financial assets with fixed or pre-determined payments that are not traded in an active market. They are measured initially at fair value and thereafter at amortized cost using the effective interest method.
(b) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount presented in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty.
(c) Impairment of financial assets measured at amortized cost
The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired.
The amount of any impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the statement of income.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the reversal of the previously recorded loss is recognized in the statement of income.
39 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Analysis
Parent company 2017 Loans and Assets held Financial Note receivables for trading liabilites Total Assets Amortized cost Trade receivables 11 (c) 355,264 355,264 Related parties 14 (b) 85,170 85,170 440,434 440,434 Fair value through profit or loss Cash and cash equivalents 9 (b) 202,971 202,971 Financial investments 10 (b) 1,670,224 1,670,224 202,971 1,670,224 1,873,195 Liabilities Amortized cost Borrowings 19 (b) 9,148,984 9,148,984 Confirming payables 20 267,673 267,673 Trade payables 479,975 479,975 Related parties 14 (b) 1,015,367 1,015,367 10,911,999 10,911,999 Fair value through profit or loss Borrowings 19 (b) 774,206 774,206 Derivative financial instruments 6.1.1 (b) 63,841 63,841 838,047 838,047
2016 Loans and Assets held Financial Note receivables for trading liabilites Total Assets Amortized cost Trade receivables 11 (c) 349,590 349,590 Related parties 14 (b) 121,677 121,677 471,267 471,267 Fair value through profit or loss Cash and cash equivalents 9 (b) 828,620 828,620 Financial investments 10 (b) 1,246,281 1,246,281 Derivative financial instruments 6.1.1 (b) 85,187 85,187 828,620 1,331,468 2,160,088 Liabilities Amortized cost Borrowings 19 (b) 11,547,384 11,547,384 Confirming payables 20 318,227 318,227 Trade payables 224,405 224,405 Related parties 14 (b) 523,215 523,215 12,613,231 12,613,231 Fair value through profit or loss Borrowings 19 (b) 963,186 963,186 Derivative financial instruments 6.1.1 (b) 517,377 517,377 1,480,563 1,480,563
40 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated 2017 Loans and Assets held Financial Note receivables for trading liabilites Total Assets At amortized cost Trade receivables 11 (c) 878,904 878,904 Related parties 14 (c) 64,320 64,320 943,224 943,224 At fair value through profit or loss Cash and cash equivalents 9 (b) 2,721,669 2,721,669 Financial investments 10 (b) 1,952,112 1,952,112 Derivative financial instruments 6.1.1 (b) 1,166 1,166 2,721,669 1,953,278 4,674,947 Liabilities At amortized cost Borrowings 19 (b) 12,859,201 12,859,201 Confirming payables 20 643,531 643,531 Trade payables 1,178,363 1,178,363 Related parties 14 (c) 175,033 175,033 Use of public assets 23 (b) 478,206 478,206 15,334,334 15,334,334 At fair value through profit or loss Borrowings 19 (b) 774,206 774,206 Derivative financial instruments 6.1.1 (b) 64,607 64,607 838,813 838,813
2016 Loans and Assets held Financial Note receivables for trading liabilites Total Assets At amortized cost Trade receivables 11 (c) 838,425 838,425 Related parties 14 (c) 73,061 73,061 911,486 911,486 At fair value through profit or loss Cash and cash equivalents 9 (b) 2,312,499 2,312,499 Financial investments 10 (b) 1,798,438 1,798,438 Derivative financial instruments 6.1.1 (b) 85,187 85,187 2,312,499 1,883,625 4,196,124 Liabilities At amortized cost Borrowings 19 (b) 14,517,195 14,517,195 Confirming payables 20 601,236 601,236 Trade payables 1,112,627 1,112,627 Related parties 14 (c) 52,965 52,965 Use of public assets 23 (b) 501,426 501,426 16,785,449 16,785,449 At fair value through profit or loss Borrowings 19 (b) 963,186 963,186 Derivative financial instruments 6.1.1 (b) 517,377 517,377 1,480,563 1,480,563
41 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
8 Credit quality of financial assets
Parent company Consolidated 2017 2016 2017 2016 Local rating Total Local rating Global rating Total Local rating Global rating Total Local rating Global rating Total Cash and cash equivalents AA+ 3 3 844 844 9 9 AA- 202,941 202,941 731,545 731,545 314,514 314,514 897,953 897,953 A+ 5 5 5 5 21 1,708,631 1,708,652 8 344,970 344,978 A 24 24 38 94,740 94,778 2 59,491 59,493 A- 1 1 17 17 1 119,767 119,768 50 398,576 398,626 BBB+ 238,643 238,643 231,019 231,019 BBB 57,769 57,769 3,390 3,390 BBB- 23,289 23,289 35,063 35,063 BB+ 33,728 33,728 BB 92,176 92,176 139,652 139,652 92,225 91,446 183,671 BB- 33 33 B 123 123 B- 1,871 1,871 B+ 21,322 21,322 80,593 80,593 CCC+ 2,517 2,517 Without rating (i) 433 4,441 4,874 52 359 411 480 40,979 41,459 202,971 202,971 824,179 4,441 828,620 315,470 2,406,199 2,721,669 990,727 1,321,772 2,312,499
Financial investments AA+ 439,427 439,427 58,851 58,851 467,735 467,735 58,851 58,851 AA 30,377 30,377 30,377 30,377 AA- 1,173,437 1,173,437 843,919 843,919 1,175,455 1,175,455 968,512 968,512 A+ 307,710 307,710 3,455 159,440 162,895 307,710 307,854 615,564 A 62,330 62,330 3,161 12,235 15,396 A- 17,830 17,830 16,569 16,569 17,830 17,830 16,569 53,942 70,511 BBB+ 20,830 20,830 BB 335 335 335 335 B- 5,507 5,507 CCC+ 50,373 50,373 Without rating (i) 9,153 9,153 18,897 18,897 9,153 9,153 18,896 18,896 1,670,224 1,670,224 1,246,281 1,246,281 1,704,005 248,107 1,952,112 1,374,034 424,404 1,798,438
Derivative financial instruments AAA 44,885 44,885 44,885 44,885 AA- 11,139 11,139 11,139 11,139 A+ 526 526 A 2,401 2,401 640 640 2,401 2,401 A- 26,762 26,762 26,762 26,762 56,024 29,163 85,187 1,166 1,166 56,024 29,163 85,187 1,873,195 1,873,195 2,126,484 33,604 2,160,088 2,019,475 2,655,472 4,674,947 2,420,785 1,775,339 4,196,124
The local and global ratings were obtained from ratings agencies (Standard & Poor's, Moody's and Fitch Ratings). The Company considered the ratings format of S&P and Fitch Ratings for presentation purposes. (i) Under the local rating, this refers mainly to the Company’s Credit Rights Investment Funds (“FIDC”), which do not have a classification from the rating agencies.
42 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
9 Cash and cash equivalents
(a) Accounting policies
Include cash, deposits with banks and other highly liquid short-term investments with original maturities of three months or less, which are readily convertible into a known amount of cash and with immaterial risk of changes in value.
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Local currency Cash and banks 1,734 738 5,033 1,574 Operações compromissadas - Private notes 674,846 674,846 Operações compromissadas - Government notes 201,237 148,595 310,437 314,307 202,971 824,179 315,470 990,727
Foreign currency Cash and banks 4,441 2,172,464 1,022,884 Deposit certificates 233,735 298,888 4,441 2,406,199 1,321,772 202,971 828,620 2,721,669 2,312,499
Cash and cash equivalents in local currency comprise cash available in bank accounts and government (overnight transactions) or financial institutions bonds, indexed to the interbank deposit rate. Cash and cash equivalents in foreign currency comprise mainly fixed-income financial instruments in local currency. 10 Financial investments
(a) Accounting policies
Financial investments are held for the purpose of meeting long-term investments from the acquisition date.
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Held for trading Local currency Operações compromissadas - Government notes 550,362 516,534 550,392 516,534 Operações compromissadas - Private notes 568,630 331,430 568,630 391,779 Government notes ("LFTs") 378,110 230,877 380,584 243,164 Bank deposit certificates ("CDBs") 163,754 151,693 195,031 206,799 Investment fund shares (i) 9,368 15,747 9,368 15,747 Others 11 1,670,224 1,246,281 1,704,005 1,374,034
Foreign currency Time deposits 248,107 424,404 248,107 424,404 1,670,224 1,246,281 1,952,112 1,798,438
Most of the financial investments have immediate liquidity; notwithstanding, these are classified as financial investments based on the original maturities, considering the expected use of the resources. Local currency investments include government or financial institutions bonds, indexed to the interbank deposit rate. Foreign currency investments comprise mainly fixed-income financial instruments in local currency (time deposits).
43 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(i) Below is the composition of the investment funds’ portfolio:
Parent company and consolidated 2017 2016 Financial investments Operações compromissadas - Government notes 9,152 8,135 Government notes ("LFTs") 117 Operações compromissadas - Private notes 99 7,612 9,368 15,747
11 Trade receivables
(a) Accounting policies
Trade receivables are amounts from customers for goods sold or services rendered in the ordinary course of the Company’s business. It is recognized at fair value and subsequently measured at amortized cost using the effective interest rate method, less provision for impairment of trade receivables.
(b) Critical accounting estimates and judgments
The allowance for doubtful accounts is computed based on an estimate sufficient to cover probable realization losses on receivables, taking into account the circumstances of individual customers and the related guarantees provided. Accordingly, the Company’s Treasury Department analyzes on a monthly basis the maturities of the portfolio of local and foreign customers and selects the customers presenting overdue balances to assess each specific situation, and also makes judgment on the associated likelihood of loss, considering the existence of contracted insurance, credit letters, real guarantees, the customer’s financial position and the involvement of the Legal Department in any enforcement. The result of this judgment establishes the financial amount to be recognized as an impairment.
(c) Analysis
Parent company Consolidated Note 2017 2016 2017 2016 Local customers (Brazil) 376,106 359,476 483,812 448,528 Foreign customers 38 59 480,570 454,821 Related parties 14 (b) and (c) 35,789 35,888 19,543 33,051 411,933 395,423 983,925 936,400
Allowance for doubtful accounts (56,669) (45,833) (105,021) (97,975) 355,264 349,590 878,904 838,425
44 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Analysis by currency
Parent company Consolidated 2017 2016 2017 2016 Real 350.681 344.695 414.743 407.097 Euro 1.848 111.562 107.589 Turkish lira 91.159 97.604 US Dollar 2.735 4.895 89.815 64.759 Moroccan dirham 55.948 45.708 Uruguayan peso 42.014 62.251 Boliviano 32.127 9.708 Tunisian dinar 20.121 16.962 Argentine peso 11.723 15.218 Indian rupee 5.475 2.474 Canadian dollar 4.217 3.222 Chinese yuan 5.833 355.264 349.590 878.904 838.425
(e) Changes in the allowance for doubtful accounts
Parent company Consolidated 2017 2016 2017 2016 Balance at the beginning of the year (45,833) (23,485) (97,975) (101,629) Additions (15,783) (28,350) (34,326) (57,757) Reversals 4,078 5,999 13,159 33,342 Receivables written off during the year as uncollectible 869 3 10,439 14,317 Write-off of assets related to sale of China operations (Note 1.1 (d)) 4,115 Exchange rate variations (433) 13,752 Balance at the end of the year (56,669) (45,833) (105,021) (97,975)
Amounts charged to the allowance for doubtful accounts are generally written off when there is no expectation of recovering additional cash.
(f) Aging of trade receivables
The aging of the balances below does not consider the allowance for doubtful accounts.
Parent company Consolidated 2017 2016 2017 2016 Coming due 321,384 326,994 759,305 752,485 Up to 3 months past due 27,613 22,668 96,635 87,100 From 3 to 6 months past due 4,343 3,477 12,931 10,337 Over 6 months past due 58,593 42,284 115,054 86,478 411,933 395,423 983,925 936,400
45 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(g) Credit quality of trade receivables
Parent company Consolidated 2017 2016 2017 2016 High risk 60,159 54,242 148,557 106,260 Medium risk 57,461 25,479 112,232 67,426 Low risk 151,130 176,587 346,770 398,846 AAA 16,845 34,798 132,203 146,902 285,595 291,106 739,762 719,434
The balances mentioned above refer to local and foreign accounts receivable not overdue and not impaired, with the exception of related party balances.
The quality of the credit risk is defined according to internal statistical models of risk scoring, according to the risk standards accepted by the Company.
12 Inventories
(a) Accounting policies
Inventories are stated at the lower of cost and net realizable value. Inventories are determined using the weighted average method. The cost of finished goods and work in progress comprises design costs, raw materials, direct labor, other direct and indirect costs and related production overheads (based on normal operating capacity).
Net realizable value is the estimated selling price in the ordinary course of business, less conclusion costs and selling expenses. Imports in transit are stated at the accumulated cost of each import.
The Company and its investees, at least once a year, carries out a physical inventory. Inventory adjustments are recorded under "Cost of goods sold and services rendered".
The provision for slow-moving materials is recognized based on the quantity of inventories, amount and average consumption of materials, according to the assumptions of the Company’s slow-moving policy, which recommends setting up provision of 20% of the amount of an item without movement for more than six months.
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Finished products 26,731 28,914 121,953 129,129 Semi-finished products 215,166 241,736 629,168 655,276 Raw materials 109,742 129,263 332,552 391,784 Auxiliary materials and consumables 92,900 98,135 398,476 399,449 Imports in transit 2,996 14,468 24,984 27,039 Other 2,289 3,997 33,031 28,830 Provision for losses (i) (71,264) (81,381) (182,469) (183,424) 378,560 435,132 1,357,695 1,448,083
(i) The provision for inventory losses refers mainly to slow-moving materials.
46 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Changes in the provision for inventory losses
Parent company 2017 2016 Auxiliary Finished Semi-finished Raw materials and products products materials consumables Other Total Total Balance at the beginning of the year (1,238) (25,395) (9,643) (44,110) (995) (81,381) (72,184) Addition (743) (13,395) (2,240) (21,552) (396) (38,326) (49,578) Reversals 1,323 9,817 10,584 26,324 395 48,443 40,381 Balance at the end of the year (658) (28,973) (1,299) (39,338) (996) (71,264) (81,381)
Consolidated 2017 2016 Auxiliary Finished Semi-finished Raw materials and products products materials consumables Other Total Total Balance at the beginning of the year (5,841) (39,308) (27,316) (89,951) (21,008) (183,424) (177,007) Addition (1,211) (16,876) (3,074) (33,379) (8,593) (63,133) (90,603) Reversals 2,357 13,589 11,735 37,868 3,643 69,192 79,235 Reclassification from assets held for sale (9,204) Foreign exchange variations (297) 265 49 (5,121) (5,104) 14,155 Balance at the end of the year (4,992) (42,330) (18,606) (85,462) (31,079) (182,469) (183,424)
13 Taxes recoverable
(a) Accounting policies
Taxes recoverable are presented net of estimated losses on tax credits.
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Corporate Income Tax ("IRPJ") and Social Contribution on Net Income ("CSLL") (i) 520,324 390,613 574,765 448,533 Social Contribution on Revenue ("COFINS") 88,011 96,255 148,990 164,265 State Value-added Tax on Sales and Services ("ICMS") 46,655 81,097 78,221 121,440 Value-added Tax ("VAT") (foreign companies) 74,322 87,100 Social Integration Program ("PIS") 19,137 20,924 32,222 35,527 State Value-added Tax on Sales and Services on PP&E 21,606 26,346 28,164 33,575 Excise Tax ("IPI") 16,858 15,142 21,547 19,054 Other 33,789 155 39,162 18,210 746,380 630,532 997,393 927,704
Current (i) 196,509 497,128 292,517 621,998 Non-current 549,871 133,404 704,876 305,706 746,380 630,532 997,393 927,704
(i) The decrease in the balance in current assets is mainly due to the reclassification to non-current assets of R$ 293,668, relating to income tax credit on foreign profits, arising from the review conducted by the Company of the expected realization of the balances in the short term.
47 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
14 Related parties
(a) Accounting policies
Related party transactions are carried out by the Company under similar conditions to other transactions, considering the usual market prices and conditions and, therefore, do not generate any undue benefit to its counterparties or losses to the Company. In the normal course of operations, the Company enters into agreements with related parties (associates, joint ventures and shareholders), related to the purchase and sale of products, loans, lease of assets, sale of raw materials and services.
(b) Parent company
Trade receivables Dividends receivable Non-current assets Trade payables Dividends payable Non-current liabilities Sales Purchases Financial income (expense) 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Parent Votorantim S.A. (i) 93 185 20,003 38 8,457 5,827 165,715 245,028 41 47,631 33,740 Subsidaries, associates or joint ventures Calmit Mineração e Participações Ltda. 3,099 3,099 Citrosuco S.A. Agroindústria 314 129 2 1 30 6,342 3,069 Companhia Brasileira de Aluminio (ii) 169 107 462 6,009 122,813 2,809 3,099 3,257 1,388 Fazenda São Miguel Ltda. 9 720 102 3 4 6,817 11,250 Hailstone Limited (vii) 16,877 16,628 42,880 (889) Interávia Taxi Aéreo Ltda. 205 508 1,467 6,101 Itacamba Cementos S.A. 2,540 4,838 32 32 2,943 33,513 Nexa Recursos Minerais S.A. 183 93 5,469 18 13 1,161 964 173 156 Pedreira Pedra Negra Ltda. 16 548 990 1,016 5,232 5,232 Seacrown do Brasil Comércio, Importação e Participações S.A. 6,731 48 Supermix Concreto S.A. (iii) 4,142 17,814 99 224 139,723 230,662 Votener - Votorantim Comercializadora de Energia Ltda. (iv) 15,006 280,786 257,500 Voto - Votorantim Overseas Trading Operantions IV Limited (v) 514,876 507,265 (42,733) (46,800) Votorantim Cement Trading S.L. 2,217 8,967 37,364 Votorantim Cimentos EAA Inversiones, S.L. (vi) 1,847 812 321,659 (3,919) Votorantim Cimentos N/NE S.A. 26,213 12,084 29,562 3,189 40,290 77,808 466 1,497 473 670 75,135 49,800 774 332 Votorantim Empreendimentos Ltda. (viii) 15,798 Other 272 90 4,860 1,543 600 205 7,197 10,018 338 562 5,721 5,463 20 68 35,789 35,888 30,374 3,189 85,170 121,677 34,594 15,282 165,715 245,028 1,015,367 523,215 228,495 321,673 355,593 353,294 (47,473) (46,732)
Current 35,789 35,888 30,374 3,189 34,594 15,282 165,715 245,028 Non-current 85,170 121,677 1,015,367 523,215 35,789 35,888 30,374 3,189 85,170 121,677 34,594 15,282 165,715 245,028 1,015,367 523,215
48 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Consolidated
Trade receivables Dividends receivable Non-current assets Trade payables Dividends payable Non-current liabilities Sales Purchases Financial income (expense)
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Parent Votorantim S.A. (i) 141 234 33,247 9,815 9,731 7,150 165,715 245,028 28 722 41 56,333 43,614 Associates or joint ventures Cementos Avellaneda S.A. 11,723 5,455 32 38 182 1,435 32,208 8,191 199 271 1,076 Cementos Bio Bio S.A. (Nota 1.1 (j)) 10,707 4,313 Cementos Especiales de las Islas, S.A. 3,285 10,916 6,877 218 154 12,285 19,638 529 773 Cementos Granadilla 983 658 6,304 5,852 791 566 13,693 63,621 1,638 49,269 Citrosuco S.A. Agroindústria 314 129 2 1 30 6,342 3,069 Companhia Brasileira de Aluminio (ii) 169 107 463 6,010 122,813 2,809 3,470 3,257 1,388 Hailstone Limited 16,877 16,628 42,880 41,518 (889) (989) IBAR Administração e Participação Ltda. (viii) 3,319 Midway Group LLC 50 5,266 8,308 2,345 20,517 Nexa Recursos Minerais S.A. 183 93 5,469 17 13 1,161 964 173 156 Superior Materials Holdings, LLC 975 58,402 68,292 Supermix Concreto S.A. (iii) 4,964 20,963 150 150 127 224 167,087 275,732 Suwannee American Cement LLC (Note 1.1 (i)) 793 26,934 46,980 43,217 UTE Pexcon 125 116 989 804 117 111 8 2 574 601 Votener-Votorantim Comercializadora de Energia Ltda. (iv) 23 23 15,006 21,373 14,767 343,399 277,509 Votorantim Empreendimentos Ltda. (viii) 15,798 Other 868 1,195 187 1,637 12,537 1,936 2,913 9,075 10,695 3,229 3,208 6,631 10,799 2 19,543 33,051 11,098 7,252 64,320 73,061 37,235 45,418 165,715 245,028 175,033 52,965 349,862 465,267 459,713 427,597 (889) 89
Total non-controlling 1,558 1,872 Current 19,543 33,051 11,098 7,252 37,235 45,418 167,273 246,900 Non-current 64,320 73,061 175,033 52,965 19,543 33,051 11,098 7,252 64,320 73,061 37,235 45,418 167,273 246,900 175,033 52,965
49 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
The main transactions with related parties were carried out under the following conditions:
(i) Services purchased include those provided by the Excellence Center of VSA related to administrative activities, human resources, back office, accounting, taxes, technical assistance and IT. These services are provided to all Votorantim companies, and reimbursed to VSA based on the cost of service rendered to the Company.
(ii) The Company used tax credits of the associate Companhia Brasileira de Alumínio (“CBA”) to settle debts related to PERT (Note 1.1 (g)).
(iii) The sales transactions with Supermix Concreto S.A. refer to the sale of cement and aggregates at prices based on the price list and the terms agreed between the parties.
(iv) Purchases of electric power from Votoner - Votorantim Comercializadora de Energia Ltda. at prices based on the price list and the terms agreed between the parties.
(v) In December 2006, the Company contracted a loan from its investee Voto IV amounting to US$ 200 million, with maturity in December 2020, and an interest rate of 8.5% p.a..
(vi) In June 2017, the Company signed a loan agreement with its subsidiary VCEAA in the total amount of EUR 135 million, bearing an interest rate of 2.5% p.a. and final maturity in June 2024. The Company has already received EUR 80 million.
(vii) In June 2017, the Company signed a loan agreement with Hailstone Limited, that occurred due to the liquidation of Lux Cem in February 2017, in the total amount of US$ 10 million, with an interest rate of 3% p.a. and maturity in December 2017, which can be renewed with the mutual consent of the parties.
(viii) On September 1, 2017, the associates IBAR Administração e Participação Ltda (“IBAR”) and Votorantim Empreendimentos Ltda. (“VEL”) were merged into VSA and, therefore, the related party balances that the Company had with IBAR and VEL are now presented with VSA.
Other prices for sales and the rendering of services between related parties were negotiated based on internal costs, with no margins applied.
(d) Company and its subsidiaries’ debts guaranteed by related parties
Instrument Guarantor 2017 2016 Eurobonds - USD (Voto 41) VSA 3,871,699 3,814,476 BNDES VSA and Hejoassu S.A. (Parent of VSA) 375,290 687,852 Eurobonds - USD (Voto 20) VSA (100%), VCSA (50%) and Fibria Celulose S.A.(50%) 319,398 314,676 ECA Framework Agreement (i) VSA 126,445 4,566,387 4,943,449
(i) Transaction settled, as mentioned in Note 19 (h) (iii).
50 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(e) Debts issued by related parties guaranteed by the Company and its subsidiaries
2017 2016 Percentage guaranteed Amount Amount Instrument Debtor Guarantor by the Company Debt guaranteed Debt guaranteed Eurobonds - USD (Voto 19) VSA VSA, VCSA, CBA 50% 695,272 347,636 684,995 342,497 Eurobonds - USD (Voto 21) CBA VSA, VCSA 50% 806,782 403,391 794,855 397,428 1,502,054 751,027 1,479,850 739,925
(f) Key management compensation
The Company’s Management comprises the Board of Directors and Board of Executive Officers. The expenses on key management compensation, including all benefits, are summarized as follows:
Parent company Consolidated 2017 2016 2017 2016 Short-term benefits to key management 21,971 20,978 29,319 31,121 Post-employment benefits 432 447 4,819 1,983 Termination benefits 195 20 195 20 Other long-term benefits to key management 4,733 4,862 6,298 7,242 27,331 26,307 40,631 40,366
Short-term benefits to key management above include fixed compensation (salaries and fees, paid vacations and 13th month salary), social charges (contributions to the National Institute of Social Security - INSS and the Government Severance Indemnity Fund for Employees - FGTS) and the short- term variable compensation program. Post-employment benefits refer to pension plans. "Other long- term benefits to key management" refer to the variable compensation program.
15 Other assets
(a) Accounting policies
An asset is recognized in the balance sheet when its future economic benefits are likely to be generated for the Company or its subsidiaries, and its cost or value can be reliably measured. This is presented in the balance sheet based on the current and non-current classification.
An asset is classified as current when: (i) it is expected to be realized or consumed in the normal operating cycle; (ii) is held mainly for trade; (iii) it is expected to be realized within 12 months after the reporting period. All other assets are classified as non-current.
51 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Current Receivables from sales of equity interests 121,863 111,878 Insurance 7,582 16,343 28,449 36,060 Advances to employees 13,191 14,288 17,869 22,957 Receivables from sales of property, plant and equipment 14,023 14,540 15,237 14,740 Loans granted to third parties 11,124 13,232 11,124 Prepaid expenses 329 609 11,457 24,957 Escrow account 7,983 5,000 Royalties 5,033 4,427 Rents receivable 484 549 Other receivables 6,361 2,782 23,546 9,297 41,486 59,686 245,153 240,989
Non-current Receivables from sales of equity interests 4,708 4,602 148,247 173,727 Escrow account 44,141 49,252 Securitization of receivables - VCNA 43,626 198,339 Judicial bonds 35,088 33,624 40,751 38,805 Royalties 21,841 20,634 Receivables from sales of property, plant and equipment 17,168 8,120 Deposits as guarantee for rents 17,096 24,561 Social security credits 7,573 7,573 8,768 8,768 Advances to suppliers 7,572 7,460 Deposits for reinvestment 2,508 2,508 6,401 6,398 Rents receivable 3,582 3,758 Pension plan benefits (Note 24 (c)) 2,075 1,974 Other receivables 1,539 1,541 32,820 30,068 51,416 49,848 394,088 571,864 92,902 109,534 639,241 812,853
16 Investments
(a) Accounting policies
Investments of the Company in entities accounted for by the equity method comprise its equity interests in associates and joint ventures.
Associates are the entities in which the Company, directly or indirectly, has significant influence but has no control or joint control over their financial and operating policies. To be classified as a jointly- controlled entity, a contractual arrangement must exist, which enables the Company to jointly control the entity and gives the Company rights to the net assets of the jointly-controlled entity and not rights to specific assets and liabilities.
These investments are recognized initially at cost, which includes the transaction costs. Subsequent to initial recognition, the financial statements include the Company’s share of profit or loss for the year and other comprehensive income of the investee through the date in which the significant influence or joint control ceases. In the parent company financial statements, investments in subsidiaries are also accounted for under this method.
52 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Analysis
Parent company
Information as at December 31, 2017 Equity in the results Balance Net income Percentage of (loss) for the voting and total Net equity year capital (%) 2017 2016 2017 2016 Investments accounted for using the equity method Subsidiaries and associates Votorantim Cimentos EAA Inversiones S.L. 6,568,574 685,304 100.00 685,304 587,144 6,568,574 7,281,455 Votorantim Cimentos N/NE S.A. 2,315,590 184,651 100.00 184,651 79,915 2,315,590 2,390,696 Silcar Empreendimentos Comércio e Participações Ltda. 307,983 26,299 100.00 26,299 59,854 307,983 319,685 Votorantim Cementos Chile Ltda. 77,054 14,725 100.00 14,725 18,159 77,054 193,031 Cementos Portland S.A. 108,310 (3,671) 50.00 (1,836) (1,639) 54,155 53,281 Votorantim Cimentos Argentina S.A. 9,206 (8,964) 99.94 (8,959) 34,639 9,200 51,762 Cia de Cimento Pinheiro Machado 251 100.00 251 Sirama Participações Administração e Transportes Ltda. 961 Other 82 11,377 9,526 Joint operation VOTO-Votorantim Overseas Trading Operations IV Limited 465,352 36,468 50.00 18,234 19,940 232,676 259,515 918,500 798,973 9,576,860 10,558,951 Goodwill Votorantim Cimentos EAA Inversiones S.L. 1,133,820 1,192,354 Votorantim Cement North America Inc. 882,799 882,799 2,016,619 2,075,153 11,593,479 12,634,104
Payables to investees Lux Cem International S.A. (i) (933) (43,452) Seacrown do Brasil Comércio, Importação e Participações S.A. (i) (1,369) 124 (790) (1,369) (809) (44,242) 917,131 798,164 11,593,479 12,589,862
(i) These investees were merged into the Company, as mentioned in Note 1.1 (b).
53 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated
Information as at December 31, 2017 Equity in the results Balance Net income Percentage of (loss) for the voting and total Net equity year capital (%) 2017 20162017 2016 Investments accounted for using the equity method Associates Votorantim Cimentos EAA Inversiones S.L. Cementos Avellaneda S.A. (a) 538,120 198,237 49.00 97,136 69,559 358,593 354,304 Cementos Especiales de las Islas S.A. 138,469 (2,192) 50.00 (1,096) 69,234 57,303 Silcar Empreendimentos Comércio e Participações Ltda. Supermix Concreto S.A. 248,417 6,815 25.00 1,704 4,441 62,104 64,400 Sirama Participações Administração e Transportes Ltda. 961 IMIX Empreendimentos Imobiliários Ltda. 24,190 10,294 25.00 2,573 5,882 6,047 3,474 Votorantim Cementos Chile Ltda. Cemento Bio Bio S.A. (Note 1.1 (j)) 11,415 17,156 151,970 Joint ventures - VCNA Suwannee American Cement, LLC (Note 1.1 (i)) 222,451 Superior Materials Holdings, LLC 105,466 51,139 50.00 25,570 20,219 52,733 42,241 Sumter Cement Co, LLC (Note 1.1 (i)) 18,607 Hutton Transport Limited 71,416 11,904 25.00 2,976 3,605 17,854 15,338 Midway Group, LLC 27,681 8,542 50.00 4,271 2,829 13,840 9,314 Trinity Materials, LLC (8,604) Joint ventures - VCSA Cementos Portland S.A. 108,310 (3,671) 50.00 (1,836) (1,639) 54,155 53,281 Other investments 14,411 6,162 60,680 41,448 157,124 120,571 695,240 1,034,131
(a) The investment Cementos Avellaneda S.A. considers as at December 31, 2017 the amount of R$ 94,914 (December 31, 2016 - R$ 115,251) relating to the goodwill paid on the acquisition of the investment.
54 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Information on investees
Below is a summary of the selected financial information of the Company’s main associates, subsidiaries and joint ventures for the years ended:
Parent company 2017 Percentage Non- Other of voting and Current Non-current Current Non-current controlling comprehensive Operational Financial Net income (loss) total capital assets assets liabilities liabilities interests income (loss) Equity Net revenue result result for the year Investments accounted for using the equity method Subsidiaries and associates Votorantim Cimentos EEA Inversiones S.L. 100.00 3,964,339 8,641,598 1,731,824 3,636,140 669,399 202,060 6,568,574 5,766,848 716,317 (259,461) 685,304 Votorantim Cimentos N/NE S.A. 100.00 428,923 3,240,598 390,890 963,041 (205) 2,315,590 1,384,369 216,054 44,064 184,651 Silcar Empreendimentos Comércio e Participações Ltda. 100.00 129,282 248,199 1,152 68,346 307,983 112 32,215 26,299 Votorantim Cementos Chile Ltda. 100.00 77,078 24 (299) 77,054 3,268 42 14,725 Cementos Portland S.A. 50.00 36,008 108,206 30,319 5,585 5,324 108,310 (2,687) (3,096) (3,671) Votorantim Cimentos Argentina S.A. 99.94 9,154 62 106 (96) (5,132) 9,206 (15,482) 6,508 (8,964) Cia de Cimento Pinheiro Machado 100.00 251 251 Joint operation Voto - Votorantim Overseas Trading Operations IV Ltda. 50.00 49,878 1,049,668 634,194 2,026 465,352 36,468 36,468
Parent company 2016 Percentage Non- Other of voting and Current Non-current Current Non-current controlling comprehensive Operational Financial Net income (loss) total capital assets assets liabilities liabilities interests income (loss) Equity Net revenue result result for the year Investments accounted for using the equity method Subsidiaries and associates Votorantim Cimentos EEA Inversiones S.L. 100.00 3,690,725 9,494,025 1,679,931 3,656,114 567,250 (1,794,466) 7,281,455 6,695,315 846,571 (136,091) 587,144 Votorantim Cimentos N/NE S.A. 100.00 539,122 3,166,978 312,718 1,002,686 (3) 2,390,696 1,438,081 221,510 (49,702) 79,915 Silcar Empreendimentos Comércio e Participações Ltda. 100.00 123,148 277,236 694 80,005 (19,141) 319,685 (749) 45,912 59,854 Votorantim Cementos Chile Ltda. 100.00 26,084 166,989 42 (65,702) 193,031 (365) 97 18,159 Cementos Portland S.A. 50.00 45,408 96,529 28,194 7,181 (27,426) 106,562 3,536 (6,008) (3,277) Votorantim Cimentos Argentina S.A. 99.94 65,530 3,549 17,286 (12,568) 51,793 1,158 29,241 24,083 34,660 Joint operation Voto - Votorantim Overseas Trading Operations IV Limited. 50.00 107,885 1,034,152 623,006 (49,022) 519,031 39,881 39,881 Payables to investees Lux Cem International S.A. 100.00 36 179 43,309 8,173 (43,452) (91) (1,024) (933) Seacrown do Brasil Comércio, Importação e Participações S.A. 40.45 1,098 3,684 3 6,733 (1,954) (95) 179 307
55 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated 2017 Percentage Non- Other of voting and Current Non-current Current Non-current controlling comprehensive Operational Financial Net income (loss) total capital assets assets liabilities liabilities interests income (loss) Equity Net revenue result result for the year Investments accounted for using the equity method Associates Votorantim Cimentos EAA Inversiones S.L. Cementos Avellaneda S.A. 49.00 490,706 360,074 307,053 5,607 (83,568) 538,120 1,239,958 296,170 10,108 198,237 Cementos Especiales de las Islas S.A. 50.00 105,080 88,248 21,983 32,876 138,469 2,980 3,124 13 (2,192) Silcar Empreendimentos Comércio e Participações Ltda. Supermix Concreto S.A. 25.00 206,435 215,343 127,754 45,607 248,417 1,013,583 1,139 3,692 6,815 IMIX Empreendimentos Imobiliários Ltda. 25.00 17,955 6,900 665 24,190 11,211 10,693 864 10,294 Joint ventures - VCNA Superior Materials Holdings, LLC. 50.00 100,014 48,151 42,699 (1,161) 105,466 330,027 52,050 (81) 51,139 Hutton Transport Limited 25.00 29,798 56,673 3,930 11,125 1,843 71,416 11,904 11,904 Midway Group, LLC. 50.00 28,012 19,590 14,959 4,962 2,083 27,681 83,965 8,542 8,542 Joint ventures - VCSA Cementos Portland S.A. 50.00 36,008 108,206 30,319 5,585 5,324 108,310 (2,687) (3,096) (3,671)
Consolidated
Percentage Non- Other of voting and Current Non-current Current Non-current controlling comprehensive Operational Financial Net income (loss) total capital assets assets liabilities liabilities interests income (loss) Equity Net revenue result result for the year Investments accounted for using the equity method Associates Votorantim Cimentos EAA Inversiones S.L. Cemento Bio Bio S.A. 16.70 648,422 1,632,082 427,818 935,838 6,847 (368,877) 910,001 1,501,931 174,797 (46,652) 102,728 Cementos Avellaneda S.A. 49.00 417,583 269,230 193,806 5,142 (185,797) 487,865 890,473 194,929 6,943 141,957 Cementos Especiales de las Islas S.A. 50.00 76,997 81,905 20,961 23,335 114,606 362 351 18 595 Silcar Empreendimentos Comércio e Participações Ltda. Supermix Concreto S.A. 25.00 238,114 213,113 131,289 62,337 (61) 257,601 1,192,113 14,240 6,479 17,763 IMIX Empreendimentos Imobiliários Ltda. 25.00 8,705 6,995 1,804 13,896 5,043 4,716 1,483 23,528 Joint ventures - VCNA Suwannee American Cement LLC. 50.00 206,496 180,491 47,209 87,174 (86,807) 252,604 240,063 35,867 (2,920) 32,947 Superior Materials Holdings, LLC. 50.00 63,214 52,706 30,900 539 (13,899) 84,481 315,140 40,480 (142) 40,438 Sumter Cement Co LLC. 50.00 4,083 101,771 68,641 (8,116) 37,213 (5,868) (1,056) (6,924) Hutton Transport Limited 25.00 5,759 27,853 1,379 1,558 20,293 30,676 17,326 3,522 14,420 Midway Group, LLC. 50.00 9,194 17,729 8,294 (221) 18,629 57,215 5,981 (322) 5,659 Trinity Materials LLC. 50.00 (17,206) (3) (17,209) Joint ventures - VCSA Cementos Portland S.A. 50.00 45,408 96,529 28,194 7,181 (27,426) 106,562 3,536 (6,008) (3,277)
56 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Changes
Parent company Consolidated 2017 2016 2017 2016 Balance at the beginning of the year 12,589,862 15,187,561 1,034,131 1,275,806 Equity in the results of investments 917,131 798,164 157,124 120,571 Dividends approved (653,639) (15,487) (57,805) (32,515) Exchange gains (losses) on investments abroad 299,828 (2,223,182) (47,674) (287,929) Realization of comprehensive income on sale of China operations (Note 1.1 (d)) (59,687) Distribution of VCEAA's share premium (Note 1.1 (a)) (937,579) (1,210,605) Capital increase - VCNNE 100,000 Capital reduction - Voto IV (ii) (47,100) Loss due to change in shareholding (30,406) (30,406) Write-off of assets related to sale of Florida and California operations (Note 1.1. (i)) (234,000) Write-off of payable to investee on merger - Lux Cem (i) 43,452 Hedge accounting of investments abroad - VCNA 96,355 Write-off of goodwill on sale of China operations (Note 1.1. (d)) (228,487) Sale of interest in Bio Bio (Note 1.1 (j)) (130,402) (172,224) Decrease in non-controlling interest - VCEAA 62,497 Capital reduction - VCEAA (Note 1.1 (a)) (360,486) Loss due to change in shareholding - Seacrown (1,164) Other comprehensive income of investees 2,898 (16,183) 15,688 (11,396) Balance at the end of the year 11,593,479 12,589,862 695,240 1,034,131
(i) In the first quarter of 2017, the Company liquidated its subsidiary Lux Cem and, accordingly, merged its net assets, as mentioned in Note 1.1 (b), writing off the investment recognized under "Payables to investees". Among the merged amounts arising from the liquidation of Lux Cem, the Company received the interest held by Lux Cem in Seacrown do Brasil, Comércio, Importação e Participações S.A. (“Seacrown”), becoming the directly holder of 100% of the shares representing the capital of Seacrown. In November 2017, the Company merged Seacrown and its negative net assets appraised at R$ 3,322.
(ii) In the third quarter of 2017, the Company entered into, along with its joint operation Voto-Votorantim Overseas Trading Operations IV Limited (“Voto IV”) (a company controlled by the Company and by Fibria Celulose S.A. (“Fibria”), both holding 50% of its capital) a Share Repurchase Agreement, aiming at the redemption and respective cancelation by Voto IV of 15,000 shares of its issue held by the Company, for USD 1,000 per share, totaling USD 15 million (R$ 47,100). Fibria entered into the same transaction with Voto IV, thus not generating changes in the company’s ownership structure.
(e) Listed non-consolidated investments
In October 2017, the Company sold its direct investment in the investee Bio Bio, as mentioned in Note 1.1 (j). The equity and market value computed proportionally to the interest held by the Company at December 31, 2016 is shown below:
2016
Book value Market value Cementos Bio Bio S.A. 151,970 140,611
57 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
17 Property, plant and equipment
(a) Accounting policies
(i) Property, plant and equipment
Property, plant and equipment are stated at historical cost of acquisition or construction less accumulated depreciation. Historical cost includes borrowing costs related to the acquisition or construction of qualifying assets.
Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with these costs will flow to the Company and they can be measured reliably. The carrying amount of the replaced items or parts is derecognized.
All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred. The cost of major refurbishments is included in the carrying value of the asset when the future economic benefits exceed the performance initially expected for the existing asset. Refurbishment expenses are depreciated over the remaining useful life of the related asset.
Except for land that is not depreciated, the depreciation of assets is calculated using the straight-line method to reduce their cost to their residual values over their estimated useful lives. The assets’ residual values and useful lives are reviewed annually, and adjusted if appropriate.
An asset's carrying amount is written down immediately to its recoverable amount when it is greater than its estimated recoverable amount, in accordance with the criteria adopted by the Company in order to determine the recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within "Other operating income (expenses), net" in the statement of income (Note 29).
(ii) Leases
Leases of property, plant and equipment where the Company and its subsidiaries have substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased item and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other liabilities.
Leases in which a significant part of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the period of the lease.
(iii) Impairment of non-financial assets
The Company and its subsidiaries review their assets for impairment on an annual basis or whenever events or changes in economic, operating or technological circumstances indicate that their carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the asset or cash-generating unit (“CGU”) exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less selling costs (net sales value) and its value in use.
The value in use is determined by the projection of future free operating cash flows discounted to present value, using a discount rate that reflects current market assessments, based on the financial budgets approved by management for the next five years. All market projections are based on trade associations,
58 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
economic consulting and research and statistics institutes from the countries in which the Company operates. The fair value is obtained from the sale of an asset or a CGU on an arm's length basis, between knowledgeable and willing parties, less estimated costs to make the sale.
For the purposes of assessing impairment, assets are grouped at the lowest level for which there is separately identifiable cash flow (CGU level). Assets other than goodwill that were adjusted due to impairment are subsequently reviewed for possible reversal of the impairment at the balance sheet date.
An impairment loss is recognized in profit or loss for the period, in the amount by which the asset’s carrying amount exceeds its recoverable amount.
(b) Critical accounting estimates and judgments
(i) Review of useful lives of property, plant and equipment and intangible assets
The Company reviews its assets to be held and used in its activities for possible impairment whenever events or changes indicate that the carrying amount of an asset or group of assets may not be recoverable on the basis of undiscounted future cash flow. In these circumstances, the useful life of an asset or group of assets is adjusted to reflect the new thresholds.
During 2017, the Company reviewed the useful lives of its property, plant and equipment based on an appraisal report issued internally and there were no changes in the useful lives, according to an analysis by management.
59 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Analysis and changes
Parent company 2017 2016 Machinery, Land and equipment and Furniture and Construction in Leasehold improvements Buildings facilities Vehicles fixtures progress improvements Total Total Balance at the beginning of the year Cost 409,174 1,267,914 6,241,184 283,722 58,759 339,553 35,911 8,636,217 8,682,077 Accumulated depreciation (37,338) (522,980) (2,746,004) (235,179) (44,062) (16,225) (3,601,788) (3,567,940) Net balance 371,836 744,934 3,495,180 48,543 14,697 339,553 19,686 5,034,429 5,114,137 Acquisitions 1,330 246,152 247,482 349,726 Disposals (141) (1,682) (3,467) (1,498) (1) (73) (6,862) (27,682) Merger of Seacrown (Note 1.1 (b)) 77 426 503 Depreciation (1,868) (25,542) (223,198) (23,225) (2,315) (2,141) (278,289) (326,186) Reversal of impairment (Note 29) 5,550 Transfers (i) 5,794 19,880 70,293 3,266 221 (149,573) 545 (49,574) (81,116)
Balance at the end of the year 375,698 738,016 3,340,138 27,086 12,602 436,132 18,017 4,947,689 5,034,429
Cost 413,383 1,283,312 6,280,408 251,216 58,978 436,132 35,368 8,758,797 8,636,217 Accumulated depreciation (37,685) (545,296) (2,940,270) (224,130) (46,376) (17,351) (3,811,108) (3,601,788) Net balance at the end of the year 375,698 738,016 3,340,138 27,086 12,602 436,132 18,017 4,947,689 5,034,429
Average annual depreciation rates - % 2 2 6 20 10 2
60 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated 2017 2016 Machinery, Land and equipment and Furniture and Construction in Leasehold improvements Buildings facilities Vehicles fixtures progress improvements Other Total Total Balance at the beginning of the year Cost 1,211,386 3,538,940 16,060,974 948,943 127,064 2,044,459 445,555 77,391 24,454,712 26,193,348 Accumulated depreciation (49,464) (1,548,810) (9,111,591) (723,096) (100,340) (236,914) (42,229) (11,812,444) (13,140,447) Net balance 1,161,922 1,990,130 6,949,383 225,847 26,724 2,044,459 208,641 35,162 12,642,268 13,052,901
Acquisitions 1,111 9,514 33,788 1,475 3,062 1,095,275 2,062 1,146,287 1,864,578 Disposals (14,810) (4,821) (45,768) (19,120) (68) (52) (6,047) (90,686) (85,530) Depreciation (3,628) (95,591) (627,375) (64,406) (5,450) (17,046) (2,895) (816,391) (897,607) Write-off of assets related to sale of China operations (Note 1.1 (d)) (86,762) (76,361) (16,533) (58) (651) (757) (181,122) Write-off of assets related to sale of Florida and California operations (Note 1.1 (i)) (33) (156,236) (45,672) (31,003) (92) (33,413) (28,975) (295,424) 13,185 Exchange variations 33,211 20,910 58,383 5,147 (608) (57,276) 10,982 70,749 (1,134,227) Reversal (recognition) of impairment (Note 29) (874) 4,774 17,798 26 525 22,249 (12,219) Transfers (i) 7,791 435,582 1,093,681 43,578 908 (1,688,035) 33,602 (72,893) (158,813) Balance at the end of the year 1,097,928 2,127,901 7,417,685 161,486 25,001 1,360,307 200,400 34,329 12,425,037 12,642,268
Cost 1,148,877 3,720,574 17,141,206 872,848 129,798 1,360,307 443,088 79,451 24,896,149 24,454,712 Accumulated depreciation (50,949) (1,592,673) (9,723,521) (711,362) (104,797) (242,688) (45,122) (12,471,112) (11,812,444) Net balance at the end of the year 1,097,928 2,127,901 7,417,685 161,486 25,001 1,360,307 200,400 34,329 12,425,037 12,642,268
Average annual depreciation rates - % 2 3 5 21 6 9 10
(i) Transfers refer to the reclassification from “Construction in progress” to “Softwares” and “Rights over natural resources” to intangible assets.
61 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Construction in progress
The balance of construction in progress is made up mainly of projects for the expansion and optimization of the industrial units.
Parent company Consolidated 2017 2016 2017 2016 Expansion of cement production capacity in Charlevoix - North America (i) 461,511 279,750 Operating equipment (ii) 95,871 57,100 122,516 88,784 Environment and security 57,115 22,105 83,814 26,686 New coprocessing lines (iii) 55,914 30,777 63,477 32,727 Expansion of cement production capacity - Tunisia 45,004 32,567 New plant in Ituaçú (BA) - Brazil 43,027 43,029 Structural recovery 31,710 15,350 39,550 19,010 Cement grinding - Pecém (CE) - Brazil 38,898 42,119 New plant in Sobral (CE) - Brazil 34,752 34,607 Geology and mining rights 23,693 18,412 36,558 26,579 Hardware and software 24,584 10,098 26,652 10,153 Overburden removal - Cement 23,958 44,970 25,729 47,337 New coprocessing lines - North America 17,925 6,737 New plant in Primavera (PA) - Brazil 14,027 80,961 New plant in Yacuses - Bolivia (v) 11,847 530,244 New plant in Edealina (GO) - Brazil 7,378 7,281 7,378 7,281 Expansion of cement production capacity in Sivas - Turkey (iv) 4,773 363,717 Agricultural lime plant in Ponte Alta (SP) - Brazil 486 14,639 486 14,639 Other projects 115,423 118,821 282,383 357,532 436,132 339,553 1,360,307 2,044,459
During the year ended December 31, 2017, borrowing charges capitalized as part of construction in progress totaled R$ 4,468 in Parent company (December 31, 2016 - R$ 8,998), and R$ 30,768 in the consolidated statement (December 31, 2016 - R$ 43,795). The capitalization rate used in the consolidated statement was 7.46% per year. (December 31, 2016 – 7.55% per year) (Note 30 (b)).
(i) Expansion of the cement production capacity of Charlevoix plant from VCNA, located in Michigan/USA, an indirect subsidiary of the Company. An ongoing project with start-up estimated for 2018 and with the main processes and industrial equipment including limestone grinding, kilns and cyclone towers, and cement grinding.
(ii) Investments in operational equipment, comprising the acquisition and/or replacement of industrial machinery and equipment related to the operation of the plants and mines, aimed to guarantee the continuity of the plants with the application of the same or new technologies.
(iii) Investment in co-processing, technology that consists of the use of industrial waste, biomass and non-usable tires as a substitute for non-renewable fuel and/or raw materials used in cement production - such as limestone, clay and iron ore - in cement plants properly licensed for this purpose. It is also a form of final disposal or environmentally friendly treatment of waste and inputs, eliminating various environmental liabilities.
(iv) Expansion of the cement production capacity of Votoratim Çimento Sanayi ve Ticaret A. ğ. plant, an indirect subsidiary of the Company located in Sivas/Turkey. The project started up its operation in April 2017, however there are still some ongoing expenses due to the final phase of project stabilization. The main processes and industrial equipment include limestone crushing, grinding, kiln and cyclone towers, bag filters and storage silos.
(v) Expansion of the cement production capacity with the new plant of Itacamba Cementos S.A., an indirect subsidiary of the Company located in Yacuses/Bolivia. The plant started up its operation in December 2016, however there are still some ongoing expenses due to the final phase of project stabilization. The main processes and industrial equipment include mining, limestone crushing, grinding, kiln and cyclone towers, bag filters, storage silos, bag-filling machines and palletizers.
62 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(e) Impairment testing of property, plant and equipment
The assets presenting any indication of impairment were tested and as a result of the tests conducted, the Company adjusted the balance of its assets to their recoverable amount, based on the cash flow projections for the next five years, or to their realizable value, if this is higher than the value in use. The reversal of net losses due to impairment, in the consolidated balance of property, plant and equipment at December 31, 2017, amounted to R$ 22,249 (December 31, 2016 – loss of R$ 12,219), recorded under “Other operating income (expenses), net” (Note 29).
The amount of impairment adjustment, mainly comprised machinery and equipment and buildings of cement activities, that consisted of: a) reversals of R$ 20,900 in plants of VCEAA in Spain; b) provision for impairment of R$ (874) for buildings of VCEAA in Spain; and c) reversals of R$ 2,223 of the plant in Barcarena.
18 Intangible assets
(a) Accounting policies
(i) Goodwill
Goodwill is measured by the difference between the amount paid and/or payable for the acquisition of a business and the net amount of the fair value of the assets and liabilities of the entity acquired. Goodwill on acquisitions of subsidiaries is recorded as "Intangible assets" in the consolidated financial statements. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to CGUs for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose.
(ii) Exploration rights over mineral resources
The costs of mining rights are capitalized and amortized using the straight-line method over their useful lives. During the development phase (new mine or stripping activity), the stripping costs are usually capitalized as part of the amortizable cost. The material removed, when the stripping activity occurs in the production phase, shall be valued proportionate to the ore recognized in the cost of operation and/or capitalized as stripping activity assets based on reports prepared internally.
(iii) Software
Costs associated with maintaining computer software programs are recognized as expenses as incurred. The amounts capitalized are amortized over their estimated useful lives.
(iv) Use of public assets
Use of public assets refers to the rights granted by the government to operate potential hydraulic energy (onerous concession), under an agreement for the Use of Public Assets (“UBP”).
The amount is recognized once the operating license is obtained, regardless of the payment schedule established in the contract. The amount is originally recognized as a liability (obligation) and an intangible asset (concession right) which corresponds to the amount of the future obligations discounted to the present value of the future payment cash flow.
The amortization of the intangible asset is calculated on a straight-line basis over the remaining concession period. The financial liability is updated based on the contractual index and the present value adjustment resulting from the lapse of time and reduced by the payments made.
63 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(v) Contractual customer relationships and non-compete agreements
Contractual customer relationships and non-compete agreements acquired in a business combination are recognized at fair value at the acquisition date. The contractual customer relations and non-compete agreements have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method over the expected useful lives as follows:
Customer relationships 15 years Non-compete agreements 5 years
(b) Critical accounting estimates and judgments
(i) Impairment of goodwill
The Company annually tests whether goodwill has suffered any impairment. The recoverable amounts of CGUs have been determined based on value-in-use calculations, based on the discounted cash flow method or the net sales value.
The value in use is sensitive to the discount rate used in the discounted cash flow as well as to expected future cash receipts and the growth rate used for extrapolation purposes.
64 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Analysis and changes
Parent company 2017 2016
Rights over natural resources Goodwill ARO (i) Software Other Total Total Balance at the beginning of the year Cost 793,528 139,504 88,467 164,649 3,507 1,189,655 1,201,044 Accumulated amortization and depletion (290,192) (26,322) (117,101) (306) (433,921) (345,047) Net balance 503,336 139,504 62,145 47,548 3,201 755,734 855,997
Acquisitions 52 260 312 817 Disposals (96) (96) (992) Amortization and depletion (78,030) (3,409) (14,975) (96,414) (89,194) Merger of Seacrown (Note 1.1 (b)) 1,630 1,630 Reversal (provision) for impairment (Note 29) 29 (47,981) (47,952) (66,443) Interest rate update 9,774 9,774 (25,567) Transfers (iii) 44,904 4,670 49,574 81,116 Balance at the end of the year 471,825 91,523 68,770 37,243 3,201 672,562 755,734
Cost 839,078 91,523 98,539 169,286 3,507 1,201,933 1,189,655 Accumulated amortization and depletion (367,253) (29,769) (132,043) (306) (529,371) (433,921) Net balance at the end of the year 471,825 91,523 68,770 37,243 3,201 672,562 755,734
Average annual amortization and depletion rates - % 7 3 20
65 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated 2017 2016 Contractual customer Rights over natural relationships and resources Goodwill Use of public assets ARO (i) agreements Software Other Total Total Balance at the beginning of the year Cost 2,640,386 3,405,273 198,546 277,965 407,975 293,543 38,324 7,262,012 8,209,970 Accumulated amortization and depletion (648,061) (74,645) (101,943) (259,950) (207,595) (15,728) (1,307,922) (1,275,495) Net balance 1,992,325 3,405,273 123,901 176,022 148,025 85,948 22,596 5,954,090 6,934,475
Acquisitions 1,365 22,582 298 181 24,426 44,371 Disposals (ii) (11,283) (228,487) (3,766) (23) (22) (243,581) (47,534) Amortization and depletion (117,696) (6,094) (14,002) (13,407) (23,232) (254) (174,685) (178,796) Write-off of assets related to sale of China operations (Note 1.1 (d)) (15,891) (9) (13) (15,913) Write-off of assets related to sale of Florida and California operations (Note 1.1 (i)) (17,988) (264,949) (1,202) (54,606) (43) (2,118) (340,906) 11,046 Exchange variations 28,937 180,095 8,574 (725) 1,345 (65) 218,161 (848,234) Reversal (provision) for impairment (Note 29) 4,703 (47,981) 2 (43,276) (90,661) Revision of estimated cash flow 4,341 Interest rate update 12,940 12,940 (33,731) Transfers (iii) 57,963 14,168 762 72,893 158,813 Balance at the end of the year 1,922,435 3,043,951 117,807 201,139 79,274 78,463 21,080 5,464,149 5,954,090
Cost 2,668,342 3,043,951 198,546 315,415 235,175 309,509 38,730 6,809,668 7,262,012 Accumulated amortization and depletion (745,907) (80,739) (114,276) (155,901) (231,046) (17,650) (1,345,519) (1,307,922) Net balance at the end of the year 1,922,435 3,043,951 117,807 201,139 79,274 78,463 21,080 5,464,149 5,954,090
Average annual amortization and depletion rates - % 4 3 7 7 21 3
(i) Asset Retirement Obligation.
(ii) The changes in “Goodwill” refer to the write-off of goodwill related to the sale of China operations, as described in Note 1.1 (d).
(iii) Transfers from property, plant and equipment are related to reclassification of "construction in progress" within assets to the line items "software" and "rights over natural resources”.
66 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Goodwill arising on acquisitions
The goodwill supported by expected future profitability arising from acquisitions of subsidiaries is recognized on the acquisition date and is measured by the amount exceeding the sum of (i) the consideration transferred in exchange for the control over the acquiree, for which generally the fair value on the acquisition date is required; (ii) any non-controlling interests in the acquiree; (iii) if the business combination is achieved in stages, the fair value, on the acquisition date, of the acquirer’s interest in the acquiree immediately before the combination; and (iv) the net value, on the acquisition date, of the identifiable assets acquired and liabilities assumed.
Acquisition-related costs are expensed as incurred. Goodwill is allocated to the CGUs, which are identified at the operating segment level.
An operating segment-level summary of the goodwill net of impairment allocation is presented below:
Parent company Consolidated 2017 2016 2017 2016 North America 1,800,354 2,059,731 Europe, Africa and Asia 1,140,241 1,194,483 Latin America 11,833 11,555
Brazil Companhia Cimento Ribeirão Grande 47,174 47,174 Engemix S.A. 75,882 75,882 75,882 75,882 CJ Mineração Ltda. 15,641 15,641 15,641 15,641 Other 807 807 91,523 139,504 3,043,951 3,405,273
Goodwill is based on the expected future profitability of the investments.
(e) Impairment testing of intangibles
In most cases, the assets were tested considering the fair value model, except for assets in which the value in use was higher than the fair value. In the cases in which the value in use was used, the growth rates used in the projections were between 0.0% and 1.0%, and the cash flow estimates were discounted at rates that varied between 8.9% and 14.3%, considering the weighted average cost of capital (“WACC”) and the country of origin of each CGUs.
The consolidated losses due to the impairment of intangible assets and goodwill, as at December 31, 2017, amounted to R$ 43,276 (December 31, 2016 - R$ 90,661), recorded under “Other operating income (expenses), net” (Note 29).
The impairment adjustment balance on intangible assets refers mainly to: a) goodwill of the investees of Companhia de Cimento Ribeirão Grande (merged into VCSA) amounting to R$ 47,174 and Seropédica (merged into VCSA) amounting to R$ 807; b) reversal of impairment of R$ 2,550 in Barcarena and R$ 2,174 of VCEAA.
67 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
19 Borrowings
(a) Accounting policies
Borrowings are recognized initially at fair value, net of transaction costs incurred, and subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the total amount payable is recognized in the statement of income over the period of the borrowings using the effective interest rate method.
Borrowing costs directly related to the acquisition, construction or production of a qualifying asset that requires a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset when it is probable that future economic benefits associated with the item will flow to the Company and costs can be measured reliably. The other borrowing costs are recognized as finance expense in the period in which they are incurred.
68 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Analysis and fair value
Parent company Current Non-current Total Fair value Type Average annual cost (i) 2017 2016 2017 2016 2017 2016 2017 2016 In local currency Debentures (ii) (iii) 119.92% CDI 778.555 241.845 2.383.748 3.060.292 3.162.303 3.302.137 3.226.228 3.367.692 BNDES (ii) 3.90% Fixed BRL / TJLP + 2.63% 207.572 207.801 44.893 248.907 252.465 456.708 255.347 437.731 FINAME 4.70% Fixed BRL 18.365 23.734 71.796 89.655 90.161 113.389 80.293 93.390 Other 129 1.258 889 1.258 1.018 1.254 716 1.004.492 473.509 2.501.695 3.399.743 3.506.187 3.873.252 3.563.122 3.899.529
In foreign currency Eurobonds - USD 7.25% Fixed USD 65.845 64.882 3.805.854 3.749.595 3.871.699 3.814.477 4.200.601 3.543.868 Eurobonds - EUR (iv) 3.44% Fixed EUR 36.665 653.584 2.246.361 1.938.536 2.283.026 2.592.120 2.414.946 2.563.954 Resolution 4131 loans (iii) (v) (vi) 3.10% Fixed USD 168.055 4.770 1.937.348 168.055 1.942.118 168.026 1.782.550 BNDES UMBNDES + 2.46% 79.801 69.638 14.422 92.520 94.223 162.158 94.357 155.081 Development agency (iii) 126.445 126.445 88.460 350.366 919.319 6.066.637 7.717.999 6.417.003 8.637.318 6.877.930 8.133.913
1.354.858 1.392.828 8.568.332 11.117.742 9.923.190 12.510.570 10.441.052 12.033.442
Interest on borrowings 198.485 221.190 Current portion of long-term borrowings (principal) 1.156.373 1.171.638 1.354.858 1.392.828
69 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated Current Non-current Total Fair value Type Average annual cost (i) 2017 2016 2017 2016 2017 2016 2017 2016 In local currency Debentures (ii) (iii) 119.92% CDI 778.555 241.845 2.383.748 3.060.292 3.162.303 3.302.137 3.226.228 3.367.692 BNDES 3.92% Fixed BRL / TJLP + 2.60% / SELIC + 2.52% 252.354 238.128 139.349 308.533 391.703 546.661 384.901 518.630 Development agency 6.95% Fixed BRL 24.248 22.825 142.436 165.921 166.684 188.746 157.550 162.745 FINAME 4.80% Fixed BRL 20.170 26.031 80.782 100.438 100.952 126.469 89.932 104.142 Other 12.821 10.819 10.543 14.532 23.364 25.351 20.544 19.622 1.088.148 539.648 2.756.858 3.649.716 3.845.006 4.189.364 3.879.155 4.172.831
In foreign currency Eurobonds - USD 6.90% Fixed USD 101.981 83.770 5.739.657 5.650.445 5.841.638 5.734.215 6.295.830 5.431.938 Eurobonds - EUR (iv) 3.44% Fixed EUR 36.665 25.594 2.246.361 1.938.536 2.283.026 1.964.130 2.414.946 1.953.997 Syndicated loans/Bilateral Euribor 6M + 2.01% / Euribor 3M + 2.00% / 6.00% Fixed BOB / agreements 2.32% Fixed EUR / 3.54% Fixed TND / 14.79% Fixed TRY 123.419 37.698 1.192.353 1.234.236 1.315.772 1.271.934 1.319.957 1.416.176 Resolution 4131 loans (iii) (v) (vi) 3.10% Fixed BRL 168.055 4.770 1.937.348 168.055 1.942.118 168.026 1.782.550 BNDES UMBNDES + 2.45% 87.030 80.433 14.421 99.618 101.451 180.051 101.632 172.602 Development agency (iii) 126.445 126.445 88.460 Working capital 9.25% Fixed INR 50.104 46.087 50.104 46.087 50.104 46.087 Other 10.506 7.719 17.849 18.318 28.355 26.037 28.355 22.693 577.760 412.516 9.210.641 10.878.501 9.788.401 11.291.017 10.378.850 10.914.503
1.665.908 952.164 11.967.499 14.528.217 13.633.407 15.480.381 14.258.005 15.087.334
Interest on borrowings 253.560 246.493 Current portion of long-term borrowings (principal) 1.362.634 659.595 Short-term borrowings (principal) 49.714 46.076 1.665.908 952.164
BNDES – Brazilian Economic and Social Development Bank. UMBNDES – Monetary unit of the BNDES, reflecting the weighted basket of currencies of foreign currency debt obligations. As at December 31, 2017, the basket consisted of 99.60% US Dollars. CDI – Interbank Deposit Certificate FINAME – Financing of new machinery and equipment manufactured in Brazil with subsidized rates. LIBOR – London Interbank Offered Rate. TJLP – Long-Term Interest Rate set by the National Monetary Council, the TJLP is the basic cost of financing of the BNDES. EURIBOR – Euro Interbank Offered Rate. BRL – Reais. BOB – Bolivianos. EUR – Euro. INR – Indian rupee. USD – US Dollar TRY – Turkish lira. TND – Tunisian dinar.
70 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(i) The average annual costs are presented only for the most relevant agreements regarding the total debt amount.
(ii) For December 31, 2017, the current liabilities comprised R$ 700,000, R$ 160,675 and R$ 234,883 related to early settlement of debentures, borrowings under Resolution 4131 and borrowings from BNDES, respectively, that occurred in January 2018, as described in Notes 35 (b), (d) and (e)
(iii) For December 31, 2016, current liabilities comprised R$ 150,000 and R$ 121,983 related to early settlement of debentures and development agency loan, respectively, that occurred in January 2017.
(iv) In 2016, the consolidated balance of this type of loan was lower than in the parent company, due to the repurchase of these bonds by the subsidiary VCEAA, which was eliminated in the Company’s consolidation process, as described in Note 34 (b) and (c) to the annual financial statements at December 2016.
(v) Borrowings under Resolution 4131 include interest rate and currency swaps (derivative financial instruments) that exchange floating LIBOR and fixed rates for floating CDI rates, and US Dollars for Brazilian reais, resulting in a final weighted average cost of 101.90 % p.a. of the CDI rate. These swaps were contracted with financial institutions along with the borrowing (debt financing in USD + swap to BRL in % of the CDI). The terms and conditions of the borrowing are equivalent to the respective derivative, such that the economic result is a debt a s a percentage of the CDI denominated in BRL. The difference in measurement between the two instruments (borrowing at amortized cost versus derivative at fair value) creates an “accounting mismatch” on the Company’s result, and to eliminate this effect, the transactions entered into as from August 2015 were designated at "fair value". The effect of this designation is the measurement of the debt as at fair value through profit or loss, as mentioned in Note 30.
(vi) The change in the balance refers mainly to the early settlement of borrowings under Resolution 4131, made by the Company in 2017, as mentioned in Note 19 (h) (v, vii, viii, ix, x and xi).
71 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Maturity profile
Parent company 2028 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 onwards Total In local currency Debentures (i) 778,555 (3,456) (3,456) (3,456) (3,456) 1,698,031 699,541 3,162,303 BNDES 207,572 44,893 252,465 FINAME 18,365 16,873 16,028 15,485 14,050 7,247 2,113 90,161 Other 1,258 1,258 1,004,492 59,568 12,572 12,029 10,594 1,705,278 701,654 3,506,187
% amortized per year 28.65% 1.70% 0.36% 0.34% 0.30% 48.64% 20.01% 100.00%
In foreign currency Eurobonds - USD 65,845 3,805,854 3,871,699 Eurobonds - EUR (i) 36,665 (5,441) (5,441) 846,274 1,410,969 2,283,026 Resolution 4131 loans 168,055 168,055 BNDES 79,801 13,312 1,110 94,223 350,366 7,871 (4,331) 846,274 1,410,969 3,805,854 6,417,003
% amortized per year 5.46% 0.12% -0.07% 13.19% 21.99% 59.31% 100.00%
1,354,858 67,439 8,241 858,303 1,421,563 1,705,278 701,654 3,805,854 9,923,190
% amortized per year 13.65% 0.68% 0.08% 8.65% 14.33% 17.18% 7.07% 0.00% 0.00% 0.00% 38.36% 100.00%
72 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
Consolidated 2028 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 onwards Total In local currency Debentures (i) 778,555 (3,456) (3,456) (3,456) (3,456) 1,698,031 699,541 3,162,303 BNDES 252,354 69,010 24,117 24,117 22,105 391,703 Development agency 24,248 23,485 23,485 23,485 23,485 23,485 23,485 1,526 166,684 FINAME 20,170 18,628 17,783 17,220 15,648 8,699 2,804 100,952 Other 12,821 7,028 3,515 23,364 1,088,148 114,695 65,444 61,366 57,782 1,730,215 725,830 1,526 3,845,006
% amortized per year 28.30% 2.98% 1.70% 1.60% 1.50% 45.00% 18.88% 0.04% 100.00%
In foreign currency Eurobonds - USD (i) 101,981 (4,653) 314,558 (4,218) (4,483) (4,766) (5,066) (5,385) (5,724) 1,653,540 3,805,854 5,841,638 Eurobonds - EUR (i) 36,665 (5,441) (5,441) 846,274 1,410,969 2,283,026 Resolution 4131 loans 168,055 168,055 Syndicated loans/bilateral agreements 123,419 261,026 275,166 258,263 145,036 140,278 56,292 56,292 1,315,772 BNDES 87,030 13,312 1,109 101,451 Working capital 50,104 50,104 Other 10,506 3,921 2,251 2,126 1,293 1,392 5,191 1,675 28,355 577,760 268,165 587,643 1,102,445 1,552,815 136,904 56,417 52,582 (5,724) 1,653,540 3,805,854 9,788,401
% amortized per year 5.90% 2.74% 6.00% 11.26% 15.86% 1.40% 0.58% 0.54% -0.06% 16.89% 38.89% 100.00%
1,665,908 382,860 653,087 1,163,811 1,610,597 1,867,119 782,247 54,108 (5,724) 1,653,540 3,805,854 13,633,407
% amortized per year 12.22% 2.81% 4.79% 8.54% 11.81% 13 .70% 5.74% 0.40% -0.04% 12.13% 27.90% 100.00%
(i) The negative balances refer to funding costs that are amortized on a straight-line basis.
73 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Changes
Parent company Consolidated 2017 2016 2017 2016 Balance at the beginning of the year 12,510,570 17,538,504 15,480,381 19,496,620 New borrowings 500,678 798,900 640,680 4,317,683 Exchange variations 354,120 (1,999,187) 480,943 (2,399,199) Interest accruals 830,823 1,071,362 1,051,640 1,200,461 Interest paid (856,519) (1,108,547) (1,047,887) (1,228,669) Amortization of funding costs, net of additions 15,255 10,185 19,370 (33,380) Discounts on repurchase of bonds (Note 30) (171,160) (171,160) Fair value adjustment - Resolution 4131 (Note 30) 19,228 (26,247) 19,228 (26,247) Payments (i) (3,450,965) (3,603,240) (3,010,948) (5,675,728) Balance at the end of the year 9,923,190 12,510,570 13,633,407 15,480,381
(i) The parent company balance comprises settlements of bonds without cash effect, in the amount of R$ 613,491 (December 31, 2017 – R$ 835,377), as described in Note 1.1 (a).
(e) Analysis by currency
Parent company Current Non-current Total 2017 2016 2017 2016 2017 2016 US Dollar 239.437 201.003 3.805.854 5.692.381 4.045.291 5.893.384 Real 1.004.492 473.509 2.501.695 3.399.743 3.506.187 3.873.252 Euro 36.665 653.584 2.246.361 1.938.536 2.283.026 2.592.120 Currency basket 74.264 64.732 14.422 87.082 88.686 151.814 1.354.858 1.392.828 8.568.332 11.117.742 9.923.190 12.510.570
Consolidated Current Non-current Total 2017 2016 2017 2016 2017 2016 US Dollar 277.503 222.076 5.739.657 7.595.127 6.017.160 7.817.203 Real 1.088.148 539.648 2.756.858 3.649.716 3.845.006 4.189.364 Euro 109.737 31.927 2.824.597 2.500.253 2.934.334 2.532.180 Boliviano 1.328 2.627 394.719 391.528 396.047 394.155 Turkish lira 47.029 26.513 220.070 279.122 267.099 305.635 Currency basket 79.562 73.342 14.420 92.284 93.982 165.626 Other 62.601 56.031 17.178 20.187 79.779 76.218 1.665.908 952.164 11.967.499 14.528.217 13.633.407 15.480.381
74 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(f) Analysis by index
Parent company Current Non-current Total 2017 2016 2017 2016 2017 2016 In local currency CDI 778,555 241,845 2,383,748 3,060,292 3,162,303 3,302,137 TJLP 202,504 190,054 44,893 243,848 247,397 433,902 Fixed rate 23,433 41,610 73,054 95,603 96,487 137,213 1,004,492 473,509 2,501,695 3,399,743 3,506,187 3,873,252
In foreign currency Fixed rate 270,565 718,317 6,052,215 5,845,984 6,322,780 6,564,301 LIBOR 131,364 1,779,495 1,910,859 UMBNDES 79,801 69,638 14,422 92,520 94,223 162,158 350,366 919,319 6,066,637 7,717,999 6,417,003 8,637,318 1,354,858 1,392,828 8,568,332 11,117,742 9,923,190 12,510,570
Consolidated Current Non-current Total 2017 2016 2017 2016 2017 2016 In local currency CDI 778,555 241,845 2,383,748 3,060,292 3,162,303 3,302,137 TJLP 246,621 226,967 103,621 295,115 350,242 522,082 Fixed rate 51,430 70,488 224,475 274,250 275,905 344,738 BNDES SELIC 11,542 348 45,014 20,059 56,556 20,407 1,088,148 539,648 2,756,858 3,649,716 3,845,006 4,189,364
In foreign currency Fixed rate 451,824 195,333 8,981,377 8,780,960 9,433,201 8,976,293 LIBOR 131,364 1,779,495 1,910,859 UMBNDES 87,030 80,433 14,421 99,618 101,451 180,051 EURIBOR 38,906 5,386 214,843 218,428 253,749 223,814 577,760 412,516 9,210,641 10,878,501 9,788,401 11,291,017 1,665,908 952,164 11,967,499 14,528,217 13,633,407 15,480,381
(g) Guarantees
At December 31, 2017, R$ 4,566,387 (December 31, 2016 – R$ 4,943,449) of the balance of borrowings of the Company and its subsidiaries were collateralized by sureties from related parties, as shown in Note 14 (d), while R$ 220,721 (December 31, 2016 – R$ 167,522) were collateralized by liens on property, plant and equipment items, and R$ 166,683 by bank guarantee (December 31, 2016 - R$ 188,746).
(h) New borrowings and repayments
Through new borrowings and prepayment of certain debts, the Company seeks to extend the average maturity of its debt and to balance its currency exposure of borrowings to its cash generation in those currencies.
The main borrowings and repayments in 2017 were as follows:
(i) On January 10, 2017, the Company issued its ninth public offer of debentures with restricted placement efforts, in the amount of R$ 500,000 at the cost of 119.9% of the CDI and with maturity on January 10, 2022.
(ii) On January 30, 2017, the Company made an early repayment of the third tranche of the seventh public issue of debentures with restricted placement efforts, in the amount of R$ 150,000 and with maturity on September 1, 2019.
75 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(iii) On January 30, 2017, the Company prepaid borrowings from the development agency EKF, in the amount of USD 38,389 (R$ 121,981). The agreements had semi-annual repayment, with final maturity on January 30, 2023.
(iv) On August 3, 2017, the Company early repaid an R$ 240,000 installment of its third public issue of debentures, with maturity on February 14, 2020.
(v) On August 3, 2017, the Company prepaid the borrowing under Resolution 4131 in the amount of USD 50,000 (R$ 165,570), entered into on September 2, 2015, with maturity on September 11, 2019. The swap agreement related to such borrowing was also settled.
(vi) On November 6 2017, the Company redeemed in advance the total outstanding amount of the third public issue of debentures. The total amount of the principal on the redemption date amounted to R$ 240,000 and matured on February 14, 2021.
(vii) On November 6 2017, the Company prepaid the borrowing under Resolution 4131 in the amount of USD 100,000 (R$ 327,900), issued on February 18, 2016, with original maturity on February 26, 2020. The swap agreement related to such borrowing was also settled.
(viii) On November 22, 2017, the Company prepaid the borrowing under Resolution 4131 in the amount of USD 100,000 (R$ 325,000), entered into on October 24, 2014 and amended on February 25, 2016, with maturity on February 25, 2021. The swap agreement related to such borrowing was also settled.
(ix) On December 1, 2017, the Company prepaid the borrowing under Resolution 4131 in the amount of USD 50,000 (R$ 163,625), entered into on August 11, 2015, with maturity on August 26, 2020. The swap agreement related to such borrowing was also settled.
(x) On December 14, 2017, the Company prepaid the borrowing under Resolution 4131 in the amount of USD 50,000 (R$ 165,500), entered into on August 10, 2015, with maturity on August 26, 2019. The swap agreement related to such borrowing was also settled.
(xi) On December 15, 2017, the Company prepaid the borrowing under Resolution 4131 in the amount of USD 200,000 (R$ 662,200), entered into on October 24, 2014 and amended on September 22, 2015, with final maturity on October 28, 2020. The swap agreement related to such borrowing was also settled.
(i) Revolving Credit Facility
Aiming to improve its financial and liquidity management, in June 2015 the Company and its subsidiaries entered into a revolving credit facility with a syndicate of banks, in the amount of USD 700 million and with maturity in June 2020. This credit facility is available to the Company, and can be used at any time. Until December 31, 2017, the Company had not used such credit facility.
In addition, the subsidiary VCNA and some of its subsidiaries entered into a revolving credit facility with a syndicate of banks in October 2015, in the amount of USD 230 million and with maturity in October 2020. This credit facility is available to the Company, and can be used at any time. At December 31, 2017, the full amount was available for utilization.
76 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
20 Confirming payables transactions
The Company and its subsidiaries entered into agreements with financial institutions to allow suppliers in domestic and foreign markets to advance their receivables. In this transaction, suppliers transfer the right to receive the trade receivables related to sales of goods to financial institutions.
Parent company Consolidated Confirming payables Deadline 2017 2016 2017 2016 Payables - Local customers up to 180 days 267,673 318,227 309,242 361,829 Payables - Foreign customers up to 180 days 334,289 239,407 267,673 318,227 643,531 601,236
21 Current and deferred income tax and social contribution
(a) Accounting policies
The income tax and social contribution benefit or expense for the period comprise current and deferred taxes. These taxes are calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the entities operate and generate taxable income and are recognized in the statement of income, except to the extent that they relate to items recognized in directly in stockholders’ equity.
The current income tax and social contribution are presented net, separated by taxpaying entity, in liabilities when there are amounts payable, or in assets when the amounts prepaid exceed the total amount due on the reporting date.
Deferred tax liabilities are recognized on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred taxes and contributions are determined based on the rates in effect at the reporting date and that should be applied when they are realized or settled.
The Company also recognizes deferred income tax and social contribution assets on recoverable balances of tax losses. Deferred tax assets are periodically analyzed to check their recoverability, considering the historical profits generated and the estimated future taxable profit, based on projections of future results performed under internal criteria and future economic scenarios which may change.
(b) Critical accounting estimates and judgments
The Company and its subsidiaries are subject to income taxes in all countries in which they operate. The provision for deferred IRPJ and CSLL is calculated individually by entity based on the tax rates and tax laws in each location at the end of the reporting period. The Company also recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. When the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will have an impact on the current and deferred tax assets and liabilities in the period in which such determination is made.
77 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Reconciliation of income tax and social contribution expenses
The income tax and social contribution amounts presented in the statement of income for the years ended December 31 are reconciled with their Brazilian statutory rates as follows:
Parent company Consolidated 2017 2016 2017 2016 Profit (loss) before taxes (918,764) 279,228 (525,789) 651,406 Standard rate 34% 34% 34% 34% Income tax and social contribution at standard rates 312,380 (94,938) 178,768 (221,478) Adjustments for the calculation of income tax and social contribution at effective rate Tax credit on income tax paid abroad IN 1,520/2014 162,529 183,108 162,529 183,108 Equity in the results of investees 311,825 271,376 53,422 40,994 Donations and grants for investment 4,347 11,637 23,960 33,160 Taxation on the reversal of tax incentive reserves (37,718) (37,718) Tax incentives 14,312 22,692 Difference in tax rate for subsidiaries abroad 111,288 77,406 Realization of other comprehensive income on disposal of investments - China (Note 1.1 (d)) 24,905 Realization of other comprehensive income on disposal of investments - Lux Cem (Note 1.1 (b)) 1,175 1,175 Write-off of goodwill on sale of China operations (Note 1 (d)) (77,686) Goodwill impairment without deferred constitution (478) (478) Tax provision (20,113) (20,113) Tax losses without constitution of deferred tax (536) (28,082) Profit earned abroad addition IN 1,520/2014 (288,123) (292,161) (288,123) (292,161) Deferral of exchange variation - effect on the income statement (22,423) (22,423) IRPJ and CSLL payable related to PERT (Note 1.1 (g)) (56,020) (56,020) Non-deductible fines on State PERT and REFIS (51,545) (51,545) Dividends received (59,520) Write-off of deferred taxes related to the sale of the Florida and California operations (91,029) Other permanent additions, net (26,182) 11,727 (70,728) (14,949) Income tax and social contribution 236,873 90,749 (152,779) (199,310) Current 86,897 182,957 (163,608) (81,745) Deferred 149,976 (92,208) 10,829 (117,565) Income tax and social contribution in the income statement 236,873 90,749 (152,779) (199,310)
Effective rate - % 25.78 (32.50) (29.06) 30.60
78 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Analysis of deferred tax balances
Parent company Consolidated 2017 2016 2017 2016 Tax credits on tax losses 473,730 265,381 566,819 689,104
Tax credits on temporary differences Deferred exchange gains - hedge of net investment 570,641 470,450 570,641 470,450 Deferred losses on derivative agreements 28,078 149,879 29,448 150,510 Use of public assets - "UBP" 85,557 88,511 Provision 124,077 98,457 146,854 155,921 Asset impairment provision 19,986 20,822 31,977 57,612 Eletricity charges provision 44,758 35,407 45,641 35,407 Provision for profit sharing, bonus and collective bargaining agreement 37,717 33,003 43,790 43,229 Provision for inventories losses 17,890 21,327 27,139 29,202 Allowance for doubtful accounts 19,268 15,583 31,092 23,286 Asset retirement obligation 15,862 12,085 24,441 20,516 Fair value adjustments - Resolution 4131 883 19,354 Provision for taxes under litigation with judicial deposits 511 40,243 662 64,178 Other credits 2,389 18,993 48,400 59,327
Tax debts on temporary differences Adjustments to useful lives of property, plant and equipment (depreciation) (423,826) (344,923) (687,682) (558,194) Amortization of goodwill (288,912) (291,366) (354,416) (327,682) Excess purchase price allocated to assets (15,019) (19,563) (279,818) (262,207) Interest capitalized (46,494) (52,109) (76,659) (82,201) Deferred exchange variation - effect on income (13,795) (20,986) (13,795) (20,986) Adjustment to present value (30,923) (31,249) (34,374) (34,936) Deferred CSLL credit on depreciation (Law 11,051/04) (7,903) Fair value adjustments - Resolution 4131 (5,574) (5,574) Other debts (49,802) (71,296) Net 536,821 415,860 175,269 516,274 Net deferred tax assets of the same legal entity 536,821 415,860 727,636 1,012,585 Net deferred tax liabilities of the same legal entity (552,367) (496,311)
(e) Effects of deferred income tax and social contribution on net income and comprehensive income
Parent company Consolidated 2017 2016 2017 2016 Balance at the beginning of the year 415,860 1,025,182 516,274 1,187,998 Effect on income 149,976 (92,208) 10,829 (117,565) Effect on income from discontinued operations (1,667) Effect on other components of comprehensive income - hedge accounting (Note 25 (d)) 93,595 (517,115) 61,477 (517,115) Effect of exchange variations on other components of comprehensive income (7,704) (33,552) Settlement of PERT (Note 1.1 (g)) (122,610) (125,604) Effect of deferred tax on sale of China operations (45,287) Effect of deferred tax on sale of Florida operations (220,376) Effect of deferred tax on sale of Bio Bio (15,911) Other 1 1,571 (1,825) Balance at the end of the year 536,821 415,860 175,269 516,274
79 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(f) Realization of deferred income tax and social contribution on tax losses
Credits related to tax losses are expected to be realized in accordance with the following schedule, based on management’s projections of future taxable profit.
2017 Parent company Consolidated Next 12 months 51,175 51,175 2019 73,128 74,250 2020 103,347 116,754 2021 58,648 62,722 2022 onwards 187,432 261,918 473,730 566,819
As at December 31, 2017, the Company had income tax and social contribution losses in various countries where it has activities, in the consolidated amount of R$ 2,518,836 (December 31, 2016 – R$ 2,912,533).
The balances of income tax and social contribution losses are distributed between the Company and its subsidiaries as follows:
Consolidated North Europe, Asia Latin Year Brazil America and Africa America Total 2017 1,537,182 777,940 203,291 423 2,518,836 2016 863,135 1,774,181 275,142 75 2,912,533
22 Provision
(a) Accounting policies
(i) Provision for legal claims relating to tax, civil, labor and environmental matters
The Company and its subsidiaries are parties to ongoing tax, civil, labor and environmental lawsuits and are contesting these matters both at the administrative and judicial levels, backed by judicial deposits, when applicable.
Provision for legal claims is recognized when: (i) the Company has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount can be reliably estimated. The losses classified as possible are not recorded in the balance sheet, but are disclosed in the explanatory notes. The contingencies for which losses are classified as remote are not provisioned nor disclosed, except when, due to the visibility of the process, the Company considers its disclosure justified. The classification of losses as possible, probable or remote is supported by the advice of the Company's legal counsel.
Provision is measured at the present value of the expenditures expected to be required to settle the obligation that reflects current market assessments of the time value of money and the risks specific to the obligation, and these variations are recognized in the statement of income. Provision does not include future operating losses.
The labor provision is recognized based on the historical average settlement amounts of the lawsuits in the last 24 months.
80 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(ii) Asset retirement obligations
The measurement of asset retirement obligations involves judgment on various assumptions. From an environmental point of view, this relates to future obligations to restore/recover the environment to conditions ecologically similar to those existing at the moment when the project was initiated or to take compensatory measures, agreed with government agencies, due to the impossibility of return to these pre-existing conditions. These obligations arise from the environmental degradation of the occupied area, object of the operation, or from formal commitments assumed with the environmental agency, under which the degradation must be compensated. The retirement of an asset occurs when it is permanently retired, through stoppage, sale or disposal.
Obligations consist mainly of costs associated with the termination of activities. As asset retirement obligations are long-term obligations, they are adjusted to present value and using a discount rate. The asset retirement cost, equivalent to the present value of the obligation (liability), is capitalized as part of the carrying amount of the asset, which is depreciated over its useful life.
The interest rate used to discount the Asset Retirement Obligation to its present value is estimated through the American market free risk rate (Treasury USA 10y Yield) adding the country risk and inflation differential. The liability recorded is periodically updated based on these discount rates, which are annually reviewed by the Company.
(iii) Judicial deposits
Judicial deposits are monetarily restated and presented net in "Provision" when there is a corresponding provision. The judicial deposits without corresponding provision are presented in non- current assets.
(b) Critical accounting estimates and judgments
(i) Provision
The Company is a party to ongoing tax, civil, labor and environmental lawsuits, which are pending at different court levels. Provision is recognized to cover potential losses arising from ongoing lawsuits, and is established and updated based on management evaluation, supported by the opinions of external legal counsel, and requires a high level of judgment.
(ii) Asset retirement obligations
The Company recognizes an obligation at the fair value of the asset retirement when it is probable that cash outflow will be required, against the respective intangible assets. The Company considers the use of accounting estimates related to the recovery of degraded areas and the costs to close a mine as a critical accounting practice, since it involves significant provision amounts and these estimates involve various assumptions such as interest rates, inflation and the useful life of the asset, considering the current depletion stage, the costs involved and the dates established for the depletion of each mine. These estimates are annually reviewed by the Company.
The interest rate used in 2017 was 8.08% per year (December 31, 2016 - 8.47 % per year).
81 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Analysis and changes Parent company 2017 2016 Legal claims ARO (i) Tax Civil Labor Environmental Total Total Balance at the beginning of the year 97.689 270.311 108.445 11.956 488.401 462.004 Additions (ii) 320 221.916 62.529 21.789 1.400 307.954 96.866 Reversals (iii) (348.646) (7.303) (320) (166) (356.435) (72.593) Judicial deposits, net of write-offs (iii) 311.339 (1.126) (21.469) (17) 288.727 (38.284) Settlements with judicial deposits (4) (17) (21) (1.158) Settlements with cash effect (665) (21.222) (8.722) (15) (59) (30.683) (11.127) Debts settled in PERT (Note 1.1 (g)) (114.610) (114.610) Present value adjustment 8.256 8.256 8.031 Interest rate update 9.822 9.822 (25.695) Interest and indexation 133.133 20.664 15 712 154.524 70.357 Balance at the end of the year 115.422 452.217 174.470 13.826 755.935 488.401
Consolidated 2017 2016 Legal claims ARO (i) Tax Civil Labor Environmental Total Total Balance at the beginning of the year 259,630 418,254 151,622 296 14,131 843,933 885,349 Additions (ii) 18,702 243,823 67,353 25,674 1,600 357,152 127,924 Reversals (iii) (1,842) (521,546) (10,336) (379) (166) (534,269) (113,224) Judicial deposits, net of write-offs (iii) 433,783 (1,355) (24,926) (17) 407,485 (47,589) Settlements with judicial deposits (6) (214) (1) (22 1) (2,795) Settlements with cash effect (4,711) (33,144) (33,929) (175) (59) (72,018) (41,423) Debts settled in PERT (Note 1.1 (g)) (119,077) (119,077) Write-off of liabilities realted to sale of Chin a operations (Note 1.1 (d)) (3,949) (3,949) Write-off (6,807) (6,807) Interest rate update 12,354 1 2,354 (37,279) Interest and indexation 146,018 23,611 21 855 170,505 103,124 Exchange variation 11,379 162 132 11,673 (44,463) Present value adjustment 20,902 2 0,902 15,793 Revision of estimated cash flow (1,485) Balance at the end of the year 305,658 568,267 196,884 510 16,344 1,087,663 843,932
(i) Asset Retirement Obligation.
82 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(ii) In the first quarter of 2017, the Company made a provision of R$ 43,000 related to expenses associated with the civil lawsuits "Civil class action - Cartel" and "Administrative investigations initiated by SDE (Economic Law Secretariat)", classified as possible losses by the Company, as described in Note 22 (e.1).
(iii) In the second quarter of 2017, the Company and its subsidiaries reversed the provision related to the exclusion of ICMS from the calculation basis of PIS and COFINS, for which there were judicial deposits constituted. This reversal was based on the conclusion of the judgment of general repercussion of the STF, which decided on the unconstitutionality of the ICMS inclusion in the referred tax base, and is supported by the opinion of the legal advisors of the Company. The amounts of R$ 323,583 and R$ 450,652 were reversed in the parent company and consolidated, respectively, of which R$ 191,672 and R$ 266,197 refer to the principal recognized in “Other operating income (expenses), net” (Note 29) and R$ 131,911 and R$ 184,455 refer to the indexation charges recognized in “Financial results, net” (Note 30). The income tax and social contribution on this reversal totaled R$ 110,018 and R$ 153,222, and the net effect of these amounts totaled R$ 213,565 and R$ 297,430 in the parent company and consolidated, respectively. Accordingly, the Company and its subsidiaries reclassified the related judicial deposits to non-current assets. (d) Provision for tax, civil, labor, environmental contingencies and outstanding judicial deposits
Parent company 2017 Judicial Outstanding judicial Judicial Outstanding judicial deposits Provision Total, net deposits (i) deposits Provision Total, net deposits2016 (i) Tax (77,685) 529,902 452,217 441,692 (389,024) 659,335 270,311 101,759 Civil (12,746) 187,216 174,470 7,122 (11,620) 120,065 108,445 5,289 Labor (53,409) 53,409 20,815 (31,940) 31,940 25,421 Environmental (503) 14,329 13,826 (486) 12,442 11,956 (144,343) 784,856 640,513 469,629 (433,070) 823,782 390,712 132,469
Judicial Outstanding judicial Judicial OutstandingConsolidated judicial deposits Provision Total, net deposits2017 (i) deposits Provision Total, net deposits2016 (i) Tax (95,920) 664,187 568,267 635,710 (529,703) 947,958 418,255 159,551 Civil (16,191) 213,075 196,884 7,632 (14,836) 166,457 151,621 6,040 Labor (66,103) 66,613 510 33,118 (41,177) 41,473 296 39,070 Environmental (503) 16,847 16,344 (486) 14,617 14,131 (178,717) 960,722 782,005 676,460 (586,202) 1,170,505 584,303 204,661
(i) The Company has judicial deposits related to lawsuits with expectation of loss classified as possible or remote, and for which the recognition of a provision is not considered necessary by the Company, based on legal advice.
83 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(e) Comments on provision with a likelihood of loss considered probable
(e.1) Tax provision
These refer mainly to disputes concerning federal, state and municipal taxes. The main tax lawsuits refer to the collection of ICMS, PIS, COFINS, IRPJ and CSLL.
(i) Financial Compensation for the Exploration of Mineral Resources - CFEM
The Company has various tax assessment notices issued by the National Department of Mineral Production for alleged non-payment or underpayment of Financial Compensation for the Exploration of Mineral Resources royalties for the periods 1991 to 2015. As at December 31, 2017, the amounts under this contingency totaled R$ 555,897 and the Company believes that R$ 99,188 represents probable losses, with this amount recorded as a provision, and R$ 456,709 represents possible losses. Currently, the lawsuits are at the administrative or judicial levels.
(ii) Exclusion of ICMS and ISS from the calculation basis of PIS and COFINS
The Company and its subsidiaries filed lawsuits to exclude the ICMS and ISSQN taxes from the PIS and COFINS taxable base, and for a certain period the Company elected to make deposits with the courts for the amount under litigation. At December 31, 2016, the deposits totaled R$ 468,110, of which only the lawsuits challenging the exclusion of ISSQN are provisioned, amounting to R$ 4,370. The provision for lawsuits challenging the exclusion of ICMS were reversed, as mentioned in Note 22 (c) (iii).
(e.2) Civil provision
This refers mainly to disputes on civil lawsuits of the administrative or judicial nature. These contingencies arise from lawsuits with different legal nature, mainly claims for compensation for property damage and pain and suffering, collection and execution, and administrative claims.
(e.3) Labor provision
The Company and its subsidiaries are parties to 3,353 labor lawsuits as at December 31, 2017 (December 31, 2016 – 3,190 lawsuits), filed by former employees, third parties and labor unions mostly claiming the payment of indemnities on dismissals, health hazard premiums and hazardous duty premiums, overtime, and commuting hours, as well as indemnity claims by former employees and third parties based on alleged occupational illnesses, work accidents, property damage and pain and suffering, in ordinary courts under Constitutional Amendment 45 and normative clauses. These claims also include administrative labor proceedings mainly involving legal quotas, working hours and regulatory standards.
(e.4) Environmental provision
The Company and its subsidiaries are subject to laws and regulations in the various countries in which they operate. The Company has established policies and procedures for complying with environmental laws.
The Company performs analyses on a regular basis to identify environmental legal risks so as to ensure that the systems in place are adequate to manage these risks.
Moreover, the environmental litigation of the Company and its subsidiaries consist basically of civil public actions in order to assess the responsibilities in the pursuit of the Company’s activities, including matters involving the environmental licensing for manufacturing units, tax assessment notices issued by the appropriate environmental agencies, as well as indemnity actions for alleged environmental impacts arising from the Company's activities.
84 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(f) Lawsuits with likelihood of loss considered possible
The Company is party to lawsuits with expectation of loss classified as possible, and for which the recognition of a provision is not considered necessary by management, based on legal advice.
Parent company Consolidated 2017 2016 2017 2016 Civil 6,283,993 6,191,201 6,792,674 6,446,293 Tax 3,857,410 2,589,009 4,819,376 3,467,207 Environmental 40,471 39,391 47,167 45,496 10,181,874 8,819,601 11,659,217 9,958,996
(f.1) Comments on contingent civil and tax lawsuits with likelihood of loss considered possible
Consolidated Nature of the lawsuits 2017 2016 Civil Civil class action – Cartel (i) 3,872,160 3,629,520 Administrative investigations by SDE (Secretariat of Economic Law) (ii) 1,994,065 1,905,304 Litigation with a transportation company in São Paulo (iii) 186,602 178,579 Tax Financial Compensation for the Exploration of Mineral Resources - "CFEM" (e.1 (i)) 456,709 427,766 Tax assessment notices - IRPJ / CSLL (iv) 1,775,328 643,268 IRPJ and CSLL – Profit earned abroad (v) 158,033 147,249 Tax assessment notice - ICMS (vi) 215,903 Other lawsuits 3,216,320 2,811,407 11,659,217 9,958,996
(i) Civil class action – Cartel
The Office of the Public Prosecutor of the State of Rio Grande do Norte filed a civil class action against the Company, together with eight other defendants, including several of Brazil's largest cement manufacturers, alleging the formation of a cartel, demanding that: (1) the defendants make an indemnity payment, jointly, amounting to R$ 5,600,000, in favor of the civil class action, due to pain and suffering and property collective damage; (2) the defendants make a payment of 10.0% of the total amount paid by the customers for the acquisition of cement or concrete under the brands owned by the defendants, during the period from 2002 to 2006, due to individual consumer damages; (3) that the defendants pay the following penalties according to Article 23 Section 1 and Article 24 of Law 8,884/94: (i) in addition to the payment mentioned in item (1) above, a fine ranging from 1.0% to 30.0% of annual gross revenues relating to the fiscal year immediately preceding the year in which the alleged violation occurred, but not less than the monetary advantage acquired; and (ii) a prohibition, for a period not shorter than five years, from obtaining financing from governmental financial institutions or from participating in bidding processes conducted by the federal, state or municipal governments and their entities. In view of the total number of the claims in item (1) above in the amount of R$ 5,600,000 and because of the claims alleging joint liability, VCSA estimated that, based on its market share, its share of the liability would be approximately R$ 2,400,000. However, there can be no assurance that this apportionment would prevail and that VCSA will not be held liable for a different proportion, which may be larger, or for the total number of these claims. Additionally, there can be no assurance that VCSA will not be required to pay other amounts as compensation for damages caused to consumers as mentioned in item (2) above and/or the fine mentioned in item (3) above.
There has been not been yet a significant decision on the lawsuit. The likelihood of loss in this matter is considered possible, and the Company has not recorded any provision for this claim. As at December 31, 2017, the restated balance of the contingency was R$ 3,872,160.
85 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(ii) Administrative Proceedings by SDE, currently CADE (Brazilian antitrust agency)
In 2006 the SDE initiated administrative proceedings against the largest Brazilian cement companies, including VCSA, alleging that the large cement companies would have breached Brazilian antitrust laws, such as in terms of price fixing and the formation of a cartel. After the finding of facts, the CADE court judged the lawsuit, issuing the final terms of the judgment on July 29, 2015, applying several penalties to the companies.
The penalties imposed on VCSA include the payment of a fine of approximately R$ 1,565,646 and the obligation of VCSA to sell: (1) all its interests in other cement and concrete companies in Brazil, (2) 20% of its installed capacity of concrete services in Brazil, in relevant markets in which VCSA has more than one concrete plant (3) a specific cement asset that, in CADE’s opinion, was directly related to the alleged illegal ac of which VCSA is accused. Other non-monetary penalties were also imposed on VCSA, including: (1) the obligation to publish CADE’s decision in one of the five biggest Brazilian newspapers; (2) the prohibition from contracting with official financial institutions credit lines with financing conditions subsidized by public programs or resources provided by these institutions; and (3) the recommendation to the Federal Revenue that they restrict or limit some other benefits and tax incentives. As at December 31, 2017, the restated balance of the contingency was R$ 1,994,065.
In November 2015, VCSA filed an annulment action to cancel the decision issued at the administrative level or, at least, to reduce the applied penalties. The injunction was granted on November 24, 2015, suspending the effects of the decision issued by CADE at the administrative level, preventing CADE from demanding the fulfillment of the obligations and/or executing the penalties until judgment of the merit. CADE was summoned and filed its defense, while VCSA presented its reply in November 2016. Now, the settlement of the lawsuit is awaited. The Company classified the likelihood of loss on this lawsuit as possible.
During 2017, some construction companies and concrete producers filed lawsuits for indemnity claims against Votorantim Cimentos and other companies which were convicted by CADE, due to the alleged cartel in the cement and concrete markets, in summary claiming that the cartel caused economic and non-economic losses. In January 2018, the first sentence dismissing the merit of the indemnity claims was issued.
(iii) Litigation with a transportation company in São Paulo
In September 2003, a transportation company filed a claim against VCB (a company merged into the Company) seeking compensation for property damages amounting to R$84,200 and pain and suffering in an unspecified amount, alleging that the Company failed to honor two oral contracts. The transportation company argued that those breaches resulted in the discontinuation of the activities of its sales department and significant losses to its transportation department. The Company filed its response in September 2009, arguing that: (1) the transportation company’s statute of limitations had expired; (2) the Company did not change the general conditions of the agreement; and (3) the transportation company was unable to provide the contracted services, which resulted in its insolvency. In August 2011, the Court rejected the argument regarding the expiration of the statute of limitations and determined an expert examination, as requested by the parties. The expert examination was concluded and the report was presented. The parties filed their challenges to the report and the lawsuit was sent to the expert for his opinion. In June 2014, clarifications were provided by the expert. On June 24, 2014, the Company’s challenge was filed. In December 2014, the Company received a decision declaring the end of the fact-finding phase and requesting the parties to declare whether they would be interested in holding a conciliation hearing. In July 2016, the request was partially judged, sentencing Votorantim to pay R$ 400. In October 2016, Votorantim filed an appeal request. As at December 31, 2017, the restated balance of this contingency was R$ 186,602.
(iv) Tax assessment notices – IRPJ/CSLL
In December 2011, the Company received a tax assessment notice from the Brazilian Federal Revenue Office in the amount of R$ 184,797 for alleged non-payment or underpayment of IRPJ and CSLL relating
86 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
to the period from 2006 to 2010, due to: (i) amortization of goodwill supposedly incorrect; (ii) utilization of tax loss above the 30% limit permitted by the tax regulation (merger); and (iii) non-payment of IRPJ and CSLL obligations due on a monthly estimate basis. In March 2015, regarding the mandatory appeal and voluntary appeal filed with the Administrative Board of Tax Appeals, the board authorized the exclusion of the qualified and isolated fines and confirmed the decision regarding the reduction mentioned above. Such court decision denied the taxpayer’s special appeal.
At September 30, 2017, the restated amount was R$ 297,781 and the Company elected to include this case in the PERT (Note 1.1 (g)).
In December 2016, the Company was assessed by the Brazilian Federal Revenue Office in the historical amount of R$ 470,306 demanding the collection of IRPJ and CSLL relating to the period of 2011, due to the alleged undue deduction of operating expenses and costs. In January 2018, the Company became aware of the Lower Court decision from the Federal Revenue’s Judgment Office, which judged the appeal partially with grounds, reducing the lawsuit by approximately R$ 114,000. Currently, the Company is awaiting the trial of the voluntary appeal and mandatory appeal. As at December 31, 2017, the restated amount of the contingency was R$ 522,746, of which R$ 49,477 was assessed as probable loss and was properly accrued, and the remaining R$ 473,269 was assessed as possible loss.
In December 2017, the Company received a tax assessment notice from the Brazilian Federal Revenue Office in the amount of R$ 1,294,680 for alleged non-payment or underpayment of IRPJ and CSLL relating to the period from 2012 to 2013, due to: (i) capital gain allegedly obtained due to a barter made by the Company; and (ii) amortization of goodwill supposedly incorrect. In January 2018, the Company filed a motion to deny and is currently awaiting trial by the Federal Revenue’s Judgment Office. At December 31, 2017, the restated amount of the contingency assessed as possible loss was R$ 1,302,059.
(v) IRPJ/CSLL – Profits earned abroad
In October 2013, the Company was assessed by the Brazilian Federal Revenue Office in the amount of R$ 106,664, for the alleged non-payment of IRPJ and CSLL on profits earned abroad in the calendar years 2008 to 2010, through its subsidiaries and associates. In the Lower Court, the judges upheld the tax assessment notice. Currently, the Company is awaiting a decision on the voluntary appeal filed with the Administrative Board of Tax Appeals. As at December 31, 2017, the restated amount of the contingency was R$ 158,033.
(vi) Tax assessment notice - ICMS
The Company received certain tax assessment notices from the State of Mato Grosso for the alleged non-payment of ICMS in the period from June 2011 to 2015. In the third quarter of 2017, the Company entered into an agreement with the State of Mato Grosso, with the adhesion to and settlement of such assessment notices under the Credits Recovery Program of the State of Mato Grosso – REFIS-MT Program (Note 1.1 (h)).
(g) Long-term commitments
The Company and its subsidiary VCNNE have various contracts for the acquisition of inputs used in cement production, partially replacing the clinker. These are contracts with thermal plants for coal ash, with steel mills for blast furnace slag and with iron alloy producers for metallurgical slag. The maturities vary from contract to contract, with the longest ending in 2035.
To complement the electric power supply from its own hydroelectric plants, the Company and its subsidiary VCNNE have long-term purchase contracts with third parties and related parties, ensuring its energy needs are met.
87 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
The subsidiaries located abroad have mainly contracts for the purchase or lease of machinery and equipment, and for property rental. The maturities vary according to each contract, with the longest ending in 2053.
23 Use of public assets
(a) Accounting policies
The amount is originally recognized as a financial liability (obligation) and as an intangible asset (right to use a public asset) which corresponds to the amount of the total annual expenses over the period of the agreement discounted to present value (present value of the future payment cash flows).
(b) Analysis
The Company has a concession contract in the electric energy industry. This contract provides for annual payments from the commencement of operations and is adjusted by the General Market Price Index (IGPM) for the Use of Public Assets.
The contract is effective until April 2037 (35 years) and the amount to be paid annually is as follows:
2017 2016 Intangible Intangible Percentege Concession Concession Payment assets assets Plants Investor ownership start date end date start date (Note 18) Liabilities (Note 18) Liabilities Pedra do Cavalo Votorantim Cimentos N/NE S.A. 100% mar/02 Apr/37 Apr/06
Current 31.278 30.908 Non-current 117.807 446.928 123.901 470.518 117.807 478.206 123.901 501.426
88 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
24 Pension plan
(a) Accounting policies
(i) Pension obligations
The Company, through its foreign subsidiaries (VCNA, VCEAA, Artigas) and in Brazil (VCNNE), participates in pension plans managed by a private pension entity, which provide post-employment benefits to employees.
The liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of the plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using market interest rates, which are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension obligations. In countries like Brazil where there is not an active market related to such obligations, market rates for government securities are used.
Actuarial gains and losses arising from changes in actuarial assumptions and in pension plans are recognized in "Other components of comprehensive income that will not be subsequently reclassified to the statement of income” in the period in which they arise.
Past service costs are recognized immediately in income, unless the changes in the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, past service costs are amortized on a straight-line basis over the vesting period.
For defined contribution plans, the Company pays contributions to the managers of the pension plans on a compulsory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expenses when they are due. Prepaid contributions are recognized as assets to the extent that a cash refund or a reduction in future payments is available.
(ii) Healthcare (post-retirement)
The liability related to the healthcare plan for retired employees is stated at the present value of the obligation, less the market value of the plan assets, adjusted by actuarial gains and losses and past service costs, similar to the accounting methodology used for defined benefit pension plans. The benefit obligation of healthcare is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined through an estimate of the future cash outflow.
Gains and losses arising from changes in actuarial assumptions are fully recognized in "Other components of comprehensive income that will not be subsequently reclassified to the statement of income" in the period in which they arise.
(b) Critical accounting estimates and judgments
The present value of the healthcare plan obligations depends on a number of factors that are determined on an actuarial basis using several assumptions. Among the assumptions used in determining the net cost for actuarial obligations is the discount rate, computed based on the return rates offered by the government. The actuarial obligations are held in the currency in which the benefits will be paid and that have maturity approximating the maturities of the respective healthcare plan obligations.
89 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Analysis
The table below shows how the balances and activities related to post-employment benefit are allocated in the Company's financial statements.
Consolidated 2017 2016 Rights recorded in the balance sheet Pension plan benefits (Note 15 (b)) 2.075 1.974 Assets recorded in the balance sheet 2.075 1.974
Obligations recorded in the balance sheet Defined pension benefits 27.794 56.652 Post-employment medical benefits 152.206 120.875 Liabilities recorded in the balance sheet 180.000 177.527
Income statement charge included in operating profit (Note 28) Defined pension benefits 8.669 7.410 Post-employment medical benefits 11.201 7.337 19.870 14.747 Remeasurement Defined benefits - gross balance (Note 25 (d)) (9.630) 29.754 Deferred income tax and social contribution 4.778 (10.117) Defined pension benefits - net balance (4.852) 19.637
(d) Defined contribution plan
The Company and its subsidiary VCNNE sponsor private pension plans managed by Fundação Senador José Ermírio de Moraes (“FUNSEJEM”), a private, not-for-profit, pension fund, which is available to all employees. Under the fund regulations, the contributions from employees to FUNSEJEM are matched based on their compensation. For employees with compensation lower than the limits established by the regulations, contributions up to 1.5% of their monthly compensation are matched. For employees with compensation higher than the limits, contributions by employees up to 6% of their monthly compensation are matched. Voluntary contributions can also be made to FUNSEJEM. After the contributions to the plan are made, no further payments are required from the Company.
(e) Defined benefit plan
The Company has defined benefit plans in North America, Latin America, Brazil and Europe, which follow similar regulatory standards. The defined benefit plans for North America and Europe also offer healthcare and life insurance, among other benefits. The costs of retirement benefits and other benefits of these plans were granted to eligible employees and were determined using the projected benefit method "pro rata", based on management's best estimates of the return on plan assets, wage readjustments, cost trends and mortality rates and the average retirement ages of employees.
90 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
The amounts recognized in the balance sheet are determined as follows:
2017 2016 Present value of funded obligations 774.228 604.867 Fair value of plan assets (680.093) (616.033) Funded plans surplus 94.135 (11.166) Present value of non-funded obligations 82.312 177.882 Total deficit of defined benefit pension plans 176.447 166.716 Impact of the minimum funding requirement/assets ceiling 1.478 8.837 Liabilities in the balance sheet 177.925 175.553
The changes in defined benefit obligation and the fair value of the plan assets plan during the year are shown below:
Present value Fair value of Impact of minimum funding of obligation plan assets Total requirement/asset ceiling Total As at January 1, 2017 782.749 (616.033) 166.716 8.837 175.553 Current service cost 9.259 9.259 9.259 Financial expense/(income) 34.095 (24.730) 9.365 40 9.405 Past service cost and curtailments 1.206 1.206 1.206 44.560 (24.730) 19.830 40 19.870 Remeasurements Return on plan assets, excluding amounts included in interest income (34.790) (34.790) (34.790) Losses arising from changes in demographic assumptions 12.906 12.906 12.906 Losses arising from changes in financial assumptions 25.111 25.111 25.111 Experience gains (5.340) (5.340) (5.340) Change in asset ceiling, excluding amounts included in interest expenses (7.517) (7.517) 32.677 (34.790) (2.113) (7.517) (9.630)
Exchange differences 54.253 (47.464) 6.789 118 6.907 Contributions Employers (4.309) (4.309) (4.309) Plan payments Benefit payments (57.699) 47.233 (10.466) (10.466) As at December 31, 2017 856.540 (680.093) 176.447 1.478 177.925
Present value Fair value of Impact of minimum funding of obligation plan assets Total requirement/asset ceiling Total As at January 1, 2016 875.724 (721.198) 154.526 15.470 169.996 Current service cost 5.459 5.459 5.459 Financial expense/(income) 37.636 (28.539) 9.097 9.097 Past service cost and curtailments 93 93 98 191 43.188 (28.539) 14.649 98 14.747 Remeasurements Return on plan assets, excluding amounts included in interest income (4.914) (4.914) (4.914) Gains arising from changes in demographic assumptions (11.674) (11.674) (11.674) Losses arising from changes in financial assumptions 46.202 46.202 46.202 Experience losses 6.446 6.446 6.446 Change in asset ceiling, excluding amounts included in interest expenses (6.306) (6.306) 40.974 (4.914) 36.060 (6.306) 29.754
Exchange differences (121.198) 95.070 (26.128) (425) (26.553) Contributions: Employers (6.013) (6.013) (6.013) Plan payments Benefit payments (55.939) 49.561 (6.378) (6.378) As at December 31, 2016 782.749 (616.033) 166.716 8.837 175.553
The defined benefit obligations and the plan assets by country are shown below:
91 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
2017 2016 North Latin North Latin Brazil Europe America America Total Brazil Europe America America Total Present value of obligations 48,855 19,442 705,931 774,228 43,295 21,121 540,451 604,867 Fair value of plan assets (52,408) (3,882) (623,803) (680,093) (53,149) (3,649) (559,235) (616,033) (3,553) 15,560 82,128 94,135 (9,854) 17,472 (18,784) (11,166) Present value of non-funded obligations 45,677 32,319 4,316 82,312 42,237 133,751 1,894 177,882 Impact of the minimum funding requirements/asset ceiling 1,478 1,478 7,880 957 8,837 (2,075) 61,237 114,447 4,316 177,925 (1,974) 59,709 115,924 1,894 175,553
The principal actuarial assumptions used were as follows:
Percentual 2017 2016 North Latin North Latin Brazil Europe America America Total Brazil Europe America America Total Discount rate 9.93% 7.25% 3.46% 10.70% 7.84% 11.41% 6.20% 4.00% 10.00% 7.90% Inflation rate 4.46% 2.85% 2.00% 3.10% 4.97% 0.75% 2.00% 11.50% 4.81% Expected return on plan assets Salary growth rate 5.25% 6.85% 2.50% 6.70% 5.33% 5.76% 7.25% 2.50% 3.00% 4.63% Pension growth rate 4.46% 4.46% 4.97% 4.97%
The assumptions relating to mortality experience are set based on the advice of actuaries in accordance with published statistics and experience in each territory. The mortality assumptions for the more significant countries are based on the following tables of post-retirement mortality: • Brazil: AT-2000 Basic segregated by gender and board entry into disability RRB-1994 modified and increased by 15%, segregated by gender. • Europe: CSO80 with a projection period of ten to 15 years and • North America: RP-2000 segregated by gender with a projection period of eight years. The sensitivity of the defined benefit obligation to changes in the main assumption, keeping the other assumptions steady, is as follows:
Impact on defined benefits Change in Increase in Decrease in assumptions assumptions assumptions Discount rate 0.42% Increase by 12.9% Increase by 12.3% Salary growth rate 0.42% Increase by 8.7% Increase by 8.3% Pension growth rate 0.25% Increase by 2.7% Increase by 2.5%
Increase in Decrease in assumption by assumption by one one year year Life expectancy Increase by 2.8% Decrease by 2.9%
The above sensitivity analyses are based on changes in individual assumptions while keeping all other assumptions steady. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated using the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognized in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous year. (f) Post-employment benefits (pension and healthcare) The Company operates post-employment benefit plans through its subsidiary in North America, VCNA, and in Europe, VCEAA. The method of accounting, assumptions and frequency of valuations are similar to those used for the defined benefit pension plans. Most of these plans are not funded. The obligations related to these plans are included in the change in the defined benefit obligations, previously presented.
92 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
25 Stockholders’ equity
(a) Accounting policies
(i) Capital
Common and preferred shares are classified in equity.
(ii) Distribution of dividends
The distribution of dividends is recognized as a liability in the financial statements at year-end based on the Company’s bylaws. Any amount that exceeds the minimum mandatory dividends, which is 25% of the net income for the year less the legal reserve, is only provided on the date it is approved by the stockholders at the General Meeting. When the Company reports loss for the year, no dividend is recognized.
(iii) Basic earnings (loss) per share
Basic earnings (loss) per share are calculated by dividing the profit (loss) attributable to the stockholders of the Company by the weighted average number of common shares outstanding during the year. The weighted average number of shares is computed based on the periods in which the shares were outstanding.
(iv) Legal reserve and profit retention reserve
The legal reserve is credited annually with 5% of the net income for the year and cannot exceed 20% of the share capital. The purpose of the legal reserve is to retain sufficient capital. This reserve can only be used to increase capital and offset accumulated losses. When the Company reports loss for the year, no legal reserve is recognized.
The profit retention reserve was created to preserve the undistributed balance of retained earnings in order to fund expansion projects pursuant to the Company's investment plan.
(v) Tax incentive reserve
The tax incentive reserve is credited with the benefit of tax incentives, which are recognized in the statement of income and allocated from retained earnings to this reserve. These incentives are not included in the calculation of the minimum mandatory dividend.
(vi) Other comprehensive income
Other comprehensive income include:
(i) The effective portion of the cumulative net change in the fair value of the hedging instruments used in the cash flow hedge until the recognition of the hedged cash flows;
(ii) Cumulative translation adjustments on exchange differences arising from the translation of financial statements of foreign operations;
(iii) The effective portion of exchange differences on the Company’s net investment hedge in a foreign operation.
(iv) Actuarial losses (gains) and measurement of retirement benefits.
93 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Capital
As at December 31, 2017 the Company’s fully subscribed and paid-up capital was R$ 5,430,875 (December 31, 2016 - R$ 3,730,875), comprising 7,186,129,975 common shares and 300,571,428 preferred shares (December 31, 2016 - 5,826,367,578 common shares and 300,571,428 preferred shares), as described in Note 1.1 (e).
(c) Dividends
Considering that the Company reported loss in 2017, no legal reserve and minimum mandatory dividends were recognized. The calculation of the dividends for the year 2016 is as follows:
2016 Net income for the year 369,977 Legal reserve - 5% (18,499) Tax incentive reserve (34,226)
Dividend calculation basis 317,252
Minimum dividends - 25% in accordance with bylaws (i) 79,313
Total number of shares 6,126,939
Dividends per share - R$ 0.01
Nature of remuneration Dividends 79,313
(i) According to the Annual General Meeting held on April 28, 2017, the shareholders approved the full allocation of the minimum mandatory dividends for 2016, in the amount of R$ 79,313, to the “Profit retention reserve”.
94 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(d) Other comprehensive income
Cumulative Cumulative currency remeasurements of Other translation employment benefit Hedge of net Hedge of net comprehensive adjustments obligations investments investments - VCNA income (loss) Total At January 1, 2016 4,592,062 (97,389) (2,884,473) (3,396) 1,606,804 Currency translation of investees abroad (2,223,182) (2,223,182) Remeasurement of actuarial gains on retirement benefits (Note 24 (c)) (Note 24 (c)) (29,754) (29,754) Hedge accounting of net investments in foreign operations 1,520,926 1,520,926 Loss on change in interests in investees 19,386 19,386 Interest in other comprehensive income of investees (30,406) (30,406) Realization of other comprehensive income of investees (25,007) (25,007) Deferred taxes 10,117 (517,115) (506,998) At December 31, 2016 2,343,873 (117,026) (1,880,662) (14,416) 331,769
At January 1, 2017 2,343,873 (117,026) (1,880,662) (14,416) 331,769 Currency translation of investees abroad 299,828 299,828 Remeasurement of actuarial losses on retirement benefits (Note 24 (c)) 9,630 9,630 Hedge accounting of net investments in foreign operations (275,280) 128,473 (146,807) Realization of other comprehensive income on disposal of investments (Note 1.1 (b) and (d)) (136,393) (136,393) Reclassification of other components of comprehensive income (14,416) 14,416 Deferred taxes (4,778) 93,595 (32,118) 56,699 At December 31, 2017 2,492,892 (112,174) (2,062,347) 96,355 414,726
95 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(e) Non-controlling shareholders
2017 2016 Cementos Artigas S.A. 204,455 196,704 Asment de Témara 170,221 143,848 Yacuces, S.L. 124,606 107,952 Itacamba Cemento S.A. 91,928 99,148 Shree Dijivay Cement Co. Ltd 54,128 51,956 Yibitas Yozgat Isci Birligi Insaat M.T.S 22,363 23,260 Other (i) 9,022 (48,296) 676,723 574,572
(i) The negative balances presented mainly refer to subsidiaries that presented negative stockholders’ equity at the end of the year, which mainly consisted of the China operations, sold as described in Note 1.1 (d).
26 Revenue
(a) Accounting policies
The Company and its subsidiaries recognize revenue when: (i) the amount of revenue can be reliably measured; (ii) it is probable that future economic benefits will result from the transaction; and (iii) specific criteria have been met for each of the activities of the Company and its subsidiaries.
Revenue is shown net of value added tax, returns, rebates and discounts and, in the consolidated financial statements, after eliminating sales among consolidated companies.
The revenue balance will not be considered reliably measurable until all sale conditions are resolved. The Company and its subsidiaries base their estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Gross revenue Local customers 5,646,348 6,576,993 7,480,145 8,588,794 Foreign customers 3,213 34,114 5,675,269 5,825,118 5,649,561 6,611,107 13,155,414 14,413,912
Taxes on sales and services and other deductions (1,512,525) (1,893,068) (2,051,634) (2,490,174) Net revenue from goods sold and services rendered 4,137,036 4,718,039 11,103,780 11,923,738
96 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
27 Expenses by nature
(a) Analysis
Parent company Consolidated 2017 2016 2017 2016 Employee benefit expenses 806.313 844.575 2.041.428 2.152.183 Raw materials and consumables used 581.153 712.930 1.537.386 1.730.314 Freight cost 740.004 769.101 1.553.542 1.543.604 Electric power 484.721 456.929 968.337 1.097.478 Fuel costs 466.585 411.501 949.898 838.747 Depreciation, amortization and depletion 374.703 415.380 991.076 1.015.230 Maintenance and upkeep 285.612 273.200 658.554 688.796 Services, miscellaneous 93.525 126.380 368.953 358.702 Packaging materials 123.817 113.299 231.929 225.686 Rents and leases 74.407 89.876 156.707 172.192 Taxes, fees and contributions 41.292 38.084 144.145 132.184 Insurance 9.187 14.319 31.558 46.288 Other expenses 183.464 316.777 668.665 781.050 4.264.783 4.582.351 10.302.178 10.782.454
Reconciliation Cost of sales and services 3.034.970 3.379.769 8.357.261 8.814.655 Selling 753.345 727.184 1.133.116 1.062.970 General and administrative 476.468 475.398 811.801 904.829 4.264.783 4.582.351 10.302.178 10.782.454
28 Employee benefit expenses
(a) Accounting policies
Provision is recognized for the expenses related to employee profit sharing. This provision is calculated based on qualitative and quantitative targets established by management and is recorded as "Employee benefits", in the statement of income.
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Direct remuneration 433,699 450,537 1,318,573 1,410,728 Social charges 231,659 243,426 402,438 421,028 Benefits 140,955 150,612 300,547 305,680 Pension plan (Note 24 (c)) 19,870 14,747 806,313 844,575 2,041,428 2,152,183
97 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
29 Other operating income (expenses), net
Parent company Consolidated 2017 2016 2017 2016 Reversal of tax provision (Note 22 (c) (iii)) 191,672 266,197 Tax benefits 12,786 34,226 70,472 97,529 Gain on waste sales 5,241 5,607 10,296 10,954 Revenue from co-processing 9,900 9,137 13,368 10,867 Gain on sales of investments, net (i) 15,855 296,915 20,825 296,915 Goodwill impairment (Note 18 (c)) (47,981) (68,172) (47,981) (81,980) Reversal (impairment) of property, plant and equipment (Note 17 (c)) 5,550 22,249 (12,219) Reversal (impairment) of intangible assets (Note 18 (c)) 29 1,729 4,705 (8,681) Gain (loss) on sales of property, plant and equipment and intangible assets, net 6,244 (693) 9,895 86,723
Impairment of goodwill on sale of China operations (Note 1.1 (d)) (228,487) Realization of other comprehensive income on sale of China operations (Note 1.1 (d)) 73,249 Debts included in Federal PERT (Note 1.1 (g)) (104,094) (104,287) Debts included in State REFIS (Note 1.1 (h)) (211,628) (211,628) Other judicial provisions, net (292,909) (67,213) (292,833) (84,782) Other operating income (expenses), net (4,399) 17,445 41,328 27,749 (574,522) 234,531 (197,394) 343,075
(i) The balances for 2017 refer mainly to the gains amounting to R$ 16,008 and R$ 19,848 in the parent company and consolidated, respectively, arising from the sale of Bio Bio (Note 1.1 (j)). The balance for 2016 refers to the gain of R$ 292,604 on the full disposal of the interest of investee in Sirama and the disposal of the interest held by the parent company in Mineração Candiota Ltda. amounting to R$ 4,311.
30 Financial results, net
(a) Accounting policies
The Company’s finance income and expense comprise:
(i) Interest income; (ii) Interest expenses; (iii) Net gains/losses on the disposal of available for sale financial assets; (iv) Net gains/losses on financial assets at fair value through profit or loss; (v) Net gains/losses on foreign exchange variations on financial assets and liabilities; (vi) Gains on the remeasurement of the fair value of existing equity interests in a company acquired in a business combination. (vii) Fair value losses on contingent consideration classified as financial liability; (viii) Impairment of financial assets (other than trade receivables); (ix) Net gains/losses on hedge instruments not recognized in profit or loss; and (x) Reclassifications of net gains/losses previously recognized in other comprehensive income.
Interest income and expense are recognized in profit or loss using the effective interest rate.
98 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(b) Analysis
Parent company Consolidated 2017 2016 2017 2016 Financial income Income from financial investments 231.873 367.262 278.057 418.041 Reversal of indexation charges on provision (Note 22 (c) (iii)) 131.911 184.455 Discount on repurchase of bonds (Note 19 (d)) 171.160 171.160 Fair value of borrowings (Note 19 (b)) 44.666 115.123 44.666 115.123 Indexation of assets 32.084 48.486 47.211 72.088 Interest on financial assets 17.238 15.322 46.966 60.461 Interest and indexation charges - UBP (i) 2.910 Discounts obtained 23.043 9.966 23.422 10.377 Interest on related party transactions (Note 14 (b) and (c)) 68 68 1.559 1.078 Other financial income 31.456 23.908 480.883 727.387 660.702 872.236
Financial expenses Interest payable on borrowings and others (830.723) (1.069.597) (1.056.862) (1.185.374) Capitalization of borrowing costs (Note 19 (d)) 4.468 8.998 30.768 43.795 Fair value of borrowings (Note 19 (b)) (63.894) (88.876) (63.894) (88.876) Indexation charges on provision (153.728) (51.923) (178.052) (81.131) Income tax on remittance of interest abroad (61.063) (75.111) (61.718) (75.729) New borrowing expenses (28.122) (57.398) (30.461) (60.085) Interest and indexation charges - UBP (i) (42.453) PIS and COFINS on financial results (13.035) (26.501) (15.936) (30.065) Interest on Federal PERT (Note 1.1 (g)) (75.159) (73.715) Interest on State REFIS (Note 1.1 (h)) (40.226) (40.226) Interest on taxes payable (3.755) (4.258) (5.824) (4.541) Interest on related party transactions (Note 14 (b) e (c)) (47.541) (46.800) (2.448) (989) Other financial expenses (31.599) (43.776) (78.877) (126.574) (1.344.377) (1.455.242) (1.577.245) (1.652.022)
Derivative financial instruments Income 185.650 739 185.650 Expenses (169.431) (947.142) (169.770) (955.665) (169.431) (761.492) (169.031) (770.015)
Net foreign exchange result (104.158) 575.185 (205.004) 552.144 (1.137.083) (914.162) (1.290.578) (997.657)
(i) In 2017, the Company recognized an income from indexation charges on UBP - Use of Public Asset because the index used for such indexation (IGP-M) was negative.
31 Tax benefits
The Company and its subsidiary VCNNE have tax incentives in accordance with Federal and State Industrial Development Programs, pursuant to the respective legislation.
The tax benefits granted by the States and the Federal Government are intended to attract industry investments, aiming at regional decentralization, promoting job and income creation, the development of economic and social welfare, and also complementing and diversifying the country’s industrial matrix.
32 Insurance
The Company contracts different types of insurance, such as property risk and civil liability, to protect its assets against losses with production interruption and damages caused to third parties. Such policies have coverage and conditions considered by management to be appropriate to the risks involved.
For the main plants in Brazil and operations abroad, an "AllRisk" policy is contracted for all its assets, including coverage for losses with production interruptions.
99 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
The Company and its subsidiaries had insurance coverage for property risks amounting to R$ 24,288,052 and for loss of profits amounting to R$ 3,434,793, as at December 31, 2017. The Company’s Management considers these amounts sufficient to cover possible property risks and loss of profits.
In addition to the coverage mentioned above, the Company also keeps insurance for civil liability of directors and officers in amounts considered appropriate by management.
33 Assets and liabilities classified as held for sale
(a) Accounting policies
These are classified in non-current assets as “Assets classified as assets held for sale” when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.
Depreciation of assets held for sale ceases when a group of assets is classified as held for sale. The assets and liabilities of the group of discontinued assets are presented in single line items in assets and liabilities.
(b) Analysis
As at December 31, 2017, the Company had assets or liabilities classified as held for sale, related to the remaining China operations.
Assets 2017 Liabilites 2017 Cash and cash equivalents 3,374 Trade payables 27 Trade receivables 405 Provision 2,972 Deferred income tax 590 Deferred income tax 590 Property, plant and equipment 36 Other liabilities 7 Other assets 121 4,526 3,596
100 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
(c) Discontinued operations
The Company presented the following results from discontinued operation related to the China operations, as mentioned in Note 1.1 (d), and the operations in the states of Florida and California, as mentioned in Note 1.1 (i).
2017 2016 Net revenue from goods sold and services rendered 777.969 773.775 Cost of goods sold and services rendered (714.568) (770.145) Gross profit 63.401 3.630
Operating income (expenses) Selling (14.893) (27.730) General and administrative (8.047) (21.397) Other operating income (expenses), net 195.400 16.472 172.460 (32.655)
Operating profit (loss) before equity results and net financial results 235.861 (29.025)
Results of investees Equity in the results of associates and joint ventures 17.927 13.012 Realization of other comprehensive income of investees (Note 1. 1 (d)) 132.936 150.863 13.012
Financial results, net (95.904) (9.504)
Income (loss) before income tax and social contribution 290.820 (25.517)
Income tax and social contribution Current (304.881) (1.191) Deferred 73.030 (1.359)
Net income (loss) for the year from discontinued operations 58.969 (28.067)
101 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
34 Information by operating segments
The operating and reportable segments used for decision-making, and regularly reviewed by the Chief Operating Decision Maker (“CODM”) defined as the Chief Executive Officer (“CEO”), are organized by geographical areas, with four reportable segments based on the location of its assets, which are segregated as follows: (1) Brazil; (2) Latin America; (3) North America; (4) Europe, Asia and Africa.
The revenue from sales, originated in the reportable segments, is a result of the following product lines:
1. Cement; 2. Ready-mix concrete (including mortars); 3. Aggregates; 4. Other construction materials.
The main source of information for assessment of the financial performance of the reportable segments is the adjusted EBITDA which is reported on a monthly basis to the CODM according to the geographical areas (Brazil, Latin America, North America and Europe, Asia and Africa) and also according to each product line. Adjusted EBITDA is calculated as described in Note 6.1.5 on capital management. For the purpose of performance measurement of the operating and reportable segments, financial income and expenses, income tax and social contribution and equity in the results of investees were not included, and therefore, such information is not presented in the segment information table below.
(a) Segment information – consolidated
2017 North Europe, Asia Latin Brazil America and Africa America Elimination Consolidated Net revenue from goods sold and services rendered 5,842,069 2,938,831 1,826,612 517,434 (21,166) 11,103,780 Operating profit (loss) before equity results and net financial results (301,155) 603,452 249,406 52,505 604,208 Depreciation, amortization and depletion 516,355 227,242 201,171 46,308 991,076 Adjusted EBITDA 344,091 867,732 451,679 98,813 1,762,315 PP&E and intangible assets additions ("CAPEX") 438,993 426,677 201,923 103,120 1,170,713 Total assets 23,252,336 6,686,200 8,999,973 1,251,958 (11,510,805) 28,679,662
2016 North Europe, Asia Latin Brazil America and Africa America Elimination Consolidated Net revenue from goods sold and services rendered 6,413,123 3,005,936 2,149,604 395,509 (40,434) 11,923,738 Operating profit before equity results and net financial results 591,238 548,960 305,942 38,219 1,484,359 Depreciation, amortization and depletion 551,799 223,719 219,552 20,160 1,015,230 Adjusted EBITDA 965,210 796,673 552,916 58,378 2,373,177 PP&E and intangible assets additions ("CAPEX") 763,027 463,334 383,844 298,744 1,908,949 Total assets 23,706,706 6,379,290 9,508,248 1,276,097 (11,637,569) 29,232,772
102 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
The following table reconciles the adjusted EBITDA for operating segments with the income:
2017 2016 Net income (loss) for the year (619,599) 424,029 Additions (exclusions) Equity in the results of associates - continuing operations (160,581) (164,704) Equity in the results of associates - discontinued operations (150,863) (13,012) Financial income, net - continuing operations 1,290,578 997,657 Financial income, net - discontinued operations 95,904 9,504 Income tax and social contribution - continuing operations 152,779 199,310 Income tax and social contribution - discontinued operations 231,851 2,550 EBIT 840,069 1,455,334 Depreciation, amortization and depletion - continuing operations 991,076 1,015,230 Depreciation, amortization and depletion - discontinued operations 35,361 61,173 EBITDA 1,866,506 2,531,737
Additions (exclusions) Dividends received 67,093 67,623 Exceptional items EBITDA - discontinued operations (i) (3,253) (32,148)
Adjustments for non-recurring items Net gain on sale of investments Sirama and Candiota (Nota 29 (i)) (296,915) Net gain on sale of Bio Bio (Note 1.1 (j)) (19,848) Gain on sale of Florida and California operations (Note 1.1 (i)) (562,571) Net loss on sale of China operations (Note 1.1 (d)) 139,364 Net impairment of goodwill on sale of China operations (Note 1.1 (d)) and (Note 29) 155,238 Impairment of goodwill (Note 18 (c)) 47,981 81,980 Net provision (reversal) of impairment of property, plant and equipment (Note 17 (c)) (22,249) 12,219 Net provision (reversal) of impairment of intangible assets (Note 18 (c)) (4,705) 8,681 Offset of PERT debts against income tax and social contribution losses 98,759 Adjusted EBITDA 1,762,315 2,373,177
(i) EBITDA from discontinued operations does not consider the loss/gain on the sale of China, Florida and California operations. The result on the sale of these transactions was included in adjustments of non-recurring items.
(b) Net revenue by product line
Consolidated 2017 2016 Cement 7,971,446 8,463,592 Ready-mix 2,103,201 2,335,801 Aggregates 401,140 456,760 Other 627,993 667,585 11,103,780 11,923,738
103 of 104 Votorantim Cimentos S.A.
Notes to the parent company and consolidated financial statements at December 31, 2017 In thousands of reais, unless otherwise stated
35 Events after the reporting period
(a) Distribution of share premium and dividends of VCEAA
On January 3, 2018, the Company’s Management approved the capital reduction of VCEAA, amounting to EUR 70,529 thousand (R$ 275,495). On the same date, VCEAA’s management approved the distribution of extraordinary dividends to the Company in the amount of EUR 296,622 thousand (R$ 1,158,646).
(b) Early settlement of debentures
On January 11, 2018, the Company redeemed in advance all outstanding debentures of the ninth public issue of debentures in the amount of R$ 500,000. The debentures had their maturity on January 10, 2022.
On January 26, 2018, the Company repaid in advance the installments with maturities on March 5, 2022 of the fifth, sixth and eighth public issue of debentures. The total amount of the principal amortized was R$ 200,000.
(c) Capital reduction of VCC
On January 19, 2018, the Company’s Management approved the capital reduction of its subsidiary VCC amounting to CLP 13,000 million (R$ 70,779), reducing the capital of VCC from CLP 21,535 million to CLP 8,535 million.
(d) Early settlement of borrowings - Resolution 4131
On January 24, 2018, the Company prepaid the borrowing under Resolution 4131in the amount of USD 50,000 (R$ 160,675), entered into on September 17, 2015, with maturity on September 25, 2020. The swap agreement related to such borrowing was also settled.
(e) Early settlement of borrowings from BNDES
On January 26, 2018, the Company prepaid borrowings from BNDES in the amount equivalent to R$ 210,639. These contracts were signed in 2009 and 2011 and had maturities in 2018, 2019 and 2020.
On January 26, 2018, the subsidiary VCNNE prepaid borrowings from BNDES in the amount equivalent to R$ 24,244. These contracts were signed in 2009 and had maturities in 2018 and 2019.
104 of 104