Glossary

Financial Glossary

This guide is intended to assist in the understanding of financial statements. It is neither an offer to sell nor to solicit an offer to buy any securities of CSN or any other company. We recommend that you seek expert financial advice before making any investment decisions.

The financial analyst, who evaluates the company, is able to make a reliable investment recommendation to investors based on the company‘s financial statements and other publicly available information. In addition to calculating and analyzing financial indicators, the analyst will identify and analyze the company‘s strengths and weakness, as well as its performance and the company‘s business and economic environment trends.

Below is a description of many of the commonly used terms and financial indicators that may be used by the financial analyst in his/her report on a Brazilian company.

Financial Statements

IFRS:International Financial Reporting Standards issued by the IASB (International Accounting Standards Board).

Parent Company:The company that owns shares and/or subsidiaries and affiliated companies.

Subsidiaries: All entities (including special purpose entities) whose financial and operating policies can be conducted by the company and whose voting stock is more than 50% controlled by the company. Subsidiaries are fully consolidated from the date on which control is transferred to the company and cease to be consolidated from the date that control ceases.

Joint Venture: Business arrangement in which two or more parties undertake the performance of an economic activity that is subject to joint control.

Consolidated Financial Statements: The consolidated financial statements detail the financial situation of a parent company, its subsidiaries and affiliated companies (only those in which the company has a controlling interest or the power to influence management‘s decisions).

Explanatory Notes: Include important and relevant information and details on items included in the financial statements, which should be read in conjunction with these notes for a better understanding of the numbers presented therein.

Audit Report: The Audit Report is a declaration signed by an independent auditing firm describing the scope of the examination of the company‘s books and records. The auditing firm will issue an opinion on the financial statements which may be unqualified (fairly stating the company‘s financial condition) or qualified (stating certain conditions) which states an auditor‘s unbiased opinion of the company‘s financial statements. The Audit Report is usually produced annually after the end of the company‘s fiscal year, but may be produced quarterly, due to its limited scope of examination.

Income Statement: The income statement is a summary of the revenues, costs and expenses of the company during an accounting period. It shows how much revenue the company brings into the business by providing goods or services to its customers. It also shows the related costs and expenses during that period. Analysts use this statement to examine the company‘s profitability.

Balance Sheet: The balance sheet is a summary of the financial condition of the company at a point in time and is comprised of assets, liabilities and net equity. The analyst uses the balance sheet to examine the company‘s liquidity and debt, among other things.

Cash Flows: This financial statement measures the incoming or outgoing payment in the company‘s cash flow, capturing the current operating results and the corresponding changes in the balance sheet during a period of time. Analysts use this statement to determine how the company generates and manages its cash, looking closely at the cash generated from operating activities.

Value Added: This statement indicates how much value the company adds to its stakeholders during a given period. It includes additional information about operations and factors that have contributed to the generation of the company‘s wealth.

Stakeholders: Stakeholders are shareholders, employees, suppliers, customers and the company‘s community in general.

Income Statements

Gross Revenues: Represent the sales made during a determined period before customers’ discounts, returns or allowances, or other adjustments.

Net Revenues: Gross sales less returns and allowances, allowed cash discounts and taxes.

Cost of Goods Sold (COGS): The purchase cost of raw materials and manufacturing of end products, including direct and indirect workforce, maintenance, and other costs.

Gross Profit: Net revenues less the cost of goods sold.

Operating expenses (selling and administrative expenses): These expenses typically include salaries of employees related to the company’s sales and administration, freight on sales and others.

Operating Income: Gross profit less operating expenses.

Equity Results: This account reflects the results of subsidiaries and affiliated companies.

Financial Income/Expenses: This account includes interest income and expenses as well as interest related to financial transactions.

Monetary and Exchange Variation: reflects the difference between the value of assets and liabilities, denominated in a foreign currency, in the local currency, during a given period.

Income Taxes: Reflects income tax and social contribution expenses.

Net Income (Loss): This figure is often called the "bottom line", as it is the last line of the income statement. It represents the profit remaining after all costs and expenses (including taxes) are deducted from total revenues for a given period. If the result is positive, it is called profit, if it is negative, it is called loss.

Earnings per Share: It is the net income divided by the number of the company‘s shares. It is the amount that a shareholder would receive per share if the company distributed all the net income of the period to its shareholders.

Adjusted EBITDA: It is the net income plus the net financial result, income and social contribution taxes, depreciation and amortization and the result of other operating income (expenses), which are excluded since they mainly refer to non-recurring items of the operation. It is used by analysts as a tool to measure the ability of recurrent operating cash flow, and enables comparisons with other companies.

Balance Sheet

Assets: Represent the company‘s resources that are used to generate revenues. Assets can be either physical (cash, inventories, property and equipment) or intangible (goodwill, trademark, patents).

Liabilities: Represent the company‘s obligations. Liabilities typically include debt with banks, creditors and suppliers, taxes to the government and others.

Shareholders’ Equity: Represents the shareholders’ investment in the company through capital contributions or reinvested earnings. The shareholders’ equity is equal to total assets less total liabilities.

Dividends and Interest on Shareholders’ Equity: Represent a payment (cash outflow) to shareholders from Retained Earnings.

Changes in Shareholders’ Equity: This statement shows the changes in the accounts of shareholders’ equity for a given period.

Withholding Income Tax: Income taxes credits.

Deferred Income Tax: Income taxes payable at a later date.

Retained Earnings: Retained earnings represent profit that has been "retained" for use in the company after dividends have been paid. Retained earnings are part of Shareholders’ Equity.

Profit Reserves: This amount includes legal reserve and investment reserve.

Legal Reserve: This reserve account in Shareholders’ Equity is constituted by 5% of the adjusted net income for the period, as required by Brazilian Corporate Law.

Investment Reserve: This reserve account in the Shareholders Equity is constituted by non-distributed profit, for future investments.

Comprehensive income: It is the change that occurs in the company’s net equity over a specific period of time resulting from transactions and other events that are not derivatives of transactions with shareholders in their capacity as shareholders. The comprehensive income statement is an important management analysis tool, such as, on an accrual basis, updates to the shareholders’ net equity, through registration of revenues and expenses incurred under net equity (not result), but in "uncertain" financial settlement, as result of long-term investments, with no expected date of redemption or other disposal. In practice, the comprehensive income aims to present the adjustments made in net equity as if it were profits.

Indexes

Price / Earnings (P/E): Price of one share divided by its earnings per share. This index gives investors an idea of how much they are paying for the company‘s ability to generate profit. The higher the P/E, the greater the expectation of profit.

Enterprise Value / EBITDA: This index measures the number of years necessary to generate an amount of cash equal to the company‘s value (market value + net debt).

EBITDA / Net Financial Expenses: This index gives an estimate of how much operating cash generation is necessary to cover financial expenses. The higher the ratio, the greater the company‘s ability to meet its financial obligations.

Net Debt / EBITDA: This index is a measure of the company‘s financial leverage. It indicates the number of years of cash generation required to pay all indebtedness.

Gross Margin: Gross profit divided by net revenue.

Operating Margin: Operating income divided by net revenue.

EBITDA Margin: EBITDA divided by net revenue.

Net Margin: Net income divided by net revenue.

ROE (Return on Equity): Net income (loss) divided by equity.

ROA (Return on Assets): Net income (loss) divided by total assets.

Technical Glossary

Click below to access the description of some useful technical terms for a better understanding of CSN‘s business and products.

Technical Terms and Expressions