Issuu on Google+

Motors | Energy | Automation | Coatings

Annual Report 2008

Transforming energy into solutions. www.weg.net


Index Management Report .....................................................................................................................................................................................03 Financial Statements......................................................................................................................................................................................08 Notes to the Financial Statements............................................................................................................................................................14 Special Review Report - Unqualified Opnion.......................................................................................................................................30 Social Report 2008 and 2007 - Brazil Consolidated...........................................................................................................................31


www.weg.net

Management Report We submit to our shareholders’ examination the Consolidated Financial Statements of Grupo WEG and WEG S.A. related to the fiscal year ended December 31, 2008. The financial statements were prepared pursuant to the provisions in Brazilian Corporation Law and the rules set forth by the Brazilian Securities and Exchange Commission (CVM). Economic Scenario The world economic scenario was marked by two very distinct periods in 2008. First, there was the continuation of one of the longest uninterrupted economic expansion periods in contemporary history. However, beginning mid-year unbalances accumulated during the expansion period like problems in the American real estate sector, caused instability in world financial markets and the beginning of an economic downturn. Within the Brazilian economic context, we saw that: g  The expansion of domestic product in 2008, estimated at nearly 6%, was due to the good performance in the first three quarters, with increased consumption and investment. In the same period, the Brazilian currency continued to appreciate. However, the adjustment caused by the international crisis was quick and violent, reducing the economic activity level and the Brazilian currency depreciated against the US dollar, as was the case with almost all other currencies; g The industrial sector enjoyed a significant and growing expansion until October, with an adjustment at the end of the year. According to the Brazilian Institute of Geography and Statistics (IBGE), industrial production grew 3.1% in 2008. Keeping with the productive investment cycle begun in 2007, production of capital goods grew more quickly, accumulating 14.4% on the previous year;

Accordingly, the electronics and appliance industry growth in 2008, estimated by the Brazilian Electric and Electronic Industry Association (ABINEE) at 11% compared to the previous year, was achieved in most part during the first part of the year. g  ABINEE data show that performance in the segments where WEG concentrates its operations, Industrial Automation, Industrial Equipment, and Energy Generation, Transmission and Distribution (GTD), was better than average sector growth, estimated at 15% compared to the previous year. We believe that the growth in demand for our products is structural because of two long-term trends: g  Growing demand for more energy efficient industrial equipment (electric motors and associated equipment) resulting from industrial companies’ constant search for productivity and operating cost reduction; g  Growing concern about the environmental impacts of traditional means of electricity generation, making the use of renewable energy sources viable, including small hydroelectric power plants and thermoelectric plants run on biomass. g

Economic-Financial aspects Gross Operating Revenues Consolidated Gross Operating Revenues (GOR) grew 20% compared to the previous year, reaching R$5,471.2 million in 2008. Each one of the four distinct areas into which our businesses are divided also enjoyed revenue growth. We would like to point out the following aspects in each one of these areas: g  Industrial electronic equipment and appliances – the 16% growth compared to 2007 would be even higher if the real had not appreciated, since sales to foreign markets are significant in this operating area; g  Equipment for energy generation, transmission and

distribution (GTD) – sales in this business sector grew 44% compared to 2007, maintaining the good performance seen over the past years and showing the competitiveness of the solutions we offer to the consumer market. g  Motors for domestic use – we saw a 4% year-on-year sales increase in this business sector that was particularly affected by the economic instability at the end of the year; g  Paints and varnishes – sales increased by 7% compared to the previous year.

Annual Report

3


www.weg.net

Economic-Financial aspects Domestic Market Gross Operating Revenues in the domestic market reached R$3,570.1 million, accounting for 65% of our Total Gross Operating Revenues and increasing 21.4% over the previous year, a reflection of the growth in demand for capital goods and for energy generation, transmission and distribution. We are leaders in the Brazilian electric motor market and have outstanding positions in all operating areas in the domestic market. This position has been built over time with the continuous expansion of our product line and the increased technological content of our products as part of our strategy of providing complete and integrated industrial solutions. Foreign Market In the foreign market, Gross Operating Revenues grew 18.1% over the previous year, reaching R$1,901.1 million and accounting for 35% of Total Gross Operating Revenues. When measured in US dollars, foreign market Gross Revenues added up to US$1,028.6 million for a 23.6% increase over the previous year. We are a company that operates globally, distributing our products to over 100 countries across five continents, with direct operation in more than 20 of the main world markets and industrial operations in Brazil, Argentina, Mexico, Portugal and China. During 2008 we announced the establishment of another distribution subsidiary in Russia, as well as the construction of a new electric motor plant in India. This geographic coverage has allowed us to grow continuously in the foreign market, minimizing the effects of

specific variations in economic performance in each country or region. We continue to pursue new opportunities in several world markets and expect to keep our corporate performance standard from the point of view of both growth in revenues and operating results. Cost of Goods Sold Cost of Goods Sold (COGS) reached R$2,933.9 million in 2008, 24.7% higher than in the previous year, accounting for 65% of Net Operating Revenues. The gross margin decreased by 2 percentage points compared to the previous year, due to the following impacts suffered during the year: g The rapid appreciation of the Brazilian currency against almost all the world’s principal convertible currencies, especially the US dollar, up to the middle of the year, affecting the profitability of sales on foreign markets. g The high price volatility of the main raw materials, especially steel and copper, making the transfer of cost increases harder. Selling, General and Administrative Expenses Consolidated Selling, General and Administrative Expenses totaled R$652.4 million, accounting for 14.5% of Net Operating Revenues in 2008, with a 21% increase over the R$536.4 million posted in 2007. The growth was a result of operating expenses related to the implementation of the WIS (WEG Integrated System) Project, mainly incurred in the first half of the year and partially neutralized by the intensification of efforts to reduce other, non-related operating expenses.

EBITDA As a result of the previously discussed impacts, EBITDA in 2008 (calculated according to the methodology set forth by CVM in Circular Letter 01/07) reached R$1,026.1 million, increasing 11% over the result obtained in 2007, with a 2008 EBITDA margin of 23%, 1.8 percentage points below the EBITDA margin of the previous year. Other Operating Revenues/Expenses According to Law 11,638/07 that set forth the new corporate accounting rules in Brazil and the subsequent regulation set forth by CVM, exchange variations on investments in subsidiaries abroad are no longer accounted for in the income for the year, but rather directly accounted for as adjustments to Shareholders’ Equity. In 2008, these exchange variations, which until 2007 were posted to income, represented R$89.8 million and were added to Shareholders’ Equity. Thus, in 2008 the “other operating revenues/expenses” account mainly includes amounts provisioned during the year with the WEG Quality and Productivity Program (PWQP) for employee profit sharing. In 2008 this amount stood at R$86.2 million compared to R$86.6 million in the previous year.

4

Annual Report

Financial Revenues and Expenses Financial Revenues came to R$464.1 million (R$345.5 million in 2007) and Financial Expenses amounted to R$505.9 million (R$212.5 million in 2007). Consequently, the Financial Result was a negative R$41.8 million (positive R$133.0 in 2007). These amounts do not consider interest on stockholders’ equity, shareholder remuneration classified as a financial expense for tax purposes. The increases in financial revenues and expenses are a result of the significant depreciation of the real beginning in September. The effects of this depreciation on foreign currency debt are immediate, while the positive effects of foreign market sales revenues increases are realized over time. Net Income As a result of the previously mentioned impacts, Net Income for the Year reached R$560.4 million, 2.5% lower than the R$575.0 million posted in 2007 and representing a 30.6% return on shareholders’ equity in 2008. If we consider the previously criteria to allocate the FX variations over the investments in foreign subsidiaries to the financial result, net profit would be of R$650,2 million and representing a 35,5% return on shareholders’ equity in 2008.


www.weg.net

Capitalization We have a conservative financing policy, allowing us to maintain funds and liquidity sources that are sufficient to meet our needs for debt service and finance the investment program, in addition to enabling us to take advantage of several business opportunities. We use short-term foreign currency financing sources to finance foreign trade operations, taking advantage of the natural hedge and constantly monitoring financial exposure to foreign exchange. Our long-term debt is mainly in domestic currency, using financing sources available from development agencies. Cash funds are invested in prime banks mainly in domestic currency. On December 31, 2008 our short-term cash position and financial investments totaled R$1,849.5 million and gross financial debt amounted to R$2,161.2 million, of which: Short-term operations totaled R$1,314.1 million (61% of the total debt), represented by foreign currency trade finance related debt and the short-term portion of loans contracted with the Brazilian Development Bank

g

(BNDES) and other development agencies, usually in domestic currency. g Long-term operations totaled R$847.1 million (39% of the total debt), mainly represented by financing contracted with BNDES and other development agencies, primarily in domestic currency, and by the long-term portion of the financing of working capital for subsidiaries abroad, in the respective currencies of each country. At the end of 2008, net debt was R$311.7 million, compared to the net cash of R$443.2 million in December 2007. The alteration from net cash to net debt is explained by: Investments in fixed assets for capacity expansion; Increase in investments in working capital; and, g Immediate impact of foreign exchange depreciation on foreign currency debt. g g

Net Debt December 2008

December 2007

CASH & EQUIVALENTS

1,849,477

2,174,972

DEBT

2,161,216

1,731,740

- Current

1,314,098

1,077,487

847,118

654,253

(311,739)

443,232

- Long Term Net Cash (Debt)

Investments

Investments in Research and Development (R&D)

Investments in Fixed Assets to expand production capacity reached R$457.2 million in 2008, 82% of which was allocated to industrial parks and other facilities located in Brazil and the remaining to plants and other subsidiaries abroad. Due to the nature of the equipment and facilities we use in our productive process, we have great flexibility to manage the investment program according to the demand actually seen. Thus, we try to optimize capacity occupation by accelerating or decelerating investments, thus maximizing return on invested capital. Within the several units built or improved in 2008, we point out the expansion of foundry capacity.

Our efforts in research and development include expenditures focused on the development of new products, continuous improvement of already available products, product and system application and adaptation engineering and improvement of our industrial processes. In 2008 these expenditures added up to R$88.8 million, accounting for 2.0% of Net Operating Revenues. In 2007, investments in R&D amounted to R$86.0 million, accounting for 2.3% of Net Operating Revenues.

Annual Report

5


www.weg.net

Dividends Based on the 2008 results, the management proposes to distribute R$301.1 million to shareholders as payment of dividends and interest on stockholders’ equity, corresponding to nearly R$0.49 per share before net of taxes. This amount accounts for 53.7% of the Net Income before statutory adjustments. Below we list the dividends shareholders were entitled to on the respective dates. Beginning August 13, 2008, we made the remuneration payments to shareholders declared during the first half of the year: a) On March 18, as interest on stockholders’ equity (JCP), in the amount of R$27.6 million, or R$0.044705882 per common share; b) On June 17, as interest on stockholders’ equity (JCP), in the amount of R$28.3 million, or R$0.045882353 per common share; c) On July 21, as “Interim Dividends” related to the first half of 2008, in the amount of R$100.7 million, or R$0.163 per common share;

Dividends related to the second half of 2008, as described below according to their declaration date, will be paid as of March 11, 2009: d) On September 18, as interest on stockholders’ equity (JCP), in the amount of R$28.3 million, or R$0.045882353 per common share; e) On December 16, as interest on stockholders’ equity (JCP), the total of R$29.1 million, or R$0.047058824 per common share; f) On February 16, 2009, as supplementary dividends related to the income for the 2008 fiscal year, in the total amount of R$87.1 million or R$0.141 per common share. The Management will propose to the Annual General Meeting to be called that the Net Income, less the legal reserve and dividends, be allocated to the reserve to finance the capital budget.

Net Income, Dividends and Pay-out (%)

42,8%

44,2%

52,0%

53,7%

575,0

560,4

45,5%

502,8 403,3

374,8

172,2

165,5

228,8

298,8

301,1

2004

2005

2006

2007

2008

Dividends

6

Annual Report

Net Income

Pay-out


www.weg.net

Highlights New Subsidiary WEG Russia On March 13 we announced the establishment of a new sales and distribution subsidiary in the foreign market, WEG Russia, incorporated in the city of Nizhny Novgorod (former Gorki), capital of the province with the same name. WEG Russia will handle the sale, distribution and technical assistance of products and systems in Russia and in the other former Soviet bloc countries. This market offers great business potential in areas such as oil and gas exploration, production and transportation. This market is attractive as one of the regions with the largest economic growth in the world. Our presence in the region is still small and our experience in the oil and gas market in other regions will be important for us to carve out a place in Eastern Europe. New Electric Motor Plant in India On May 26 we announced our plans to expand activities in India, with the construction of an electric motor manufacturing unit to be built in the city of Hosur, Tamil Nadu State, close to Bangalore. The new plant will require total investments estimated at US$50 million for the first phase of the project and should start producing electric motors at the end of 2009. India has proven to be an extremely attractive market since we started our sales activities with our own subsidiary in 2004, with important supplies in irrigation, electric, hydro- and thermoelectric energy generation projects. Plant WEG India

Outlook Our business plan is to be executed during several years, considering periods of larger or smaller market growth according to economic cycles. In moments of slower growth, as is expected for 2009, we should grow by consolidating our international presence, achieving more market share and launching new products. In the domestic market we expect to strengthen our position as a supplier of industrial electronic equipment and appliance

Investments Fixed assets (plant expansion/modernization) Current assets (working capital) Total Investments

solutions and developer of systems specific to energy, with packages of greater value added. In the foreign market, we will continue to increase in all world markets our market share in industrial electronic equipment and appliances and increase energy and automation equipment businesses. Our capital budget estimates the following investments:

Amount (in millions of R$) 375.0 136.5 511.5

These investments are financed through the use of the Capital Budget Reserve and funds to be raised with financial institutions in Brazil, mainly from BNDES lines. Jaraguรก do Sul (SC), February 2009. The Management

Annual Report

7


www.weg.net

Financial Statements Consolitadet Balance Sheet in December 31, 2008 and 2007 ASSETS

Figures in R$ Thousands

PARENT COMPANY CONSOLIDADED 2008 2007 2008 2007 CURRENT ASSETS 241.482 260.483 4.386.420 3.799.067 CASH AND BANKS 98 232 71.198 108.900 FINANCIAL INVESTMENTS 88.405 81.519 1.778.280 2.066.072 CREDITS - - 1.110.905 749.587 INVENTORIES - - 1.106.585 705.553 DIVIDENDS / INTEREST ON EQUITY 144.556 168.677 - RECOVERABLE TAXES 8.423 10.055 176.383 84.793 EXPENSES OF FUTURE PERIODS - - 3.801 7.169 OTHER CREDITS - - 139.268 76.993 NON-CURRENT ASSETS 2.106.057 1.765.822 1.386.354 1.074.778 LONG-TERM ASSETS 44.631 20.370 197.616 176.914 CREDITS WITH RELATED PARTIES 18.086 7.407 - COURT DEPOSITS 19.744 7.970 52.152 76.488 DEFERRED TAXES 6.801 4.993 79.240 59.400 RECOVERABLE TAXES - - 57.043 32.392 OTHER - - 9.181 8.634 PERMANENT ASSETS 2.061.426 1.745.452 1.188.738 897.864 INVESTMENTS IN DIRECT/INDIRECT ASSOCIATED COMPANIES 2.060.141 1.744.022 12.242 9.814 IN SUBSIDIARIES - - - 36.582 OTHER INVESTMENTS - 1 1.100 1.819 PROPERTY, PLANT AND EQUIPMENT 1.285 1.429 1.047.333 745.599 DEFERRED CHARGES - - - 104.050 INTANGIBLE ASSETS - - 128.063 TOTAL ASSETS 2.347.539 2.026.305 5.772.774 4.873.845

8

Annual Report


www.weg.net

Financial Statements Consolitadet Balance Sheet in December 31, 2008 and 2007 LIABILITIES PARENT COMPANY 2008 2007 CURRENT LIABILITIES 146.083 161.377 SUPPLIERS - - TAXES, FEES AND CONTRIBUTIONS 7.140 10.477 LOANS AND FINANCING - - INCOME TAX AND SOCIAL CONTRIBUTION - - DIVIDENDS PAYABLE 138.038 150.420 ADVANCE FROM CUSTOMERS - - PROFIT SHARING - - OTHER LIABILITIES 905 480 NON-CURRENT LIABILITIES 22.876 35.754 LONG-TERM LIABILITIES 22.876 35.754 SOCIAL AND TAX LIABILITIES - - LOANS AND FINANCING - - DEBTS WITH RELATED PARTIES 2.967 21.072 PROVISION FOR CONTINGENCIES 19.909 14.682 DEFERRED TAXES - - OTHER LIABILITIES - - INTEREST OF NON-CONTROLLING SHAREHOLDERS - - SHAREHOLDERS’ EQUITY 2.178.580 1.829.174 PAID-IN CAPITAL 1.360.500 1.360.500 REVALUATION RESERVES 6.071 6.754 ADJUSTMENT TO ASSET VALUATION 89.829 - PROFIT RESERVES 722.180 461.920 TOTAL LIABILITIES 2.347.539 2.026.305

Figures in R$ Thousands CONSOLIDADED 2008 2007 2.520.871

2.158.053

318.029 116.506 1.314.098 30.103 140.167 465.506 50.046 86.416

193.580 111.805 1.077.487 101.260 151.991 360.895 52.571 108.464

1.073.323

886.618

1.030.982 31.208 847.118 - 135.917 7.505 9.234

852.428 13.312 654.253 175.545 1.672 7.646

42.341

34.190

2.178.580

1.829.174

1.360.500 6.071 89.829 722.180

1.360.500 6.754 461.920

5.772.774

4.873.845

Annual Report

9


www.weg.net

Financial Statements Consolidated Statement of Income In December 31, 2008 and 2007

Figures in R$ Thousands PARENT COMPANY CONSOLIDADED 2008 2007 2008 2007 GROSS REVENUE FROM SALES AND/OR SERVICES - - 5.471.192 4.550.645 DOMESTIC MARKET - - 3.570.130 2.941.396 EXTERNAL MARKET - - 1.901.062 1.609.249 GROSS REVENUE DEDUCTIONS - - (969.151) (801.468) NET REVENUE FROM SALES AND/OR SERVICES - - 4.502.041 3.749.177 DOMESTIC MARKET - - 2.659.554 2.202.485 EXTERNAL MARKET - - 1.842.487 1.546.692 COST OF GOODS AND/OR SERVICES SOLD - - (2.933.931) (2.353.495) GROSS INCOME - - 1.568.110 1.395.682 OPERATING EXPENSES/REVENUES 556.244 573.595 (897.740) (668.732) SELLING EXPENSES - - (403.220) (333.313) GENERAL AND ADMINISTRATIVE EXPENSES (3.657) (3.020) (249.176) (203.076) FINANCIAL REVENUES / EXPENSES 583 4.532 (155.599) 34.779 FINANCIAL REVENUES 114.248 107.768 464.131 345.469 INTEREST ON EQUITY (RECEIVED) 109.251 95.115 - OTHER FINANCIAL REVENUES 4.997 12.573 - FINANCIAL EXPENSES (113.665) (103.236) (619.730) (310.690) INTEREST ON EQUITY (PAID) (113.353) (98.094) (113.810) (98.227) OTHER FINANCIAL EXPENSES (312) (5.142) (505.920) (212.463) OTHER OPERATING EXPENSES / REVENUES (NOTE 20) (213) 197 (92.982) (169.661) EQUITY PICK-UP SUBSIDIARIES AND ASSOCIATED COS. (NOTE 11) 559.531 571.886 3.237 2.539 NET OPERATING INCOME 556.244 573.595 670.370 726.950 NON-OPERATING INCOME 111 848 3.817 (152) INCOME BEFORE TAXES/INTEREST 556.355 574.443 674.187 726.798 STATUTORY INTEREST/CONTRIBUTIONS (1.885) (1.274) (8.310) (7.620) SOCIAL CONTRIBUTION 386 (308) (50.088) (58.483) INCOME TAX 1.444 (776) (156.205) (179.335) REVERSAL OF INTEREST ON EQUITY 4.101 2.899 113.810 98.227 NONCONTROLLING INTEREST - - (12.993) (4.603) INCOME/LOSS FOR THE PERIOD 560.401 574.984 560.401 574.984 NUMBER OF SHARES EX-TREASURY (UNITS) 617.627 617.627 EARNINGS PER SHARE (REAIS) 0,91 0,93 EQUITY VALUE PER SHARE (REAIS) 3,53 2,96

10

Annual Report


www.weg.net

Financial Statements Statements of Changes in Shareholders Equity In December 31, 2008 and 2007 Figures in R$ Thousands PROFIT RESERVES CAPITAL REVALUATION REVENUE STOCK RESERVES RESERVES

CAPITAL RESERVE

RETAINED ADJUSTMENTS EARNINGS/ TO ASSET ACCUMULATED LOSSES VALUATION

TOTAL SHAREHOLDERS’ EQUITY

OPENING BALANCE IN JANUARY 1ST, 2007 907.000 7.432 43.882 594.410 - INCREASE/DECREASE IN CAPITAL STOCK 453.500 - (43.882) (409.618) - DIVIDEND REVERSAL - - - - - REALIZATION OF REVALUATION RESERVE - (678) - - - INCOME/LOSS FOR THE PERIOD - - - - - LEGAL RESERVE - - 28.749 - - DIVIDENDS - - - - - INTEREST ON EQUITY - - - - - RESERVE FOR CAPITAL BUDGET - - - 248.379 - OPENING BALANCE IN JANUARY 31ST, 2007 1.360.500 6.754 28.749 433.171 - DIVIDEND REVERSAL - - - - - REALIZATION OF REVALUATION RESERVE - (683) - - - ADJUSTMENT TO ASSET VALUATION - - - - 89.829 INCOME/LOSS FOR THE PERIOD - - - - - LEGAL RESERVE - - 28.020 - - DIVIDENDS - - - - - INTEREST ON EQUITY - - - - - RESERVE FOR CAPITAL BUDGET - - - 232.240 - OPENING BALANCE IN DECEMBER 31ST, 2008 1.360.500 6.071 56.769 665.411 89.829

- 1.552.724 - 289 678 574.984

289 574.984

(28.749) (200.729) (98.094) (248.379)

(200.729) (98.094) -

-

1.829.174

287 683 - 560.401

287 89.829 560.401

(28.020) (187.758) (113.353) (232.240)

(187.758) (113.353) -

- 2.178.580

Annual Report

11


www.weg.net

Financial Statements Statements of Cash Flow Ended in December 31, 2008 and 2007

Figures in R$ Thousands PARENT COMPANY CONSOLIDATED 2008 2007 2008 2007 OPERATING ACTIVITIES Net income before taxes (IR/CS) 556.354 574.443 674.187 726.798 Depreciation and amortization 144 144 206.081 156.633 Equity pick-up (559.531) (571.886) (3.237) (2.539) Provisions: Profit sharing - - 86.246 86.634 Interests on equity 4.101 2.899 113.810 98.227 Other (429) 864 8.705 32.785 Increase/Reduction in accounts receivable (19.847) (10.739) (553.390) (243.671) Increase/Reduction in accounts payable (17.331) 28.163 158.677 427.947 Increase/Reduction in inventories - - (401.932) (177.033) Income and social contribution taxes paid (314) (3.068) (274.461) (207.405) Profit sharing paid - - (95.485) (85.384) Net cash from operating activities (36.853) 20.820 (80.799) 812.992 INVESTMENT ACTIVITIES Investments 7.266 400 (4.868) (37.851) Property, plant and equipment - - (457.168) (349.486) Intangible assets - - (5.930) (29.628) Permanent assets write-off - - 1.245 592 Dividends/Interest on equity received 334.131 258.264 - Deferred - - - Accumulated conversion adjustment - - 89.829 Net chash from investiments activities 341.397 258.664 (376.892) (416.373) FINANCING ACTIVITIES Working capital financing - - 126.567 220.570 Long-term financing - - 302.909 99.250 Payment of dividends/interest on equity (297.792) (259.451) (297.279) (257.970) Net cash invested in financing activities (297.792) (259.451) 132.197 61.850 Increase (Reduction) in cash and cash equivalents 6.752 20.033 (325.494) 458.469 Cash Balance: Cash and equivalents balance at the beginning of the period 81.751 61.718 2.174.972 1.716.503 Cash and equivalents balance at the end of the period 88.503 81.751 1.849.478 2.174.972

12

Annual Report


www.weg.net

Financial Statements Consolidated Statement of Value Added Ended in December 31, 2008 and 2007

Figures in R$ Thousands

PARENT COMPANY CONSOLIDATED 2008 2007 2008 2007 1 - Revenues 100 (872) 5,482,014 4.490,029 1.1. Sale of goods, products and services - - 5,471,192 4,550,645 1.2. Other revenues 100 (872) 9,034 (59,395) 1.3. Provision/reversal of Doubtful accounts - - 1,788 (1,221) 2 - Inputs acquired from third-parties (1,024) (264) (3,216,575) (2,587,410) 2.1. Cost of good s and services sold (810) (447) (3,200,070) (2,559,027) 2.2. Loss/recovery of assets (214) 183 (16,505) (28,383) 3 - Gross value added (924) (1,136) 2,265,439 1,902,619 4 - Depreciation, amortization and depletion 144 144 196,624 150,530 5 - Net value added produced (1,068) (1,280) 2,068,815 1,752,089 6 - Value added received as transfer 673,790 681,388 467,368 348,008 6.1. Equity pick-up 559,542 573,620 3,237 2,539 6.2. Financial revenues 114,248 107,768 464,131 345,469 7 - Total value added to distribute 672,722 680,108 2,536,183 2,100,097 8 - Value added distribution 672,722 680,108 2,536,183 2,100,097 8.1. Personnel 4,098 3,327 743,157 632,325 8.1.1 Direct compensation 4,044 3,290 633,746 547,267 8.1.2 Benefits 5 - 74,261 57,483 8.1.3 Workers severance fund (FGTS) 49 37 35,150 27,575 8.2. Taxes, fees and contributions (1,339) 1,461 722,156 680,325 8.2.1 Federal (1,340) 1,461 631,316 610,103 8.2.2 State - - 84,720 65,369 8.2.3 Municipal 1 - 6,120 4,853 8.3. Third-party’s capital remuneration 109,562 100,336 510,469 212,463 8.3.1 Interest 109,562 100,336 505,920 212,463 8.3.2 Rentals - - 4,549 8.3.3 Other - - - 8.4. Equity remuneration 560,401 574,984 560,401 574,984 8.4.1 Interest on equity 113,353 98,094 113,353 98,094 8.4.2 Dividends 187,758 200,729 187,759 200,729 8.4.3 Retained earnings/accumulated losses in the year 259,290 276,161 259,289 276,161

Annual Report

13


www.weg.net

Management Report .............................................................. Financial Statements

Notes to the Financial Statements

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands)

01. OPERATIONAL CONTEXT WEG S.A. is a publicly-held company, headquartered in the city of Jaraguá do Sul, state of Santa Catarina, Brazil, a holding company comprising WEG group, and has as corporate purpose the production, industrialization, trade, import and export of industrial, electromechanical and electronic systems, rotating electrical machines, machinery and equipment in general, equipment for the production, distribution and conversion of electric power, electrical supplies, programmable controllers, machine parts and components, devices and equipment in general, hydraulic turbines of all kinds and capacities, resins in general, paint supplies, vegetable and chemical substances and products destined to industry and science, through industrial parks located in Brazil, Argentina, Mexico, Portugal and China. 02. PRESENTATION OF THE FINANCIAL STATEMENTS AND MAIN ACCOUNTING PRACTICES (i) Overview The Financial Statements of the Company and its subsidiaries (parent company and consolidated) are presented in thousands of reais, except when otherwise indicated, including the explanatory notes, and are prepared pursuant to the accounting practices adopted in Brazil, which include the accounting practices established by the Brazilian Corporate Legislation – Laws 6,404, 9,457 and 10,303 of December 15, 1976, May 5, 1997 and November 1, 2001, respectively, and supplementary provisions from the Brazilian Securities and Exchange Commission (CVM). The process for preparing the Financial Statements involves the utilization of accounting estimates. The determination of these estimates took into account experiences from past and current events, assumptions related to future events, and other objective and subjective factors. Some of the material items subject to such estimates and assumptions are the selection of the useful life of property, plant and equipment and its recovery in operations, credit risk analysis to determine the allowance for doubtful accounts, measurement of financial instruments fair value, maintenance of the deferred income tax on tax losses and negative basis for social contribution, as well as the analysis of other risks to determine other provisions, including the provision for contingencies resulting from judicial, civil, labor and tax proceedings and evaluation of financial instruments and other assets and liabilities as of the balance sheet date. The settlement of the transactions involving these estimates might cause the amounts to differ from those recorded in the financial statements, due to inaccuracies inherent to the estimate process. The Company revises its estimates and assumptions on a quarterly basis. Assets and liabilities are classified as current when their realization or settlement is likely to occur in the subsequent twelve months. On the contrary, they are presented as non-current. Monetary assets and liabilities denominated in foreign currencies were converted into reais based on the exchange rate on the closing date of the balance sheet, and the differences resulting from currency conversion were recognized in the statement of income. The exchange variations of investments in subsidiaries overseas, whose assets and liabilities were converted into reais based on the exchange rate as of the closing date of the balance sheet, and the results were ascertained based on the year’s average rate are recognized in a specific Shareholders’ Equity account. Other permanent investments are recorded at the acquisition cost net of the provision for devaluation, when applicable. The authorization to complete the preparation of these financial statements occurred at the board of executive officers’ meeting held on January 30, 2009.

(ii) Initial Adoption of Law number 11,638/07 The effects in the Income and in Shareholders’ Equity of the initial adoption of Law 11,638/07 and Provisional Measure 449/08 are stated below:

Net Shareholders’ Income Equity Balances according to accounting statements on December 31, 2008 560,401 2,178,580 Effects of Law number 11,638/07: - Accumulated Conversion Adjustment 89,829 - Subsidy (Tax Reduction) (200) - Pre-Operating Expenses 130 130 Balances Before Application of Law number 11,638/07 and Provisional Measure 449/08 650,160 2,178,710

14

Annual Report


www.weg.net

..............

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands)

The Company chose to prepare the balance sheet with transition date on January 1, 2008 (or December 31, 2007) which is the starting point for the adoption of changes in the accounting practices adopted in Brazil according to the corporate legislation amended by Law 11,638/07 and by Provisional Measure 449/08. The amendments introduced by the aforementioned legislation are characterized as a change in the accounting practice, however, as allowed by the Technical Pronouncement CPC 13 – Initial Adoption of Law 11,638/07 and Provisional Measure 449/08 of the Accounting Pronouncements Committee “CPC”, approved by CVM Resolution 565 of December 17, 2008, all adjustments affecting the income were made against retained earnings and accumulated losses on the transition date pursuant to Article 186 of Law 6,404/76, with no retroactive effects on the financial statements. Additionally, the consolidated accounting statements for the year ended December 31, 2007 were reclassified, when applicable, for purposes of better presenting and keeping the uniformity in the comparison, according to the table below: 31/12/2007 Adjustments 1/1/2008 ASSETS CURRENT ASSETS 3,799,067 - 3,799,067 NON-CURRENT ASSETS 1,074,778 (193) 1,074,585 LONG-TERM ASSETS 176,914 - 176,914 PERMANENT ASSETS 897,864 (193) 897,671 INVESTMENTS IN SUBSIDIARIES/AFFILIATED COMPANY 9,814 (851) 8,963 IN SUBSIDIARIES – GOODWILL 36,582 (36,582) OTHER INVESTMENTS 1,819 - 1,819 PROPERTY, PLANT AND EQUIPMENT 745,599 (25,321) 720,278 DEFERRED ASSETS 104,050 (104,050) INTANGÍBLE ASSETS - 166,611 166,611 TOTAL ASSETS 4,873,845 (193) 4,873,652 LIABILITIES CURRENT LIABILITIES 2,158,053 - 2,158,053 NON-CURRENT LIABILITIES 886,618 - 886,618 SHAREHOLDERS’ EQUITY 1,829,174 (193) 1,828,981 TOTAL LIABILIITES 4,873,845 (193) 4,873,652

The Company adopted the rules and interpretations issued by CVM and which are effective for the year ended December 31, 2008. The main new rules applied in the preparation of the financial statements of the parent company and consolidated are listed below: 1) Impairment – CVM Resolution 527/07 (CPC 01) The Company measured the recoverable value of property, plant and equipment and intangible assets through the value in use method (Future Cash Flows), not assessing any impairment which should be recorded on an accounting basis. 2) Effects of Changes in Exchange Rates and Conversion of Accounting Statements – CVM Resolution 534/08 (CPC 02) The Company has adopted the following practices: g a) Functional and Presentation Currency The financial statements of each subsidiary included in the Company’s consolidation are prepared using the functional currency of each entity. The functional currency of an entity is the currency of the main economic environment in which it operates. The financial statements of the subsidiaries overseas are converted into Reais, which is WEG S.A.’s functional and presentation currency. g b)Investments Investments in subsidiaries and affiliated companies (Note 11) are adjusted by the equity method of accounting. Other investments are evaluated at acquisition cost, minus provision for depreciation, when applicable. The financial statements of subsidiaries overseas are converted into local currency, as follows: - Balance Sheets are converted based on the exchange rate effective as of December 31, 2008; - Statements of income are converted based on the average monthly rate of the period.

Annual Report

15


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands)

c) Exchange Variation on Investments - The values of capital gains and losses, resulting from the exchange variation on investments in subsidiaries overseas, in the amount of R$89,829 on December 31, 2008, are recognized the in Shareholders’ Equity; On December 31, 2007, capital gains and losses, in the amount of R$62,386, were recorded in other operating revenues/ expenses (Note 20). - The Company’s interest in the values resulting from the result for the period and from equity increases or reductions in subsidiaries are recorded in the operating result. 3) Statement of Cash Flows – CVM Resolution 547/08 (CPC 03) Presented as an integral part of the financial statements, prepared by the indirect method, according to the Resolution’s rules and procedures. 4) Intangible Assets – CVM Resolution 553/08 (CPC 04) Presented the Intangible Assets group as determined, with the reclassification of the following accounts: Investments (R$37,433), Property, Plant and Equipment (R$25,321) and Deferred Charges (R$103,857) totaling R$166,611. All intangible assets are considered with defined useful life. Goodwill based on future profitability recorded by the Company was amortized by the straight-line method up to December 31, 2008. 5) Disclosure on Related Parties – CVM Resolution 560/08 (CPC 05) The Related Parties note was prepared according to the Resolution’s criteria (Note 08). 6) Subsidy and Government Assistances – CVM Resolution 555/08 (CPC 07) Government subsidies as monetary contribution are recognized on systematic bases during the period in operating results. Tax reductions are recognized in a write-down account of taxes and expenses. 7) Statement of Value Added – CVM Resolution 557/08 (CPC 09) Presented as an integral part of the financial statements, prepared according to the Resolution’s rules and procedures. 8) Adjustment to Present Value – CVM Resolution 564/08 (CPC12) The Company calculated the adjustment to present value based on the overall calculation on the outstanding balances of each group of monetary assets and liabilities accounts, as well as applied discount rates based on the market assumptions existing on the transition date. Items comprising each one of the account groups which were purpose of overall calculation have uniform characteristics. Given the immaterial values, the Company did not make adjustments to the financial statements. 9) Initial Adoption of Law 11,638/07 – CVM Resolution 565/08 (CPC 13) The Company is adopting Law 11,638 and Provisional Measure 449/08 making the comparison with the transition balance sheet of January 1, 2008 and according to the Resolution prerogative, during 2009 the Company will review the economic useful life of its property, plant and equipment and intangible assets. 10) Financial Instruments: Recognition, Measurement and Presentation – CVM Resolution 566/08 (CPC 14) Financial instruments are only recognized when the Company becomes part of the contractual provisions of the instrument. The records are made by the acquisition or issue value, monthly evaluated in each balance sheet date and recorded at their fair value and informed according to the rules set forth (Note 22). 11) CVM Resolution 469 of May 2, 2008 The balances of revaluation reserves recorded up to December 31, 2007, considering that the accounting values of assets, purpose of revaluation, are lower than the market values, the Company maintained the amounts in their respective accounts until their effective realization. (iii) Main Accounting Practices Adopted in the Preparation of the Financial Statements g a) Determination of Net Income. Revenues and expenses are stated in compliance with the accrual basis of accounting. Revenues from product sales are recognized in the result when all risks and benefits inherent to the product are transferred to the buyer as well as the Company no longer holds control or responsibility for goods sold and it is probable that the economic benefits will favor the Company and the service revenue is recognized in the income in view of its realization. g b) Cash and Cash Equivalents. These include the balances in checking accounts and financial investments, recorded at cost accrued of income earned up to December 31, 2008, according to rates agreed upon with financial institutions (Note 04). g c) Trade Accounts Receivable. These are stated at realization values, and the amounts receivable from international customers are restated based on exchange rates effective at the end of each year. The provision for customer credit losses was calculated based on the analysis of credit risks, which takes into account the history of losses, and it is sufficient to cover losses on amounts receivable (Note 05). g d) Inventories. Inventories are stated at the average acquisition or manufacturing cost. Provisions for low turnover or obsolete inventories are recorded when considered necessary by the Management (Note 06). g e) Other Current and Non-Current Assets. These are stated at cost or realization value, including, when applicable, income earned and monetary and exchange variations incurred. g f) Property, Plant and Equipment. These are evaluated at acquisition cost, less the respective depreciation, except plots of land, which are not depreciated. The depreciation is calculated by the straight-line method and takes into account the economic useful life of the assets. The property, plant and equipment are net of PIS/COFINS and ICMS credits and the g

16

Annual Report


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) counter-entry is recorded as recoverable taxes (Note 12). g g) Intangible Assets. These are evaluated at acquisition cost, less amortization and possible provision to adjust them to their probable realization values, when needed. Intangible assets are usually amortized taking into account the estimated term for their effective utilization, considering they have a defined useful life. Goodwill in the acquisitions of investments which have as economic base the future profitability was amortized on a straight-line basis for a 5-year term up to December 31, 2008. As of January 1, 2009 they will no longer be amortized, and should only be submitted to an annual impairment test (Note 14). g h) Investments. Investments in subsidiaries and affiliated companies with interest in the voting capital higher than 20% or with a significant influence and in other companies which are part of the same group or which are under common control, are evaluated according to the equity accounting method (Note 11). Other investments that not suited in the category above are assessed by the acquisition cost, less depreciation provision, when applicable. g i) Income Tax and Social Contribution. Ascertained by actual and presumed profit, pursuant to the prevailing legislation (Note 19). Deferred Income Tax and Social Contribution were calculated under CVM Rule 371/02 (Note 10). g j) Other Current and Non-Current Liabilities. Stated at known or calculable values, plus, when applicable, the corresponding financial charges on a daily pro rata basis, and the incurred monetary and exchange variations. g k) Conversion of Foreign Currency Balances. The criterion for the conversion of the asset and liability balances of foreign exchange operations consists of the conversion to domestic currency (R$) at the exchange rate effective on the closing date of the financial statements. Gains and losses from the restatement of these assets and liabilities verified between the exchange rate effective on the transaction date and the closures of the years are recognized as financial revenues or expenses in the income. g l) Interest on equity. For corporate purposes, interest on equity is stated as allocation of results directly to shareholders’ equity. For tax purposes, it was considered a financial expense, reducing the calculation basis of income tax and social contribution. g m) Earnings per Share. These are calculated based on the amount of shares existing on the balance sheets closing date. g n) Related Parties. Purchase and sale transactions of inputs and products are made under conditions and terms similar to transactions with unrelated third parties (Note 08). 03. CONSOLIDATED FINANCIAL STATEMENTS The fiscal years of subsidiaries included in the consolidation coincide with the parent company’s, and the accounting policies have been applied in a uniform manner in all consolidated companies, and are consistent with those used in the previous year, except for the option of non-retroactive application of new accounting pronouncements effects, effective as of 2008, as described in note 2(ii). The main consolidation procedures are as follows: a) Exclusion of balances of assets and liabilities accounts among consolidated companies; b) Exclusion of interests in the capital, in reserves and in the accumulated deficit of subsidiaries; c) Exclusion of balances of revenues and expenses, as well as of unrealized profits from intercompany transactions. Unrealized losses are excluded in the same way, but only when there are no evidences of recovery problems of related assets. d) Highlight of the minority interest in the consolidated financial statements.

Annual Report

17


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands)

04. FINANCIAL INVESTMENTS PARENT COMPANY 2008 2007

In domestic currency - Bank Deposit Certificate (CDB) - Fixed-Income Funds In foreign currency - International Deposit Certificates - Other TOTAL

88,405 88,405 - - - - 88,405

80,824 80,247 577 695 695 - 81,519

CONSOLIDATED 2008 2007 1,579,415 1,579,415 - 198,865 195,471 3,394 1,778,280

1,835,572 1,798,924 36,648 230,500 230,103 397 2,066,072

Domestic Investments: In December 31, 2008, the CDBs are paid by an average of 102% of CDI (101% at December 31, 2007). The Fixed Income Funds are paid on average 99% of CDI in 2007. Investments Overseas: - Interest from 3.20% to 5.66% p.a. in bank deposit certificates issued by financial institutions overseas in the original amount of EUR40,212, whose balance on December 31, 2008 was R$131,341. - In U.S. dollar plus interest between 3.75% and 5.22% p.a., in deposit certificates issued by financial institutions overseas in the original amount of US$21,792, the balance of which was R$52,286 on December 31, 2008; - In U.S. dollar, with remuneration calculated based on 95.9% of the CDI rate, applied to the amounts in reais obtained from converting the amounts in foreign currency based on the rate on the date of investment. These investments refer to deposit certificates issued by financial institutions overseas in the original amount of US$6,234, the balance of which was R$11,844 on December 31, 2008. In all cases, they are cash investments.

05. TRADE ACCOUNTS RECEIVABLE

Domestic market Foreign market Advances on Export Contracts – ACE Provision with Credit Losses from Customers (*) TOTAL Effective Credit Losses from Customers in the Period Trade bills due Overdue trade bills: In up to 30 days Over 30 days

06. INVENTORIES

2008 486,142 635,428 (721) (9,944) 1,110,905 2,334 703,401 193,640 224,529

CONSOLIDATED 2007 390,780 370,705 (1,795) (10,103) 749,587 1,078 523,014 113,810 124,661 CONSOLIDATED

2008

2007

Domestic market 820,283 530,671 Finished Products 248,518 119,415 Products under Production 236,230 235,176 Raw materials and Other 291,800 181,012 Imports in Progress 48,500 Allowance for Losses (4,765) (4,932) Foreign market 286,302 174,882 Finished Products 224,138 156,648 Products under Production 21,450 14,259 Raw materials and Other 53,661 15,401 Provision for Losses (12,947) (11,426) TOTAL 1,106,585 705,553

18

Annual Report


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands)

07. RECOVERABLE TAXES

PARENT COMPANY 2008 2007

ICMS Sales Tax on acquisitions of property, plant and equipment VAT (Subsidiaries Overseas) PIS/COFINS on acquisitions of property, plant and equipment PIS/COFINS on Financial Income Tax on Industrialized Products - IPI ICMS Sales Tax Withholding Income Tax Other TOTAL Short-Term Long-Term

- - - - - - 8,423 - 8,423 8,423 -

- - - - - - 10,055 - 10,055 10,055 -

CONSOLIDATED 2008 2007 46,186 43,132 38,665 11,725 20,982 19,336 36,138 17,263 233,426 176,383 57,043

29,156 27,744 17,152 16,845 14,351 4,178 7,759 117,185 84,793 32,392

Credits will be realized by the Company and its subsidiaries, by means of refund and/or taxes and contributions carryforwards. 08. RELATED PARTIES Commercial transactions of purchase and sale of products, raw materials and service contracting, as well as financial loan transactions, funding among the group companies and key management personnel compensation were carried out as follows: PARENT COMPANY CONSOLIDATED 2008 2007 2008 2007 EQUITY ACCOUNTS Long-Term Assets Management of Financial Resources 18,086 7,407 - - WEG Indústrias S.A. 16,882 7,407 - - WEG Exportadora S.A. 1,202 - - - WEG Automação S.A. 2 - - Long-Term Liabilities Management of Financial Resources 2,967 21,072 - - WEG Exportadora S.A. 17,578 - - WEG Equipamentos Elétricos S.A. 2,967 3,494 - INCOME ACCOUNTS Key Management Personnel Compensation: - Salaries and Charges - Fees - Profit Sharing

1,470 129 646 695

1,000 92 524 384

4,100 582 1,761 1,757

6,182 589 2,306 3,287

Additional information: g a) Commercial Operations Input and product purchase and sale transactions are carried out under the same conditions with unrelated third parties, prevailing cash sales. g b) Technology Transfer WEG Equipamentos Elétricos S.A. and its subsidiary TRAFO Equipamentos Elétricos S.A. executed an agreement of mutual transfer of technology related to the calculation and project of transformers. g c) Management of Financial Resources (i) Financial and commercial operations among group companies are recorded at a book account, complying with requirements of the group agreement; (ii) Credit/debit agreements entered into with Managers are recorded at a book account and remunerated between 95% and 100% of CDI variation. Annual Report

19


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) g d) Service Provision and Other Covenants (i) WEG Equipamentos Elétricos S.A. entered into a service agreement with WEG Automação S.A.; WEG Indústrias S.A. and TRAFO Equipamentos Elétricos S.A related to management consulting services. The reimbursement is made through the Service Invoice. (ii) WEG Equipamentos Elétricos S.A. and Hidráulica Industrial S.A Ind. e Com – HISA entered into a “Guarantees and Other Covenants” agreement, with the purpose of WEG being the guarantor in loan operations and in the issue of guarantee to customers (Performance Bond, surety bond, etc.). g e) Sureties and Guarantees (i) WEG S.A. granted sureties and guarantees to subsidiaries overseas, in the amount of US$147.7 million (US$157.5 million in 2007). (ii) A WEG Equipamentos Elétricos S.A. granted sureties and guarantees to subsidiaries abroad, in the amount of US$9.4 million in 2008 (US$5.9 million in 2007). 09. COURT DEPOSITS PARENT COMPANY CONSOLIDATED 2008 2007 2008 2007 Proceedings - Tax - Labor claims - Other TOTAL

19,744 - - 19,744

7,970 - - 7,970

48,806 1,506 1,840 52,152

72,043 2,549 1,896 76,488

Court deposits subject to proceedings involving Occupational Accident Insurance (SAT) in the amount of R$31,651 and SEBRAE in the amount of R$5,395, made final and unnappealable, were reverted against tax contingencies (Note 16 a.3 and a.4), and during 2008, court deposits related to other proceedings were made in the amount of R$13,809. 10. DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION Deferred Income Tax and Social Contribution credits were ascertained in conformity with IBRACON pronouncement, approved by CVM Rule 371/02, and are based on tax losses and temporary differences, related to fiscal, labor, and civil contingencies, and provisions for losses. Tax credits recorded on temporary differences will be realized to the extent of the realization of the provisions which served as its base, and are accounted for under long-term receivables. Management believes tax losses will be offset within the next two years. PARENT COMPANY CONSOLIDATED

2008

2007

2008

2007

NON-CURRENT ASSETS 6,801 4,993 79,240 59,400 - Provisions 74 43 49,299 27,545 - Labor/Civil Contingencies - - 10,743 8,190 - Fiscal Contingencies 6,727 4,950 16,526 17,280 - Tax Losses - - 2,672 6,385 NON-CURRENT LIABILITIES - - 7,505 1,672 - Accelerated Depreciation with Incentive Law 11.196/05 - - 7,505 1,672

20

Annual Report


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 11. INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANY 11.1 SUBSIDIARIES Adjusted Shareholders’ Equity

Net Income for the year

Interest in Capital Stock (%) Direct

Indirect

Equity Accounting 12/31/2008

Book Value of Investment

12/31/2007 12/31/2008

12/312007

WEG Equipamentos Elétricos S.A. 1,450,450 470,025 99.94 - 445,572 477,970 1,449,602 1,236,303 WEG Exportadora S.A. 482,396 90,884 99.96 - 90,844 73,039 482,180 389,718 WEG Indústrias S.A. 116,069 21,053 99.94 - 21,041 18,712 116,001 101,291 WEG Amazônia S.A. 8,471 (1,494) 0.02 99.98 - 1 2 2 WEG Automação S.A. 193,639 51,441 0.00 99.99 - - - WEG Itajaí Equips. Elétricos Ltda 26,182 17,714 0.00 99.99 - - - TRAFO Equips. Elétricos S.A. 61,314 15,152 - 68.70 - - - Hidráulica Industrial S.A. Ind. Com. - HISA 27,495 16,378 - 51.00 - - - WEG Chile S.A. 9,344 2,794 8.00 92.00 224 119 747 496 WEG Colômbia Ltda 4,363 962 - 99.00 - - - WEG Equipamientos Electricos S.A 34,766 6,585 20.71 79.28 1,339 455 7,200 6,005 WEG Indústrias Venezuela C.A 12,628 1,331 - 99.99 - - - WEG México S.A. de C.V. 52,574 2,160 0.00 99.99 - - - WEG Transformadores México S.A. de CV 28,114 (509) - 70.00 - - - WEG Electric Corp. 67,288 9,275 0.79 99.21 78 (196) 530 332 WEG Overseas S.A. 2,174 9 100.00 - 9 (345) 2,174 1,653 WEG Europe S.A 46,837 2,869 - 100.00 - 84 - 1,389 WEG France S.A.S 1,833 (361) - 100.00 - - - WEG Germany GmbH 29,556 7,114 - 100.00 - 1,700 - 5,533 WEG Ibéria S.A 485,501 49,705 - 100.00 - - - WEG Electric Motors (UK) Ltd. 6,255 1,630 - 100.00 - - - WEG Itália S.R.L 6,766 281 0.07 99.93 - 1 5 4 WEGeuro Ind. Electricas S.A 29,248 7,172 5.74 94.26 414 378 1,679 946 WEG Scandinávia AB 3,840 1,269 - 100.00 - - - WEG Austrália PTY 10,968 225 - 100.00 - (38) - 344 WEG Electric (Índia) Private Limited 418 202 4.99 94.99 10 6 21 6 WEG Electric Motors Japan CO Ltd. 851 174 - 100.00 - - - WEG Nantong Electric Motors Manufacturing 4,764 (14,224) - 100.00 - - - WEG Singapore PTE LTD (513) (227) - 100.00 - - - Nantong Testing Station 364 43 - 70.00 - - - WEG Germany NN (415) (686) - 100.00 - - - WEG Middle East FZE 120 (460) - 100.00 - - - WEG Industries (Índia) Private Limited 8,806 (663) - 99.99 - - - TOTAL 559,531 571,886 2,060,141 1,744,022 11.2 AFFILIATED COMPANIES VOLTRAN S.A. de C.V. 38,207 12,520 - 30.00 - - 12,242 9,814 11.3 GOODWILL IN THE ACQUISTION - - - - - - - 36,582 OF SUBSIDIARIES 11.4 OTHER - - - - - - 1,100 1,819

Annual Report

21


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 12. PROPERTY, PLANT AND EQUIPMENT

Annual Depreciation PARENT COMPANY CONSOLIDATED Rate (%) 2008 2007 2008 2007

Land and Constructions Equipment and Facilities Furniture and Fixtures Hardware/Software Vehicles Construction in Progress Reforestation Other Subtotal Accrued Depreciations/Depletions Total

00 to 04 10 to 30 10 to 30 20 to 30 20 to 30 - - - - - -

4,320 270 - - - - - - 4,590 (3,305) 1,285

4,320 270 - - - - - - 4,590 (3,161) 1,429

377,337 1,308,702 38,229 50,975 8,731 184,546 10,723 18,138 1,997,381 (950,048) 1,047,333

331,825 1,003,829 63,562 92,285 8,641 47,205 10,782 16,904 1,575,033 (829,434) 745,599

In 2008, the amounts related to brands and patents and software in the net amount of R$25,321 were reclassified to the Intangible assets group. g a) Summary of the changes in property, plant, and equipment:

2008

Balance at the beginning of the year (net) Acquisitions Transfer to intangible assets Inclusion of Assets (TRAFO and HISA) Write-offs Depreciation and Depletion Effect of foreign exchange on property, plant, and equipment (subsidiaries overseas) Balance at the end of the year (net)

745,599 457,168 (25,321) - (1,245) (158,423) 29,555 1,047,333

CONSOLIDATED 2007 543,379 318,204 31,282 (592) (129,043) (17,631) 745,599

g b) Values offered in guarantee - property, plant and equipment were offered as guarantee of loans, financings, and tax and labor claims in the amount of R$15,389 - consolidated on December 31, 2008 (R$13,752 on December 31, 2007). g c) Fully depreciated assets in use in Brazil - the gross book value of the fully depreciated assets in use is R$577,365 consolidated on December 31, 2008 (R$461,614 on December 31, 2007). g d) New Estimates of Useful Life of Property, Plant and Equipment – As from September 1, 2007, based on a technical study carried out by a specialized Institute, the Company and its subsidiaries have changed their estimate of economic useful life of property, plant and equipment. This procedure resulted in an increment of R$30,566 in depreciation charges recognized in the income for the year (R$21,183 on December 31, 2007), when compared to charges that would be recognized had there not been said change in the economic useful life of assets.

22

Annual Report


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 13. DEFERRED CHARGES - CONSOLIDATED Specification

Amortization Number of years

2008

2007

5 5 5 5 -

- - - - -

40,786 61,835 238 1,191 104,050

Research and Development Projects Information Technology Projects Projects in Companies Overseas Other Total

Net Balance

On December 31, 2008 deferred charges balance was reclassified to intangible assets, according to procedures of CVM resolution 553/08 (CPC 04). 14. INTANGIBLE ASSETS - CONSOLIDATED Amortization Accumulated Net Balance Specification Number of years Cost Amortization 2008 2007 Projects: - Research and Development 5 69,505 42,846 26,659 - Information Technology 5 79,241 33,254 45,987 Goodwill in Acquisition of Subsidiaries 5 53,746 20,726 33,020 Software License 5 43,561 25,915 17,646 Other 5 26,228 21,477 4,751 Total - 272,281 144,218 128,063 The amortization schedule is as follows: 2009 38,128 2010 23,712 2011 20,123 2012 10,065 2013/2014 3,015 TOTAL 95,043

Annual Report

23


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 15. FINANCINGS AND LOANS - CONSOLIDATED As of December 31, 2008, financings raised in foreign currency include the ACCs in the amount of R$619.5 million, and BNDES-FINEM in basket of currencies in the amount of R$12.7 million in the short term and R$13.6 million in the long term. Financings applied for by subsidiaries overseas allocated to working capital are in dollars and/or in the currency of each country, in the amount of R$264.5 million in the short term (R$113.0 in 2007) and R$81.0 million in the long-term (R$179.5 million in 2007), equivalent to US$147.8 million (US$165.0 million in 2007). Financings are secured by sureties and fiduciary disposal. MODALITY

ANNUAL CHARGES

2008

2007

IN BRAZIL 1,815,666 1,439,354 SHORT TERM 1,049,590 964,588 Working Capital 3.5% to 8.6% interest p.a. (+) Exchange Variation 619,497 559,300 Working Capital TJLP (+) 1.4% to 6.25% p.a. 390,434 381,026 Working Capital Basket of Currencies (+) 0.8% to 3.2% p.a. 12,653 12,306 Non Deliverable Forwards (NDF) Exchange Variation 16,884 Property, Plant and Equipment IGPM (+) 1.0% p.a. 9,267 8,258 Working Capital CDI (+) 3.8% per month - 3,222 Property, Plant and Equipment TJLP (+) 1.2% to 2.3% p.a. 832 429 Other 1.1% to 1.6% interest per month 23 47 LONG TERM 766,076 474,766 Working Capital TJLP (+) 1.5% to 5.0% p.a. 615,765 399,651 Property, Plant and Equipment IGPM (+) 1.0% p.a. 52,004 52,624 Property, Plant and Equipment UFIR (+) 1.0 to 4.0% p.a. 1,293 Working Capital Currency basket (+) 0.8% to 1.5% p.a. 13,610 18,765 Working Capital 5.3% interest p.a. 62,935 Property, Plant and Equipment TJLP (+) 1.2% to 2.3% p.a. 20,464 3,698 Other 1.1% to 1.6% interest per month 5 28 ABROAD 345,550 292,386 SHORT TERM 264,508 112,899 Working Capital EURIBOR (+) 0.3% to 1.5% p.a. 68,177 50,538 Working Capital LIBOR (+) 0.7% to 1.7% p.a. 72,767 37,878 Working Capital 5.02% to 18.0% interest p.a. 123,564 24,483 LONGO PRAZO 81,042 179,487 Working Capital LIBOR (+) 0.7% to 0.8% p.a. - 46,192 Working Capital EURIBOR (+) 0.6% to 0.7% p.a. - 14,277 Working Capital 5.0% to 10.8% interest p.a. 81,042 119,01 TOTAL SHORT TERM 1,314,098 1,077,487 TOTAL LONG TERM 847,118 654,253 MATURITY OF LONG-TERM FINANCINGS AND LOANS: Maturity 2008 2007 2009 - 325,385 2010 345,996 117,378 2011 172,676 92,872 2012 124,338 63,456 2013 92,927 32,053 2014 onwards 111,180 23,109 TOTAL 847,118 654,253

24

Annual Report


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 16. PROVISIONS FOR CONTINGENCIES The Company and its subsidiaries are parties to legal and administrative proceedings, arising from the normal course of operations, involving tax, labor and civil issues. The respective provisions were recorded for the proceedings whose possibility of loss was evaluated as probable and/or possible, based on the expected value at risk estimated by the Company’s legal advisors. Management estimates the recorded provision for contingencies is sufficient to cover possible losses with judicial proceedings in progress, as follows: a) Tax: - Income Tax and Social Contribution (a.1) - Semiannual PIS Law 07/70 (a.2) - INSS (a.3) - SEBRAE (a.4) - PIS/COFINS on Interest on equity (a.5) - Other (a.6) b) Labor

PARENT COMPANY 2008 2007 19,909 14,682 119 119 - - - - - - 19,495 14,550 295 13 -

-

CONSOLIDATED 2008 2007 65,619 103,891 14,151 14,151 1,382 11,731 13,569 39,018 - 5,395 19,917 14,550 16,600 19,046 8,362

9,073

c) Private Pension Plan – Risk Benefits (Note 18) - 10,500 - d) Civil and Other - - 51,436 62,581 TOTAL

19,909

14,682

135,917

175,545

g a) Tax Contingencies (a.1) There were no changes in the progress of these proceedings regarding the year ended on December 31, 2007. (a.2) Reversal of the provision on PIS Semestralidade Law 07/70 proceeding in the amount of R$10,349, made final and unappealable. (a.3) Reversal of the provision on Occupational Accident Insurance (SAT) in the amount of R$31,651, against judicial deposit (Note 09), as a result of the final and unappealable decision of the proceeding. The balance refers to contributions owed to Social Security whose judicial discussions refer to social security pertinent charges on private pension, profit sharing, education allowance and others. (a.4) Reversal of the provision in the amount of R$5,395, against judicial deposit (Note 09), as a result of the final and unappealable decision of the proceeding. (a.5) The Company is judicially questioning the PIS/COFINS levied on the Interest on equity. (a.6) Tax contingencies named “Other” refer to several lawsuits of individual amounts less significant. g b) Labor Contingencies The Company and its subsidiaries are parties to labor claims involving especially discussions about overtime, health hazard, risks, and others. Based on the payment history and on the legal advisors’ opinion, the provision of R$8,362 on December 31, 2008 (R$9,073 on December 31, 2007) is deemed sufficient to cover probable losses. g c) Civil and Other Contingencies They correspond especially to civil proceedings, including moral and esthetic damages, occupational diseases, and damages arising from occupational accidents. Based on the legal advisors’ opinion, Management recorded a provision of R$51,436 on December 31, 2008 (R$62,581 on December 31, 2007), which is deemed sufficient to cover probable losses.

Annual Report

25


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 17. SHAREHOLDERS’ EQUITY g a) Capital Stock As of December 31, 2008, the capital stock consists of 617,626,729 non-par registered book-entry voting common shares. g b) Dividends and Interest on equity The Bylaws provide for the distribution of at least 25% of the adjusted Net Income, however the Company proposes the following:

NET INCOME FOR THE YEAR ( -) Legal Reserve DIVIDENDS CALCULATION BASIS 1st Half Dividends (R$ 0.163/share in 2008 and R$0.196/share in 2007) 1st Half Interest on equity (R$0.077/share in 2008 and R$0.024/share in 2007) (Withholding Tax R$8,392 in 2008 and R$2,615 in 2007) 2nd Half Dividends (R$0.141/share in 2008 and R$0.129/share in 2007) 2nd Half Interest on equity (R$0.079/share in 2008 and R$0.111/share in 2007) (Withholding Tax R$8,610 in 2008 and R$12,098 in 2007) Total Dividends/Interest on equity for the year

2008

2.007

560.401 28,020 532,381 100,673

574.984 28,749 546,235 121,055

55,950 87,085

17,439 79,674

57,403 301,111

80,654 298,822

c)Recording of Reserves - Legal Reserve – recorded in the amount of R$28,020 equivalent to 5% of the Net Income for the Year in compliance with the 20% limit of the capital stock; - Profit Retention – corresponds to the remaining value of the Net Income for the Year R$231,270, plus the balance of retained earnings R$970 (resulting from the revaluation reserve realization and reversal of previous years dividends) which are allocated to the capital budget reserve, in view of the 2009 investment plan.

g

18. PRIVATE PENSION PLAN LIABILITIES The Company and its subsidiaries provide their employees with post-employment benefits of supplementary private pension plan, health insurance and bonus related to length of service. During 2008 and 2007 they contributed with R$13,496 and R$10,280, respectively. On December 31, 2008, the net amount of R$10,500 was recorded to cover futures benefits. The purpose of the private pension plan is to supplement retirement benefits granted by the official social security system. The plan, managed by WEG Seguridade Social, comprises the benefits of monthly income, sickness allowance additional, disability retirement additional, disability benefit, death annuity, death benefit, proportional deferred benefit and self-sponsorship. The plan’s contribution forms comprise the contributions of contributing participants and the sponsor’s additional and special monthly contribution.

19. PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION The parent company and subsidiaries in Brazil calculate the income tax and social contribution at pretax profits, except for subsidiary WEG Itajaí Equipamentos Elétricos Ltda, which assesses it at the presumed profits. The provision for income tax was recorded with a 15% rate, plus an additional 10%; and the provision for social contribution, with a 9% rate, in accordance with the prevailing legislation. Taxes of companies overseas are recorded in accordance with the legislation of each country.

26

Annual Report


www.weg.net

Income Tax and Social Contribution in the Result: PARENT COMPANY CONSOLIDATED 2008 2007 2008 2007 Income before income tax and social contribution and profit sharing 556,354 574,443 674,188 726,799 Nominal rate 34% 34% 34% 34% Income tax and social contribution calculated at nominal rate (189,160) (195,311) (229,224) (247,112) Adjustments for effective income tax and social contribution ascertainment: Equity in the earnings of subsidiaries 190,241 194,446 2,874 (19,280) Difference of rates on results abroad - - (5,341) (6,415) Tax incentives - - 22,430 21,177 Other effects 749 (219) 2,967 13,812 Income Tax and Social Contribution in the result 1,830 (1,084) (206,293) (237,818) Current tax 22 (2,686) (221,465) (269,046) Deferred tax 1,808 1,602 15,172 31,228

20 - OTHER OPERATING REVENUES/EXPENSES - CONSOLIDATED Values referring to the exchange variation on shareholders’ equity of companies overseas in 2007, profit sharing, goodwill amortization, provision for tax proceedings and others are recorded under other operating revenues/expenses, as follows:

2008

2007

OTHER OPERATING REVENUES - Other

2,035 12,035

6,551 6,551

OTHER OPERATING EXPENSES - Employee profit sharing - Profit sharing – subsidiaries overseas - Exchange variation on Shareholders’ Equity of subsidiaries overseas - Semiannual PIS Law 07/70 - Goodwill amortization - Tax incentives of Rouanet Law - Other TOTAL NET

(105,017) (80,885) (5,361) - 10,349 (9,457) (2,652) (17,011)

(176,212) (81,632) (5,002) (62,386) (315) (6,103) (3,441) (17,333)

(92,982)

(169,661)

The amounts of capital gains and losses, resulting from the exchange variation on investments in subsidiaries overseas, in the amount of R$89,829 on December 31, 2008, are recognized in Shareholders’ Equity. 21. INSURANCE COVERAGE The Company adopts the policy of contracting insurance coverage for assets subject to risks by amounts deemed sufficient to cover possible claims, considering the nature of its activity. The risk assumptions adopted, given their nature, are not part of the scope of a financial statements audit, consequently they were not examined by our independent auditors. On December 31, 2008, the insurance coverage for operational risks was comprised of R$50,000 for material damages, R$25,000 for profit loss and R$10,000 for civil liability.

Annual Report

27


www.weg.net

Notes to the Financial Statements In December 31, 2008 (Figures in R$ Thousands) 22 - FINANCIAL INSTRUMENTS In compliance with CVM Resolution 566, of December 17, 2008, which approved the Technical Pronouncement CPC 14, and with CVM Rule 475, of December 17, 2008, the Company and its subsidiaries carried out an evaluation of their financial instruments, including derivatives, recorded in the financial statements on December 31, 2008, presenting the following book and market values: DESCRIPTION

CONSOLIDATED BOOK VALUE MARKET VALUE 2008 2007 2008 2007

Cash and cash equivalents 71,198 108,900 71,198 108,900 Financial Investments: - In Domestic Currency 1,579,415 1,835,572 1,579,415 1,835,572 - In Foreign Currency 198,865 230,500 198,865 230,500 Financings and Loans - In Domestic Currency 1,153,023 848,984 1,153,023 848,984 - In Foreign Currency 991,309 882,756 991,309 882,756 - Derivative Instrument (NDF) 16,884 - 16,884 -

Financial Investments are described as follows: g a)Cash and cash equivalents These are presented at their market value, which is equivalent to their book value. g b) Financial Investments (footnote 4) They are classified as allocated to trading. The market value is reflected on the amounts recorded in the balance sheets. g c) Loans and Financing (footnote 15) The main purpose of this financial instrument is to generate funds to finance the Company’s expansion programs and occasionally meet the needs of its cash flows in the short term. - Domestic currency loans and financing – they are classified as financial liabilities not measured to fair value, and are accounted for by their values restated according to contracted rates. The market values of these loans are equivalent to their book values, as they are financial instruments with exclusive characteristics coming from specific financing sources. - Foreign currency loans and financing – financing contracted to support working capital of commercial operations in Brazil and in subsidiaries overseas and restated according to contracted rates. - Derivative financial instruments – operations with derivatives have as purpose the protection against exchange variations in foreign currency funding, with no speculative nature. The fair values are calculated projecting future flows of operations (assets and liabilities) using BM&F curves and bringing these flows to present value using BM&F’s future DI rate. Risk factors of financial instruments are basically related to: g (i) Financial Risks g Foreign Currency Risks In order to mitigate foreign exchange risks, the Company exports in several currencies, and it also monitors the financial exposure, seeking to balance its financial assets and liabilities within the limits established by Management. As defined by the Company’s Board of Directors, the short-term cash flow protection must be limited to the equivalent to 3 months of revenues in foreign currencies witch correspond to U$ 180.00 million. At the end of 2008 the net financial exposure was of U.S. $ 105.0 million, therefore, below this limit. The Company’s exports amounted to US$675.7 million in 2008, representing natural hedge (US$593.9 million in 2007). g Debt Charges Risks This risk results from the possibility of subsidiaries incurring in losses due to fluctuations in interest rates or other debt indexes that increase financial expenses related to loans and financing obtained in the market, or decrease financial revenue related to subsidiaries’ financial investments. The Company continuously monitors market interest rates in order to evaluate the possible need to protect itself against volatility risk of these rates. g Derivative Financial Instruments The Company does not have as policy to operate with derivatives as a routine. During 2008, in view of the momentary credit insufficiency in the market, the Company and its subsidiaries carried out operations with derivatives of the NDF “Non Deliverable Forwards” type to mitigate or eliminate risks inherent to their operations. The Company’s and its subsidiaries’ Management permanently monitors the derivative financial instruments contracted by means of their internal controls. The demonstrative chart of sensitivity analysis must be read together with other financial assets and liabilities expressed in foreign currency on December 31, 2008. The effect of estimated deteriorations of exchange rates on NDFs below shall be offset, if realized, fully or partially, with depreciations on total assets and liabilities. In the preparation of the chart below, the Management defined that, for the probable scenario, exchange rates used for markto-market of financial instruments must be considered, due on December 31, 2008. Such rates represent the best estimate for 28

Annual Report


www.weg.net

their future price behavior, and represent the value for which the positions may be settled in the maturity. The chart below presents the “cash and expense” effects of financial instruments results in each scenario. The data relative to the “possible” and ”remote” scenarios, as they refer to prospective information, not deriving from historical accounting information, were not reviewed by independent auditors. Sensitivity Analysis Chart (NDF) Market Value on 12/31/08 Average Value Quotation

Possible Scenario (25%) Average Value Quotation

Remote Scenario (50%) Average Value Quotation

Risk

Notional Value

Increase of US$

US$ 40.0 million

US$ 2.3844

(13,418)

US$2.9805

(37,359)

US$3.5766

(61,203)

Increase of EUR

EUR 7.7 million

EUR 3.3067

(3,466)

EUR 4.1334

(5,209)

EUR 4.9601

(7,274)

We have executed the accounting registration based on its market price on December 31, 2008 by the accrual method of accounting. These operations had a net negative impact of R$16,884, which was recognized as financial expenses. g Operating Risks g Credit risk It arises from the possibility that the Company’s subsidiaries do not receive values resulting from sales operations or from credits with financial institutions generated by financial investments. In order to mitigate this risk, the Company’s subsidiaries adopt as a practice the analysis of their customers’ equity and financial position, define a credit limit and permanently follow-up on their outstanding balance. As for the financial investments, the Company and its subsidiaries do not carry out investments in institutions unless they present low credit risk. Moreover, each institution has a maximum limit of investment balance, established by Management. 23 - SUBBSIDY AND GOVERNMENT ASSISTANCE The Company, through its subsidiaries, was granted the following subsidies: Tax Reduction The subsidiary WEG Amazônia S.A. was granted a tax incentive from ICMS incentive credit of 90.25%, and its amount is recognized in the tax incentive reserve in the Shareholders’ Equity of that subsidiary in the amount of R$200 in 2008. g Monetary Contribution The subsidiaries WEG Automação S.A. and WEG Equipamentos Elétricos S.A. were granted during 2008 an economic subsidy by FINEP to execute a research and development project of innovative products in the amount of R$1,397. This amount was recorded in the liabilities and realized to the result as expenses were incurred. On December 31, 2008, the R$196 balance remains in the liabilities. g

FINANCIAL STATEMENTS PUBLICATION g Diário Oficial do Estado de Santa Catarina A Notícia S.A. - from Joinville/SC g Valor Econômico - from São Paulo/SP BOARD OF DIRETORS DIRETORIA Décio da Silva - President Harry Schmelzer Junior - President Diretor Gerd Edgar Baumer - Vice-President Sérgio Luis Silva Schwartz - Diretor Vice-President and Ana Teresa do Amaral Meirelles International Area Diretor Martin Werninghaus Alidor Lueders - Administrative and Investor Relations Director Miriam Voigt Schwartz Jaime Richter - Marketing Director Moacyr Rogério Sens Roberto Bauer - Director - Energy Nildemar Secches Umberto Gobbato - Director - Automation Siegfried Kreutzfeld - Director - Motors

g

FISCAL COUNCIL Eunildo Lázaro Rebelo Ilário Bruch Ivan Farias de Castro

ACCOUNTANT Wilson José Watzko TC-CRC/SC 16555/O-4 CPF 352.366.129-34

The full financial statements were audited by Ernst & Young Auditores Independentes S/S, without qualifications and, it is available at company´s headquarters .

Annual Report

29


www.weg.net

Special Review Report - Unqualified Opnion To the Shareholders, Board of Directors, and Executive Officers of WEG S/A Jaraguá do Sul – SC 1. We have examined the balance sheet of WEG S.A. (parent company and consolidated) as of December 31, 2008, and the respective statement of income, statements of changes in shareholders’ equity, of cash flows, and value added corresponding to the year ended on that date, prepared under the responsibility of its Management. Our responsibility is to express an opinion on these financial statements. The financial statements of certain subsidiaries and associated companies, whose investments represented R$519,867 thousand on December 31, 2008 and generated earnings in subsidiaries’ equity of R$42,944 thousand during the year ended on that date, were examined by other independent auditors, which issued an unqualified review report. In our opinion, concerning the amount of these investments and the earnings in the subsidiaries’ equity generated by them, it is based on the review report of these other auditors. 2. Our review was conducted in compliance with the auditing rules applicable in Brazil and comprise: a) the planning of the works, taking in consideration the relevance of the balances, the volume of transactions and the accounting and internal control systems of the Company; b) the verification, based on tests, of the evidences and records that support the accounting figures and information disclosed; and (c) the evaluation of the most representative accounting practices and estimates adopted by the Management of the Company, and of the presentation of the financial statements taken as a whole. 3. In our opinion, based on our reviews, and on the report on other independent auditors’ reviews, as mentioned in paragraph 1, the financial statements referred to above adequately represent, in all relevant aspects, the equity and financial position of WEG S/A on December 31, 2008, the result of its operations, the changes in shareholders’ equity its cash flows, and the value added in operations related to the year ended on that date, pursuant to the accounting practices adopted in Brazil. 4. The financial statements (parent company and consolidated) referring to year ended on December 31, 2007, comprising the balance sheet, the statements of income, of changes in the shareholders’ equity, and of changes in financial position, in addition to the supplementary information comprising the statements of cash flow, were audited by other independent auditors, which issued a unqualified opinion, dated February 4, 2008. As mentioned in note 20 (ii), the accounting practices adopted in Brazil were amended as of January 1, 2008. The financial statements related to the year ended on December 31, 2007 presented jointly with the 2008 financial statements, were prepared according to the accounting practices adopted in Brazil effective up to December 31, 2007 and, as permitted by the Technical Pronouncement CPC 13 – Initial Adoption of Law 11,638/07 and Provisional Measure no. 449/08, are not being newly presented with the adjustments for comparison purposes between the fiscal years. 5. The statements of valued added, corresponding to year ended on December 31, 2007, prepared together with the financial statements of 2008 fiscal year, were submitted to the same audit procedures described in paragraph 2, and, in our opinion, it is properly presented, in all its relevant aspects, in relation to the financial statements mentioned in paragraph 4, taken as a whole. Blumenau, February 2, 2009 ERNST & YOUNG Auditores Independentes S.S. CRC-2-SP 015.199/O-6 F-SC Marcos Antonio Quintanilha Accountant CRC-1-SP 132.776/O-3-T-SC Fiscal Council´s opinion The Fiscal Council of WEG SA, performing its statutory duties reviewing the Management Report, the Financial Statements of the fiscal year ended in 12/31/2008 and, the Management´s opinion to the allocation of the net profit, based on examinations performed and considering the explanations provided by Company’s management, the representative of external audit and, in addition, on the opinion of the external independent auditors, ERNST & YOUNG – Auditores Independentes, without qualifications, dated 02/02/2009, believes that the previously mentioned documents are prepared to be discussed and voted at the Annual General Meeting. Jaraguá do Sul (SC) February 16th, 2009. Ilário Bruch

30

Annual Report

Eunildo Lázaro Rebelo

Ivan Farias de Castro


www.weg.net

Social Report 2008 and 2007 - Brazil Consolidated (Figures are expressed in thousands of Reais, except for employees figures) 1- 1- Basis of Calculation 1.1 - Gross Operating Revenues 1.2 - Net Operating Revenues 1.3 - Net Operating Income 1.4 - Gross Payroll 2 - Internal Social Indicators 2.1 - Meals 2.2 - Compulsory Social Charges 2.3 - Profit Sharing 2.4 - Private Pension Plan 2.5 - Health and Dental Assistance 2.6 - Education 2.7 - Other Benefits TOTAL 3 - External Social Indicators 3.1 - Taxes 3.2 - Contributions to Society 3.2.1 - Education and Culture 3.2.2 - Sports and Leisure 3.2.3 - Philantropy TOTAL 4 - Environmental Indicators Environmental Investments

2008 28.267 260.724 95.915 13.625 13.438 10.307 11.553 433.829 2008 629.617 8.255 3.174 236 4.845 637.872 2008 20.115

% of Gross Payroll 4,47 41,27 15,18 2,16 2,13 1,63 1,83 68,67 % of Gross Payroll 99,66 1,31 0,50 0,04 0,77 100,96 % of Gross Payroll 3,18

2008 5.471.192 4.502.041 670.370 631.786 % of Net Revenues 4,22 38,89 14,31 2,03 2,00 1,54 1,72 64,71 % of Net Revenues 93,92 1,23 0,47 0,04 0,72 95,15 % of Net Revenues 3,00

( ) does not set gols ( ) meets from 51 to With regard to setting “annual goals” to reduce waste generation, 75% consumption in general in production/operation and increase the ( ) meets from 0 to 50% ( X ) meets from 76 effectiveness with which natural resources are used, the company: to 100% 5 - Employee Indicators 5.1 - Number of employees at the end of the period 5.2 - Number of admissions during the period 5.3 - Number of layoffs during the period 5.4 - Number of women working at the end of period 5.5 - % of management positions held by women 5.6 - Number of outsourced employees 5.7 - Number of interns 5.8 - Number of employees aged 45+ at the end of period 5.9 - Number of afro-descendants employees at the end of period 5.10 - % of management positions held by afro-descendants 6 - Material information about the company’s corporate citizenship practices Total number of work-related accidents Social and environmental projects developed by the company were defined by: Safety and health standards at the workplace were defined by: With regard to the freedom of association, the right to collective bargaining and the internal representation of workers, the company:

( ) Board

( ) does not get involved

The profit sharing scheme includes:

( ) Board

Distribution of Value Added (DVA)

( ) Board and Management

( ) Board and ( ) all employees Management

( ) Board

Total value added to be distributed

% of Gross Payroll 3,67 40,54 19,49 2,12 2,46 1,58 2,01 71,87 % of Gross Payroll 115,83 1,95 1,19 0,05 0,71 117,78 % of Gross Payroll 1,39

2007 17.820 196.845 94.614 10.280 11.934 7.660 9.779 348.932 2007 562.376 9.454 5.775 232 3.447 571.830 2007 6.731

( ) does not set gols ( ) meets from 51 to 75% ( ) meets from 0 to 50% ( X ) meets from 76 to 100% 2008 19.504 4.541 2.586 3.797 10 1.059 122 1.772 2.261 10

2007 17.549 5.066 1.766 3.279 11 968 147 1.577 1.879 8

2008

Targets 2009

1.116

The private pension  scheme includes:

When selecting suppliers, the same ethical and social and environmental responsibility standards adopted by the company: With regard to employees’  participation in voluntary work programs, the company

2007 4.550.645 3.749.177 726.950 485.508 % of Net Revenues 2,45 27,08 13,02 1,41 1,64 1,05 1,35 48,00 % of Net Revenues 77,36 1,30 0,79 0,03 0,47 78,66 % of Net Revenues 0,93

( ) are not considered ( ) does not get involved

( X ) follows ILO norms

( ) Board

( X ) all ( ) Board and employees Management +Cipa

( ) all employees)

( ) encourages and follows ILO

( ) Board and management ( ) Board and management ( ) are suggested

( X ) all employees) ( X ) all employees ( X ) are demanded ( ) organizes and ( X ) supports encourages

Im 2008: 30% Employees 22% Shareholders

( ) Board and Management

( X ) all employees

R$ 2.536.183

( ) does not get involved ( ) Board ( ) Board ( ) are not considered ( ) does not get involved

( X ) follows ILO norms ( ) Board and management ( ) Board and management ( ) are suggested ( X ) supports

(X) all employees (X) all employees +Cipa ( ) encourages and follows ILO ( X ) todos(as) empregados(as) ( X ) todos(as) empregados(as) ( X ) are demanded ( ) organizes and encourages

Im 2007:

28% Government 32% Government 20% third parties 27% Shareholders

R$ 2.100.096

30% Employees 11% Third Parties

Annual Report

31


WEG Equipamentos Elétricos S.A. Jaraguá do Sul - SC Fone (47) 3276-4000 - Fax (47) 3276-4020 São Paulo - SP Fone (11) 5053-2300 - Fax (11) 5052-4212 motores@weg.net www.weg.net


2008 Annual Report