Item 5.
|
Operating and Financial Review and Prospects
|
The following discussion is derived from our
audited consolidated financial statements, which are presented elsewhere in this annual report. This discussion does not include
all of the information included in our financial statements. You should read our financial statements to gain a better understanding
of our business and our historical results of operations.
Adoption of International Financial Reporting Standards (IFRS)
The Mexican National Banking and Securities
Commission (CNBV) has established the requirement that listed companies must disclose their financial information to the public,
through the Mexican Stock Exchange (BMV), and therefore, beginning in 2012, we prepare our financial information in accordance
with IFRS, issued by the IASB. IFRS differs in certain significant respects from U.S. GAAP. Accordingly, Mexican financial statements
and reported earnings are likely to differ from those of companies in other countries in this and other respects.
Overview
We are producers of SBQ and structural steel
products. Accordingly, our net sales and profitability are highly dependent on market conditions in the steel industry which is
greatly influenced by general economic conditions in North America and globally. The sharp reduction in economic activity and consumer
demand in general, and in the automotive, construction and manufacturing industries in particular, in North America starting in
the fourth quarter of 2008 has had a significant negative impact on the demand and price levels for all steel products, including
SBQ and structural steel products. These economic conditions have had an impact on all parts of our operations since the fourth
quarter of 2008. Demand, production levels and prices in certain segments and markets have recovered and stabilized to a certain
degree, although the extent, timing and duration of the recovery and potential return to pre-crisis levels remains uncertain. Our
net revenue from sales decreased in 2013, compared to 2012, decreased by 23% in the automotive sector, decreased 15% in the independent
distributor sector, decreased 33% in the hand tools sector, increased 3% in the mining sector and decreased 13% in other industries.
The total decrease in net revenue from sales of SBQ products in 2013, compared to 2012, was 18%. Our net revenue from sales increased
in 2014, compared to 2013, increased by 42% in the automotive sector, decreased 13% in the independent distributor sector, decreased
34% in the hand tools sector, decreased 61% in the mining sector and increased 29% in other industries. The total increase in net
revenue from sales of SBQ products in 2014, compared to 2013, was 18%. Our net revenue from sales decreased in 2015, compared to
2014, increased by 20% in the automotive sector, decreased 43% in the independent distributor sector, increased 204% in the hand
tools sector, decreased 52% in the mining sector and decreased 48% in other industries. The total decrease in net revenue from
sales of SBQ products in 2015, compared to 2014, was 16%. Our net revenue from sales decreased in 2016, compared to 2015, decreased
by 18% in the automotive sector, increased 9% in the independent distributor sector, decreased 72% in the hand tools sector, decreased
42% in the mining sector and decreased 10% in other industries. The total decrease in net revenue from sales of SBQ products in
2016, compared to 2015, was 13%. In 2017, the total increase in net revenue from sales of SBQ products compared to 2016 was 13%.
As a result of the significant competition in
the steel industry and the commodity-like nature of some of our products, we have limited pricing power over many of our products.
The North American and global steel markets influence finished steel product prices. Nevertheless, many of our products are SBQ
products for which competition is limited, and, therefore, these products tend to generate somewhat higher margins compared with
our more commoditized steel products. We attempt to adjust the mix of our product output toward higher margin products to the extent
that we are able to do so, and we also adjust our overall product levels based on the product demand.
We focus on controlling our cost of sales as
well as our selling, general and administrative expenses. Our cost of sales largely consist of the costs of acquiring the raw materials
necessary to manufacture steel, primarily scrap metal and iron ore. Market supply and demand generally determine scrap and iron
ore prices, and, as a result, we have limited ability to influence their cost or the costs of other raw materials, including energy
costs; however, in 2013, 2014, 2015, 2016 and 2017 we did not purchase iron ore pellets or coke since our Lorain, Ohio blast furnace
facility, which is our only facility that utilizes these materials, was idle during these periods. There is a correlation between
the prices of scrap and iron ore and finished product prices, although the degree and timing of this correlation varies from time
to time, so we may not always be able to fully pass along scrap, iron ore and other raw material price increases to our customers.
Therefore, our ability to decrease our cost of sales as a percentage of net sales is largely dependent on increasing our productivity.
Our ability to control selling, general and administrative expenses, which do not correlate to net sales as closely as cost of
sales do, is a key element of our profitability. Although our revenues and costs fluctuate from quarter to quarter, we do not experience
large fluctuations due to seasonality.
Production costs at our U.S. facilities are
higher than those in our facilities in Mexico principally due to the higher cost of labor and the higher cost of ferroalloys used
to manufacture SBQ steel, which is the only steel product that we produce in the United States.
The negative operating trends in our USA segment
are primarily driven by under-utilized production capacity that severely impacts cost. The automotive sector is stable and continues
to provide good demand for our products.
Our U.S. subsidiaries have entered into sale
agreements with customers and, in order to comply with the terms thereof, any existing orders pursuant to those agreements need
to be fulfilled even if the price of raw material increases with time. As the existing sale agreements expire, we will evaluate
new agreements which would result in a production of profitable products.
Typically, about 75% of our business uses a
fixed base price that is negotiated annually, plus monthly scrap and alloy surcharges. The remaining 25% is transaction business,
where we can adjust the base pricing as required. Scrap metal and commodity prices stabilized somewhat midway through 2016, and
in 2017 the prices of scrap and other inputs increased significantly. Financial resources will continue to be made available as
our U.S. segment tackles the cost curve and restores the business to profitability.
Sales Volume, Price and Cost Data, 2013 -
2017
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Shipments (thousands of tons)
|
|
|
2,064
|
|
|
|
2,197
|
|
|
|
2,026
|
|
|
|
2,085
|
|
|
|
2,091
|
|
Guadalajara and Mexicali
|
|
|
518
|
|
|
|
540
|
|
|
|
589
|
|
|
|
591
|
|
|
|
533
|
|
Apizaco and Cholula
|
|
|
329
|
|
|
|
362
|
|
|
|
339
|
|
|
|
350
|
|
|
|
331
|
|
San Luis facilities
|
|
|
528
|
|
|
|
517
|
|
|
|
524
|
|
|
|
554
|
|
|
|
540
|
|
Republic facilities
|
|
|
689
|
|
|
|
778
|
|
|
|
570
|
|
|
|
397
|
|
|
|
387
|
|
Brazil
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
193
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (Ps. millions)
|
|
|
24,369
|
|
|
|
26,829
|
|
|
|
24,476
|
|
|
|
27,516
|
|
|
|
28,700
|
|
Guadalajara and Mexicali
|
|
|
4,981
|
|
|
|
5,366
|
|
|
|
5,658
|
|
|
|
6,188
|
|
|
|
6,149
|
|
Apizaco and Cholula
|
|
|
3,897
|
|
|
|
4,361
|
|
|
|
4,192
|
|
|
|
4,467
|
|
|
|
5,106
|
|
San Luis facilities
|
|
|
4,915
|
|
|
|
4,792
|
|
|
|
5,128
|
|
|
|
5,707
|
|
|
|
5,870
|
|
Republic facilities
|
|
|
10,576
|
|
|
|
12,310
|
|
|
|
9,468
|
|
|
|
9,340
|
|
|
|
8,371
|
|
Brazil
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
|
1,814
|
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (Ps. millions)
|
|
|
22,410
|
|
|
|
25,492
|
|
|
|
23,097
|
|
|
|
22,776
|
|
|
|
23,994
|
|
Guadalajara and Mexicali
|
|
|
4,087
|
|
|
|
4,740
|
|
|
|
3,955
|
|
|
|
5,364
|
|
|
|
4,703
|
|
Apizaco and Cholula
|
|
|
2,729
|
|
|
|
3,115
|
|
|
|
2,764
|
|
|
|
3,635
|
|
|
|
3,607
|
|
San Luis facilities
|
|
|
4,240
|
|
|
|
4,221
|
|
|
|
4,529
|
|
|
|
4,726
|
|
|
|
5,030
|
|
Republic facilities
|
|
|
11,354
|
|
|
|
13,416
|
|
|
|
11,829
|
|
|
|
7,332
|
|
|
|
7,814
|
|
Brazil
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
1,719
|
|
|
|
2,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per ton (Ps.)
|
|
|
11,807
|
|
|
|
12,212
|
|
|
|
12,081
|
|
|
|
13,197
|
|
|
|
13,725
|
|
Guadalajara and Mexicali
|
|
|
9,616
|
|
|
|
9,937
|
|
|
|
9,606
|
|
|
|
10,470
|
|
|
|
11,537
|
|
Apizaco and Cholula
|
|
|
11,845
|
|
|
|
12,047
|
|
|
|
12,366
|
|
|
|
12,763
|
|
|
|
15,426
|
|
San Luis facilities
|
|
|
9,309
|
|
|
|
9,269
|
|
|
|
9,786
|
|
|
|
10,301
|
|
|
|
10,870
|
|
Republic facilities
|
|
|
15,350
|
|
|
|
15,823
|
|
|
|
16,611
|
|
|
|
23,526
|
|
|
|
21,630
|
|
Brazil
|
|
|
—
|
|
|
|
—
|
|
|
|
7,500
|
|
|
|
9,399
|
|
|
|
10,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average cost per ton (Ps.)
|
|
|
10,858
|
|
|
|
11,603
|
|
|
|
11,400
|
|
|
|
10,924
|
|
|
|
11,475
|
|
Guadalajara and Mexicali
|
|
|
7,890
|
|
|
|
8,778
|
|
|
|
6,715
|
|
|
|
9,076
|
|
|
|
8,824
|
|
Apizaco and Cholula
|
|
|
8,295
|
|
|
|
8,605
|
|
|
|
8,153
|
|
|
|
10,386
|
|
|
|
10,897
|
|
San Luis facilities
|
|
|
8,030
|
|
|
|
8,164
|
|
|
|
8,643
|
|
|
|
8,531
|
|
|
|
9,315
|
|
Republic facilities
|
|
|
16,479
|
|
|
|
17,244
|
|
|
|
20,753
|
|
|
|
18,469
|
|
|
|
20,191
|
|
Brazil
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
8,907
|
|
|
|
9,467
|
|
Our results are affected by general global trends
in the steel industry and by the economic conditions in the countries in which we operate and in other steel producing countries.
Our results are also affected by the specific performance of the automotive, non-residential construction, industrial equipment,
tooling equipment and other related industries. Our profitability is also impacted by events that affect the price and availability
of raw materials and energy inputs needed for our operations. The factors and trends discussed below also affect our results and
profitability.
Our primary source of revenue is the sale of SBQ steel and structural
steel products.
In August 2004, we completed the Atlax Acquisition
(Tlaxcala and Cholula facilities). In July 2005, we and our controlling shareholder, Industrias CH, completed the acquisition of
Republic. We believe that these acquisitions allowed us to become the leading producer of SBQ steel in North America and the leading
producer of structural and light structural steel in Mexico, in each case in terms of sales volume. We expect the sale of SBQ steel,
structural steel and other steel products to continue to be our primary source of revenue. The markets for our products are highly
competitive and highly dependent on developments in global markets for those products. The main competitive factors are price,
product quality and customer relationships and service.
Our results are affected by economic activity, steel consumption
and end-market demand for steel products.
Our results of operations depend largely on
macroeconomic conditions in North America. Historically, there has been a strong correlation between the annual rate of steel consumption
and the annual change in gross domestic products (“GDP”) in the Mexican, U.S. and Canadian markets.
We sell our steel
products to the automotive, construction, manufacturing and other related industries. These industries are generally cyclical,
and their demand for steel is impacted by the stage of their industry market cycles and the country’s economic performance.
Mexico’s GDP increased 2% in 2017 (according to preliminary figures of the INEGI) and increased 2.9% in 2016. The U.S. GDP
increased 2.3% in 2017 (according to preliminary figures of the
U.S. Department of Commerce
)
and 1.5% in 2016. Deterioration in economic conditions in the countries in which we operate is likely to adversely affect our results
of operation.
Our results are affected by international steel prices and trends
in the global steel industry.
Steel prices are generally set by reference
to world steel prices, which are determined by global supply and demand trends. As a result of general excess capacity in the industry,
the world steel industry was previously subject to substantial downward pricing pressure, which negatively impacted the results
of steel companies in the second half of 2000 and all of 2001. International steel prices generally improved beginning in 2003,
driven by a strong increase in global demand fostered by economic growth in Asia and an economic recovery in the United States,
combined with increased rationalization of production capacity in the United States and elsewhere. Average steel prices continued
to improve from 2003 to 2008 due to strong end-market demand fundamentals for a number of key steel-consuming industries, continued
strong steel demand in China, India and other developing economies, relatively high raw material and energy costs and reductions
in U.S. production from some of the industry’s largest producers.
This period of high prices for steel encouraged
reactivation of investment in production capacity, and consequently an increase in the supply of steel products that contributed
to a decline in steel prices. As the 2008 financial crisis worsened in late 2008 and early 2009, global demand for steel fell while
new steel production capacity was coming into the market, and as a result steel prices fell worldwide. In 2009 the average steel
price decreased approximately 22% compared to 2008. Due to an increase in the demand, in 2010, the average steel price increased
approximately 16% compared to 2009. The average steel price increased approximately 17% in 2011 compared to 2010. The average steel
price increased approximately 2% in 2012 compared to 2011. The average steel price decreased approximately 10% in 2013 compared
to 2012. The average steel price increased approximately 3% in 2014 compared to 2013. The average steel price decreased approximately
23% in 2015 compared to 2014, mainly due to the deceleration in China. The average steel price increased approximately 2% in 2016
compared to 2015. Our average steel price increased approximately 2% in 2017 compared to 2016.
In recent years, there has been a trend toward
consolidation of the steel industry. For example, in 2006, Arcelor completed the acquisition of Dofasco in Canada, and Mittal Steel
announced the acquisition of Arcelor, forming the largest steel company in the world. Aceralia, Arbed and Usinor merged in February
2002 to create Arcelor, and LNM Holdings and Ispat International merged in October 2004 to create Mittal Steel, which subsequently
acquired International Steel Group. In addition, a number of other steel acquisition transactions have been announced, including
the acquisition of Oregon Steel by Evraz and the acquisition of Corus by Tata Steel. Consolidation has enabled steel companies
to lower their production costs and allowed for more stringent supply-side discipline, including through selective capacity closures
or idling, as the ones observed recently in the United States by Mittal Steel, U.S. Steel and others. Consolidation may result
in increased competition and could adversely affect our results.
Our results are affected by competition from imports.
Our ability to sell our products is influenced,
to varying degrees, by global trade for steel products, particularly trends in imports of steel products into the Mexican and U.S.
markets. During 2005, the Mexican government, at the request of CANACERO, implemented several measures to prevent unfair trade
practices such as dumping in the steel import market. These measures include initiating anti-dumping and countervailing duty proceedings,
temporarily increasing import tariffs for countries with which Mexico does not have free trade agreements. As a result, the competitive
price pressure from dumping declined, contributing to a general upward trend in domestic Mexican steel prices. In 2006 and 2007,
imports to Mexico increased as market conditions improved, and in 2008, imports to Mexico continued to increase, notwithstanding
the worsening of international market conditions. In 2009, however, imports to Mexico decreased as domestic and global market conditions
worsened. In 2010, 2011 and 2012, imports to Mexico increased as market conditions improved. In 2013, imports to Mexico decreased
as domestic and global market conditions worsened. In 2014, imports to Mexico increased slightly. In 2015, imports to Mexico increased
10% compared to 2014 according to preliminary information of CANACERO. In 2016, imports to Mexico increased 1.6% compared to 2015
according to preliminary information of CANACERO. In 2017, imports to Mexico in tons increased 6.8% compared to 2016 according
to preliminary information of CANACERO.
Steel imports to the United States accounted
for an estimated 27% of the domestic U.S. steel market in 2017 and an estimated 26% in 2016. Foreign producers typically have lower
labor costs, and in some cases are owned, controlled or subsidized by their governments, allowing production and pricing decisions
to be influenced by political and economic policy considerations as well as prevailing market conditions. Increases in future levels
of imported steel in the United States could reduce future market prices and demand levels for steel in the United States. To this
extent, the U.S. Department of Commerce and the U.S. International Trade Commission are currently conducting five year “sunset”
reviews of existing trade relief in several different steel products. Imports represent less of a threat to SBQ producers like
us in the United States than to commodity steel producers because of the high quality requirements and standard required by buyers
of SBQ steel products.
Our results are affected by the cost of raw materials and energy.
We purchase substantial quantities of raw materials,
including scrap metal, iron ore, coke and ferroalloys for use in the production of our steel products. The availability and price
of these inputs vary according to general market and economic conditions and thus are influenced by industry cycles. As a result
of the 2008 financial crisis that continues to affect the international markets, the prices of these inputs have remained highly
volatile. For example, prices of scrap metal decreased approximately 6% in 2013, increased approximately 7% in 2014, decreased
approximately 16% in 2015, increased approximately 2% in 2016 and increased approximately 31% in 2017; and prices of ferroalloys
decreased approximately 5% in 2013, increased approximately 16% in 2014 and decreased approximately 9% and 13% in 2015 and 2016,
respectively, in 2017 increased approximately 22%. As with other raw materials, iron ore and coke prices fluctuate significantly.
However, in 2013, 2014, 2015, 2016 and 2017 we did not purchase coke or pellets since our Lorain, Ohio blast furnace facility was
idle during this period.
In addition to raw materials, electricity and
natural gas are both relevant components of our cost structure. We purchase electricity and natural gas at prevailing market prices
in Mexico and the United States. These prices are impacted by general demand and supply for energy in the United States and Mexico
as economic activity fueled energy demand and the supply and price of oil was impacted by geopolitical events. While natural gas
and electricity prices in the United States and Mexico decreased in response to the financial crisis, they have remained highly
volatile. Prices for electricity increased approximately 9% in 2013, 7% in 2014, decreased approximately 12% in 2015, increased
approximately 1.5% in 2016 and increased approximately 22% in 2017; and prices for natural gas increased approximately 16% in 2013
and 25% in 2014, decreased approximately 23% in 2015, increased approximately 8% in 2016 and increased approximately 22% in 2017.
If inflation rates in Mexico rise significantly, our costs may
increase and the demand for our services may decrease.
Mexico has historically experienced high annual
rates of inflation. The annual rate of inflation, as measured by changes in the Mexican national consumer price index (
Índice
Nacional de Precios al Consumidor
) published by the INEGI was 4.0% for 2013, 4.1% for 2014, 2.1% for 2015, 3.4% for 2016 and
6.8% for 2017. High inflation rates could adversely affect our business and results
of operations by increasing certain costs, such as the labor costs
of our Mexican facilities, beyond levels that we could pass on to our customers and reducing consumer purchasing power, thereby
adversely affecting demand for our products.
Depreciation of the Mexican peso relative to the U.S. dollar,
as well as the reinstatement of exchange controls and restrictions, could adversely affect our financial performance.
Depreciation of the Mexican peso relative to
the U.S. dollar may negatively affect our results of operations. Since the second half of 2008, the value of the Mexican peso relative
to the U.S. dollar has fluctuated significantly. According to the Mexican Central Bank (
Banco de Mexico
), during this period
the exchange rate registered a low of Ps. 9.92 per U.S.$1.00 at August 6, 2008, and a high of Ps. 20.84 per U.S.$1.00 at November
14, 2016. The appreciation of the Mexican peso relative to the U.S. dollar in 2017 was 4.5%. The exchange rate at December 31,
2017 was 19.7354 compared to 20.6640 at December 31, 2016. At May 11, 2018 the exchange rate was Ps. 19.5387 per U.S.$1.00.
A severe depreciation of the Mexican peso may
also result in disruption of the international foreign exchange markets and may limit our ability to convert Mexican pesos into
U.S. dollars and other currencies. While the Mexican government does not currently restrict, and has not recently restricted the
right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies
out of Mexico, it has done so in the past and could reinstate exchange controls and restrictions in the future. Currency fluctuations
or restrictions on the transfer of foreign currency outside of Mexico may have an adverse effect on our financial performance.
Segment Information
We are required to disclose segment information
in accordance with IFRS 8 “Operating Segments”: Information which establishes standards for reporting information about
operating segments in annual financial statements and requires reporting of selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess
performance. The statement also establishes standards for related disclosures about a company’s products and services, geographical
areas and major customers.
We conduct business in three principal business
segments which are organized on a geographical basis:
|
●
|
our Mexican segment represents the results of our operations in Mexico, including our plants in Mexicali, Guadalajara, Tlaxcala and San Luis Potosí;
|
|
●
|
our U.S. segment represents the results of our operations of Republic, including its eight plants, seven of which are located in the United States and one in Canada; and
|
|
●
|
our Brazil segment represents the results of our operations in one plant located in Pindamonhangaba, São Paulo State, Brazil, which started operations in June 2015.
|
The following information shows other results
by segment.
|
|
For the year ended December 31, 2017
|
|
|
|
Mexico
|
|
United States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
|
|
(in thousands of pesos)
|
|
Net sales
|
|
17,125,369
|
|
8,370,999
|
|
3,204,082
|
|
—
|
|
28,700,450
|
|
Cost of sales
|
|
13,340,648
|
|
7,814,180
|
|
2,839,698
|
|
—
|
|
23,994,526
|
|
Gross profit (loss)
|
|
3,784,721
|
|
556,819
|
|
364,384
|
|
—
|
|
4,705,924
|
|
Administrative expenses
|
|
753,676
|
|
257,001
|
|
228,266
|
|
—
|
|
1,238,943
|
|
Other (income) expense, net
|
|
98,915
|
|
(105,849)
|
|
—
|
|
—
|
|
(6,934)
|
|
Interest income
|
|
54,021
|
|
217
|
|
—
|
|
—
|
|
54,238
|
|
Interest expense
|
|
(7,459)
|
|
(50,962)
|
|
(65,186)
|
|
69,203
|
|
(54,404)
|
|
Exchange (loss) gain, net
|
|
(1,291,909)
|
|
(26,256)
|
|
1,861
|
|
661,942
|
|
(654,362)
|
|
Income (loss) before income tax
|
|
1,686,783
|
|
328,666
|
|
72,793
|
|
731,145
|
|
2,819,387
|
|
Income tax
|
|
761,953
|
|
322,444
|
|
13,463
|
|
—
|
|
1,097,860
|
|
Net income (loss)
|
|
924,830
|
|
6,222
|
|
59,330
|
|
731,145
|
|
1,721,527
|
|
Other Data
|
|
Mexico
|
|
United States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
Depreciation and amortization
|
|
677,665
|
|
538,699
|
|
249,395
|
|
—
|
|
1,465,759
|
|
Total assets
|
|
32,440,109
|
|
10,548,895
|
|
5,356,860
|
|
(2,807,367)
|
|
45,538,497
|
|
Total liabilities
|
|
891,037
|
|
10,760,999
|
|
2,570,925
|
|
(2,807,367)
|
|
11,415,594
|
|
Additions of property, plant and equipment, net
|
|
2,394,541
|
|
622,785
|
|
22,175
|
|
—
|
|
3,039,501
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
Mexico
|
|
United States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
|
|
(in thousands of pesos)
|
|
Net sales
|
|
16,361,808
|
|
9,339,527
|
|
1,814,230
|
|
—
|
|
27,515,565
|
|
Cost of sales
|
|
13,724,880
|
|
7,332,094
|
|
1,718,619
|
|
—
|
|
22,775,593
|
|
Gross profit (loss)
|
|
2,636,928
|
|
2,007,433
|
|
95,611
|
|
|
|
4,739,972
|
|
Administrative expenses
|
|
901,849
|
|
298,967
|
|
76,671
|
|
|
|
1,277,487
|
|
Other (income) expense, net
|
|
40,134
|
|
(1,481,573)
|
|
—
|
|
1,477,637
|
|
36,198
|
|
Interest income
|
|
108,004
|
|
147
|
|
—
|
|
—
|
|
108,151
|
|
Interest expense
|
|
(15,053)
|
|
(45,120)
|
|
(50,980)
|
|
70,983
|
|
(40,170)
|
|
Exchange gain (loss), net
|
|
2,343,393
|
|
42,727
|
|
765,684
|
|
(1,376,820)
|
|
1,774,984
|
|
Income (loss) before income tax
|
|
4,131,289
|
|
3,187,793
|
|
733,644
|
|
(2,783,474)
|
|
5,269,252
|
|
Income tax
|
|
667,667
|
|
256,089
|
|
2,285
|
|
—
|
|
926,041
|
|
Net income (loss)
|
|
3,463,622
|
|
2,931,704
|
|
731,359
|
|
(2,783,474)
|
|
4,343,211
|
|
Other Data
|
|
Mexico
|
|
United States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
Depreciation and amortization
|
|
620,354
|
|
551,650
|
|
257,377
|
|
—
|
|
1,429,381
|
|
Total assets
|
|
33,124,471
|
|
9,684,303
|
|
5,293,891
|
|
(6,463,293)
|
|
41,639,372
|
|
Total liabilities
|
|
4,151,297
|
|
9,893,536
|
|
2,325,325
|
|
(7,940,930)
|
|
8,429,228
|
|
Additions of property, plant and equipment, net
|
|
2,169,375
|
|
816,586
|
|
114,298
|
|
—
|
|
3,100,259
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
Mexico
|
|
United States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
|
|
(in thousands of pesos)
|
|
Net sales
|
|
14,978,728
|
|
9,467,604
|
|
29,489
|
|
—
|
|
24,475,821
|
|
Cost of sales
|
|
11,247,661
|
|
11,828,885
|
|
20,421
|
|
—
|
|
23,096,967
|
|
Impairment of property, plant and equipment
|
|
—
|
|
2,071,901
|
|
—
|
|
—
|
|
2,071,901
|
|
Gross profit (loss)
|
|
3,731,067
|
|
(4,433,182)
|
|
9,068
|
|
—
|
|
(693,047)
|
|
Administrative expenses
|
|
1,100,622
|
|
457,435
|
|
24,432
|
|
—
|
|
1,582,489
|
|
Other (income) expense, net
|
|
(5,656)
|
|
(184,039)
|
|
16,268
|
|
—
|
|
(173,427)
|
|
Interest income
|
|
33,872
|
|
155
|
|
—
|
|
—
|
|
34,027
|
|
Interest expense
|
|
(
9,987)
|
|
(
47,032)
|
|
(24,805)
|
|
41,629
|
|
(40,195)
|
|
Exchange gain (loss), net
|
|
840,156
|
|
—
|
|
(496,906)
|
|
(725,312)
|
|
(382,062)
|
|
Income (loss) before income tax
|
|
3,500,142
|
|
(4,753,455)
|
|
(553,343)
|
|
(683,683)
|
|
(2,490,339)
|
|
Income tax
|
|
1,412,695
|
|
(642,123)
|
|
—
|
|
—
|
|
770,572
|
|
Net income (loss)
|
|
2,087,447
|
|
(4,111,332)
|
|
(553,343)
|
|
(683,683)
|
|
(3,260,911)
|
|
Other Data
|
|
Mexico
|
|
United States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
Depreciation and amortization
|
|
747,436
|
|
512,393
|
|
1,264
|
|
—
|
|
1,261,093
|
|
Total assets
|
|
28,530,321
|
|
7,891,964
|
|
3,226,150
|
|
(7,404,019)
|
|
32,244,416
|
|
Total liabilities
|
|
1,889,025
|
|
10,808,505
|
|
1,829,524
|
|
(7,404,019)
|
|
7,123,035
|
|
Additions of property, plant and equipment, net
|
|
574,211
|
|
396
|
|
73,136
|
|
—
|
|
647,743
|
|
Our net sales by product during 2015, 2016
and 2017 were as follows:
SALES BY PRODUCT
(in thousands of pesos)
|
|
2015
|
2016
|
2017
|
Light structurals
|
1,270,459
|
1,467,727
|
1,557,567
|
Structurals
|
1,957,388
|
2,321,771
|
2,232,979
|
Bars
|
1,272,580
|
1,122,116
|
1,065,731
|
Rebar
|
5,235,167
|
7,449,278
|
8,931,862
|
Flat bar
|
906,243
|
1,090,841
|
1,552,578
|
Hot rolled bars
|
8,568,417
|
7,729,167
|
8,594,130
|
Cold drawn bars
|
2,750,380
|
3,207,924
|
3,370,150
|
Other
|
2,515,187
|
3,126,741
|
1,395,453
|
Total
|
24,475,821
|
27,515,565
|
28,700,450
|
Our net sales by country or region during 2015,
2016 and 2017 are as follows:
SALES BY COUNTRY OR REGION
(in thousands of pesos)
|
|
2015
|
2016
|
2017
|
Mexico
|
14,543,446
|
16,077,884
|
16,712,874
|
USA
|
9,417,392
|
9,198,561
|
8,333,259
|
Brazil
|
—
|
1,828,279
|
3,214,117
|
Canada
|
371,610
|
350,673
|
370,803
|
Latin America
|
134,031
|
34,932
|
30,173
|
Other (Europe and Asia)
|
9,342
|
25,236
|
39,224
|
Total
|
24,475,821
|
27,515,565
|
28,700,450
|
Consolidated Statements of Comprehensive Income
Comparison of Years Ended December 31, 2016 and 2017
Net Sales
Net sales increased 4%, to Ps. 28,700 million
in 2017 compared to Ps. 27,516 million in 2016. This increase resulted primarily from a 4% increase in the average price per ton
of steel products and an increase of 6,000 tons in shipments of finished steel products. Total sales outside of Mexico increased
5%, to Ps. 11,987 million in 2017 compared to Ps. 11,438 million in 2016. Total sales in Mexico increased 4%, from Ps. 16,078 million
in 2016 to Ps. 16,713 million in 2017.
Shipments of finished steel products increased
0.3%, to 2.091 million tons in 2017, compared to 2.085 million tons in 2016. Total sales volume outside of Mexico of finished steel
products increased 17% to 0.743 million tons in 2017, compared to 0.636 million tons in 2016, while total Mexican sales decreased
7%, from 1.449 million tons in 2016, compared to 1.348 million tons in 2017. The average price of steel products increased 4% in
2017 compared to 2016.
Cost of Sales
Our cost of sales increased 5%, from Ps. 22,776
million in 2016 to Ps. 23,994 million in 2017, which increase is mainly attributable to a 5% increase in the average price per
ton of steel products sold. Cost of sales as a percentage of net sales was 84% in 2017 and 83% in 2016. We experienced higher cost
of sales at our Republic facilities, mainly as a result of (i) higher labor costs corresponding to our U.S. operations, and (ii)
the higher cost of raw materials, which our U.S. operations use in the production of SBQ steel. Hourly wages at our Mexican operations
were approximately U.S.$1.6 (Ps. 31) per hour in 2017 and U.S.$1.4 (Ps. 29) per hour in 2016, compared to U.S.$56.4 (Ps. 1,113)
and U.S.$61.3 (Ps. 1,267) per hour for 2017 and 2016, respectively, at our U.S. operations. Although raw material costs are similar
in the United States and Mexico, our U.S. operations produce only the more costly SBQ steel, which requires more expensive raw
materials such as chromium, nickel, molybdenum and other alloys. Our Mexican operations require these alloys to a lesser extent,
because they produce commodity steel as well as SBQ steel.
Gross Profit (Loss)
Our gross profit was Ps. 4,706 million in 2017
compared to a Ps. 4,740 million gross profit in 2016. This gross profit is attributable mainly to an increase of 6,000 tons of
finished steel products shipped, a 4% increase in the average price of steel products sold, and a 5% increase in the average price
per ton of steel products sold. As a percentage of net sales, our gross profit was 16% in 2017 and our gross profit was 17% in
2016.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 3%, to Ps. 1,239 million in 2017, compared to Ps. 1,277 million in 2016. The variation of Ps. 38 million
corresponds to the decrease of Ps. 148 million in the Mexican segment, the decrease of Ps. 42 million in the United States segment
and an increase of Ps. 152 million in the Brazil segment. In 2017 and 2016, our general and administrative expenses included Ps.
125 million and Ps. 258 million, respectively, of amortization of the tangible and intangible assets registered principally in
connection with the acquisition of Grupo San.
Operating expenses as a percentage of net sales
were 4% in 2017 and 5% in 2016. Depreciation and amortization expense were Ps. 285 million in 2017 compared to Ps. 398 million
in 2016.
Other (Income) Expense, Net
We recorded other income, net, of Ps. 7 million
in 2017, reflecting (i) income of Ps. 10 million related to the sale of scrap, (ii) expense of Ps. 7 million in land treatment
at Pacific Steel and (iii) income related to other financial operations of Ps. 4 million.
We recorded other expense, net, of Ps. 36 million
in 2016, reflecting (i) income of Ps. 10 million related to the sale of scrap, (ii) expense of Ps. 35 million in the dismantling
of machinery and (iii) an expense related to other financial operations of Ps. 11 million.
Interest Income
We recorded an interest income of Ps. 54
million in 2017 compared to Ps. 108 million in 2016. This decrease is attributable mainly to interest rates negotiated with
financial services institutions.
Interest Expense
We recorded an interest expense of Ps. 54
million in 2017 compared to Ps. 40 million in 2016. This increase is attributable mainly to the interest rates negotiated with
out lenders.
Foreign Exchange Loss (Gain)
We recorded a foreign exchange loss of Ps. 654
million in 2017 compared to an exchange gain of Ps. 1,775 million in 2016; this foreign exchange gain reflected the 4.5% appreciation
of the peso against the dollar in 2017, compared to the 19.2% depreciation of the peso against the dollar and the 17% appreciation
of the Brazilian real against the dollar in 2016.
Income Tax
In 2017 we recorded an income tax provision
of Ps. 1,098 million, which included an income tax provision of Ps. 20 million and an income tax provision for deferred income
taxes of Ps. 1,078 million. In 2016 we recorded an income tax provision of Ps. 926 million, which included an income tax provision
of Ps. 57 million and an income tax provision for deferred income taxes of Ps. 869 million.
Our effective income tax rates for 2017 and
2016 were 38.9% and 17.6%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2017 and years thereafter
is 30%. We have implemented the practice of recognizing the benefit derived from the amortization of tax losses for the period
in which such losses are actually amortized. In 2017 and 2016, we amortized tax losses which generated a benefit on income tax
of approximately Ps. 115 million and Ps. 1,166 million, respectively. These effects caused our effective tax rates during 2016
to be lower than the statutory tax rate.
Net Income (Loss)
We recorded net income of Ps. 1,722 million
in 2017, compared to net income of Ps. 4,343 million in 2016. The decrease in net income for the year 2017 compared to 2016 is
mainly as a result of (i) the exchange loss of 654 million in 2017 compared to a foreign exchange gain of 1,775 million in 2016,
(ii) in the year 2017 we had no interest compared to the year 2016 where we had $ 67 million of interest in favor and (iii) the
increase in the provision of income taxes in 2017 of Ps. 1,098 million compared to Ps. 926 million in 2016.
Mexican Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2016 and 2017
Net Sales
Net sales increased 4.7%, to Ps. 17,125 million
in 2017 compared to Ps. 16,362 million in 2016. This increase resulted principally from a 11.5% increase in the average price per
ton of steel products.
Shipments of finished steel products decreased
6%, to 1.404 million tons in 2017, compared to 1.495 million tons in 2016.
The average price of steel products increased
11.5% in 2017 compared to 2016.
Cost of Sales
Our cost of sales decreased 2.8%, from Ps. 13,725
million in 2016 to Ps. 13,340 million in 2017, which decrease is mainly attributable to a decrease of 91,000 tons of shipments
of finished steel products. As a percentage of net sales, our cost of sales was 78% in 2017, compared to 84% in 2016.
Gross Profit
Our gross profit increased 43%, to Ps. 3,785
million in 2017 compared to Ps. 2,637 million in 2016. This increase is attributable mainly to an increase of 11.5% in the average
price of steel products sold. As a percentage of net sales, our gross profit was 22% in 2017, compared to 16% in 2016.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 16%, to Ps. 754 million in 2017, compared to Ps. 902 million in 2016. In 2017 and 2016, our general
and administrative expenses included Ps. 103 million and Ps. 245 million, respectively, of amortization of tangible and intangible
assets registered principally in connection with the acquisition of Grupo San.
Administrative expenses as a percentage of net
sales were 4% in 2017 and 6% in 2016. Depreciation and amortization expense were Ps. 211 million in 2017 compared to Ps. 338 million
in 2016.
Other Expense (Income), Net
We recorded other expense, net, of Ps. 99 million
in 2017, reflecting (i) an income of Ps. 10 million related to the sale of scrap, (ii) other expense of Ps. 108 million related
to the acquisition of plant and equipment by the Tlaxcala plant from the Republic plant, (iii) other expense of Ps. 8 million in
the land treatment at Pacific Steel and (iv) other income, net, related to other financial operations of Ps. 7 million.
We recorded other expense, net, of Ps. 40 million
in 2016, reflecting (i) an income of Ps. 10 million related to the sale of scrap, (ii) other expense of Ps. 35 million related
to dismantling machinery and (iii) other expense, net, related to other financial operations of Ps. 15 million.
Interest Income
We recorded an interest income of Ps. 54
million in 2017 compared to Ps. 108 million in 2016. This decrease is attributable mainly to interest rates negotiated with
financial services institutions.
Interest Expense
We recorded an interest expense of Ps. 7 million
in 2017 compared to Ps. 15 million in 2016. This decrease was principally due to negotiations with our lenders in connection with
commissions payable to them.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 1,292
million in 2017 compared to an exchange gain of Ps. 2,343 million in 2016; this foreign exchange reflected the 4.5% appreciation
of the peso against the dollar in 2017.
Income Tax
In 2017, we recorded an income tax provision
of Ps. 762 million, which included an income tax provision of Ps. 106 million and an income tax provision for deferred income taxes
of Ps. 656 million. In 2016, we recorded an income tax provision of Ps. 668 million, which included an income tax provision of
Ps. 7 million and an income tax provision for deferred income taxes of Ps. 661 million.
According to the Income Tax Law in Mexico, the
tax rate for the year 2017 and years thereafter is 30%.
Net Income
We recorded net income of Ps. 925 million in
2017, compared to net income of Ps. 3,463 million in 2016. This decrease is attributable mainly to a foreign exchange loss of Ps.
1,292 million in 2017 compared to Ps. 2,343 million of foreign exchange gain in 2016.
USA Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2016 and 2017
Net Sales
Net sales decreased 10%, to Ps. 8,371 million
in 2017 compared to Ps. 9,339 million in 2016. This decrease resulted principally from a decrease of 8% in the average price of
steel products.
Shipments of finished steel products decreased
3%, to 387,000 tons in 2017, compared to 397,000 tons in 2016.
The average price of steel products in pesos
decreased 8% in 2017 compared to 2016, derived mainly from the appreciation of the peso against the dollar in 2017.
Cost of Sales
Our cost of sales increased 7%, from Ps. 7,332
million in 2016 to Ps. 7,814 million in 2017, which increase is mainly attributable to an increase of 9%, approximately, in the
prices of raw materials used for the production of finished products. Cost of sales as a percentage of net sales was 93% in 2017,
compared to 79% in 2016.
Gross Profit (Loss)
Our gross profit was Ps. 557 million in 2017
compared to a Ps. 2,007 million gross profit in 2016. As a percentage of net sales, our gross profit was 7% in 2017, compared to
a 21% gross profit in 2016. The selling steel prices throughout the year also impacted our margin since prices for steel products
charged to our customers were gradually lower than our costs of steel purchases as a result of the time lag between the production
and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 14%, to Ps. 257 million in 2017, compared to Ps. 299 million in 2016.
Administrative expenses as a percentage of net
sales were 3% in 2017 and 3% in 2016. Depreciation and amortization expense were Ps. 37 million in 2017 compared to Ps. 58 million
in 2016.
Other Income, Net
We recorded other income, net, of Ps. 106 million
in 2017, reflecting (i) other income, net, of Ps. 108 million related to the sale of plant and equipment by Republic to the Tlaxcala
plant and (ii) other expense, net, of Ps. 2 million related to other financial operations.
We recorded other income, net, of Ps. 1,482
million in 2016, reflecting (i) income of Ps. 1,478 million related to the transfer of the total assets of the Gary, Indiana plant
in the United States to the current Tlaxcala plant in Mexico, through a turnkey transaction, by which Republic Steel developed
the project until the start of the operations in Tlaxcala, Mexico, and (ii) other income, net, of Ps. 4 million related to other
financial operations.
Interest Income
We recorded an interest income of Ps. 0 million in 2017
compared to Ps. 0 million in 2016.
Interest Expense
We recorded an interest expense of Ps. 51 million in
2017 compared to Ps. 45 million in 2016.
Income Tax
In 2017 we recorded an income tax provision
of Ps. 322 million for deferred income taxes. In 2016 we recorded an income tax provision of Ps. 256 million for deferred income
taxes.
Net Income (Loss)
We recorded net income of Ps. 6 million in 2017,
compared to a net income of Ps. 2,932 million in 2016. The decrease in our net income in 2017 compared to the net income in 2016
is mainly due to (i) the selling steel prices throughout the year, which impacted our margin since prices for steel products charged
to our customers were gradually lower than our costs of steel purchases as a result of the time lag between the production and
sales cycles, and (ii) the fact that in 2017 we had other net income of Ps. 106 million, compared to other net income of Ps. 1,482
million in 2016.
Brazil Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2016 and 2017
Net Sales
Net sales increased to Ps. 3,204 million in
2017 compared to Ps. 1,814 million in 2016. This increase resulted principally from an increase of 107 thousand tons of shipments
of finished steel products and the 13.6% increase in the average price per ton of steel products.
Shipments of finished steel products increased
to 300,000 tons in 2017, compared to 193,000 tons in 2016.
Cost of Sales
Our cost of sales increased to Ps. 2,840 million
in 2017 compared to Ps. 1,719 million in 2016. which increase is mainly attributable to the increase of 107,000 tons in 2017 compared
to 2016 and a 6.3% increase in the average cost per ton of steel products sold. Cost of sales as a percentage of net sales was
89% in 2017, compared to 95% in 2016.
Gross Profit
Our gross profit was Ps. 364 million in 2017
compared to Ps. 95 million of gross profit in 2016. This increase is attributable mainly to an increase of 107,000 tons of shipments
of finished steel products and an increase of 13.6% in the average price of steel products sold. As a percentage of net sales,
our gross profit was 11% in 2017, compared to 5% of gross profit in 2016.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) were Ps. 228 million in 2017 compared to Ps. 77 million in 2016. Operating expenses as a percentage of net sales
were 7% in 2017 compared to 4% in 2016. This increase is
attributable mainly due to the fact that in 2017 we worked at a
production capacity of 61% and in 2016 we worked at a production capacity of 45%.
Depreciation and amortization expenses were
Ps. 36 million in 2017 compared to Ps. 3 million in 2016.
Other Expense, Net
We did not record other expense, net, in 2017
or 2016.
Interest Expense
We recorded an interest expense of Ps. 65 million in
2017 compared to Ps. 51 million in 2016.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 2
million in 2017 compared to an exchange gain of Ps. 766 million in 2016; this exchange gain was generated as a result of the payments
made to suppliers during the year 2017. This foreign exchange gain reflected the 17% appreciation of the Brazilian real against
the dollar in 2016 compared to 2015.
Income Tax
In 2017 we recorded an income tax provision
of Ps. 13 million compared to Ps. 2 million in 2016.
Net Income (Loss)
We recorded a net income of Ps. 59 million in
2017 compared to Ps. 731 million of net income in 2016. The decrease of our net income in 2017 compared to the net income in 2016
is mainly due to the fact that in 2017 the foreign exchange gain was Ps. 2 million and in 2016 the foreign exchange gain was Ps.
766 million.
Consolidated Statements of Comprehensive Income
Comparison of Years Ended December 31, 2015 and 2016
Net Sales
Net sales increased 12%, to Ps. 27,516 million
in 2016 compared to Ps. 24,476 million in 2015. This increase resulted primarily from a 9% increase in the average price per ton
of steel products and an increase of 59 thousand tons in shipments of finished steel products. Total sales outside of Mexico increased
15%, to Ps. 11,438 million in 2016 compared to Ps. 9,932 million in 2015. Total sales in Mexico increased 11%, from Ps. 14,543
million in 2015 to Ps. 16,078 million in 2016.
Shipments of finished steel products increased
3%, to 2.085 million tons in 2016, compared to 2.026 million tons in 2015. Total sales volume outside of Mexico of finished steel
products increased 0.6% to 0.636 million tons in 2016, compared to 0.632 million tons in 2015, while total Mexican sales decreased
0.2%, from 1.452 million tons in 2015, compared to 1.449 million tons in 2016. The average price of steel products increased 9%
in 2016 compared to 2015.
Cost of Sales
Our cost of sales decreased 1%, from
Ps. 23,097 million in 2015 to Ps. 22,776 million in 2016, which decrease is mainly attributable to a 4% decrease in the
average price per ton of steel products sold and the impairment recorded of the coke inventory. Cost of sales as a percentage of net sales was 83% in 2016 and 94% in 2015. We
experienced higher cost of sales at our Republic facilities, mainly a result of (i) higher labor costs corresponding to our
U.S. operations, and (ii) the higher cost of raw materials, which our U.S. operations use in the production of SBQ steel.
Hourly wages at our Mexican operations were approximately U.S.$1.4 (Ps. 29) per hour in 2016 and U.S.$1.7 (Ps. 35) per hour
in 2015, compared to U.S.$61.3 (Ps. 1,267) and U.S.$52.5 (Ps. 1,085) per hour for 2016 and 2015, respectively, at our U.S.
operations. Although raw material costs are similar in the United States and Mexico, our U.S. operations produce only the
more costly SBQ steel, which requires more expensive raw materials such as chromium, nickel, molybdenum and other alloys. Our
Mexican operations require these alloys to a lesser extent, because they produce commodity steel as well as SBQ steel.
Gross Profit (Loss)
Our gross profit was Ps. 4,740 million
in 2016 compared to a Ps. 693 million gross loss in 2015. This gross profit is attributable mainly to an increase of 59
thousand tons of finished steel products shipped, a 9% increase in the average price of steel products sold, a 4%
decrease in the average price per ton of steel products sold and in 2015 we registered the impairment of property, plant and
equipment of Ps. 2,072 million (U.S. $130.7 million). As a percentage of net sales, our gross profit was 17% in 2016 and our gross
loss was 3% in 2015.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 19%, to Ps. 1,277 million in 2016, compared to Ps. 1,582 million in 2015. The decrease of Ps. 305 million
in 2016 compared to 2015 is attributable principally to the fact that in 2015 we made the following payments, which we did not
make in 2016: (i) Ps. 178 million in royalties to Industrias CH for use of their brands, (ii) Ps. 78 million related to fees for
legal services and (iii) expenses of Ps. 76 million corresponding to severance payments in Republic, which were made in 2015. In
2016 and 2015, our general and administrative expenses included Ps. 258 million and Ps. 256 million, respectively, of amortization
of the tangible and intangible assets registered principally in connection with the acquisition of Grupo San.
Operating expenses as a percentage of net sales
were 5% in 2016 and 6% in 2015. Depreciation and amortization expense were Ps. 398 million in 2016 compared to Ps. 419 million
in 2015.
Other (Expense) Income, Net
We recorded other expense, net, of Ps. 36 million
in 2016, reflecting (i) income of Ps. 10 million related to the sale of scrap, (ii) expense of Ps. 35 million in the dismantling
of machinery and (iii) an expense related to other financial operations of Ps. 11 million.
We recorded other income, net, of Ps. 173 million
in 2015, reflecting (i) income of Ps. 4 million related to the sale of scrap, (ii) income of Ps. 174 million related to proceeds
from a settlement with a client and (iii) an expense related to other financial operations of Ps. 5 million.
Interest Income
We recorded an interest income of Ps. 108
million in 2016 compared to Ps. 34 million in 2015. This increase is attributable mainly to better interest rates negotiated
with financial services institutions.
Interest Expense
We recorded an interest expense of Ps. 40 million
in 2016 compared to Ps. 40 million in 2015.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 1,775
million in 2016 compared to an exchange loss of Ps. 382 million in 2015; this foreign exchange gain reflected the 19.2% depreciation
of the peso against the dollar and the 17% appreciation of the Brazilian real against the dollar in 2016, compared to the 47% depreciation
of the Brazilian real against the dollar and the 17.7% depreciation of the peso against the dollar in 2015.
Income Tax
In 2016 we recorded an income tax provision
of Ps. 926 million, which included an income tax provision of Ps. 57 million and an income tax provision for deferred income taxes
of Ps. 869 million. In 2015 we recorded an income tax provision of Ps. 771 million, which included an income tax provision of Ps.
1,598 million and an income tax benefit for deferred income taxes of Ps. 827 million. The income tax of 2015 includes Ps. 1,333
million that was paid by Simec International 6 S.A. de C.V. and Simec International 8 S.A. de C.V. arising from a review by the
tax authority initiated in July 2015 to the fiscal year ended December 31, 2010, due to a difference of opinion on the deduction
of losses on disposal of treasury bonds of the United States.
Our effective income tax rates for 2016 and
2015 were 17.6% and 22.5%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2016 and years thereafter
is 30%. We have implemented the practice of recognizing the benefit derived from the amortization of tax losses for the period
in which such losses are actually amortized. In 2016 and 2015, we amortized tax losses which generated a benefit on income tax
of approximately Ps. 1,166 million and Ps. 39 million, respectively. These effects caused our effective tax rates during 2016 and
2015 to be lower than the statutory tax rate.
Net Income (Loss)
We recorded net income of Ps. 4,343 million
in 2016, compared to net loss of Ps. 3,261 million in 2015. This income is attributable mainly to (i) an increase of 59 thousand
shipments of finished steel products, (ii) an increase of 9% in the average price of steel products sold, (iii) the 4% decrease
in the average price per ton of steel products sold and (iv) a foreign exchange gain of Ps. 1,775 million in 2016 compared to Ps.
382 million of foreign exchange loss in 2015.
Mexican Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2015 and 2016
Net Sales
Net sales increased 9%, to Ps. 16,362 million
in 2016 compared to Ps. 14,978 million in 2015. This increase resulted principally from a 6% increase in the average price per
ton of steel products and an increase of 43 thousand tons of shipments of finished steel products.
Shipments of finished steel products increased
3%, to 1.495 million tons in 2016, compared to 1.452 million tons in 2015.
The average price of steel products increased
6% in 2016 compared to 2015.
Cost of Sales
Our cost of sales increased 22%, from Ps. 11,248
million in 2015 to Ps. 13,725 million in 2016, which increase is mainly attributable to a 18% increase in the cost of sales of
our products sold and the increase of 43 thousand tons of shipments of finished steel products. As a percentage of net sales, our
cost of sales was 84% in 2016, compared to 75% in 2015.
Gross Profit
Our gross profit decreased 29%, to Ps. 2,637
million in 2016 compared to Ps. 3,731 million in 2015. This decrease is attributable mainly to an increase of 18% in the average
price of steel products sold. As a percentage of net sales, our gross profit was 16% in 2016, compared to 25% in 2015.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 18%, to Ps. 902 million in 2016, compared to Ps. 1,101 million in 2015. Such decrease is attributable
principally to the fact that in 2015 we had an administrative expense of Ps. 178 million in royalties paid to Industrias CH for
use of their brands, which we did not have in 2016. In 2016 and 2015, our general and administrative expenses included Ps. 245
million and Ps. 245 million, respectively, of amortization of the tangible and intangible assets registered principally in connection
with the acquisition of Grupo San.
Administrative expenses as a percentage of net
sales were 6% in 2016 and 7% in 2015. Depreciation and amortization expense were Ps. 338 million in 2016 compared to Ps. 366 million
in 2015.
Other Expense (Income), Net
We recorded other expense, net, of Ps. 40 million
in 2016, reflecting (i) an income of Ps. 10 million related to the sale of scrap, (ii) other expense of Ps. 35 million related
to dismantling machinery and (iii) other expense, net, related to other financial operations of Ps. 15 million.
We recorded other income, net, of Ps. 6 million
in 2015, reflecting (i) an income of Ps. 4 million related to the sale of scrap and (ii) other income related to other financial
operations of Ps. 2 million.
Interest Income
We recorded an interest income of Ps. 108 million
in 2016 compared to Ps. 34 million in 2015. This increase is attributable mainly to better interest rates negotiated with financial services institutions.
Interest Expense
We recorded an interest expense of Ps. 15 million
in 2016 compared to Ps. 10 million in 2015. This increase was principally due to negotiations with our lenders in connection with
commissions payable to them.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 2,343
million in 2016 compared to an exchange gain of Ps. 840 million in 2015; this foreign exchange reflected the 19.2% depreciation
of the peso against the dollar in 2016.
Income Tax
In 2016, we recorded an income tax provision
of Ps. 668 million, which included an income tax provision of Ps. 7 million and an income tax provision for deferred income taxes
of Ps. 661 million. In 2015 we recorded an income tax provision of Ps. 1,413 million, which included an income tax provision of
Ps. 1,598 million and an income tax benefit for deferred income taxes of Ps. 185 million. The income tax of 2015 includes Ps. 1,333
million that was paid by Simec International 6 S.A. de C.V. and Simec International 8 S.A. de C.V. arising from a review by the
tax authority initiated in July 2015 to the fiscal year ended December 31, 2010, due to a difference of opinion on the deduction
of losses on disposal of treasury bonds of the United States.
According to the Income Tax Law in Mexico, the
tax rate for the year 2016 and years thereafter is 30%.
Net Income
We recorded net income of Ps. 3,463 million
in 2016, compared to net income of Ps. 2,087 million in 2015. This increase is attributable mainly to (i) an increase of 43 thousand
shipments of finished steel products, (ii) an increase of 6% in the average price of steel products sold, and (iii) a foreign exchange
gain of Ps. 2,343 million in 2016 compared to Ps. 840 million of foreign exchange gain in 2015.
USA Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2015 and 2016
Net Sales
Net sales decreased 1%, to Ps. 9,339 million
in 2016 compared to Ps. 9,468 million in 2015. This decrease resulted principally from a decrease of 173 thousand tons of shipments
of finished steel products.
Shipments of finished steel products decreased
30%, to 397 thousand tons in 2016, compared to 570 thousand tons in 2015.
The average price of steel products in pesos
increased 41% in 2016 compared to 2015. Also, surcharges of scrap have affected the sales price due to a consistently low level
of scrap cost.
Cost of Sales
Our cost of sales decreased 38%, from Ps. 11,829
million in 2015 to Ps. 7,332 million in 2016, which decrease is mainly attributable to a 30% decrease in shipments of finished
steel products, a decrease of 11% in the prices of raw materials used for the production of finished products and to the fact that
in 2016 Ps. 466 million was charged against the cost of sales as a result of the increase in the value of the coke inventory, compared
to Ps. 552 million in 2015. Cost of sales as a percentage of net sales was 79% in 2016, compared to 125% in 2015.
Gross Profit (Loss)
Our gross profit was Ps. 2,007 million in 2016
compared to a Ps. 4,433 million gross loss in 2015. As a percentage of net sales, our gross profit was 21% in 2016, compared to
a 47% gross loss in 2015. The selling steel prices throughout the year also impacted our margin since prices for steel products
charged to our customers were gradually lower than our costs of steel purchases as a result of the time lag between the production
and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 35%, to Ps. 299 million in 2016, compared to Ps. 457 million in 2015.
Administrative expenses as a percentage of net
sales were 4% in 2016 and 5% in 2015. Depreciation and amortization expense were Ps. 58 million in 2016 compared to Ps. 67 million
in 2015.
Other Income, Net
We recorded other income, net, of Ps. 1,482
million in 2016, reflecting (i) income of Ps. 1,478 million related to the transfer of the total assets of the Gary, Indiana plant
in the United States to the current Tlaxcala plant in Mexico, through a turnkey transaction, by which Republic Steel developed
the project until the start of the operations in Tlaxcala, Mexico, and (ii) other income, net of Ps. 4 million related to other
financial operations.
We recorded other income, net, of Ps. 184 million
in 2015, reflecting (i) income of Ps. 174 million related to proceeds from a settlement with a client and (ii) other income, net
of Ps. 10 million related to other financial operations.
Interest Income
We recorded an interest income of Ps. 0.1 million in
2016 compared to Ps. 0.2 million in 2015.
Interest Expense
We recorded an interest expense of Ps. 45 million in
2016 compared to Ps. 47 million in 2015.
Income Tax
In 2016 we recorded an income tax provision
of Ps. 256 million for deferred income taxes. In 2015 we recorded an income tax benefit of Ps. 642 million for deferred income
taxes.
Net Income (Loss)
We recorded net income of Ps. 2,932 million
in 2016, compared to a net loss of Ps. 4,111 million in 2015. Our net income is attributable mainly to (i) the increase of 41%
in the average price of steel products sold, (ii) a decrease of 11% in the prices of raw materials used for the production of finished
products and (iii) other income, net, of Ps. 1,482 million.
Brazil Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2015 and 2016
Our segment in Brazil started operations in
late 2015. The information presented for 2016 is not comparable with 2015 because the information presented for 2016 corresponds
to a full year of operations, while the information presented for 2015 corresponds only to a few months of operations.
Net Sales
Net sales increased to Ps. 1,814 million in
2016 compared to Ps. 29 million in 2015. This increase resulted principally from an increase of 189 thousand tons of shipments
of finished steel products.
Shipments of finished steel products increased
to 193 thousand tons in 2016, compared to 4 thousand tons in 2015.
Cost of Sales
Our cost of sales increased to Ps. 1,719 million
compared to Ps. 20 million in 2015. Cost of sales as a percentage of net sales was 95% in 2016, compared to 69% in 2015.
Gross Profit
Our gross profit was Ps. 95 million in 2016
compared to Ps. 9 million of gross profit in 2015. As a percentage of net sales, our gross profit was 5% in 2016, compared to 31%
of gross loss in 2015.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) were Ps. 77 million in 2016 compared to Ps. 24 million in 2015. Operating expenses as a percentage of net sales
were 4% in 2016 compared to 83% in 2015. Depreciation and amortization expense were Ps. 3 million in 2016 compared to Ps. 1 million
in 2015.
Other Expense, Net
We did not record other expense, net, in 2016.
We recorded other expense, net, of Ps. 16 million in 2015, reflecting other expenses related to other financial operations.
Interest Expense
We recorded an interest expense of Ps. 51 million in
2016 compared to Ps. 25 million in 2015.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 766
million in 2016 compared to an exchange loss of Ps. 497 million in 2015; this foreign exchange reflected the 17% appreciation of
the Brazilian real against the dollar in 2016 compared to 2015.
Income Tax
In 2016 we recorded an income tax provision
of Ps. 2 million, while in 2015 we did not record any income tax.
Net Income (Loss)
We recorded a net income of Ps. 731 million
in 2016 compared to Ps. 553 million of net loss in 2015.
Consolidated Statements of Comprehensive Income
Comparison of Years Ended December 31, 2014 and 2015
Net Sales
Net sales decreased 9%, to Ps. 24,476 million
in 2015 compared to Ps. 26,829 million in 2014. This decrease resulted principally from a 1% decrease in the average price per
ton of steel products and a decrease of 171 thousand shipments of finished steel products. Total sales outside of Mexico decreased
22%, to Ps. 9,932 million in 2015 compared with Ps. 12,664 million in the same period of 2014. Total sales in Mexico increased
3%, from Ps. 14,165 million in 2014 to Ps. 14,543 million in 2015.
Shipments of finished steel products decreased
8%, to 2.026 million tons in 2015, compared to 2.197 million tons in 2014. Total sales volume outside of Mexico of finished steel
products decreased 24% to 0.632 million tons in 2015, compared to 0.837 million tons in 2014, while total Mexican sales increased
2%, from 1.360 million tons in 2014, compared to 1.394 million tons in 2015.
The average price of steel products decreased
1% in 2015 compared to 2014.
Cost of Sales
Our cost of sales decreased 9%, from Ps. 25,492
million in 2014 to Ps. 23,097 million in 2015, which decrease is mainly attributable to (i) a 1% decrease in the average price
per ton of steel products sold, and (ii) an decrease of 171 thousand tons of finished steel products shipped. Cost of sales as
a percentage of net sales was 95% in 2015 and 2014. We experienced higher cost of sales at our Republic facilities, mainly a result
of (i) higher labor costs corresponding to our U.S. operations, and (ii) the higher cost of raw materials, which our U.S. operations
use in the production of SBQ steel. Hourly wages at our Mexican operations were approximately U.S.$1.7 (Ps. 30) per hour in 2015
and U.S.$2.0 (Ps. 29) per hour in 2014, compared to U.S.$52.5 (Ps. 909) and U.S.$50 (Ps. 736) per hour for 2015 and 2014, respectively,
at our U.S. operations. Although raw material costs are similar in the United States and Mexico, our U.S. operations produce only
the more costly SBQ steel, which requires more expensive raw materials such as chromium, nickel, molybdenum and other alloys. Our
Mexican operations require these alloys to a lesser extent, because they produce commodity steel as well as SBQ steel.
Impairment of Property, Plant and Equipment
We made an analysis of the fair value of the
Lorain facility with the assistance of an independent valuation firm and determined the net book value exceeded the fair value
by approximately Ps. 2,072 million (U.S.$130.7 million) and as such, recognized an asset impairment of this amount during the year
ended December 31, 2015.
Gross (Loss) Profit
Our gross loss was Ps. 693 million in 2015 compared
to Ps. 1,337 million of gross profit in 2014. This gross loss is attributable mainly to the impairment of property, plant and equipment
and a decrease of 171 thousand tons of finished steel products shipped. As a percentage of net sales, our gross loss was 3% in
2015 and our gross profit was 5% in 2014.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 32%, to Ps. 1,582 million in 2015, compared to Ps. 1,194 million in 2014. The increase of Ps. 388 million
in 2015 compared to 2014, is attributable principally to (i) Ps. 178 million in royalties paid to Industrias CH for use of their
brands, (ii) Ps. 78 million related to fees paid for legal services and (iii) expenses of Ps. 76 million corresponding to severance
payments in Republic. In 2015 and 2014, our general and administrative expenses included Ps. 256 million and Ps. 254 million, respectively,
of amortization of the tangible and intangible assets registered principally in connection with the acquisition of Grupo San.
Operating expenses as a percentage of net sales
were 6% in 2015 and 4% in 2014. Depreciation and amortization expense were Ps. 419 million in 2015 compared to Ps. 393 million
in 2014.
Other Income (Expense), Net
We recorded other income, net of Ps. 173 million
in 2015, reflecting (i) income of Ps. 4 million related to the sale of scrap, (ii) income of Ps. 174 million related to proceeds
from a settlement with a client and (iii) an expense related to other financial operations of Ps. 5 million.
We recorded other income, net of Ps. 61 million
in 2014, reflecting (i) expenses of Ps. 1 million corresponding to land remediation work at Pacific Steel (ii) an expense of Ps.
2 million related to the write-off of certain account balances (iii) an income of Ps. 29 million related to the sale of scrap and
(iv) an income related to other financial operations of Ps. 35 million.
Interest Income
We recorded an interest income of Ps. 34 million
in 2015 compared to Ps. 25 million in 2014. This increase is attributable mainly to better interest rates negotiated with financial services institutions.
Interest Expense
We recorded an interest expense of Ps. 40 million
in 2015 compared to Ps. 23 million in 2014. This increase was principally due to negotiations with our lenders in connection with
commissions payable to them.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 382
million in 2015 compared to an exchange gain of Ps. 474 million in 2014; this foreign exchange loss reflected the 47% depreciation
of the Brazilian real against the dollar and the 17.7% depreciation of the peso against the dollar in 2015 compared to the 13%
depreciation of the peso against the dollar in 2014.
Income Tax
In 2015 we recorded an income tax provision
of Ps. 771 million, which included an income tax provision of Ps. 1,598 million and an income tax benefit for deferred income taxes
of Ps. 827 million. The income tax of 2015 includes Ps. 1,333 million that was paid by Simec International 6 S.A. de C.V. and Simec
International 8 S.A. de C.V. arising from a review by the tax authority initiated in July 2015 to the fiscal year ended December
31, 2010, by difference of opinion on the deduction of losses on disposal of treasury bonds of the United States. In 2014 we recorded
an income tax provision of Ps. 162 million, which included an income tax provision of Ps. 278 million and an income tax benefit
for deferred income taxes of Ps. 116 million.
Our effective income tax rates for 2015 and
2014 were 22.5% and 23.8%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2015 and years thereafter
is 30%. We have implemented the practice of recognizing the benefit derived from the amortization of tax losses for the period
in which such losses are actually amortized. In 2015 and 2014, we amortized
tax losses which generated a benefit on income tax of approximately
Ps. 39 million and Ps. 145 million, respectively. These effects caused our effective tax rates during 2015 and 2014 to be lower
than the statutory tax rate.
Net (Loss) Income
We recorded net loss of Ps. 3,261 million in
2015, compared to net income of Ps. 518 million in 2014. This loss attributable mainly to (i) a decrease of 171 thousand shipments
of finished steel products, (ii) an expense of Ps. 2,072 million related to impairment charges in Republic, (iii) a foreign exchange
loss of Ps. 419 million in 2015 compared to Ps. 474 million of foreign exchange gain in 2014 and (iv) the Ps. 1,333 million that
was paid by Simec International 6, S.A. de C.V. and Simec International 8, S.A. de C.V. derived by a review initiated in July 2015
to the fiscal year 2010 by the tax authority, by difference of opinion on the deduction of losses on disposal of treasury bonds
of the United States.
Mexican Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2014 and 2015
Net Sales
Net sales increased 3%, to Ps. 14,978 million
in 2015 compared to Ps. 14,518 million in 2014. This increase resulted principally from a 1% increase in the average price per
ton of steel products and an increase of 33 thousand tons of shipments of finished steel products.
Shipments of finished steel products increased
3%, to 1.452 million tons in 2015, compared to 1.419 million tons in 2014.
The average price of steel products increased
1% in 2015 compared to 2014.
Cost of Sales
Our cost of sales decreased 7%, from Ps. 12,076
million in 2014 to Ps. 11,248 million in 2015, which decrease is mainly attributable to a 9% decrease in the prices of raw materials
used for the production of finished products. As a percentage of net sales, our cost of sales was 75% in 2015, compared to 83%
in 2014.
Gross Profit
Our gross profit increased 53%, to Ps. 3,731
million in 2015 compared to Ps. 2,442 million in 2014. This increase is attributable mainly to a 9% decrease in the prices of raw
materials used for the production of finished products and an increase of 33 thousand tons of shipments of finished steel products.
As a percentage of net sales, our gross profit was 25% in 2015, compared to 17% in 2014.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 35%, to Ps. 1,101 million in 2015, compared to Ps. 818 million in 2014. Such increase is attributable
principally to (i) an administrative expense of Ps. 178 million in royalties paid to Industrias CH for use of their brands, (ii)
Ps. 78 million related to fees paid for legal services and (iii) other administrative expenses in our plants in Mexico. In 2015
and 2014, our general and administrative expenses included Ps. 245 million and Ps. 245 million, respectively, of amortization of
the tangible and intangible assets registered principally in connection with the acquisition of Grupo San.
Administrative expenses as a percentage of net
sales were 7% in 2015 and 6% in 2014. Depreciation and amortization expense were Ps. 366 million in 2015 compared to Ps. 331 million
in 2014.
Other Income (Expense), Net
We recorded other income, net of Ps. 6 million
in 2015, reflecting (i) an income of Ps. 4 million related to the sale of scrap and (ii) other income related to other financial
operations of Ps. 2 million.
We recorded other income, net of Ps. 30 million
in 2014, reflecting (i) an expenses of Ps. 1 million corresponding to land remediation work at Pacific Steel (ii) an expense of
Ps. 2 million related to the depuration of some account balances (iii) an income of Ps. 4 million related to adjustments in inflation
for taxes returned to us and (iv) other income related to other financial operations of Ps. 29 million.
Interest Income
We recorded an interest income of Ps. 34 million
in 2015 compared to Ps. 25 million in 2014. This increase is attributable mainly to better interest rates negotiated with financial services institutions.
Interest Expense
We recorded an interest expense of Ps. 10 million
in 2015 compared to Ps. 7 million in 2014. This increase was principally due to negotiations with our lenders in connection with
commissions payable to them.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 840
million in 2015 compared to an exchange gain of Ps. 491 million in 2014; this foreign exchange reflected the 17.7% depreciation
of the peso against the dollar in 2015 and the 47% depreciation of the Brazilian real against the dollar in 2015 compared to the
13% depreciation of the peso against the dollar in 2014.
Income Tax
In 2015 we recorded an income tax provision
of Ps. 1,413 million, which included an income tax provision of Ps. 1,598 million and an income tax benefit for deferred income
taxes of Ps. 185 million. The income tax of 2015 includes Ps. 1,333 million that was paid by Simec International 6 S.A. de C.V.
and Simec International 8 S.A. de C.V. arising from a review by the tax authority initiated in July 2015 to the fiscal year ended
December 31, 2010, by difference of opinion on the deduction of losses on disposal of treasury bonds of the United States. In 2014
we recorded an income tax provision of Ps. 222 million, which included an income tax provision of Ps. 278 million and an income
tax benefit for deferred income taxes of Ps. 56 million.
According to the Income Tax Law in Mexico, the
tax rate for the year 2015 and years thereafter is 30%.
Net Income
We recorded net income of Ps. 2,087 million
in 2015, compared to net income of Ps. 1,940 million in 2014. Net income for 2015 remains virtually equal to the net income generated
in 2014, due to the increase in tons sold that offset the additional expense of income tax.
USA Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2014 and 2015
Net Sales
Net sales decreased 23%, to Ps. 9,468 million
in 2015 compared to Ps. 12,310 million in 2014. This decrease resulted principally from a decrease of 208 thousand tons of shipments
of finished steel products.
Shipments of finished steel products decreased
27%, to 570 thousand tons in 2015, compared to 778 thousand tons in 2014.
The average price of steel products in pesos
increased 5% in 2015 (in dollars decreased 14%) compared to 2014, mainly as a result of lower prices in the steel market. Also,
surcharges of scrap have affected the sales price due to a consistently low level of scrap cost.
Cost of Sales
Our cost of sales decreased 12%, from Ps. 13,416
million in 2014 to Ps. 11,829 million in 2015, which decrease is mainly attributable to a 27% decrease in shipments of finished
steel products and the decrease of 25% in the prices of raw materials used for the production of finished products. In 2015 we
made a charge to the cost of sales for an inventory valuation allowance of Ps. 681 million. Cost of sales as a percentage of net
sales was 125% in 2015, compared to 109% in 2014.
Impairment of Property, Plant and Equipment
We made an analysis of the fair value of the
Lorain facility with the assistance of an independent valuation firm and determined the net book value exceeded the fair value
by approximately Ps. 2,072 million (U.S.$130.7 million) and as such, recognized an asset impairment of this amount during the year
ended December 31, 2015.
Gross (Loss) Profit
Our gross loss was Ps. 4,433 million in 2015
compared to Ps. 1,106 million of gross loss in 2014. This gross loss is attributable mainly to the impairment of property, plant
and equipment of Ps. 2,072 million (U.S.$130.7 million), a decrease of 208 thousand tons of shipments of finished steel products
and the charge to the cost of sales for an inventory valuation allowance of Ps. 681 million. As a percentage of net sales, our
gross loss was 47% in 2015, compared to 9% of gross loss in 2014. The selling steel prices throughout the year also impacted our
margin since prices for steel products charged to our customers were gradually lower than our costs of steel purchases as a result
of the time lag between the production and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 36%, to Ps. 457 million in 2015, compared to Ps. 335 million in 2014. The administrative expenses in
dollars increased by U.S.$3.6 million (Ps. 74 million), due to the expenses of U.S.$3.8 million corresponding to severance payments
(Ps. 76 million), the other difference in pesos of Ps. 46 million corresponds to 17.7% depreciation of the peso against the dollar,
the amount in pesos is recorded as an increase.
Administrative expenses as a percentage of net
sales were 5% in 2015 and 3% in 2014. Depreciation and amortization expense were Ps. 67 million in 2015 compared to Ps. 62 million
in 2014.
Other Income, Net
We recorded other income, net of Ps. 184 million
in 2015, reflecting (i) income of Ps. 174 million related to proceeds from a settlement with a client and (ii) other income, net
of Ps. 10 million related to other financial operations.
We recorded other income, net of Ps. 31 million
in 2014, reflecting an income of (i) Ps. 29 million related to the sale of scrap and (ii) Ps. 2 million related to other financial
operations.
Interest Income
We recorded an interest income of Ps. 0.2 million in
2015 compared to Ps. 0.4 million in 2014.
Interest Expense
We recorded an interest expense of Ps. 47 million in
2015 compared to Ps. 25 million in 2014.
Income Tax
In 2015 we recorded an income tax benefit of
Ps. 642 million for deferred income taxes. In 2014 we recorded an income tax benefit of Ps. 60 million for deferred income taxes.
Net Loss
We recorded net loss of Ps. 4,111 million in
2015, compared to net loss of Ps. 1,374 million in 2014. This increase in our net loss is attributable mainly to (i) an expense
of Ps. 2,072 million related to asset impairment charges, (ii) a decrease of 208 thousand tons of shipments of finished steel products
and (iii) the charge to the cost of sales for an inventory valuation allowance of Ps. 681 million.
Brazil Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2014 and 2015
Our segment in Brazil started operations in
late 2015; the information presented is not comparable with 2014 because in that year we did not have production and sale of our
products.
Net Sales
Our net sales were Ps. 29 million in 2015. Our
shipments of finished steel products in 2015 were 4 thousand tons.
Cost of Sales
Our cost of sales was Ps. 20 million in 2015.
As a percentage of net sales, our cost of sales was 69% in 2015.
Gross Profit
Our gross profit was Ps. 9 million in 2015.
As a percentage of net sales, our gross loss was 31% in 2015. The selling steel prices throughout the year also impacted our margin
since prices for steel products charged to our customers were gradually lower than our costs of steel purchases as a result of
the time lag between the production and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) were Ps. 24 million in 2015. Operating expenses as a percentage of net sales were 83% in 2015. Depreciation and
amortization expense were Ps. 1 million in 2015.
Other Expense, Net
We recorded other expense, net of Ps. 16 million
in 2015, reflecting other expenses related to other financial operations.
Interest Expense
We recorded an interest expense of Ps. 25 million in
2015 compared to Ps. 15 million in 2014.
Foreign Exchange Loss
We recorded a foreign exchange loss of Ps. 497
million in 2015 compared to an exchange loss of Ps. 203 million in 2014; this foreign exchange reflected the 47% depreciation of
the Brazilian real against the dollar in 2015.
Income Tax
In 2015 we did not record any income tax for
2015.
Net Loss
We recorded a net loss of Ps. 553 million in
2015. Our net loss is attributable mainly to our foreign exchange loss of Ps. 497 million.
Critical Accounting Policies
The discussion in this section is based upon
our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at year-end, and the reported amount of revenues and expenses during the year. Management
regularly evaluates these estimates, including those related to the carrying value of property, plant and equipment and other non-current
assets, inventories and cost of sales, income taxes, foreign currency transactions and exchange differences, liabilities for deferred
income taxes, valuation of financial instruments, obligations relating to employee benefits, potential tax deficiencies, environmental
obligations, and potential litigation claims and settlements. Management estimates are based on historical experience and various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results
may differ materially from current expectations under different assumptions or conditions.
Management believes that the critical accounting
policies which require the most significant judgments and estimates used in the preparation of the financial statements relate
to deferred income taxes, the impairment of property, plant and equipment, impairment of intangible assets, valuation allowance
on accounts receivable and inventories obsolescence. We evaluate the recoverability of operating tax losses (NOL) carry forwards,
and only for those who have probability of being recovered is determined a deferred tax asset. The final realization of deferred
tax assets depends on the generation of taxable profits in the periods when the temporary differences are deductible. Upon carrying
out this evaluation, we considered the expected reversal of deferred tax liabilities,
projected taxable profit and planning strategies. Based on the company’s
evaluation, it determined the amount of deferred tax assets that is more likely than not to be realized in the future against those
taxable profits.
We evaluate periodically the adjusted values
of our property, plant and equipment and intangible assets to determine whether there is an indication of potential impairment.
Impairment exists when the carrying amount of an asset exceeds net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or realizable value. Significant
judgment is involved in estimating future revenues and cash flows or realizable value, as applicable, of our property, plant and
equipment due to the characteristics of those assets. The class of our assets which most require complex determinations based upon
assumptions and estimates relates to indefinite lived intangibles including goodwill, due to the current market environment.
In June of 2015 Republic Steel temporarily idled
the newly constructed electric arc furnace at the Lorain, Ohio, facility in response to the severe economic downturn in the energy
exploration sector following the sharp drop in the price of oil which has led to significant market declines and demand for product.
As a consequence of this event management determined a triggering event took place to where the long-lived assets at the Lorain
facility may not be fully recoverable. Management performed an analysis of the fair value of the Lorain facility with the assistance
of an independent valuation firm and determined the net book value exceeded the fair value by approximately U.S.$130.7 million
(Ps. 2,701 million) and as such recognized an asset impairment of this amount during the year ended December 31, 2015. The fair
value determination at the Lorain facility was based on an independent valuation of the Lorain melt shop assets using the comparable
match method of the market approach. The income approach was not considered an appropriate fair value measurement due to the absence
of reliable forecast data as the facility was idled indefinitely in early 2016.
As of the date of this report, management has
no near-term plans to restart the facility. The expectation is that it will be restarted when market conditions improve substantially,
particularly in the oil and gas industry. We have property, plant and equipment with a net book value of approximately U.S.$46.9
million (Ps. 969 million) as of December 31, 2016, pertaining to the Lorain Ohio facility after recording the impairment charge
of U.S.$130.7 million (Ps. 2,700 million) in 2015 (the impairment charge did not impact the cash flows, as it was not a cash expenditure).
Management further assessed if there were any impairments at the Company’s other asset groups in accordance with IFRS and
determined that as of December 31, 2017, no other asset groups were impaired based on current projections. No further impairment
was considered necessary or appropriate.
In assessing the recoverability of the goodwill
and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value
of the respective assets. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential
impairment exist, to determine if the carrying value of recorded goodwill is impaired. The impairment review process compares the
fair value of the reporting unit in which goodwill resides to its carrying value. We estimate the reporting unit’s fair value
based on a discounted future cash flow approach that requires estimating income from operations. In order to estimate our cash
flows used in impairment computations, we considered the following:
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our history of earnings;
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our history of capital expenditures;
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the remaining useful lives of our primary assets;
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current and expected market and operating conditions; and
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our weighted average cost of capital.
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Other intangible assets are mainly comprised
of trademarks, customer list and non-competition agreements. When impairment indicators exist, or at least annually for indefinite
live intangibles, we determine our projected revenue streams over the estimated useful life of the asset. In order to obtain undiscounted
and discounted cash flows attributable to each intangible asset, such revenues are adjusted for operating expenses, changes in
working capital and other expenditures as applicable, and discounted to net present value using the risk adjusted discount rates
of return. As of December 31, 2016 and 2017 there was no impairment charge to other intangible assets.
As a result of the downturn in the construction
industry in Mexico during 2009 and the negative impact the downturn had on our operations mainly at the San Luis facilities, in
which goodwill resides we adjusted the key assumptions used in the valuation model. As of December 31, 2016 and 2017, there was
no impairment charge related to the San Luis facilities.
As of December 31, 2017, the main key assumptions
used in the valuation models of the San Luis reporting unit are as follows:
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discount rate: 13%; and
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sales: we estimate an increase in sales volume of approximately 24.2% in 2018 and 7.4% in 2019, mainly attributable to the increase in volume due to the start of production of the new industrial wire product and an increase of 7% in the sale prices for the year 2018. After 2020, no sales increases in volume terms are considered in the valuation model and for the years after 2019, only an increase in sales prices proportional to estimated inflation.
|
If these estimates or their related assumptions
for prices and demand change in the future, we may be required to record additional impairment charges for these assets.
With respect to valuation allowance on accounts
receivable, on a periodic basis management analyzes the recoverability of accounts receivable in order to determine if, due to
credit risk or other factors, some receivables may not be collected. If management determines that such a situation exists, the
book value of the non-recoverable assets is adjusted and charged to the income statement through an increase in the doubtful accounts
allowance. This determination requires substantial judgment by management. As a result, final losses from doubtful accounts could
differ significantly from estimated allowances.
We apply judgment at each balance sheet date
to determine whether the slow moving inventory is impaired. Inventory is impaired when the carrying value is greater than the net
realizable value.
The reserve for environmental liabilities represent
the estimated environmental remediation costs that we believe are going to incur. These estimates are based on currently available
data, existing technology, the current laws and regulations and take into account the likely effects of inflation and other economic
and social factors. The time in which we could incur these costs cannot be determined reliably at this time due to the absence
of deadlines for remediation under the laws and regulations which apply to remediation costs will be made.
New Accounting Pronouncements
IASB has issued amendments to IFRS, which were
enacted but some of which are not yet effective:
IFRS to be effective from 2018:
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IFRS 15, Revenue for Contracts with Customers;
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IFRS 9, Financial Instruments;
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Amendment to IAS 40, Investment Property;
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Amendment to IAS 28, Investment Entity;
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Amendments to IFRS 2, related to the Classification and Measurement of Share-based Payment Transactions; and
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●
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Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration Issued.
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IFRS to be effective from 2019:
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IFRS 16, Leases;
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Amendment to IAS 28, regarding long-term interests in associates and joint ventures;
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Amendment to IAS 3, Business Combinations;
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Amendment to IAS 11, Joint Arrangements;
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Amendment to IAS 12, Income Taxes;
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●
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Amendment to IAS 23,
Borrowing Costs; and
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●
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Interpretation IFRIC 23, to clarify the recognition of deferred tax assets for unrealised losses related to debt instruments measured at fair value.
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At the date
of issuance of our consolidated financial statements, these new standards have not had any effect on our financial information.
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B.
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Liquidity and Capital Resources
|
On December 31, 2017, our total consolidated
debt was Ps. 5.960 million (U.S.$302,000) of 8 7/8% medium-term notes (“MTNs”) due 1998 which remained outstanding
after we conducted exchange offers for the MTNs in October 1997 and August of 1998. We could not identify the holders of such MTNs
at the time of the exchange offers and as a result such MTNs, which matured in 1998, have not been paid and remain outstanding.
On September 6, 2006, Industrias CH and its
subsidiaries and affiliates made available a line of credit in favor of Republic. Effective January 1, 2009, Industrias CH reduced
the interest rate from 5.23% to 0.25% per annum. As of December 31, 2017 and 2016, Republic had Ps. 985 million (comprised of U.S.$38
million and Ps. 227 million, including interest) and Ps. 1,016 million (comprised of U.S.$38 million and Ps. 222 million, including
interest), respectively, outstanding under this line of credit. See Note 18 to our consolidated financial statements included elsewhere
herein.
We depend heavily on cash generated from operations
as our principal source of liquidity. Other sources of liquidity have included financing made available to us by our parent Industrias
CH (primarily in the form of equity or debt, substantially all of which was subsequently converted to equity), primarily for the
purpose of repaying third party indebtedness, as well as limited amounts of vendor financing. On February 8, 2007, we completed
a public offering of ADSs and series B shares and raised cash proceeds of approximately Ps. 2,421 millones
(
U.S.$214 million).
As of December 31, 2013 we had cash and cash equivalents of Ps. 6,985 million, as of December 31, 2014 we had cash and cash equivalents
of Ps. 7,003 million, as of December 31, 2015 we had cash and cash equivalents of Ps. 6,224 million, as of December 31, 2016 we
had cash and cash equivalents of Ps. 7,536 million and as of December 31, 2017 we had cash and cash equivalents of Ps. 7,204 million.
We believe that this amount of cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements,
including our currently anticipated capital expenditures.
Our principal use of cash has generally been
to fund our operating activities, to acquire businesses and to fund our capital expenditure programs. The following is a summary
of cash flows for the three years ended December 31, 2015, 2016 and 2017:
Principal Cash Flows
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|
Years ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
Funds provided (used) by operating activities
|
|
(382)
|
|
5,822
|
|
2,772
|
Funds used in investing activities
|
|
(655)
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|
(3,166)
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(2,706)
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Funds (used) in financing activities
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(285)
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|
(1,495)
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|
(374)
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Our net funds provided by operations were Ps.
2,772 million in 2017 compared to Ps. 5,822 million of net funds provided by operations in 2016. The decrease of Ps. 3,050 million
in the net funds provided by operations between 2017 and 2016 originated mainly from the lower net income for the year 2017. Our
net funds provided by operations were Ps. 5,822 million in 2016 compared to Ps. 382 million of net funds used by operations in
2015. The increase of Ps. 5,440 million in the net funds provided by operations between 2016 and 2015 originated mainly from the
net income for the year.
We attribute our net funds used in investing
activities primarily to the acquisition of new facilities, property, plant and equipment and other non-current assets. Our net
funds used in investing activities were Ps. 2,706 million in 2017 compared to Ps. 3,166 million in 2016. In addition, in 2017 we
also recovered temporary investments of Ps. 339 million. Our net funds used in investing activities were Ps. 3,166 million in 2016
compared to Ps. 655 million in 2015. In addition, in 2016 we invested Ps. 54 million in the acquisition of shares of public companies
for trading.
Our net funds used by financing activities in
2017 were Ps. 374 million, compared to Ps. 1,495 million used by financing activities in 2016. In 2017, there was a decrease of
Ps. 279 million in the repurchase of our own shares compared to Ps. 2,394 million used in loans to related parties and there was
an increase of Ps. 938 million in the repurchase of our own shares in 2016. Our net funds used by financing activities in 2016
were Ps. 1,495 million, compared to Ps. 285 million used by financing activities in 2015. In 2016, we made loans to related parties
for Ps. 2,394 million and there was an increase of Ps. 938 million in the repurchase of our own shares compared to Ps. 245 million
in 2015. We do not have in place any interest rate or currency hedging instruments. We were not a party to any non-exchange traded
contracts accounted for at fair value in 2017 and 2016.
As of December 31, 2017, we have the following
commitments for capital expenditures:
On September 5, 2015 a turnkey contract became
effective with Danieli & Officine Meccaniche Spa (Danieli) for the supply and construction (except for civil engineering) in
Tlaxcala, México, of a new Mini mill for the production of 600,000 SBQ, up to a total amount of U.S.$203.5 million (Ps.
4,205 million). The off-shore portion of the contract price is equal to U.S.$152.5 million (Ps. 3,151 million) , which will be
paid to Danieli in various installments according to the project’s progress, and the on-shore portion of the contract price
is equal to U.S.$51 million (Ps. 1,054), which will be paid to certain local suppliers of Danieli on a monthly basis, as instructed
by them. As of December 31, 2017, the outstanding amount of this project amounts to U.S. $ 17.9 million (Ps.353.3 million). The
project is estimated to be completed in May 2018.
In January 2013, the Company entered into a
15 year product supply agreement with Air Products and Chemicals, Inc. The agreement required that Air Products and Chemicals construct
and install a plant for the production of oxygen, nitrogen and argon gas on the premises of the Lorain, Ohio facility. In August
of 2016, the Company entered into an agreement with Air Products and Chemicals, Inc. whereby the plant was purchased for U.S.$30
million (Ps. 592 million) and the supply agreement cancelled in its entirety. The purchase price is repayable over 6 years in equal
monthly installments of U.S.$0.4 million (Ps. 7.9 million) after an initial payment of U.S.$1.2 million (Ps. 23 million) and carries
no interest cost. Obligations are secured by certain physical assets (operating, manufacturing, and storage equipment, buildings
and machinery) at the Company’s Canton facility.
In December 2017, the Company entered into a
contract with the supplier COMERC, LTDA, for an amount of U.S.$5.2 million (Ps. 103 million) for the purchase of 8,000 MWH of energy
per month, for its subsidiary GV do Brasil Industria y Comercio of Aço LTDA. The monthly payments expire 6 days after the
closing date of the month. The contract ends in February 2019.
In January 2018, the Company entered into a
contract with the supplier ECOM, LTDA, for an amount of U.S.$ 6.1 million (Ps. 120 million) for the purchase of 10,000 MWH of energy
per month, for its subsidiary GV do Brasil Industria e Comercio de Aço LTDA. The monthly payments expire 6 days after the
closing date of the month. The contract ends in February 2019.
In January 2018, the Company entered into a
contract with the supplier ECOM, LTDA, for an amount of U.S.$ 6.3 million (Ps. 124 million) for the purchase of 10,000 MWH of energy
per month, for its subsidiary GV do Brasil Industria e Comercio de Aço LTDA. The monthly payments expire 6 days after the
closing date of the month. The contract ends in February 2020.
On February 22, 2018, a contract was signed
with Primental Technologies of Italy, the United States and Mexico for the reconstruction of the rolling mill and the supply of
a new reheating furnace for the Mexicali plant, which will increase capacity of finished product manufacturing from 17,500 to 22,500
tons per month. An advance of 20% has already been paid for U.S.$1.67 million (Ps. 33 million) and the placement of the letters
of credit is in process. The term of execution of the project is 16 months and a budget of U.S.$23.2 million (Ps. 458 million)
is estimated.
C.
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Research and Development, Patents and Licenses
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The San Luis facilities are registered with
the Mexican Institute of Industrial Property (“IMPI”) and the trademarks “SAN” and “Aceros San Luis.”
The trademark “Grupo Simec” is registered with the IMPI. On October 11, 2017, Simec International 6, S.A. de C.V.,
concluded the registration of the patent “
Fabricación de Aceros de Mecanizado Fácil con Plomo en la Máquina
de Colada Continua
” (Manufacture of Easy Machining Steels with Lead in Continuous Casting Machine) in the IMPI.
In the first quarter of 2018 net sales increased
17% compared to the fourth quarter of 2017. Sales in tons of finished steel increased 12% in the first quarter of 2018 compared
with the fourth quarter of 2017. Prices of finished products sold in the first quarter of 2018 increased approximately 4.4% compared
to the fourth quarter of 2017.
All of the statements in this “Trend Information”
section are subject to and qualified by the information set forth under the “Cautionary Statement Regarding Forward Looking
Statements.” See also Item 5.A “Operating and Financial Review and Prospects—Overview of Operating Results.”
E.
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Off-Balance Sheet Arrangements
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We do not have any material off-balance sheet
arrangements.
F.
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Contractual Obligations
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The table below sets forth our significant short-term
and long-term contractual obligations as of December 31, 2017:
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Maturity
|
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Less than
1
year
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1–
3 years
|
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4–
5 years
|
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In excess
of
5 years
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Total
|
|
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|
(millions of pesos)
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Short-term debt obligations of related parties
(1)
|
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1,024
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,024
|
|
Short-term debt obligations
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
Long-term contractual obligations (see paragraph below)
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|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
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|
Total
|
|
|
1,031
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,032
|
|
|
(1)
|
Ps. 984 million correspond to a note payable to Industrias CH (Ps. 227 million) and Tuberías Procarsa, Pytsa Industrial de México and Procarsa Tube and Pipe denominated in U.S. dollars, for an indefinite term and bearing annual interest at a rate of 0.25%; Ps. 40 million correspond to other liabilities.
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Republic leases certain equipment, office space
and computers through operating contracts under non-cancelable operating leases. These lease contracts expire on several different
dates by the end of 2020. During 2017 and 2016, the expenses for operating leases were Ps. 9.5 million (U.S.$0.5 million) and Ps.
21 million (U.S.$1.1 million), respectively. As of December 31, 2017, total future minimum lease payments under non-cancelable
operating leases are Ps. 0.7 million (U.S.$0.037 million) in 2018, Ps. 0.6 million (U.S.$0.032 million) in 2019 and Ps. 0.1 million
(U.S.$0.006 million in 2020. At December 31, 2017 there are no additional obligations after 2020.
In January 2013, Republic entered into an agreement
with EnerNOC which enables Republic to receive payments for reducing the electricity consumption during a dispatch declared by
PJM Interconnection as an emergency. The agreement is for 5 years, effective January 31, 2013 and expires on May 31, 2018. Republic
recognized income of Ps. 19 million (U.S.$1 million) and of Ps. 18.6 million (U.S.$ 1 million) from this agreement in 2017 and
in 2016, respectively.
In December 2017, the Company entered into a
contract with the supplier COMERC, LTDA. for an amount of Ps. 102.6 million (U.S.$ 5.2 million) for the purchase of 8,000 MWH of
energy per month, for its subsidiary GV do Brasil Industria y Comercio de Aço LTDA. All monthly payments due 6 days after
the closing date of the month. The contract ends in February 2019.
In January 2018, the Company entered into a
contract with the supplier ECOM, LTDA. for an amount of Ps. 124.3 (U.S.$ 6.3 million) for the purchase of 10,000 MWH of energy
per month, for its subsidiary GV do Brasil Industria y Comercio de Aço LTDA, beginning the supply in 2019. All payments
due monthly 6 days after the closing date of the month. The contract ends in February 2020.
Item 6.
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Directors, Senior Management and Employees
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A.
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Directors and Senior Management
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Our Board of Directors
Our board of directors is responsible for managing
our business. Pursuant to our by-laws, the board of directors shall consist of a maximum of 21 but not less than five members elected
at an ordinary general meeting of shareholders. Our board of directors currently consists of five directors, each of whom is elected
at the annual shareholders’ meeting for a term of one year with an additional period of thirty days, if a successor has not
been appointed. The board of directors may appoint provisional directors until the shareholders’ meeting appoints the new
directors. Under the Mexican Securities Market Law and our bylaws, at least 25% of our directors must be independent. Under the
law, the determination as to the independence of our directors made by our shareholders’ meeting may be contested by the
CNBV. In compliance with our bylaws and applicable Mexican law, our board of directors meets on a quarterly basis and resolutions
adopted by a majority of directors at the meeting are valid resolutions.
Election of the Board of Directors
At each shareholders’ meeting for the
election of directors, the holders of shares are entitled pursuant to our by-laws to elect the directors. Each person (or group
of persons acting together) holding 10% of our capital stock is entitled to designate one director.
The current members of our board of directors
were nominated and elected to such position at the 2016 general meeting of shareholders as proposed by Industrias CH. We expect
that Industrias CH will be in a position to continue to elect the majority of our directors and to exercise substantial influence
and control over our business and policies and to influence us to enter into transactions with Industrias CH and affiliated companies.
However, our by-laws provide that at least 25% of our directors must be independent from us and our affiliates, and our board of
directors has passed a resolution requiring the approval of at least two independent directors for certain transactions between
us and our affiliates which are not our subsidiaries.
Under Mexican law, a majority shareholder has
no fiduciary duty to minority shareholders but may not act contrary to the interests of the corporation for the majority shareholder’s
benefit. Such a majority shareholder is required to abstain from voting on any matter in which it directly or indirectly has a
conflict of interest and can be liable for actual and consequential damages if such matter passes as a result of its vote in favor
thereof. In addition, the directors of a Mexican corporation owe a duty to act in a manner which, in their independent judgment,
is in the best interests of the corporation and all its shareholders.
Our board of directors adopted a code of ethics
in December 2002.
Authority of the Board of Directors
The board of directors is our legal representative.
The board of directors must approve, among other matters, the following:
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annual approval of the business plan and the investment budget;
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capital investments not considered in the approved annual budget for each fiscal year;
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proposals to increase our capital or that of our subsidiaries;
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with input from the Audit Committee, on an individual basis: (i) any transactions with related parties, subject to certain limited exceptions, (ii) our management structure and any amendments thereto, and (iii) the election of our chief executive officer, his compensation and removal for justified causes; (iv) our financial statements and those of our subsidiaries, (v) unusual or non- recurrent transactions and any transactions or series of related transactions during any calendar year that involve (a) the acquisition or sale of assets with a value equal to or exceeding 5% of our consolidated assets or (b) the giving of collateral or guarantees or the assumption of liabilities, equal to or exceeding 5% of our consolidated assets, and (vi) contracts with external auditors and the chief executive officer annual report to the shareholders’ meeting;
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calling shareholders’ meetings and acting on their resolutions;
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any transfer by us of shares in our subsidiaries;
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creation of special committees and granting them the power and authority, provided that the committees will not have the authority which by law or under our by-laws is expressly reserved for the board of directors or the shareholders;
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determining how to vote the shares that we hold in our subsidiaries; and
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the exercise of our general powers in order to comply with our corporate purpose.
|
Meetings of the board of directors will be validly
convened and held if a majority of our members are present. Resolutions at the meetings will be valid if approved by a majority
of the members of the board of directors, unless our by-laws require a higher number. The chairman has a tie-breaking vote. Notwithstanding
the board’s authority, our shareholders pursuant to decisions validly taken at a shareholders’ meeting at all times
may override the board.
Duty of Care and Duty of Loyalty
The Mexican Securities Market Law imposes a
duty of care and a duty of loyalty on directors. The duty of care requires our directors to act in good faith and in the best interests
of the company. In carrying out this duty, our directors are required to obtain the necessary information from the executive officers,
the external auditors or any other person to act in the best interests of the company. Our directors are liable for damages and
losses caused to us and our subsidiaries as a result of violating their duty of care.
The duty of loyalty requires our directors to
preserve the confidentiality of information received in connection with the performance of their duties and to abstain from discussing
or voting on matters in which they have a conflict of interest. In addition, the duty of loyalty is violated if a shareholder or
group of shareholders is knowingly favored or if, without the express approval of the board of directors, a director takes advantage
of a corporate opportunity. The duty of loyalty is also violated, among other things, by (i) failing to disclose to the audit and
corporate practices committee or the external auditors any irregularities that the director encounters in the performance of his
or her duties or (ii) disclosing information that is false or misleading or omitting to record any transaction in our records that
could affect our financial statements. Directors are liable for damages and losses caused to us and our subsidiaries for violations
of this duty of loyalty. This liability also extends to damages and losses caused as a result of benefits obtained by the director
or directors or third parties, as a result of actions of such directors.
Our directors may be subject to criminal penalties
of up to 12 years’ imprisonment for certain illegal acts involving willful misconduct that result in losses to us. Such acts
include the alteration of financial statements and records.
Liability actions for damages and losses resulting
from the violation of the duty of care or the duty of loyalty may be exercised solely for our benefit and may be brought by us,
or by shareholders representing 5% or more of our capital stock, and criminal actions only may be brought by the Mexican Ministry
of Finance, after consulting with the CNBV. As a safe harbor for directors, the liabilities specified above (including criminal
liability) will not be applicable if the director acting in good faith (i) complied with applicable law, (ii) made the decision
based upon information provided by our executive officers or third-party experts, the capacity and credibility of which could not
be subject to reasonable doubt, (iii) selected the most adequate alternative in good faith or if the negative effects of such decision
could not have been foreseeable, and (iv) complied with shareholders’ resolutions provided the resolutions do not violate
applicable law.
The members of the board are liable to our shareholders
only for the loss of net worth suffered as a consequence of disloyal acts carried out in excess of their authority or in violation
of our by-laws.
In accordance with the Mexican Securities Market
Law, supervision of our management is entrusted to our board of directors, which shall act through an audit and corporate practices
committee for such purposes, and to our external auditor. The audit and corporate practices committee (together with the board
of directors) replaces the statutory auditor (
comisario
) that previously had been required by the Mexican Corporations Law.
See Item 6.C. “— Committees” below.
The following table sets forth the names of
the members of our board of directors and the year of their initial appointment:
Name
|
|
Director
Since
|
Rufino Vigil González
|
|
2001
|
Raúl Arturo Pérez Trejo
|
|
2003
|
Luis García Limón
|
|
2011
|
Rodolfo García Gómez de Parada
|
|
2001
|
Gerardo Arturo Avendaño Guzmán
|
|
2001
|
Biographical Information of our Board of Directors
Gerardo Arturo Avendaño Guzmán
.
Mr. Avendaño was born in 1955. He is an independent director for purposes of Mexican law and has been a member of our
board of directors and the Audit Committee since 2001. Mr. Avendaño is an independent lawyer specializing in civil, mercantile
and fiscal litigation.
Rodolfo García Gómez de
Parada
. Mr. García was born in 1953. He has been a member of our board of directors since 2001 and is an independent
director for purposes of Mexican law, and is the chairman of our Audit Committee. He has been the tax advisor of Industrias CH
since 1978 and also serves as member of the board of directors of a group of self-service stores and restaurants since 1990.
Luis García Limón
.
Mr. García was born in 1944. He is currently our chief executive officer and has been a member of our board of directors
since 2011. From 1982 to 1990 he was general director of Compañía Siderúrgica de Guadalajara, S.A. de C.V.
(“
CSG
”), from 1978 to 1982 he was Operation Director of CSG, from 1974 to 1978 he was general manager of Moly
Cop and Pyesa, and from 1969-1974 he was Engineering Manager of CSG. In addition, from 1967 to 1969 Mr. García was the director
of electrical installation of a construction company.
Raúl Arturo Pérez Trejo
.
Mr. Pérez was born in 1959. He has been a member of our board of directors since 2003, and is an independent director for
purposes of Mexican law. Mr. Pérez has also served since 1992 as the chief financial officer of a group that produces and
sells structural steel racks for warehousing and other industrial storage.
Rufino Vigil González
.
Mr.
Vigil was born in 1948. He is currently the chairman of our board of directors and has been a member of the board of directors
since 2001. Since 1973, Mr. Vigil has been chief executive officer of a steel related products corporation. From 1988 to 1993,
Mr. Vigil was a member of the board of directors of a Mexican investment bank and from 1971 to 1973 he was a construction corporation
manager.
Executive Officers
The following table sets forth the names of
our executive officers, their current position with us and the year of their initial appointment to that position.
Name
|
|
Position
|
|
Position
Held Since
|
Luis García Limón
|
|
Chief Executive Officer
|
|
1982*
|
Mario Moreno Cortez
|
|
Coordinator of Finance
|
|
2012
|
Juan José Acosta Macías
|
|
Chief Operating Officer
|
|
2004
|
__________________
* Represents the date as of which
Mr. García Limón first held this office with our predecessor, CSG.
Luis García Limón
.
Mr. García was born in 1944. He is currently our chief executive officer and has been a member of our board of directors
since 2011. From 1982 to 1990 he was general director of CSG, from 1978 to 1982 he was Operation Director of CSG, from 1974 to
1978 he was general manager of Moly Cop and Pyesa, and from 1969-1974 he was Engineering Manager of CSG. In addition, from 1967
to 1969 Mr. García was the director of electrical installation of a construction company.
Mario Moreno Cortez.
Mr. Moreno
was born in 1968. He is currently our coordinator of Finance. From 1998 to 2010 he was the general accountant within the main subsidiaries
of Grupo Simec. Previously Mr. Moreno worked in various departments of the financial area within certain of our principal subsidiaries.
Juan José Acosta Macías
.
Mr. Acosta was born in 1960. He is currently our chief operating officer. From 1998 to 2004 he was production manager of CSG,
he has been working with us since 1983. Prior to working with us, Mr. Acosta worked for Mexicana de Cobre as a supervisor in 1982.
Our chief executive officer and executive officers
are required, under the Mexican Securities Market Law, to act for our benefit and not that of a shareholder or group of shareholders.
Our chief executive is required, principally, to (i) implement the instructions of our shareholders’ meeting and our board
of directors, (ii) submit to the board of directors for approval the principal strategies for the business, (iii) submit to the
Audit Committee proposals for the systems of internal control, (iv) disclose all material information to the public and (v) maintain
adequate accounting and registration systems and mechanisms for internal control. Our chief executive officer and our executive
officers will also be subject to liability of the type described above in connection with our directors.
The business address of our directors and executive
officers is our principal executive headquarters.
For the years ended December 31, 2017 and 2016,
we paid no fees to our five directors, and the aggregate compensation our executive officers earned was approximately Ps. 82.4
million and Ps. 71.6 million, respectively. We do not provide pension, retirement or similar benefits to our directors in their
capacity as directors. Our executive officers are eligible for retirement and severance benefits required by Mexican law on the
same terms as all other employees, and we do not separately set aside, accrue or determine the amount of our costs that is attributable
to executive officers.
None of our directors or executive officers
are entitled to benefits upon termination under their service contracts with us, except for what is due them according to the Mexican
Federal Labor Law
(Ley Federal del Trabajo)
.
Committees
Our by-laws provide for an audit and corporate
practices committee to assist the board of directors with the management of our business.
Audit and Corporate Practices Committee
Our audit and corporate practices committee
is governed by our bylaws and Mexican law. Our by-laws provide that the audit and corporate practices committee shall be at least
three members, all of which must be independent directors. The chairman of the audit and corporate practices committee is elected
by our shareholders’ meeting, and the board of directors appoints the remaining members.
The audit and corporate practices committee
is currently composed of three members. Raúl Arturo Pérez Trejo was appointed as chairman of the audit and corporate
practices committee at our annual ordinary shareholders’ meeting held on April 23, 2018, and Gerardo Arturo Avendaño
Guzmán and Rodolfo García Gómez de Parada were re-elected as members. Raúl Arturo Pérez Trejo
has been ratified as the “audit committee financial expert.”
The audit and corporate practices committee
is responsible, among others, for (i) supervising our external auditors and analyzing their reports, (ii) analyzing and supervising
the preparation of our financial statements, (iii) informing the board of our internal controls and their adequacy, (iv) requesting
reports of our board of directors and executive officers whenever it deems appropriate, (v) informing the board of any irregularities
that it may encounter, (vi) receiving and analyzing recommendations and
observations made by the shareholders, members of the board, executive
officers, our external auditors or any third party and taking the necessary actions, (vii) calling shareholders’ meetings,
(viii) supervising the activities of our chief executive officer, (ix) providing an annual report to the annual shareholders’
meeting, (x) providing opinions to our board of directors, (xi) requesting and obtaining opinions from independent third parties
and (xii) assisting the board in the preparation of annual reports and other reporting obligations.
The chairman of the audit and corporate practices
committee, shall prepare an annual report to the annual shareholders’ meeting with respect to the findings of the audit and
corporate practices committee, which shall include (i) the status of the internal controls and internal audits and any deviations
and deficiencies thereof, taking into consideration the reports of external auditors and independent experts, (ii) the results
of any preventive and corrective measures taken based on results of investigations in respect of non-compliance of operating and
accounting policies, (iii) the evaluation of external auditors, (iv) the main results from the review of our financial statements
and those of our subsidiaries, (v) the description and effects of changes to accounting policies, (vi) the measures adopted as
result of observations of shareholders, directors, executive officers and third parties relating to accounting, internal controls,
and internal or external audits; (vii) compliance with shareholders’ and directors’ resolutions; (viii) observations
with respect to relevant directors and officers; (ix) the transactions entered into with related parties; and (x) the remuneration
paid to directors and officers.
Our audit and corporate practices committee
met at least quarterly in 2017.
As of December 31, 2017, we had 3,767 employees
(2,552 were employed at our Mexico facilities, of whom 1,131 were unionized, 892 were employed at Republic facilities, of whom
737 were unionized and 323 were employed at our Brazil plant, of whom 249 were unionized) compared to 3,973 employees as of December
31, 2016, (2,616 were employed at our Mexico facilities, of whom 1,189 were unionized, 1,087 were employed at Republic facilities,
of whom 927 were unionized and 270 were employed at our Brazil plant, of whom 198 were unionized) and 4,420 employees as of December
31, 2015, (2,688 were employed at our Mexico facilities, of whom 1,418 were unionized, 1,503 were employed at Republic facilities,
of whom 1,247 were unionized and 229 were employed at Brazil plant, of whom 135 were unionized).
The unionized employees in each of our Mexican
facilities are affiliated with different unions. Salaries and benefits of our Mexican unionized employees are determined annually
through collective bargaining agreements. Set forth below is the union affiliation of the employees of each of our Mexican facilities
and the expiration date of the current collective bargaining agreements.
|
●
|
Guadalajara facilities:
Sindicato de Trabajadores en la Industria Siderúrgica y Similares en el Estado de Jalisco. The contract expires on February 18, 2020.
|
|
●
|
Mexicali facilities
: Sindicato de Trabajadores de la Industria Procesadora y Comercialización de Metales de Baja California. The contract expires on January 15, 2020.
|
|
●
|
Apizaco facilities
: Sindicato Nacional de Trabajadores de Productos Metálicos, Similares y Conexos de la República Mexicana. The contract expires on January 16, 2019.
|
|
●
|
Cholula facilities
: Sindicato Industrial “Acción y Fuerza” de Trabajadores Metalúrgicos Fundidores, Mecánicos y Conexos CROM del Estado de Puebla. The contract expires on March 1, 2020.
|
|
●
|
San Luis facilities
: At the Aceros San Luis facility: Sindicato de Empresas adherido a la CTM, the contract expires on January 15, 2020; and at the Aceros DM facility: Sindicato de Trabajadores de la Industria Metal Mecánica, Similares y Conexos del Estado de San Luis Potosí CTM, the contract expires on January 23, 2020.
|
We have had good relations with the unions in
our Mexican facilities. The collective bargaining agreements are renegotiated every two years, and wages are adjusted every year.
Republic is the only subsidiary of the Group
which offers other benefits and pension plans to their employees. Benefit plans to employees with Republic are described below.
Collective Bargaining Agreements
As of December 31, 2017, 83% of Republic’s
workers are covered by a collective bargaining agreement with the United Steelworkers (USW). The agreement expired on August 15,
2016 and was extended for a further three years through August 15, 2019. The extended agreement renews all the provisions,
understandings and agreements set forth in the January 1, 2012 Basic Labor
Agreement. The base rates of pay determined under the
extended agreement will remain. The extended agreement provides that the
company’s quarterly contributions to fund the Republic Retirement
VEBA Benefit Trust (the “Benefit Trust”) be reduced from U.S.$2.6 million (Ps. 51 million) to U.S.$0.25 million (Ps.
5 million) beginning in August 15, 2016 through June 30, 2019. Effective July 1, 2019, the Company’s contribution to the
Benefit Trust will change to U.S.$4.00 (Ps. 83) per hour for each hour worked by USW represented employees.
For the Mexican operations, approximately 44%
of the employees are under collective bargaining agreements, which expire as described above.
For the Brazil operations, approximately 77%
of the employees are under collective bargaining agreements, with
Sindicato dos Metalúrgicos de Pindamonhangaba, Moreira
César e Roseira afiliado a CUT
, which expires on August 31, 2018.
Defined Contribution Plans
Steelworkers Pension Trust
Republic participates in the Steelworkers Pension
Trust (SPT), a defined benefit multi-employer pension plan. While this plan provides defined benefits as a result of lack of information,
the company accounts for the plan as a defined contribution plan. Specifically, the plan does not maintain accounting records for
purposes of IFRS presentation and does not provide enough information to allocate amounts between participating employers’.
The company obligations to the plan are based
upon fixed contribution requirements. The company contributes a fixed dollar amount of U.S.$1.68 (Ps. 33) per hour for each covered
employee’s contributory hours, as defined under the plan.
Participation in a multi-employer pension plan
agreed to under the terms of a collective bargaining agreement differs from a traditional qualified single employer defined benefit
pension plan. The SPT shares risks associated with the plan in the following respects:
- Contributions to the SPT by the company may be used
to provide benefits to employees of other participating employers;
- If a participating employer stops contributing to the
SPT, the unfunded obligations of the plan may be borne by the remaining participating employers;
- If Republic chooses to stop participating in the SPT,
the company may be required to pay an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
On March 21, 2011, the Board of Trustees of
the SPT elected funding relief which has the effect of decreasing the amount of required minimum contributions in near-term years,
but will increase the minimum funding requirements during later plan years. As a result of the election of funding relief, the
SPT’s zone funding under the Pension Protection Act may be impacted.
In addition to the funding relief election,
the Board of Trustees also elected a special amortization rule, which allows the SPT to separately amortize investment losses incurred
during the SPT’s December 31, 2008 plan year-end over a 29 year period, whereas they were previously required to be amortized
over a 15 year period.
Republic’s participation in the SPT for
the annual periods ended December 31, 2017 and 2016, is outlined in the table below.
|
|
|
|
Pension
Protection Act
Zone Status
(a)
|
|
|
|
|
Republic Steel Contributions
(U.S.$ in thousands)
|
|
|
Surcharge Imposed
(c)
|
|
|
|
Pension
Fund
|
|
EIN/ Pension
Plan Number
|
|
2017
|
|
|
2016
|
|
|
FIP/RP Status Pending/ Implemented
(b)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Expiration of
Collective Bargaining
Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steelworkers
Pension Trust
|
|
23-6648508/499
|
|
|
Green
|
|
|
|
Green
|
|
|
No
|
|
$
|
2,467
|
|
|
$
|
3,153
|
|
|
|
No
|
|
|
|
No
|
|
|
August 15, 2019
|
|
(a)
|
The zone status is based on information that Republic received from the plan and is certified by the plan’s actuary. Among other factors: plans in the green zone are at least 80% funded, plans in the yellow zone are less than 80% funded, and plans in the red zone are less than 65% funded.
|
|
(b)
|
Indicates if a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented.
|
|
(c)
|
Indicates whether there were charges to Republic from the plan.
|
Republic has not been listed in the plans’
Forms 5500 as providing more than five percent of the total contributions for any plan years.
There have been no significant changes that
affect the comparability of 2017 and 2016 contributions.
VEBA Benefit Trust
Republic is required to make quarterly contributions
to the VEBA Benefit Trust as determined by the terms of the USW collective bargaining agreement. The VEBA Benefit Trust is a health
and welfare plan for USW retiree healthcare benefits, and is not a “qualified” plan under the regulations of the Employee
Retirement Income Security Act of 1974 (ERISA). Under the terms of the extended collective bargaining agreement referred to above,
the Benefit Trust contributions have been reduced from U.S.$2.6 million (Ps. 54 million) to U.S.$0.25 (Ps. 5 million) million per
quarter, effective August 16, 2016. For the years ended December 31, 2017 and 2016, the company recorded expenses of Ps. 19
million (U.S.$1 million) and Ps. 128.7 million (U.S.$6.9 million), respectively, related to the Benefit Trust.
Republic recorded combined expenses of Ps.
66 million (U.S.$3.5 million) and Ps. 186.6 million (U.S.$10 million) for the years ended December 31, 2017 and 2016, respectively,
related to the funding obligations of the Benefit Trust and SPT.
401(k) Plans
Republic has a defined contribution 401(k)
retirement plan that covers substantially all salaried and nonunion hourly employees. This plan is designed to provide retirement
benefits through company contributions and voluntary deferrals of employees’ compensation. The company funds contributions
to this plan each pay period based upon the participant’s age and service as of January first of each year. The amount
of the company’s contribution is equal to the monthly base salary multiplied by the appropriate percentage based on age and
years of service. The contribution becomes 100% vested upon completion of three years of vesting service. In addition, employees
are permitted to make contributions into a 401(k) retirement plan through payroll deferrals. The company provides a 25.0% matching
contribution for the first 5.0% of payroll that an employee elects to contribute. Employees are 100% vested in both their and the
company’s matching 401(k) contributions. For the years ended December 31, 2017 and 2016, the company recorded expense
of Ps. 15.1 million
(
U.S.$0.8 million) and Ps. 13.1 million
(
U.S.$0.7 million), respectively, related to
this defined contribution retirement plan.
Employees who are covered by the USW labor
agreement are eligible to participate in the defined contribution 401(k) retirement plan through voluntary deferrals of employees’
compensation. There are no company contributions or employer matching contributions relating to these employees.
Profit Sharing Plans and Incentive Compensation Plans
The labor agreement includes a profit sharing
plan to which Republic is required to contribute 2.5% of its quarterly pre-tax income, as defined in the labor agreement. At the
end of each year, the contribution is based upon annual pre-tax income up to U.S.$50.0 million (Ps. 1,033 million) multiplied
by 2.5%, U.S.$50.0 million (Ps. 1,033 million) to U,S.$100.0 million (Ps. 2,066 million) multiplied by 3.0%, and above
U.S.$100.0 million (Ps. 2,066 million) multiplied by 3.5%, less the previous payouts during the year. No expense was recorded
during the years ended December 31, 2017 and 2016, because the current and prior year thresholds had not been achieved.
Republic has a profit sharing plan for all
salaried and nonunion hourly employees. During 2012, the profit sharing plan was based upon achieving target Earnings Before Interest,
Taxes, Depreciation, and Amortization (EBITDA) amounts. During 2017 and 2016, the profit sharing plan was based upon achieving
certain inventory and shipment targets. During the years ended December 31, 2017 and 2016, Republic paid Ps.17 million (U.S.$0.9
million) and Ps.11.2 million (U.S.$0.6 million), respectively, to employees covered by the profit sharing plans.
Industrias CH and its direct wholly-owned subsidiaries
currently hold approximately 84% of our series B shares. At March 31, 2018, Rufino Vigil González, the chairman of our board
of directors, owned, directly or indirectly, approximately 67% of Industrias CH.
Item
|
10.
Additional Information
|
Not applicable.
B.
|
Memorandum and Articles of Association
|
Our principal objects and purposes, as expressed
in the Second Clause of our by-laws, are to engage in the control of companies dedicated to the manufacture, processing and distribution
of diversified special bar quality (“SBQ”) steel and structural products.
The Mexican Securities Market Law imposes a
duty of care and a duty of loyalty on directors. The duty of care, which generally requires that directors: (i) obtain the information
reasonably necessary to make decisions; (ii) request from officers and auditors information that is relevant to a decision to be
made; (iii) postpone board of directors meetings when a director is not present, has not arrived on time or has not been provided
with the same information as other directors; (iv) deliberate and vote, including if requested with the presence only of the other
directors and the secretary of the board. Directors will breached their duty of care and be subject to liability when damage is
caused to the issuer by any of the following: (i) failure to attend board, shareholders’ or committee meetings, which failure
prevents such meeting from being duly held; (ii) failure to reveal relevant information to the board of directors or to an applicable
committee, subject to legal or contractual limitations on disclosure of such information; or (iii) failure to comply
with the duties imposed by the Mexican Securities Market Law or
the issuer’s by-laws. Failure of directors to act with due care makes the relevant directors jointly and severally liable
for damages and losses caused to the issuer and its subsidiaries, which may be limited in the company’s by-laws or by resolution
of the shareholders’ meeting, except in the case of bad faith, willful misconduct or illegal acts. Liability for breach of
the duty of care may also be covered by indemnification provisions and director and executive officer insurance policies.
The duty of loyalty, which primarily consists
of maintaining the confidentiality of information received in connection with the performance of the director’s duties, and
abstaining from discussing or voting on matters where the director has a conflict of interest. Directors will have breached their
duty of loyalty in the following cases: (i) if without justification they utilize their position to gain benefits for themselves
or third parties, including an individual shareholder or group of shareholders; (ii) if they vote on or participate in deliberations
concerning an issue on which they have a conflict of interest; (iii) if they do not reveal the conflicts of interests they have;
(iv) if they deliberately favor an individual shareholder or group of shareholders to the detriment of others; (v) if the approve
related party transactions without observing the related guidelines under the Mexican Securities Market Law; (vi) if they utilize
property of the issuer for their own benefit or that of third parties in contravention of relevant policies; (vii) if they make
undue use of privileged information; or (viii) if, for themselves or third parties, they take advantage of a corporate opportunity.
A violation of the duty of loyalty makes the relevant directors jointly and severally liable for damages and losses caused to the
issuer and its subsidiaries, and in every case require removal from their positions. Unlike the duty of care, liability for breach
of the duty of loyalty may not be limited by the company’s by-laws, by resolution of the shareholders’ meeting or otherwise,
nor may indemnification provisions or insurance policies cover such liability.
Our directors may be subject to criminal penalties
of up to 12 years’ imprisonment for certain illegal acts involving willful misconduct that result in losses to us, which
include, among others, altering financial statements or records. In terms of the General Law of Commercial Companies and our by-laws,
only the shareholders’ meetings can determinate compensation for the directors. Our directors cannot individually exercise
any of our borrowing powers. We do not have any retirement plan. Shareholders, or a group of shareholders, that control 10% of
our shares can name a director and (in that director’s absence) an alternate director.
Voting Rights and Shareholders’ Meetings
Each series B share entitles its holder to one
vote at any meeting of our shareholders. Each series L share would entitle its holder to one vote at any meeting at which holders
of series L shares are entitled to vote. Holders of series L shares would be entitled to vote only on the following matters:
|
●
|
our transformation from one type of company to another;
|
|
●
|
to elect one member of our board of directors pursuant to the provisions of our by-laws and the Securities Market Law;
|
|
●
|
any merger or corporate spin-off in which we are not the surviving entity;
|
|
●
|
our dissolution or liquidation;
|
|
●
|
cancellation of the registration of our shares with the National Registry of Securities; and
|
|
●
|
any action that would prejudice the rights of holders of series L shares and not prejudice the other classes of shares similarly. A resolution on any such action requires the affirmative vote of a majority of all outstanding series L shares.
|
Shareholders may vote by proxy duly appointed
in writing. Under Mexican law, holders of shares of any series are also entitled to vote as a class on any action that would prejudice
the rights of holders of shares of such series but not rights of holders of shares of other series, and a holder of shares of such
series would be entitled to judicial relief against any such action taken without such a vote. Our board of directors or other
party calling for shareholder action initially would determine whether an action requires a class vote on these grounds. A negative
determination would be subject to judicial challenge by an affected shareholder, and a court ultimately would determine the necessity
for a class vote. There are no other procedures for determining whether a proposed shareholder action requires a class vote, and
Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination.
Under Mexican law and our by-laws, we may hold
three types of shareholders’ meetings: ordinary, extraordinary and special. Ordinary shareholders’ meetings are those
called to discuss any issue not reserved for extraordinary shareholders’ meeting. An annual ordinary shareholders’
meeting must be convened and held within the first four months following the end of each fiscal year to discuss, among other things,
the board of director’s report on our financial statements, the chief executive officer’s report on our operations
during the preceding year, a report on fulfillment of our tax obligations of the last fiscal year and the Audit Committee’s
report with respect to the preceding year, the appointment of members of the board of directors and the chairman of the Audit
Committee, declaration of dividends and the determination of compensation
for members of the board of directors and for members of the Audit Committee. Under the Mexican Securities Market Law, our ordinary
shareholders’ meeting, in addition to those matters described above, will have to approve any transaction representing 20%
or more of our consolidated assets, executed in a single or a series of transactions, during any fiscal year.
Extraordinary shareholders’ meetings are
those called to consider any of the following matters:
|
●
|
voluntary dissolution of the company;
|
|
●
|
an increase or decrease in a company’s minimum fixed capital;
|
|
●
|
change in corporate purpose or nationality;
|
|
●
|
any transformation, merger or spin-off involving the company;
|
|
●
|
any stock redemption or issuance of preferred stock or bonds;
|
|
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the cancellation of the listing of our shares with the National Securities Registry or on any stock exchange;
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any other amendment to our by-laws; and
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any other matters for which applicable Mexican law or our by-laws specifically require an extraordinary meeting.
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Special shareholders’ meetings are those
that shareholders of the same series or class call and hold to consider any matter particularly affecting the relevant series or
class of shares.
Shareholders’ meetings are required to
be held in our corporate domicile, which is Guadalajara, Jalisco. Calls for shareholders’ meetings must be made by the chairman
or the secretary of the board of directors or the chairman of our Audit Committee. Any shareholder or group of shareholders representing
at least 10% of our capital stock has the right to request that the chairman of the board of directors or the chairman of the Audit
Committee call a shareholders’ meeting to discuss the matters indicated in the relevant request. If the chairman of the board
of directors or the chairman of the Audit Committee fails to call a meeting within 15 calendar days following receipt of the request,
the shareholder or group of shareholders representing at least 10% of our capital stock may request that the call be made by a
competent court.
Calls for shareholders’ meetings must
be published in the official gazette of the state of Jalisco or any major newspaper located in the City of Guadalajara, Jalisco
at least 15 calendar days prior to the date of the meeting. Each call must set forth the place, date and time of the meeting and
the matters to be addressed. Calls must be signed by whomever makes them, provided that calls made by the board of directors or
the Audit Committee must be signed by the chairman, the secretary or a special delegate appointed by the board of directors or
the Audit Committee as appropriate, for that purpose. Shareholders’ meetings will be validly held and convened without the
need of a prior call or publication whenever all the shares representing our capital are duly represented.
To be admitted to any shareholders’ meeting,
shareholders must: (i) be registered in our share registry; and (ii) at least 24 hours prior to the commencement of the meeting
submit (a) an admission ticket issued by us for that purpose, and (b) a certificate of deposit of the relevant stock certificates
issued by the Secretary or by a securities deposit institution, a Mexican or foreign bank or securities dealer in accordance with
the Mexican Securities Market Law. Shareholders may be represented at any shareholders’ meeting by one or more attorneys-in-fact,
and these representatives may not be one of our directors. Representation at shareholders’ meetings may be substantiated
pursuant to general or special powers of attorney or by a proxy executed before two witnesses.
At or prior to the time of the publication of
any call for a shareholders’ meeting, we will provide copies of the publication to the depositary for distribution to the
holders of ADSs. Holders of ADSs are entitled to instruct the depositary as to the exercise of voting rights pertaining to the
Series B shares. See “Description of American Depository Receipts — Voting Rights.”
Quorum
Ordinary meetings are regarded as legally convened
pursuant to a first call when shares representing more than 50% of our capital are present or duly represented. Resolutions at
ordinary meetings of shareholders are valid when approved by a majority of the shares present at the meeting approves them. Any
number of shares represented at an ordinary meeting of shareholders convened pursuant to a second or subsequent call constitutes
a quorum. Resolutions at ordinary meetings of shareholders convened pursuant to a second or subsequent call are valid when a majority
of the shares present at the meeting approves them.
Extraordinary shareholders’ meetings are
regarded as legally convened pursuant to a first call when shares representing at least 75% of our capital are present or duly
represented, and extraordinary shareholders’ meetings convened pursuant to a second or subsequent call are regarded as legally
convened when shares representing 50% of our capital are present or duly represented. Resolutions at extraordinary meetings of
shareholders are valid when approved by 50% of our capital. Special meetings of holders of series L shares are governed by the
same rules applicable to extraordinary general meeting of holders of series B shares. The quorum for an extraordinary general meeting
at which holders of series L shares may not vote is 75% of the series B shares, and the quorum for an extraordinary general meeting
at which holders of L shares are entitled to vote is 75% of the outstanding capital stock. Whether on first, second or subsequent
call, actions at an extraordinary general meeting generally may be taken by a majority vote of the series B shares outstanding
and, on matters which holders of series L shares are entitled to vote, a majority vote of all the outstanding capital stock.
Our by-laws also establish that a delisting
of our shares requires the vote of holders of 95% of our capital stock.
No Right of Redemption
The Mexican Securities Market Law and our by-laws
provide that our shareholders do not have redemption rights for their shares.
Registration and Transfer
Our shares are registered with the National
Securities Registry, as required under the Mexican Securities Market Law and regulations issued by the CNBV. Our shares are evidenced
by share certificates in registered form, and registered dividend coupons may be attached thereto. Our shareholders either may
hold their shares directly, in the form of physical certificates, or indirectly, in book-entry form, through institutions that
have accounts with INDEVAL.
INDEVAL is the holder of record in respect of
all such shares held in book-entry form. INDEVAL will issue certificates on behalf of our shareholders upon request. INDEVAL participants,
brokers, banks, other financial entities or other entities approved by the CNBV maintain accounts at INDEVAL. We maintain a stock
registry and only those persons listed in such stock registry, and those holding certificates issued by INDEVAL indicating ownership,
and any relevant INDEVAL participants, will be recognized as our shareholders.
Dividends and Distributions
At the annual general ordinary shareholders’
meeting, the board of directors submits our financial statements for the previous fiscal year, together with their report on us,
to the series B shareholders for approval. Under our by-laws and Mexican law, our annual net income, based upon our audited financial
statements prepared in accordance with MFRS, is applied as follows: (i) five percent of our net earnings must be allocated to a
legal reserve fund, until such fund reaches an amount equal to at least 20% of our then current capital stock, (ii) thereafter,
a certain percentage of net earnings may be allocated to any general or specific reserve fund, and (iii) the remainder of any net
earnings is allocated as determined by the majority of our shareholders and may be distributed as dividends. All shares that are
fully paid and outstanding at the time a dividend or other distribution is declared are entitled to share equally in any or other
distribution. We will distribute through INDEVAL cash dividends on shares held through INDEVAL. Any cash dividends on shares evidenced
by physical certificates will be paid by surrendering to us the relevant dividend coupon registered in the name of its holder.
To the extent that we declare and pay dividends
on our shares, owners of ADSs at the time a dividend or other distribution is declared will be entitled to receive any dividends
payable in respect of the series B shares underlying their ADSs, subject to the terms of the Deposit Agreement. Cash dividends
will be paid to the depositary in pesos, and, except as otherwise described under “Description of American Depositary Receipts—Dividends,
Other Distribution and Rights,” the depositary will convert them into U.S. dollars and pay them to the holders of ADSs net
of currency expenses and applicable fees.
A shareholder’s entitlement to uncollected
dividends lapses within five years following the stated payment date, in favor of us.
For additional tender offer and insider trading
rules applicable to our securities pursuant to Mexican Law, see “Market Information.”
Changes in Capital Stock
Increases and reductions of our share capital
must be approved at an ordinary or extraordinary shareholders’ meeting, subject to the provisions of our by-laws and the
Mexican Corporations Law.
Subject to the individual ownership limitations
set forth in our by-laws, in the event of an increase of our capital stock, other than (i) in connection with mergers, (ii) for
the conversion of convertible debentures as provided in Section 210 Bis of the Mexican General Law on Negotiable Instruments and
Credit Transactions, (iii) for purposes of conducting a public offering of such shares or (iv) for the resale of shares maintained
in our treasury as a result of repurchase of shares conducted on the Mexican Stock Exchange, our shareholders will have a preemptive
right to subscribe and pay for new stock issued as a result of such increase in proportion to their shareholder interest at that
time. This preemptive right must be exercised by any method provided in Section 132 of the Mexican Corporations Law, by subscription
and payment of the relevant stock within fifteen business days after the date of publication of the corresponding notice to our
shareholders in the in the official gazette of the state of Jalisco or in one of the newspapers of general circulation in Guadalajara,
Jalisco, Mexico, provided that if at the corresponding meeting all of our shares are duly represented, the fifteen business day
period shall commence on the date of the meeting. Preemptive rights cannot be waived in advance and cannot be traded separately
from the corresponding shares that give rise to such right.
Holders of ADSs may exercise preemptive rights
in limited circumstances. See “Description of American Depositary Receipts—Dividends, Other Distributions and Rights.”
If a holder of series B shares or ADSs were unable or unwilling to exercise its preemptive rights in connection with such a capital
increase, such holder’s proportionate share of dividends and other distributions and voting rights would decline. In addition,
depending on the series of shares increased and the pattern in which preemptive rights were exercised, such a capital increase
might increase or reduce the portion of our capital stock represented by series B shares and ADSs or increase or reduce the proportionate
voting rights of such holder.
Our capital stock may be reduced by resolution
of a shareholders’ meeting taken pursuant to the rules applicable to capital increases. Our capital stock also may be reduced
upon withdrawal of a shareholder as provided in Section 206 of the Mexican Corporations Law, see “—Voting Rights and
Shareholders’ Meetings” above, or by repurchase of our own stock in accordance with the Mexican Securities Market Law,
see “Share Repurchases” below.
Share Repurchases
We may choose to acquire our own shares through
the Mexican Stock Exchange on the following terms and conditions:
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the acquisition must be carried out through the Mexican Stock Exchange;
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the acquisition must be carried out at market price, unless a public offer or auction has been authorized by the CNBV;
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the acquisition must be carried out against our net worth (
capital contable
) without adopting a reduction in capital stock or against our capital stock, and the shares so acquired will be held as treasury stock without any requirement to adopt a reduction in capital stock. No shareholder consent is required for such purchases.
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the amount and price paid in all share repurchases must be made public;
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the annual ordinary shareholders meeting must determine the maximum amount of resources to be used in the fiscal year for the repurchase of shares;
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we may not be delinquent on payments due on any outstanding debt issued by us that is registered with the National Securities Registry; and
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any acquisition of shares must be in conformity with the requirements of Article 54 of the Mexican Securities Market Law, and we must maintain a sufficient number of outstanding shares to meet the minimum trading volumes required by the stock markets on which our shares are listed.
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The economic and voting rights corresponding
to repurchased shares may not be exercised during the period in which we own such shares, and such shares are not deemed to be
outstanding for purposes of calculating any quorum or vote at any shareholders’ meeting during such period.
The shares and negotiable instruments representing
title to shares belonging to us or, as the case may be, issued but unsubscribed treasury shares, may be placed with the investing
public without the need for a shareholders’ meeting or board resolution. As such, the provisions of Article 132 of the Mexican
Corporations Law do not apply.
In our Ordinary Shareholders Meeting held on
September 14, 2016, an increase in the reserve for repurchase of shares to Ps. 1,000 million was approved and the total reserve
at December 31, 2017, amounts to Ps. 2,000 million. In our Ordinary Shareholders
Meeting held on April 23, 2018, an increase in the reserve for repurchase
of shares to Ps. 3,000 million was approved and the total reserve at April 23, 2018, amounts to Ps. 5,000 million. In 2015, we
repurchased 63,697,541 shares, of which 57,450,890 we resold. At December 31, 2015, we had 11,466,445 treasury shares. In the year
2015 we registered a loss of Ps. 76.3 million in the repurchase of shares. In 2016, we repurchased 36,317,389 shares, and we resold
47,660,950. At December 31, 2016, we had 122,884 treasury shares. In the year 2016 we registered a gain of Ps. 507.7 million in
the repurchase of shares. In 2017, we repurchased 5,143,680 shares, and we resold 1,604,000. At December 31, 2017, we had 3,662,564
treasury shares. In the year 2017 we registered a loss of Ps. 22.8 million in the repurchase of shares.
Ownership of Capital Stock by Subsidiaries
Our subsidiaries may not, directly or indirectly,
invest in our shares, except for shares acquired as part of an employee stock option plan and in conformity with the Mexican Securities
Market Law.
Delisting
Pursuant to the Mexican Securities Market Law,
in the event that we decide to cancel the registration of our shares in the National Securities Registry and the listing of our
shares on the Mexican Stock Exchange, or if the CNBV orders such cancellation, we will be required to conduct a tender offer for
the shares held by minority shareholders and to create a trust with a term of six months, with amounts sufficient to purchase all
shares not participating in the tender offer. Under the law, our controlling shareholders will be secondarily liable for these
obligations. The price at which the shares must be purchased in the offer must be the greater of (i) the average of the trading
price on the Mexican Stock Exchange during the last 30 days on which the shares were quoted prior to the date on which the tender
offer is made or (ii) the book value of such shares as determined pursuant to our latest quarterly financial information filed
with the CNBV and the Mexican Stock Exchange. If the CNBV orders the cancellation, we must launch the tender offer within 180 days
from the date of their request. If we initiate it, under the Mexican Securities Market Law, the cancellation must be approved by
95% of our shareholders.
Other Provisions
Information to Shareholders.
The Mexican
Corporations Law establishes that companies, acting through their boards of directors, must annually present a report at a shareholder’s
meeting that includes:
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a report of the directors on our financial statements, as well as on the policies followed by the directors and on the principal existing projects;
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a report explaining the principal accounting and information policies and criteria followed in the preparation of the financial information;
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a statement of the financial condition of the company at the end of the fiscal year;
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a statement showing the results of operations of the company during the preceding year, as well as changes in the company’s financial condition and capital stock during the preceding year;
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a report of the chief executive officer on the operations of the company during the preceding year;
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a report of the fulfillment of the company’s tax obligations of the last fiscal year;
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a report of the Audit Committee with respect to the preceding year; and
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the notes which are required to complete or clarify the above mentioned information.
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In addition to the foregoing, our by-laws provide
that our board of directors also should prepare the information referred to above with respect to any subsidiary that represents
at least 20% of our net worth (based on the financial statements most recently available).
Shareholders’ Conflict of Interest.
Under Mexican law, any shareholder that has a conflict of interest with respect to any transaction must abstain from voting
thereon at the relevant shareholders’ meeting. A shareholder that votes on a transaction in which its interest conflicts
with ours may be liable for damages in the event the relevant transaction would not have been approved without such shareholder’s
vote.
Liquidation.
In the event we are liquidated,
the surplus assets remaining after payment of all our creditors will be divided among our shareholders in proportion to their respective
share holdings. Shares that are only partially paid will participate in the distribution in the proportion that they were paid.
The general extraordinary shareholders’ meeting at which the liquidation resolution is made, will appoint one or more liquidators.
Foreign Investment.
Ownership by foreign
investors of shares of Mexican enterprises in certain economic sectors is regulated by the Foreign Investment Law and the regulations
thereunder. The Ministry of the Economy and the National Commission on Foreign Investment are responsible for the administration
of the Foreign Investment Law and Regulations.
Pursuant to the Mexican Foreign Investment Law
and Regulations, foreign investors may acquire up to 100% of the capital stock of Mexican companies or entities in the steel industry.
In accordance with our bylaws, Mexican and non-Mexican nationals may own all series of our share capital. We have registered any
foreign owner of our shares, and the depositary with respect to the ADSs representing our shares, with the National Registry of
Foreign Investment
(Registro Nacional de Inversión Extranjera)
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Forfeiture of Shares
. As required by
Mexican law, our by-laws provide that “any alien who at the time of incorporation or at any time thereafter acquires an interest
or participation in the capital of the corporation shall be considered, by virtue thereof, as Mexican in respect thereof and shall
be deemed to have agreed not to invoke the protection of his own government, under penalty, in case of breach of such agreement,
of forfeiture of such interest or participation in favor of the Mexican nation.” Under this provision, a non-Mexican shareholder
is deemed to have agreed not to invoke the protection of his own government by asking such government to interpose a diplomatic
claim against the Mexican government with respect to the shareholder’s rights as a shareholder but is not deemed to have
waived any other rights it may have, including any rights under the U.S. securities laws, with respect to its investment in us.
If the shareholder invokes such governmental protection in violation of this agreement, its shares could be forfeited to the Mexican
government. Mexican law requires that such a provision be included in the by-laws of all Mexican corporations unless such by-laws
prohibit ownership of shares by non-Mexican persons or entities.
Duration
. Our existence under our by-laws
is indefinite.
Certain Differences between Mexican and U.S. Corporate Law
You should be aware that the Mexican Corporations
Law and the Mexican Securities Market Law, which apply to us, differ in certain material respects from laws generally applicable
to U.S. corporations and their shareholders.
Independent Directors
The Mexican Securities Market Law requires that
25% of the directors of Mexican public companies must be independent, but the Audit Committee must be comprised entirely of independent
directors. One alternate director may be appointed for each principal director, provided that the alternates for the independent
directors are also deemed independent. Under Mexican law, certain individuals, including insiders, controlling individuals, major
clients and suppliers, and any relatives of such individuals, are per se deemed as non-independent. In addition, under Mexican
law, the determination as to the independence of our directors made by our shareholders’ meeting may be contested by the
CNBV. The independent directors are required under our bylaws to meet as often as necessary to fulfill their responsibilities.
Independent directors are not required under Mexican law or our bylaws to meet without the presence of non-independent directors
and management.
Pursuant to the rules and regulations of the
New York Stock Exchange, 50% of the directors of listed companies must be independent, and foreign companies subject to reporting
requirements under the U.S. federal securities laws and listed on the New York Stock Exchange must maintain an audit committee
comprised entirely of independent directors as defined in the United States federal securities laws. Further, independent directors
are required meet on a regular basis as often as necessary to fulfill their responsibilities, including at least annually in executive
session without the presence of non-independent directors and management.
Audit-Committee
For differences among Mexican Securities Market
Law, which apply to us, and laws generally applicable to U.S. corporations regarding audit-committees, see “Item 6. Directors,
Senior Management and Employees—C. Board Practices—Committees—Audit and Corporate Practices Committee.”
Mergers, Consolidations, and Similar Arrangements
A Mexican company may merge with another company
only if a majority of the shares representing its outstanding capital stock approve the merger at a duly convened general extraordinary
shareholders’ meeting, unless the company’s by-laws impose a
higher threshold. Dissenting shareholders are not entitled to appraisal
rights. Creditors have ninety days to oppose a merger judicially, provided they have a legal interest to oppose the merger.
Under Delaware law, with certain exceptions,
a merger, consolidation, or sale of all or substantially all the assets of a corporation must be approved by the board of directors
and a majority of the outstanding shares entitled to vote thereon. Under Delaware law, a shareholder of a corporation participating
in certain major corporate transactions, under certain circumstances, may be entitled to appraisal rights pursuant to which the
shareholder may receive payment in the amount of the fair market value of the shares held by the shareholder (as determined by
a court) in lieu of the consideration the shareholder would otherwise receive in the transaction. Delaware law also provides that
a parent corporation, by resolution of its board of directors and without any shareholder vote, may merge with any subsidiary of
which it owns at least 90% of each class of share capital. Upon any such merger, dissenting shareholders of the subsidiary would
have appraisal rights.
Anti-Takeover Provisions
Subject to the approval of the CNBV, the Mexican
Securities Market Law permits public companies to include anti-takeover provisions in their by-laws that restrict the ability of
third parties to acquire control of the company without obtaining approval of the company’s board of directors. See “Market
Information—Market Regulation—Anti-Takeover Protections.”
Under Delaware law, corporations can implement
shareholder rights plans and other measures, including staggered terms for directors and super-majority voting requirements, to
prevent takeover attempts. Delaware law also prohibits a publicly-held Delaware corporation from engaging in a business combination
with an interested shareholder for a period of three years after the date of the transaction in which the shareholder became an
interested shareholder unless:
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prior to the date of the transaction in which the shareholder became an interested shareholder, the board of directors of the corporation approves either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder;
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upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owns at least 84% of the voting stock of the corporation, excluding shares held by directors, officers, and employee stock plans; or
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at or after the date of the transaction in which the shareholder became an interested shareholder, the business combination is approved by the board of directors and authorized at a shareholders’ meeting by at least 66
2
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Shareholders’ Suits
Pursuant to the Mexican Securities Market Law,
only a shareholder or group of shareholders holding at least 5% of our outstanding shares may bring a claim against some or all
of our directors, secretary of the board of directors or relevant executives for violation of their duty of care or duty of loyalty.
In addition, such shareholder or group of shareholders must include in its claim the amount of damages or losses caused to the
company and not only the damages or losses caused to the shareholder or group of shareholders bringing the claim, provided that
any amount recovered as indemnification arising from the liability action will be for the benefit of the company, and not for the
benefit of the shareholder or group of shareholders. The shareholder or group or shareholders must demonstrate the direct and immediate
link between the damage or loss caused to the company, and the acts alleged to have caused it. There is no requirement for the
shareholder or group of shareholders to hold the shares for a certain period of time in order to bring a claim.
If the court determines that the shareholder
or group of shareholders that initiated the claim acted in bad faith, such shareholder or group of shareholders will be liable
to pay the legal fees and legal proceeding expenses.
The statute of limitations for these actions
is five years from the date on which the act or event that caused the damage or loss occurred. These actions must be brought in
the federal or local courts in Guadalajara, Jalisco (Mexico) and the court must personally notify the parties that have been sued,
and must comply with all other legal formalities in order to satisfy the due process requirements of the Mexican Constitution.
Process must be served on the defendant personally,
or, in the defendant’s absence, process can be served by a judicial officer on the defendant’s domicile whether or
not the defendant is present. A method of service that does not comply with these requirements could be considered void. Class
action lawsuits are not permitted under Mexican law.
Shareholder Proposals
Under Mexican law and our by-laws, holders of
at least 10% of our outstanding capital stock are entitled to appoint one member of our board of directors.
Delaware law does not include a provision restricting
the manner in which nominations for directors may be made by shareholders or the manner in which business may be brought before
a meeting.
Calling of Special Shareholders’ Meetings
Under Mexican law and our by-laws, the board
of directors, the chairman of the board of directors or the chairman of the Audit Committee may call a shareholders’ meeting.
Any shareholder or group of shareholders with voting rights representing at least 10% of our capital stock may request that the
chairman of the board of directors or the Audit Committee call a shareholders’ meeting to discuss the matters indicated in
the written request. If the chairman of the board of directors or the chairman of the Audit Committee fails to call a meeting within
15 calendar days following date of the written request, the shareholder or group of shareholders may request that a competent court
call the meeting. A single shareholder may call a shareholders’ meeting if no meeting has been held for two consecutive years
or if matters to be dealt with at an ordinary shareholders’ meeting have not been considered.
Delaware law permits the board of directors
or any person who is authorized under a corporation’s certificate of incorporation or by-laws to call a special meeting of
shareholders.
Cumulative Voting
Under Mexican law, cumulative voting for the
election of directors is permitted.
Under Delaware law, cumulative voting for the
election of directors is permitted if expressly authorized in the certificate of incorporation.
Staggered Board of Directors
Mexican law does not permit companies to have
a staggered board of directors, while Delaware law does permit corporations to have a staggered board of directors.
Approval of Corporate Matters by Written
Consent
Mexican law permits shareholders to take action
by unanimous written consent of the holders of all shares entitled to vote. These resolutions have the same legal effect as those
adopted in a general or special shareholders’ meeting. The board of directors may also approve matters by unanimous written
consent.
Delaware law permits shareholders to take action
by written consent of holders of outstanding shares having more than the minimum number of votes necessary to take the action at
a shareholders’ meeting at which all voting shares were present and voted.
Amendment of Certificate of Incorporation
Under Mexican law, it is not possible to amend
a company’s certificate of incorporation (
acta constitutiva
). However, the provisions that govern a Mexican company
are contained in its by-laws, which may be amended as described below. Under Delaware law, a company’s certificate of incorporation
generally may be amended by a vote of holders of a majority of the outstanding stock entitled to vote thereon (unless otherwise
provided in the certificate of incorporation), subsequent to a resolution of the board of directors proposing such amendment.
Amendment of By-laws
Under Mexican law, amending a company’s
by-laws requires shareholder approval at an extraordinary shareholders’ meeting. Mexican law requires that at least 75% of
the shares representing a company’s outstanding capital stock be present at the meeting in the first call (unless the by-laws
require a higher threshold) and that the resolutions be approved by a majority of the shares representing a company’s outstanding
capital stock.
Under Delaware law, holders of a majority of
the outstanding stock entitled to vote and, if so provided in the certificate of incorporation, the directors of the corporation,
have the power to adopt, amend, and repeal the by-laws of a corporation.
None
There are no legislative or legal provisions
currently in force in Mexico or arising under our by-laws restricting the payment of dividends to holders of our common stock not
resident in Mexico, except for regulations restricting the remittance of dividends and other payments in compliance with United
Nations sanctions. There are no limitations, either under the laws of Mexico or in our by-laws, on the right of foreigners to hold
or vote on shares of our common stock.
The following summary contains a description
of the material anticipated U.S. and Mexican federal income tax consequences of the purchase, ownership and disposition of the
series B shares or ADSs by a “non-Mexican holder” (as defined below) that is an individual citizen or resident of the
United States or a U.S. domestic corporation or that otherwise will be subject to U.S. federal income tax on a net income basis
in respect of the series B shares or ADSs (a “U.S. holder”), but it does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to an owner of the series B shares or ADSs. In particular, the summary deals
only with U.S. holders that will hold the series B shares or ADSs as capital assets and use the U.S. dollar as their functional
currency and does not address the tax treatment of a U.S. holder that owns or is treated as owning 10% or more of our outstanding
voting shares. In addition, the summary does not address the effects of the U.S. Medicare tax on net investment income, or any
U.S. or Mexican state or local tax considerations that may be relevant to U.S. holders. This summary also does not address U.S.
federal income tax consequences applicable to U.S. holders that are subject to special tax rules, such as banks, securities or
currency dealers, traders in securities that mark their securities to market, insurance companies, tax-exempt entities, persons
liable for the alternative minimum tax, persons that hold ADSs or series B shares as a hedge or as part of a straddle, conversion
transaction or other risk reduction transaction for tax purposes or partnerships or other pass-through entities for U.S. federal
income tax purposes. If a partnership (or other pass-through entity for U.S. federal income tax purposes) holds the series B shares
or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership.
If a U.S. holder is a partner of a partnership holding our series B shares or ADSs, such U.S. holder should consult its tax advisor.
The summary is based upon the federal income
tax laws of the United States and Mexico as in effect on the date of this annual report, including the provisions of the income
tax treaty between the United States and Mexico and protocol thereto (the “Tax Treaty”), all of which are subject to
change, possibly with retroactive effect in the case of U.S. federal income tax law. Prospective investors in the series B shares
or ADSs should consult their own tax advisors as to the U.S., Mexican or other tax consequences of the purchase, ownership and
disposition of the series B shares or ADSs, including, in particular, the effect of any foreign, state or local tax laws and their
entitlement to the benefits, if any, afforded by the Tax Treaty.
For purposes of this summary, the term “non-Mexican
holder” shall mean a holder of series B shares or ADSs that is not a resident of Mexico and that will not hold the series
B shares or ADSs or a beneficial interest therein in connection with the conduct of a trade or business through a permanent establishment
or fixed base in Mexico.
An individual is a resident of Mexico for tax
purposes if he established his home in Mexico. When the individual in question has a home in another country, the individual will
be deemed a resident in Mexico if his “center of vital interests” is located in Mexico. This will be deemed to occur
if (i) more than 50% of the aggregate income realized by such individual in the calendar year is from a Mexican source or (ii)
the principal center of his professional activities is located in Mexico.
A Mexican national who files a change of tax
residence notice with a country or jurisdiction that does not have a comprehensive exchange of information agreement with Mexico
and in which his income is subject to a preferred tax regime pursuant to the provisions of the Mexican Income Tax Law will be considered
a Mexican resident for tax purposes during the year the notice is filed and during the following three years. Unless otherwise
proven, a Mexican national is deemed a resident of Mexico for tax purposes.
An entity in Mexico is a resident of Mexico
if it maintains its principal place of business or its place of effective management in Mexico. If non-residents of Mexico are
deemed to have a permanent establishment in Mexico for tax purposes, all income attributable to the permanent establishment will
be subject to Mexican taxes, in accordance with applicable Mexican tax law.
In general, for U.S. federal income tax purposes,
holders of ADSs will be treated as the beneficial owners of the series B shares represented by those ADSs.
Taxation of Dividends
Mexican Tax Considerations
Under Mexican Income Tax Law provisions (
Ley
del Impuesto Sobre la Renta
), dividends paid to non-Mexican holders with respect to the series B shares (including the shares
represented by the ADSs) are not subject to Mexican withholding tax.
Dividends paid from distributable earnings that
have not been subject to corporate income tax are subject to a corporate-level dividend tax at a rate of 42.86% for 2017. The corporate-level
dividend tax on the distribution of earnings is not final and may be credited against income tax payable during the fiscal year
in which the dividend tax was paid and for the following two years. Dividends paid from distributable earnings, after corporate
income tax has been paid with respect to these earnings, are not subject to this corporate-level dividend tax. Currently, dividend
distributions are not subject to individual withholding taxes for shareholder recipients thereof.
Dividends or profits distributed by legal entities
resident in Mexico that are paid to natural persons and persons residing abroad on profits generated since fiscal year 2014, are
subject to an additional Income Tax rate of 10%; this additional tax will be withheld by the legal person who distributes the dividend
and its payment is considered definitive. In this case, the rates established in the agreement to avoid double taxation between
Mexico and the United States of America can be applied.
Distributions made by us to our shareholders
other than as dividends, including capital reductions, amortization of shares or otherwise, would be subject to taxation in Mexico
at the corporate rate of 30% in 2017, or at the rate mentioned above, as the case may be.
U.S. Federal Income Tax Considerations
The gross amount of any distributions paid with
respect to the series B shares or the ADSs (including any amounts withheld for Mexican taxes), to the extent paid out of our current
or accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be taxable as dividends and generally
will be includible in the gross income of a U.S. holder as ordinary income on the date on which the distributions are received
by the U.S. holder, in the case of series B shares, or the depositary, in the case of ADSs. Such dividends will not be eligible
for the dividends received deduction allowed to certain corporations under the U.S. Internal Revenue Code of 1986, as amended.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by non-corporate
U.S. holders (including individuals) with respect to the series B shares and ADSs will be subject to taxation at a maximum rate
of 20% if the dividends are “qualified dividends.” Dividends paid on the series B shares and ADSs will generally be
treated as qualified dividends if (A) we were not, in the year prior to the year in which the dividend was paid, and are not, in
the year in which the dividend is paid, a passive foreign investment company (“PFIC”) and (B) (i) we are eligible for
the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the
purposes of the qualified dividend rules or (ii) the series B shares or ADSs, as applicable, are readily tradable on an established
securities market in the United States. The Tax Treaty has been approved for the purposes of the qualified dividend rules and we
believe that we are eligible for the benefits of the Tax Treaty. Further, as discussed below, we do not believe that we are a PFIC.
Therefore, we believe that dividends paid to a non-corporate U.S. holder with respect to the series B shares and ADSs will generally
be treated as qualified dividends. U.S. holders should consult their own tax advisors in this regard in light of their particular
circumstances.
To the extent that a distribution exceeds our
current and accumulated earnings and profits for a taxable year, it generally will first be treated as a non-taxable return of
basis to the extent thereof, and thereafter as capital gain from the sale of the series B shares or ADSs. However, we do not expect
to keep earnings and profits in accordance with U.S. federal income tax principles. Therefore, a U.S. holder should expect that
a distribution will generally be treated as a dividend (as discussed above).
Distributions, which will be made in pesos,
will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect
on the date they are received by such U.S. holder, in the case of series B shares, or by the depositary, in the case of ADSs, whether
or not they are converted into U.S. dollars. If the pesos received as a dividend are converted into U.S. dollars on the date they
are received, a U.S. holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend
income. If the pesos received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in
the pesos equal to their United States dollar value on the date of receipt. U.S. holders should consult their own tax advisors
regarding the treatment of foreign currency gain or loss, if any, on any pesos received that are converted into U.S. dollars on
a date subsequent to receipt.
Subject to certain conditions and limitations
(including a minimum holding period requirement), Mexican withholding taxes on dividends, if any, may be treated as foreign taxes
eligible for credit against a U.S. holder’s U.S. federal income tax liability. Dividend income generally will constitute
foreign source “passive category income” or, in the case of certain U.S. holders, “general category income”
for U.S. foreign tax credit purposes.
Distributions of additional series B shares
or ADSs that are made as part of a pro rata distribution to all our stockholders generally will not be subject to U.S. federal
income tax.
Taxation of Dispositions of Shares or ADSs
Mexican Tax Considerations
Gain on the sale or other disposition of ADSs
by a U.S. holder will generally not be subject to Mexican tax. Deposits and withdrawals of series B shares in exchange for ADSs
will not give rise to Mexican tax or transfer duties.
Gain on the sale of series B shares by a U.S.
holder will not be subject to any Mexican tax if the transaction is carried out through the Mexican Stock Exchange or other stock
exchange or securities markets approved by the Mexican Ministry of Finance and Public Credit. Gain on sales or other dispositions
of series B shares made in other circumstances generally would be subject to Mexican tax at a rate of 30% for 2017 of gains realized
from the disposition.
Under the Tax Treaty, a U.S. holder that is
eligible to claim the benefits of the Tax Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition
of series B shares in a transaction that is not carried out through the Mexican Stock Exchange or such other approved securities
markets, so long as the holder did not own, directly or indirectly, 25% or more of our share capital (including ADSs) during the
twelve-month period preceding the sale or other disposition, and the value of those shares does not derive mainly from immovable
property located in Mexico. Specific formalities apply to claim such treaty benefits.
U.S. Federal Income Tax Considerations
Upon the sale or other disposition of the series
B shares or ADSs, a U.S. holder generally will recognize U.S. source capital gain or loss in an amount equal to the difference
between the amount realized on the sale or other disposition and such U.S. holder’s tax basis in the series B shares or ADSs.
Gain or loss recognized by a U.S. holder on such sale or other disposition generally will be long-term capital gain or loss if,
at the time of the sale or other disposition, the series B shares or ADSs have been held for more than one year. Under current
law, long-term capital gain recognized by a non-corporate U.S. holder (including individuals) generally is subject to a maximum
federal income tax rate of 20%. The deduction of a capital loss is subject to limitations for U.S. federal income tax purposes.
Deposits and withdrawals of series B shares by U.S. holders in exchange for ADSs will not result in the realization of gain or
loss for U.S. federal income tax purposes.
A U.S. holder that receives pesos upon sale
or other disposition of the series B shares will realize an amount equal to the U.S. dollar value of the pesos upon the date of
sale (or in the case of cash basis and electing accrual basis taxpayers, the settlement date). A U.S. holder will have a tax basis
in the pesos received equal to the U.S. dollar value of the pesos received translated at the same rate the U.S. holder used to
determine the amount realized on its disposal of the series B shares. Any gain or loss realized by a U.S. holder on a subsequent
conversion of the pesos into U.S. dollars generally will be a U.S. source ordinary income or loss.
Other Mexican Taxes
There are no Mexican inheritance, gift, succession
or value added taxes applicable to the ownership, transfer or disposition of the series B shares or ADSs by non-Mexican holders;
provided, however, that gratuitous transfers of the series B shares or ADSs may in certain circumstances cause a Mexican federal
tax to be imposed upon the recipient. There are no Mexican stamp, issue, registration or similar taxes or duties payable by non-Mexican
holders of the series B shares or ADSs.
Passive Foreign Investment Company (PFIC)
Based on our audited financial statements and
relevant market and shareholder data, we believe that we are not a PFIC for U.S. federal income tax purposes with respect to our
2015, 2016 and 2017 taxable years, and we expect to operate in such a manner so as to not become a PFIC. If, however, we are or
become a PFIC, a U.S. holder could be subject to additional U.S. federal income taxes on gain recognized with respect to the series
B shares or ADSs and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the
PFIC rules.
U.S. Backup Withholding Tax and Information Reporting Requirements
In general, information reporting requirements
will apply to certain payments to a U.S. holder of dividends in respect of the series B shares or ADSs or the proceeds received
on the sale or other disposition of the series B shares or ADSs that are paid to such U.S. holder within the United States (and
in certain cases, outside the United States), unless such U.S. holder is an exempt recipient. A backup withholding tax may apply
to such amounts if the U.S. holder fails to provide an accurate taxpayer identification number to the paying agent or fails to
establish an exemption or otherwise comply with these provisions. Amounts withheld as backup withholding tax will be creditable
against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that the
required information is furnished to the U.S. Internal Revenue Service.
F.
|
Dividends and Paying Agents
|
Not applicable.
Not applicable
Statements contained in this annual report regarding
the contents of any contract or other document are not necessarily complete, and, where the contract or other document is an exhibit
to the annual report, each of these statements is qualified in all respects by the provisions of the actual contract or other documents.
We are subject to the informational requirements
of the U.S. Securities Exchange Act of 1934, or the Exchange Act. Accordingly, we file reports and other information with the Commission,
including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy the reports and other information that
we file with the Commission at the public reference facilities of the Commission at 100 F. Street, N.E., Washington D.C. 20549.
You may obtain information on the operation of the Commission’s public reference room by calling the Commission in the United
States at 1-800-SEC-0330. In addition, the Commission maintains an internet website at
www.sec.gov
from which you can electronically
access this annual report and the other materials that we file with the Commission.
As a foreign private issuer, we are not subject
to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act. For example, we are not required to prepare
and issue quarterly reports. However, we are required to file with the Commission, promptly after it is made public or filed, information
that we make public in Mexico, file with the Mexican Stock Exchange or the CNBV or distribute to our security holders. As a foreign
private issuer, we are exempt from Exchange Act rules regarding proxy statements and short-swing profits.
I.
|
Subsidiary Information
|
Not applicable.