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. All of the statements in this Item 5 are subject to and qualified by the information set forth under
“Forward Looking Statements.” In evaluating this discussion, you should also consider the factors discussed in Item 3.D. “Risk
Factors” and elsewhere in this annual report and other factors that could cause results to differ materially from those expressed
in such forward-looking statements.
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) or the Bolsa Institucional de Valores, S.A. de C.V. (BIVA) (operating since July 25, 2018), and therefore,
beginning in 2012, we prepare our financial information in accordance with IFRS, as 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. In 2018, the total increase in net revenue from sales of
SBQ products compared to 2017 was 10%. In 2019, the total decrease in net revenue from sales of SBQ products compared to 2018 was 12%.
In 2020, the total decrease in net revenue from sales of SBQ products compared to 2019 was 16%
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 commercial 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 ferroalloys. Market supply and demand generally determine scrap 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 2018, 2019 and
2020, we did not purchase iron ore pellets or coking coal since our Lorain, Ohio blast furnace facility, which is our only facility that
utilizes these materials, was idled 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 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 was stable until 2019, after
the pandemic-has suffered a significant drop.
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 60% of our business uses a fixed base
price that is negotiated annually, plus monthly scrap and alloy surcharges. The remaining 40% is transaction business, where we can adjust
the base pricing as required. Scrap metal and commodity prices increased significantly in 2018, in 2019, the prices of scrap decreased
approximately 20% and in 2020 they increased by 9%. 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, 2016 - 2020
|
Year ended December 31,
|
|
2016
|
2017
|
2018
|
2019
|
2020
|
Shipments (thousands of tons)
|
2,085
|
2,091
|
2,192
|
2,349
|
2,441
|
Guadalajara and Mexicali
|
591
|
533
|
515
|
503
|
519
|
Apizaco and Cholula
|
350
|
331
|
321
|
318
|
318
|
San Luis facilities
|
554
|
540
|
538
|
546
|
496
|
Republic facilities
|
397
|
387
|
385
|
298
|
237
|
Brazil
|
193
|
300
|
433
|
684
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (Ps. millions)
|
27,516
|
28,700
|
35,678
|
34,171
|
35,869
|
Guadalajara and Mexicali
|
6,188
|
6,149
|
7,082
|
6,537
|
6,914
|
Apizaco and Cholula
|
4,467
|
5,106
|
5,757
|
5,319
|
5,222
|
San Luis facilities
|
5,707
|
5,870
|
7,669
|
6,675
|
7,525
|
Republic facilities
|
9,340
|
8,371
|
9,246
|
7,120
|
5,549
|
Brazil
|
1,814
|
3,204
|
5,924
|
8,520
|
10,659
|
|
|
|
|
|
|
Cost of sales (Ps. millions)
|
22,776
|
23,994
|
30,563
|
30,067
|
29,212
|
Guadalajara and Mexicali
|
5,364
|
4,703
|
5,710
|
5,364
|
5,311
|
Apizaco and Cholula
|
3,635
|
3,607
|
3,948
|
4,001
|
4,148
|
San Luis facilities
|
4,726
|
5,030
|
6,058
|
5,569
|
6,000
|
Republic facilities
|
7,332
|
7,814
|
9,294
|
7,753
|
5,677
|
Brazil
|
1,719
|
2,840
|
5,553
|
7,380
|
8,075
|
|
|
|
|
|
|
Average price per ton (Ps.)
|
13,197
|
13,725
|
16,276
|
14,547
|
14,666
|
Guadalajara and Mexicali
|
10,470
|
11,537
|
13,751
|
12,996
|
13,321
|
Apizaco and Cholula
|
12,763
|
15,426
|
17,935
|
16,726
|
16,421
|
San Luis facilities
|
10,301
|
10,870
|
14,255
|
12,225
|
15,171
|
Republic facilities
|
23,526
|
21,630
|
24,016
|
23,893
|
23,437
|
Brazil
|
9,399
|
10,680
|
13,681
|
12,456
|
12,237
|
|
|
|
|
|
|
Average cost per ton (Ps.)
|
10,924
|
11,475
|
13,943
|
12,800
|
11,968
|
Guadalajara and Mexicali
|
9,076
|
8,824
|
11,087
|
10,664
|
10,138
|
Apizaco and Cholula
|
10,386
|
10,897
|
12,299
|
12,582
|
13,044
|
San Luis facilities
|
8,531
|
9,315
|
11,260
|
10,200
|
12,107
|
Republic facilities
|
18,469
|
20,191
|
24,140
|
26,017
|
25,996
|
Brazil
|
8,907
|
9,467
|
12,824
|
10,789
|
10,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 GDP in the Mexican and U.S. 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 in 2020 was negative by 8.5% (according to preliminary
figures of the INEGI) and 0.1% in 2019 (according to preliminary figures of the INEGI). The U.S. GDP decreased 3.5% in 2020 (according
to preliminary figures of the U.S. Department of Commerce) and increased 2.3% in 2019. 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. Our average steel price increased approximately 4% in 2017 compared
to 2016. Our average steel price increased approximately 18.6% in 2018 compared to 2017. Our average steel price decreased approximately
10.6% in 2019 compared to 2018. Our average steel price increased approximately 1% in 2020 compared to 2019.
During the last two decades the steel industry has
been consolidating. 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
a certain degree, 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 2018, imports to Mexico in tons increased 4.5% compared
to 2017 according to information of CANACERO. In 2019, imports to Mexico in tons increased 0.2% compared to 2018 according to information
of CANACERO. In 2020, imports to Mexico in tons decreased 13.1% compared to 2019 according to information of CANACERO.
Steel imports to the United States accounted for an
estimated 18% of the domestic U.S. steel market in 2020 and an estimated 19% in 2019. 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, 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 increased approximately 2% in 2016, increased
approximately 31% in 2017, increased approximately 19.4% in 2018, decreased
20% in 2019 and increased 9% in 2020; and prices of ferroalloys decreased approximately13% in 2016, in 2017 increased approximately 22%,
increased approximately 9.6% in 2018, decreased approximately 1% in 2019 and decreased approximately 20% in 2020. As with other raw materials,
iron ore and coking coal prices fluctuate significantly. However, in 2016, 2017, 2018, 2019 and 2020 we did not purchase coking coal 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 1.5% in 2016, increased approximately 22% in 2017, increased approximately 14% in 2018, increased approximately
0.1% in 2019 and decreased 10% in 2020; and prices for natural gas increased approximately 8% in 2016, increased approximately 22% in
2017, increased approximately 28% in 2018, increased approximately 1.8% in 2019 and decreased 18% in 2020.
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 3.4% for 2016, 6.8% for 2017, 4.8% for 2018, 2.8% for 2019 and 3.2% in 2020.
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 the period from 2018 to 2020,
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 January 13, 2017.
The depreciation of the Mexican peso relative to the U.S. dollar in 2020 was 5.6%. The exchange rate at December 31, 2020 was 19.9352
compared to 18.8727 at December 31, 2019. At April 23, 2021, the exchange rate was Ps. 19.8740 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. We do not utilize derivative financial
instruments to manage our market risks with respect to foreign currency.
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 five plants, located in the United States; and
|
|
●
|
our Brazil segment represents the results of our operations in three plants located in Brazil, one of which started operations in June 2015 and two of which started to consolidate operations in May 2018.
|
The following information shows other results by segment.
|
|
For the year ended December 31, 2020
|
|
|
Mexico
|
|
United
States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
|
(in thousands of pesos)
|
Net sales
|
|
19,660,889
|
|
5,549,366
|
|
10,659,059
|
|
—
|
|
35,869,314
|
Cost of sales
|
|
15,459,258
|
|
5,677,213
|
|
8,075,253
|
|
—
|
|
29,211,724
|
Gross profit (loss)
|
|
4,201,631
|
|
(127,847)
|
|
2,583,806
|
|
—
|
|
6,657,590
|
Administrative expenses
|
|
1,117,817
|
|
240,726
|
|
660,785
|
|
—
|
|
2,019,328
|
Other expense (income), net
|
|
(52,655)
|
|
(505,946)
|
|
11,854
|
|
—
|
|
(546,747)
|
Interest income
|
|
(107,605)
|
|
(222)
|
|
—
|
|
—
|
|
107,827
|
Interest expense
|
|
5,108
|
|
16,104
|
|
66,007
|
|
(33,473)
|
|
53,746
|
Exchange (loss) gain, net
|
|
(483,822)
|
|
1,510
|
|
(1,096,416)
|
|
(1,215,564)
|
|
(363,164)
|
Income (loss) before income tax
|
|
2,755,144
|
|
123,001
|
|
748,744
|
|
1,249,037
|
|
4,875,926
|
Income tax
|
|
1,747,568
|
|
118,926
|
|
211,350
|
|
—
|
|
2,077,844
|
Net (loss) income
|
|
1,007,576
|
|
4,075
|
|
537,394
|
|
1,249,037
|
|
2,798,082
|
Other Data
|
|
Mexico
|
|
United
States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
Depreciation and amortization
|
|
693,362
|
|
332,186
|
|
426,723
|
|
—
|
|
1,452,271
|
Total assets
|
|
33,386,043
|
|
9,237,831
|
|
5,807,121
|
|
(2,927,348)
|
|
45,503,647
|
Total liabilities
|
|
6,944,579
|
|
4,797,682
|
|
3,670,075
|
|
(2,927,348)
|
|
12,484,988
|
Additions of property, plant and equipment, net
|
|
278,700
|
|
41,054
|
|
631,451
|
|
—
|
|
951,205
|
|
|
For the year ended December 31, 2019
|
|
|
Mexico
|
|
United
States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
|
(in thousands of pesos)
|
Net sales
|
|
18,530,672
|
|
7,120,360
|
|
8,520,169
|
|
—
|
|
34,171,201
|
Cost of sales
|
|
14,934,575
|
|
7,752,776
|
|
7,379,790
|
|
—
|
|
30,067,141
|
Gross profit (loss)
|
|
3,596,097
|
|
(632,416)
|
|
1,140,379
|
|
—
|
|
4,104,060
|
Administrative expenses
|
|
848,495
|
|
267,756
|
|
521,174
|
|
—
|
|
1,637,425
|
Other expense (income), net
|
|
175,412
|
|
(71,324)
|
|
32,494
|
|
—
|
|
136,582
|
Interest income
|
|
145,729
|
|
266
|
|
—
|
|
—
|
|
145,995
|
Interest expense
|
|
3,438
|
|
(84,621)
|
|
(110,919)
|
|
137,053
|
|
(55,049)
|
Exchange (loss) gain, net
|
|
(628,044)
|
|
2,745
|
|
(177,314)
|
|
18,030
|
|
(784,583)
|
Income (loss) before income tax
|
|
2,093,313
|
|
(910,458)
|
|
298,478
|
|
155,083
|
|
1,636,416
|
Income tax
|
|
3,505,015
|
|
(236,598)
|
|
7,857
|
|
—
|
|
3,276,274
|
Net (loss) income
|
|
(1,411,702)
|
|
(673,860)
|
|
290,621
|
|
155,083
|
|
(1,639,858)
|
Other Data
|
|
Mexico
|
|
United
States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
Depreciation and amortization
|
|
577,048
|
|
260,760
|
|
270,821
|
|
—
|
|
1,108,629
|
Total assets
|
|
32,935,743
|
|
8,419,771
|
|
6,002,701
|
|
(3,343,456)
|
|
44,014,759
|
Total liabilities
|
|
7,253,713
|
|
4,219,817
|
|
3,274,908
|
|
(3,343,456)
|
|
11,404,982
|
Additions of property, plant and equipment, net
|
|
785,818
|
|
278,467
|
|
207,135
|
|
—
|
|
1,271,420
|
|
|
For the year ended December 31, 2018
|
|
|
Mexico
|
|
United
States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
|
|
(in thousands of pesos)
|
Net sales
|
|
20,507,794
|
|
9,246,444
|
|
5,924,015
|
|
—
|
|
35,678,253
|
Cost of sales
|
|
15,715,761
|
|
9,294,352
|
|
5,553,202
|
|
—
|
|
30,563,315
|
Gross profit (loss)
|
|
4,792,033
|
|
(47,908)
|
|
370,813
|
|
—
|
|
5,114,938
|
Administrative expenses
|
|
592,218
|
|
267,905
|
|
219,889
|
|
—
|
|
1,080,012
|
Other (income) expense, net
|
|
(11,367)
|
|
(3,685)
|
|
—
|
|
—
|
|
(15,052)
|
Interest income
|
|
307,279
|
|
5,542
|
|
—
|
|
—
|
|
312,821
|
Interest expense
|
|
52,226
|
|
(99,985)
|
|
(103,141)
|
|
134,389
|
|
(16,511)
|
Exchange gain (loss), net
|
|
445,289
|
|
7,522
|
|
(602,747)
|
|
3,040
|
|
(146,896)
|
Income (loss) before income tax
|
|
5,015,976
|
|
(399,049)
|
|
(554,964)
|
|
137,429
|
|
4,199,392
|
Income tax
|
|
905,482
|
|
7,145
|
|
(160,165)
|
|
—
|
|
752,462
|
Net income (loss)
|
|
4,110,494
|
|
(406,194)
|
|
(394,799)
|
|
137,429
|
|
3,446,930
|
Other Data
|
|
Mexico
|
|
United
States
|
|
Brazil
|
|
Operations between Segments
|
|
Total
|
Depreciation and amortization
|
|
587,407
|
|
268,635
|
|
256,376
|
|
—
|
|
1,112,418
|
Total assets
|
|
40,617,874
|
|
10,181,967
|
|
6,733,362
|
|
(8,679,380)
|
|
48,853,823
|
Total liabilities
|
|
8,458,465
|
|
10,815,692
|
|
2,750,043
|
|
(8,679,380)
|
|
13,344,820
|
Additions of property, plant and equipment, net
|
|
1,552,587
|
|
433,154
|
|
8,724
|
|
—
|
|
1,994,465
|
Our net sales by product during 2018, 2019 and 2020
were as follows:
SALES BY PRODUCT
(in thousands of pesos)
|
|
2018
|
2019
|
2020
|
Light structural
|
1,654,720
|
1,396,632
|
1,529,216
|
Structural
|
2,441,079
|
3,304,178
|
3,677,441
|
Bars
|
1,575,291
|
2,220,264
|
2,061,053
|
Rebar
|
12,363,530
|
12,370,490
|
14,081,399
|
Flat bar
|
2,271,347
|
1,833,576
|
1,851,960
|
Hot rolled bars
|
9,549,286
|
8,226,613
|
7,548,939
|
Cold drawn bars
|
3,779,385
|
3,102,544
|
2,139,938
|
Other
|
2,043,615
|
1,716,904
|
2,989,368
|
Total
|
35,678,253
|
34,171,201
|
35,869,314
|
Our net sales by country or region during 2018, 2019
and 2020 are as follows:
SALES BY COUNTRY OR REGION
(in thousands of pesos)
|
|
2018
|
2019
|
2020
|
Mexico
|
20,421,529
|
17,873,633
|
18,122,828
|
USA
|
8,975,585
|
7,544,078
|
6,555,642
|
Brazil
|
5,932,297
|
8,500,592
|
10,608,151
|
Canada
|
267,606
|
175,686
|
311,761
|
Latin America
|
60,578
|
60,672
|
253,096
|
Other (Europe and Asia)
|
20,658
|
16,540
|
17,836
|
Total
|
35,678,253
|
34,171,201
|
35,869,314
|
Consolidated Statements of Comprehensive Income
Comparison of Years Ended December 31, 2019 and 2020
Net Sales
Net sales increased 5%, to Ps. 35,869 million in 2020
compared to Ps. 34,171 million in 2019. This increase resulted primarily from a 1% increase in the average price per ton of steel products
and an increase of 92,000 tons in shipments of finished steel products. Total sales outside of Mexico increased 9%, to Ps. 17,746 million
in 2020 compared to Ps. 16,297 million in 2019. Total sales in Mexico increased 1%, from Ps. 17,874 million in 2019 to Ps. 18,123 million
in 2020.
Shipments of finished steel products increased 4%,
to 2.441 million tons in 2020, compared to 2.349 million tons in 2019. Total sales volume outside of Mexico of finished steel products
increased 14% to 1.202 million tons in 2020, compared to 1.055 million tons in 2019, while total Mexican sales decreased 4%, from 1.294
million tons in 2019, compared to 1.239 million tons in 2020. The average price of steel products increased 1% in 2020 compared to 2019.
Cost of Sales
Our cost of sales decreased 3%, from Ps. 30,067 million
in 2019 to Ps. 29,212 million in 2020, which decrease is mainly attributable to a 6.5% decrease in the average cost per ton of steel products
sold. Cost of sales as a percentage of net sales was 81% in 2020 and 88% in 2019. 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.$1.9 (Ps.
37) per hour in 2020 and U.S.$1.9 (Ps. 36) per hour in 2019, compared to U.S.$34 (Ps. 678) and U.S.$50.6 (Ps. 954) per hour for 2020 and
2019, respectively, at our U.S. operations. Although raw material costs are similar in the United States and Mexico, our U.S. operations
produce higher value-added 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
Our gross profit was Ps. 6,658 million in 2020 compared
to a Ps. 4,104 million gross profit in 2019. This increase in gross profit is attributable mainly to an increase of 92,000 tons of finished
steel products shipped, a 1% increase in the average price of steel products sold, and a 6.5% decrease in the average cost per ton of
steel products sold. As a percentage of net sales, our gross profit was 18% in 2020 and our gross profit was 12% in 2019.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 23%, to Ps. 2,019 million in 2020, compared to Ps. 1,637 million in 2019. The variation of Ps. 382 million
corresponds to the increase of Ps. 270 million in the Mexican segment (mainly expenses originated from depreciation and legal expenses)
and the increase of Ps. 140 million in the Brazil segment (expenses from new companies and higher depreciation expenses). In 2020 and
2019, our general and administrative expenses
included Ps. 11.2 million and 10 million of amortization of the tangible
and intangible assets registered principally in connection with the acquisition of Republic.
Administrative expenses as a percentage of net sales
were 6% in 2020 and 5% in 2019. Depreciation and amortization expense were Ps. 422 million in 2020 compared to Ps. 220 million in 2019.
Other (Income) Expense, Net
We recorded other expense, net, of Ps. 547 million
in 2020, reflecting (i) income of Ps. 232 million related to the sale of scrap, (ii) income of Ps. 257 million from a tax benefit in our
operations in Brazil.
We recorded other income, net, of Ps. 137 million in
2019, reflecting (i) income of Ps. 3 million related to the sale of scrap, (ii) expense of Ps. 125 million for debugging accounts, (iii)
income of Ps. 6 million for recovery of insurance companies and (iv) expense related to other financial operations of Ps. 21 million.
Interest Income
We recorded interest income of Ps. 108 million in 2020
compared to Ps. 146 million in 2019. This decrease is attributable mainly to interest charged to affiliated companies.
Interest Expense
We recorded interest expense of Ps. 54 million in 2020
compared to Ps. 55 million in 2019. This decrease is attributable mainly to the lower use of financial services.
Foreign Exchange Loss (Gain)
We recorded a foreign exchange loss of Ps. 363 million
in 2020 compared to a foreign exchange loss of Ps. 785 million in 2019; this foreign exchange loss reflected the 6% depreciation of the
peso against the dollar in 2020, compared to the 4% appreciation of the Mexican peso against the dollar in 2018.
Income Tax
In 2020 we recorded an income tax provision of Ps.
2,078 million, which included an income tax provision of Ps. 1,831 million (includes Ps. 554.4 million of the income tax derived from
a review of the Tax Administration System) (SAT) and an income tax provision for deferred income taxes of Ps. 247 million. In 2019 we
recorded an income tax provision of Ps. 3,276 million, which included an income tax provision of Ps. 2,324 million (includes Ps. 2,324
million of the income tax derived from a review of the Tax Administration System) (SAT) and an income tax provision for deferred income
taxes of Ps. 202 million.
Our effective income tax rates for 2020 and 2019 were
27.9% and 58.2%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2020 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 2020 and 2019, we amortized tax losses which generated a benefit on income tax of approximately Ps. 17 million
and Ps. 987 million, respectively. These effects caused our effective tax rates during 2020 to be lower than the statutory tax rate.
Net Income (Loss)
We recorded net profit of Ps. 2,798 million in 2020,
compared to net loss of Ps. 1,640 million in 2019. The net profit for the year 2020 compared to the net loss in 2019 is mainly as a result
of (i) a 1% increase in the average price of steel products sold, (ii) a 3% decrease in the average cost per ton of steel products sold,
(iii) the decrease in the foreign exchange loss in 2020 to Ps. 363 million compared to Ps. 785 million in 2019 and (iv) the decrease in
the provision of income taxes in 2020 to Ps. 1,919 million compared to Ps. 3,276 million in 2019.
Mexican Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2019 and 2020
Net Sales
Net sales increased 6%, to Ps. 19,661 million in 2020
compared to Ps. 18,531 million in 2019. This increase resulted principally from a 8.8% increase in the average price per ton of steel
products in 2020 compared to 2019.
Shipments of finished steel products decreased 2.5%,
to 1.332 million tons in 2020, compared to 1.367 million tons in 2019.
Cost of Sales
Our cost of sales increased 3.5%, from Ps. 14,935 million
in 2019 to Ps. 15,459 million in 2020, which increase is mainly attributable to the increase in the average cost per ton of steel products
sold. As a percentage of net sales, our cost of sales was 79% in 2020, compared to 81% in 2019.
Gross Profit
Our gross profit increased 17%, to Ps. 4,202 million
in 2020 compared to Ps. 3,596 million in 2019. This increase is attributable mainly to an increase of 9% in the average price of steel
products sold. As a percentage of net sales, our gross profit was 21% in 2020, compared to 19% in 2019.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 31.7%, to Ps. 1,118 million in 2020, compared to Ps. 848 million in 2019. The increase of Ps. 270 million
were mainly expenses originated by depreciation and legal costs.
Administrative expenses as a percentage of net sales
were 6% in 2020 and 5% in 2019. Depreciation and amortization expense were Ps. 283 million in 2020 compared to Ps. 147 million in 2019.
Other Expense (Income), Net
We recorded other income, net, of Ps. 53 million in
2020, reflecting an income related to the sale of scrap,
We recorded other expense, net, of Ps. 175 million
in 2019, reflecting (i) an income of Ps. 3 million related to the sale of scrap, (ii) income of Ps. 6 million for recovery of insurance
companies, (iii) other expense of Ps. 130 million for debugging accounts and (iv) other expense, net, related to other financial operations
of Ps. 54 million.
Interest Income
We recorded interest income of Ps. 107 million in 2020
compared to Ps. 146 million in 2019. This interest income corresponds mainly to affiliates.
Interest Expense
We recorded interest expense of Ps. 5 million in 2020,
corresponding mainly to related party transactions that are eliminated in the consolidated statement of income, compared to Ps. 3 million
of interest income in 2019.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 484 million
in 2020 compared to a foreign exchange gain of Ps. 628 million in 2019; this foreign exchange reflected the 5.6% depreciation of the Mexican
peso against the dollar in 2019.
Income Tax
In 2020, we recorded an income tax provision of Ps.
1,748 million, which included an income tax provision of Ps. 1,460 million and an income tax provision for deferred income taxes of Ps.
288 million. In 2019, we recorded an income tax provision of Ps. 3,505 million, which included an income tax provision of Ps. 3,492 million
(includes Ps. 2,733 million of the income tax derived from a review of the Tax Administration System) (SAT) and an income tax provision
for deferred income taxes of Ps. 13 million.
According to the Income Tax Law in Mexico, the tax
rate for 2020 and thereafter is 30%.
Net Income
We recorded net income of Ps. 1,008 million in 2020,
compared to net loss of Ps. 1,412 million in 2019. This variance is attributable mainly to; (i) an increase of 8% in the average price
of steel products sold, (ii) the increase of Ps. 269 million in our administrative expenses, (iii) a foreign exchange loss of Ps. 484
million in 2020 compared to Ps. 628 million of foreign exchange loss in 2019 and (iv) the decrease in the provision of income taxes in
2020 to Ps. 1,748 million compared to Ps. 3,505 million in 2019.
USA Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2019 and 2020
Net Sales
Net sales decreased 22%, to Ps. 5,549 million in 2020
compared to Ps. 7,120 million in 2019. This decrease resulted principally from a decrease of 61,000 tons in shipments of finished steel
products.
Shipments of finished steel products decreased 20%,
to 237,000 tons in 2020, compared to 298,000 tons in 2019.
The average price of steel products in pesos decreased
2.1% in 2020 compared to 2019.
Cost of Sales
Our cost of sales decreased 26.7%, from Ps. 7,753 million
in 2019 to Ps. 5,677 million in 2020, the decrease is mainly due to a decrease of approximately 20% in tons of shipments of finished steel
products and the 8% decrease in the average cost per ton of steel products sold. Cost of sales as a percentage of net sales was 102% in
2020, compared to 109% in 2019.
Gross Profit (Loss)
Our gross loss was Ps. 128 million in 2020 compared
to a Ps. 632 million gross loss in 2019. As a percentage of net sales, our gross loss was (2%) in 2020, mainly attributable to a decrease
of approximately 20% in tons of shipments of finished steel products and a decrease of 8%, approximately, in the average cost per ton
of steel products sold, compared to a gross loss of (9%) in 2019. 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 raw material purchases as a result of
the time lag between the production and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) was Ps. 241 million in 2020, compared to Ps. 268 million in 2019.
Administrative expenses as a percentage of net sales
were 4% in 2020 and 4% in 2019. Depreciation and amortization expense were Ps. 25 million in 2020 compared to Ps. 50 million in 2019.
Other Income, Net
We recorded other income, net, of Ps. 506 million in
2020, related to scrap metal sold during the period.
We recorded other income, net, of Ps. 71 million in
2019, reflecting (i) other income, net, of Ps. 38 million for debugging accounts and (ii) other income, net, of Ps. 33 million related
to other financial operations.
Interest Income
We recorded an interest income of Ps. 0 million in 2020 compared
to Ps. 0 million in 2019.
Interest Expense
We recorded an interest expense of Ps. 16 million in 2020 compared
to Ps. 85 million in 2019.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 2 million
in 2020 compared to a foreign exchange gain of Ps. 3 million in 2019.
Income Tax
In 2020, we recorded an income tax profit provision
of Ps. 1,528 million and an income tax profit provision for deferred income taxes of Ps. 220 million for deferred income taxes. In 2019,
we recorded an income tax profit provision of Ps. 237 million.
Net loss
We recorded a net profit of Ps. 4 million in 2020,
compared to a net loss of Ps. 674 million in 2019. Our net income in 2020 is attributable mainly to a decrease in the average cost of
steel tons produced This compared to 2019, which was mainly impacted due to a decrease of 61,000 tons in shipments of finished steel products
and a decrease of 8% in the average cost of steel products sold.
Brazil Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2019 and 2020
Net Sales
Net sales increased 25% to Ps. 10,659 million in 2020
compared to Ps. 8,520 million in 2019. This increase resulted principally from an increase of 186,000 tons of shipments of finished steel
products.
Shipments of finished steel products increased to 870,500
tons in 2020 compared to 684,000 tons in 2019 (including the shipment of the new plants acquired in 2018, Cariacica and Itauna.
The average price of steel products in pesos decreased
1.7% in 2020 compared to 2019.
Cost of Sales
Our cost of sales increased to Ps. 8,075 million in
2020 compared to Ps. 7,380 million in 2019, which increase is mainly attributable to the increase of the shipments of finished steel products
of 186,000 tons in 2020.
The average cost per ton of steel products sold decreased
14% compared to 2019. Cost of sales as a percentage of net sales was 76% in 2020, compared to 87% in 2019.
Gross Profit
Our gross profit was Ps. 2,584 million in 2020 compared
to Ps. 1,140 million of gross profit in 2019. This increase in gross profit is attributable mainly to an increase of 186,000 tons of finished
steel products shipped, a 1.7% decrease in the average price of steel products sold, and a 14% decrease in the average cost per ton of
steel products sold. As a percentage of net sales, our gross profit was 24% in 2020, compared to 13% of gross profit in 2019.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) were Ps. 661 million in 2020 compared to Ps. 521 million in 2019. Operating expenses as a percentage of net sales were
6% in 2020 and 2019. Expenses for new companies acquired in 2018 increased the administrative expenses.
Depreciation and amortization expenses were Ps. 220
million in 2020 compared to Ps. 126 million in 2019.
Other Expense, Net
We recorded other expense, net of Ps.12 million in
2020.
We recorded other expense, net, of Ps. 32 million in
2019, for debugging accounts.
Interest Expense
We recorded an interest expense of Ps. 66 million in 2020 compared
to Ps. 111 million in 2019.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 1,096 million
in 2020 this foreign exchange loss reflected the 29% depreciation of the Brazilian real against the dollar in 2020 compared to 2019 compared
to a foreign exchange loss of Ps. 177 million in 2019.
Income Tax
In 2020 we recorded an income tax provision for deferred
income taxes of Ps. 211 million compared to Ps. 8 million of income tax provision in 2019.
Net Income (Loss)
We recorded a net income of Ps. 537 million in 2020
compared to a net income of Ps. 291 million in 2019. The net income for the year 2020 compared to the net income in 2019 is mainly as
a result of an increase of 186,000 tons of finished steel products shipped.
Consolidated Statements of Comprehensive Income
Comparison of Years Ended December 31, 2018 and 2019
Net Sales
Net sales decreased 4%, to Ps. 34,171 million in 2019
compared to Ps. 35,678 million in 2018. This decrease resulted primarily from a 11% decrease in the average price per ton of steel products
and an increase of 157,000 tons in shipments of finished steel products. Total sales outside of Mexico increased 7%, to Ps. 16,297 million
in 2019 compared to Ps. 15,257 million in 2018. Total sales in Mexico decreased 12%, from Ps. 20,421 million in 2018 to Ps. 17,874 million
in 2019.
Shipments of finished steel products increased 7%,
to 2.349 million tons in 2019, compared to 2.192 million tons in 2018. Total sales volume outside of Mexico of finished steel products
increased 24% to 1.055 million tons in 2019, compared to 0.853 million tons in 2018, while total Mexican sales decreased 3%, from 1.339
million tons in 2018, compared to 1.294 million tons in 2019. The average price of steel products decreased 11% in 2019 compared to 2018.
Cost of Sales
Our cost of sales decreased 2%, from Ps. 30,563 million
in 2018 to Ps. 30,067 million in 2019, which decrease is mainly attributable to a 8% decrease in the average cost per ton of steel products
sold. Cost of sales as a percentage of net sales was 88% in 2019 and 86% in 2018. 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.$1.9 (Ps.
36) per hour in 2019 and U.S.$1.9 (Ps. 36) per hour in 2018, compared to U.S.$50.6 (Ps. 954) and U.S.$55.3 (Ps.1,087) per hour for 2019
and 2018, respectively, at our U.S. operations. Although raw material costs are similar in the United States and Mexico, our U.S. operations
produce higher value-added 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
Our gross profit was Ps. 4,104 million in 2019 compared
to a Ps. 5,115 million gross profit in 2018. This decrease in gross profit is attributable mainly to an increase of 157,000 tons of finished
steel products shipped, an 11% decrease in the average price of steel products sold, and a 8% decrease in the average cost per ton of
steel products sold. As a percentage of net sales, our gross profit was 12% in 2019 and our gross profit was 14% in 2018.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 52%, to Ps. 1,637 million in 2019, compared to Ps. 1,080 million in 2018. The variation of Ps. 557 million
corresponds to the increase of Ps. 256 million in the Mexican segment (mainly expenses originated from the review carried out by the tax
authorities) and the increase of Ps. 301 million in the Brazil segment (expenses for new companies acquired in May 2018 were not for the
entire year and in 2019 they were for the entire year). In 2019 and 2018, our general and administrative expenses included Ps. 10 million
of amortization of the tangible and intangible assets registered principally in connection with the acquisition of Republic.
Administrative expenses as a percentage of net sales
were 5% in 2019 and 3% in 2018. Depreciation and amortization expense were Ps. 220 million in 2019 compared to Ps. 157 million in 2018.
Other (Income) Expense, Net
We recorded other expense, net, of Ps. 136 million
in 2019, reflecting (i) income of Ps. 3 million related to the sale of scrap, (ii) expense of Ps. 125 million for debugging accounts,
(iii) income of Ps. 6 million for recovery of insurance companies and (iv) expense related to other financial operations of Ps. 20 million.
We recorded other income, net, of Ps. 15 million in
2018, reflecting (i) income of Ps. 10 million related to the sale of scrap, (ii) expense of Ps. 9 million in land remediation at Pacific
Steel, (iii) income of Ps. 6 million for recovery of insurance companies and (iv) income related to other financial operations of Ps.
8 million.
Interest Income
We recorded an interest income of Ps. 146 million in
2019 compared to Ps. 313 million in 2018. This decrease is attributable mainly to interest charged to affiliated companies.
Interest Expense
We recorded an interest expense of Ps. 55 million in
2019 compared to Ps. 16 million in 2018. This increase is attributable mainly to the higher use of financial services.
Foreign Exchange Loss (Gain)
We recorded a foreign exchange loss of Ps. 785 million
in 2019 compared to a foreign exchange loss of Ps. 147 million in 2018; this foreign exchange loss reflected the 4% appreciation of the
peso against the dollar in 2019, compared to the 0.4% appreciation of the Mexican peso against the dollar in 2017.
Income Tax
In 2019 we recorded an income tax provision of Ps.
3,276 million, which included an income tax provision of Ps. 3,478 million (includes Ps. 2,324 million of the income tax derived from
a review of the Tax Administration System) (SAT) and an income tax profit provision for deferred income taxes of Ps. 202 million. In 2018
we recorded an income tax provision of Ps. 752 million, which included an income tax provision of Ps. 511 million and an income tax provision
for deferred income taxes of Ps. 241 million.
Our effective income tax rates for 2019 and 2018 were
54.3% and 16.9%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2019 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 2019 and 2018, we amortized tax losses which generated a benefit on income tax of approximately Ps. 987 million
and Ps. 1,238 million, respectively. These effects caused our effective tax rates during 2018 to be lower than the statutory tax rate.
Net Income (Loss)
We recorded net loss of Ps. 1,640 million in 2019,
compared to net income of Ps. 3,447 million in 2018. The net loss for the year 2019 compared to the net income in 2018 is mainly as a
result of (i) an increase of 157,000 tons of finished steel products shipped, a 11% decrease in the average price of steel products sold,
and a 8% decrease in the average cost per ton of steel products sold, (ii) in the year 2018 we had Ps. 313 million of interest income
compared to the year 2019 where we had Ps. 146 million of interest income, net, (iii) the increase in the foreign exchange loss in 2019
to Ps. 785 million compared to Ps. 147 million in 2018 and (iv) the increase in the provision of income taxes in 2019 to Ps. 3,276 million
compared to Ps. 752 million in 2018.
Mexican Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2018 and 2019
Net Sales
Net sales decreased 10%, to Ps. 18,531 million in 2019
compared to Ps. 20,508 million in 2018. This decrease resulted principally from a 9% decrease in the average price per ton of steel products
in 2019 compared to 2018.
Shipments of finished steel products decreased 0.5%,
to 1.367 million tons in 2019, compared to 1.374 million tons in 2018.
Cost of Sales
Our cost of sales decreased 5%, from Ps. 15,716 million
in 2018 to Ps. 14,935 million in 2019, which decrease is mainly attributable to a 4% decrease in the average cost per ton of steel products
sold. As a percentage of net sales, our cost of sales was 81% in 2019, compared to 77% in 2018.
Gross Profit
Our gross profit decreased 25%, to Ps. 3,596 million
in 2019 compared to Ps. 4,792 million in 2018. This decrease is attributable mainly to an increase of 9% in the average price of steel
products sold. As a percentage of net sales, our gross profit was 19% in 2019, compared to 23% in 2018.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 43%, to Ps. 848 million in 2019, compared to Ps. 592 million in 2018. The increase of Ps. 256 million were
mainly expenses originated by the review carried out by the tax authorities.
Administrative expenses as a percentage of net sales
were 5% in 2019 and 3% in 2018. Depreciation and amortization expense were Ps. 147 million in 2019 compared to Ps. 129 million in 2018.
Other Expense (Income), Net
We recorded other expense, net, of Ps. 175 million
in 2019, reflecting (i) an income of Ps. 3 million related to the sale of scrap, (ii) income of Ps. 6 million for recovery of insurance
companies, (iii) expense of Ps. 130 million for debugging accounts and (iv) other expense, net, related to other financial operations
of Ps. 54 million.
We recorded other income, net, of Ps. 11 million in
2018, reflecting (i) an income of Ps. 10 million related to the sale of scrap, (ii) income of Ps. 6 million for recovery of insurance
companies, (iii) other expense of Ps. 9 million in the land treatment at Pacific Steel and (iv) other income, net, related to other financial
operations of Ps. 4 million.
Interest Income
We recorded an interest income of Ps. 146 million in
2019 compared to Ps. 307 million in 2018. This interest income corresponds mainly to affiliates.
Interest Expense
We recorded an interest income of Ps. 3 million in
2019, corresponding mainly to related party transactions that are eliminated in the consolidated statement of income, compared to Ps.
52 million of interest income in 2018.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 628 million
in 2019 compared to a foreign exchange gain of Ps. 445 million in 2018; this foreign exchange reflected the 4% appreciation of the Mexican
peso against the dollar in 2019.
Income Tax
In 2019, we recorded an income tax provision of Ps.
3,505 million, which included an income tax provision of Ps. 3,492 million (includes Ps. 2,733 million of the income tax derived from
a review of the Tax Administration System) (SAT) and an income tax provision for deferred income taxes of Ps. 13 million. In 2018, we
recorded an income tax provision of Ps. 905 million, which included an income tax provision of Ps. 497 million and an income tax provision
for deferred income taxes of Ps. 408 million.
According to the Income Tax Law in Mexico, the tax
rate for 2019 and thereafter is 30%.
Net Income
We recorded net loss of Ps. 1,412 million in 2019,
compared to net income of Ps. 4,110 million in 2018. This decrease is attributable mainly to; (i) a decrease of 9% in the average price
of steel products sold, (ii) the increase of Ps. 256 million in our administrative expenses, (iii) a foreign exchange loss of Ps. 628
million in 2019 compared to Ps. 445 million of foreign exchange gain in 2018 and (iv) the increase in the provision of income taxes in
2019 to Ps. 3,505 million compared to Ps. 905 million in 2018.
USA Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2018 and 2019
Net Sales
Net sales decreased 23%, to Ps. 7,120 million in 2019
compared to Ps. 9,246 million in 2018. This decrease resulted principally from a decrease of 87,000 tons in shipments of finished steel
products.
Shipments of finished steel products decreased 23%,
to 298,000 tons in 2019, compared to 385,000 tons in 2018.
The average price of steel products in pesos decreased
0.5% in 2019 compared to 2018.
Cost of Sales
Our cost of sales decreased 17%, from Ps. 9,294 million
in 2018 to Ps. 7,753 million in 2019, the decrease is mainly due to a decrease of approximately 23% in tons of shipments of finished steel
products and the 8% increase in the average cost per ton of steel products sold. Cost of sales as a percentage of net sales was 109% in
2019, compared to 101% in 2018.
Gross Profit (Loss)
Our gross loss was Ps. 632 million in 2019 compared
to a Ps. 48 million gross loss in 2018. As a percentage of net sales, our gross loss was (9%) in 2019 mainly attributable to a decrease
of approximately 23% in tons of shipments of finished steel products and an increase of 8%, approximately, in the average cost per ton
of steel products sold, compared to a gross loss of (1%) in 2018. 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 raw material purchases as a result of
the time lag between the production and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) was Ps. 268 million in 2019, compared to Ps. 268 million in 2018.
Administrative expenses as a percentage of net sales
were 4% in 2019 and 3% in 2018. Depreciation and amortization expense were Ps. 50 million in 2019 compared to Ps. 25 million in 2018.
Other Income, Net
We recorded other income, net, of Ps. 71 million in
2019, reflecting (i) other income, net, of Ps. 38 million for debugging accounts and (ii) other income, net, of Ps. 33 million related
to other financial operations.
We recorded other income, net, of Ps. 4 million in
2018, related to other financial operations.
Interest Income
We recorded an interest income of Ps. 0 million in 2019 compared
to Ps. 6 million in 2018.
Interest Expense
We recorded an interest expense of Ps. 85 million in 2019 compared
to Ps. 100 million in 2018.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 3 million
in 2019 compared to a foreign exchange gain of Ps. 8 million in 2018.
Income Tax
In 2019, we recorded an income tax profit provision
of Ps. 237 million which included an income tax profit provision of Ps. 13 million and an income tax profit provision for deferred income
taxes of Ps. 224 million for deferred income taxes. In 2018 we recorded an income tax provision of Ps. 7 million for deferred income taxes.
Net loss
We recorded a net loss of Ps. 674 million in 2019,
compared to a net loss of Ps. 406 million in 2018. Our net loss in 2019 is attributable mainly to a decrease of 87,000 tons in shipments
of finished steel products and an increase of 8% in the average cost of
steel products sold, compared to 2018, which impacted our margin since
prices for steel products charged to our customers were gradually lower than our costs of raw material purchases as a result of the time
lag between the production and sales cycles.
Brazil Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2018 and 2019
Net Sales
Net sales increased 44% to Ps. 8,520 million in 2019
compared to Ps. 5,924 million in 2018. This increase resulted principally from an increase of 251,000 tons of shipments of finished steel
products.
Shipments of finished steel products increased to 684,000
tons in 2019 compared to 433,000 tons in 2018 (including the shipment of the new plants acquired in 2018, Cariacica and Itauna
The average price of steel products in pesos decreased
9% in 2019 compared to 2018.
Cost of Sales
Our cost of sales increased to Ps. 7,380 million in
2019 compared to Ps. 5,553 million in 2018, which increase is mainly attributable to the increase of the shipments of finished steel products
of 251,000 tons in 2019.
The average cost per ton of steel products sold decreased
16% compared to 2018. Cost of sales as a percentage of net sales was 87% in 2019, compared to 94% in 2018.
Gross Profit
Our gross profit was Ps. 1,140 million in 2019 compared
to Ps. 371 million of gross profit in 2018. This increase in gross profit is attributable mainly to an increase of 251,000 tons of finished
steel products shipped, a 9% decrease in the average price of steel products sold, and a 16% decrease in the average cost per ton of steel
products sold. As a percentage of net sales, our gross profit was 13% in 2019, compared to 6% of gross profit in 2018.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) were Ps. 521 million in 2019 compared to Ps. 220 million in 2018. Operating expenses as a percentage of net sales were
6% in 2019 compared to 4% in 2018. Expenses for new companies acquired in 2018 were not for the entire year and in 2019 they were for
the entire year.
Depreciation and amortization expenses were Ps. 23
million in 2019 compared to Ps. 3 million in 2018.
Other Expense, Net
We recorded other expense, net, of Ps. 32 million in
2019, for debugging accounts.
We did not record other expense, net, in 2018.
Interest Expense
We recorded an interest expense of Ps. 111 million in 2019
compared to Ps. 103 million in 2018.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 177 million
in 2019 this foreign exchange loss reflected the 4% depreciation of the Brazilian real against the dollar in 2019 compared to 2018 compared
to a foreign exchange loss of Ps. 603 million in 2018. This foreign exchange loss reflected the 17.1% depreciation of the Brazilian real
against the dollar in 2018 compared to 2017.
Income Tax
In 2019 we recorded an income tax provision for deferred
income taxes of Ps. 8 million compared to Ps. 160 million of income tax provision in 2018 which included an income tax provision of Ps.
15 million and an income tax profit provision for deferred income taxes of Ps. 175 million.
Net Income (Loss)
We recorded a net income of Ps. 291 million in 2019
compared to a net loss of Ps. 395 million in 2018. The net income for the year 2019 compared to the net loss in 2018 is mainly as a result
of (i) an increase of 251,000 tons of finished steel products shipped, a 9% decrease in the average price of steel products sold, and
a 16% decrease in the average cost per ton of steel products sold, (ii) the decrease in the foreign exchange loss in 2019 to Ps. 177 million
compared to Ps. 603 million in 2018.
Consolidated Statements of Comprehensive Income
Comparison of Years Ended December 31, 2017 and 2018
Net Sales
Net sales increased 24%, to Ps. 35,678 million in 2018
compared to Ps. 28,700 million in 2017. This increase resulted primarily from a 19% increase in the average price per ton of steel products
and an increase of 101,000 tons in shipments of finished steel products. Total sales outside of Mexico increased 27%, to Ps. 15,257 million
in 2018 compared to Ps. 11,987 million in 2017. Total sales in Mexico increased 22%, from Ps. 16,713 million in 2017 to Ps. 20,421 million
in 2018.
Shipments of finished steel products increased 4.8%,
to 2.192 million tons in 2018, compared to 2.091 million tons in 2017. Total sales volume outside of Mexico of finished steel products
increased 14.8% to 0.853 million tons in 2018, compared to 0.743 million tons in 2017, while total Mexican sales decreased 0.7%, from
1.348 million tons in 2017, compared to 1.339 million tons in 2018. The average price of steel products increased 18.6% in 2018 compared
to 2017.
Cost of Sales
Our cost of sales increased 27%, from Ps. 23,994 million
in 2017 to Ps. 30,563 million in 2018, which increase is mainly attributable to a 21.5% increase in the average cost per ton of steel
products sold. Cost of sales as a percentage of net sales was 86% in 2018 and 84% in 2017. 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.$1.9
(Ps. 36) per hour in 2018 and U.S.$ 1.6 (Ps. 31) per hour in 2017, compared to U.S.$55.3 (Ps.1,087) and U.S.$56.4 (Ps. 1,113) per hour
for 2018 and 2017, respectively, at our U.S. operations. Although raw material costs are similar in the United States and Mexico, our
U.S. operations produce higher value-added 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
Our gross profit was Ps. 5,115 million in 2018 compared
to a Ps. 4,706 million gross profit in 2017. This increase in gross profit is attributable mainly to an increase of 101,000 tons of finished
steel products shipped, a 18.6% increase in the average price of steel products sold, and a 21.5% increase in the average cost per ton
of steel products sold. As a percentage of net sales, our gross profit was 14% in 2018 and our gross profit was 16% in 2017.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 13%, to Ps. 1,080 million in 2018, compared to Ps. 1,239 million in 2017. The variation of Ps. 159 million
corresponds to the decrease of Ps. 162 million in the Mexican segment, the increase of Ps. 11 million in the United States segment and
a decrease of Ps. 8 million in the Brazil segment. In 2018 and 2017, our general and administrative expenses included Ps. 10 million of
amortization of the tangible and intangible assets registered principally in connection with the acquisition of Republic and Ps. 125 million,
of amortization of the tangible and intangible assets registered principally in connection with the acquisition of Grupo San, respectively.
Administrative expenses as a percentage of net sales
were 3% in 2018 and 4% in 2017. Depreciation and amortization expense were Ps. 157 million in 2018 compared to Ps. 285 million in 2017.
Other (Income) Expense, Net
We recorded other income, net, of Ps. 15 million in
2018, reflecting (i) income of Ps. 10 million related to the sale of scrap, (ii) expense of Ps. 9 million in land remediation at Pacific
Steel, (iii) income of Ps. 6 million for recovery of insurance companies and (iv) income related to other financial operations of Ps.
8 million.
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 remediation at Pacific
Steel and (iii) income related to other financial operations of Ps. 4 million.
Interest Income
We recorded an interest income of Ps. 313 million in
2018 compared to Ps. 252 million in 2017. This increase is attributable mainly to higher interest rates in the U.S. and Mexico.
Interest Expense
We recorded an interest expense of Ps. 16 million in
2018 compared to Ps. 54 million in 2017. This decrease is attributable mainly to the lesser use of financial services.
Foreign Exchange Loss (Gain)
We recorded a foreign exchange loss of Ps. 147 million
in 2018 compared to a foreign exchange loss of Ps. 654 million in 2017; this foreign exchange loss reflected the 0.4% appreciation of
the peso against the dollar in 2018, compared to the 4.5% appreciation of the Mexican peso against the dollar in 2017.
Income Tax
In 2018 we recorded an income tax provision of Ps.
752 million, which included an income tax provision of Ps. 511 million and an income tax provision for deferred income taxes of Ps. 241
million. In 2017 we recorded an income tax provision of Ps. 1,123 million, which included an income tax provision of Ps. 45 million and
an income tax provision for deferred income taxes of Ps. 1,078 million.
Our effective income tax rates for 2018 and 2017 were
16.9% and 38.9%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2018 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 2018 and 2017, we amortized tax losses which generated a benefit on income tax of approximately Ps. 1,238 million
and Ps. 115 million, respectively. These effects caused our effective tax rates during 2018 to be lower than the statutory tax rate.
Net Income (Loss)
We recorded net income of Ps. 3,447 million in 2018,
compared to net income of Ps. 1,895 million in 2017. The increase in net income for the year 2018 compared to 2017 is mainly as a result
of (i) an increase of 101,000 tons of finished steel products shipped, a 18.6% increase in the average price of steel products sold, and
a 21.5% increase in the average cost per ton of steel products sold, (ii) in the year 2017 we had Ps. 198 million of interest income compared
to the year 2018 where we had Ps. 297 million of interest income, net, (iii) the decrease in the foreign exchange loss in 2018 to Ps.
151 million compared to Ps. 654 million in 2018 and (iv) the decrease in the provision of income taxes in 2018 to Ps. 752 million compared
to Ps. 1,123 million in 2017.
Mexican Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2017 and 2018
Net Sales
Net sales increased 20%, to Ps. 20,508 million in 2018
compared to Ps. 17,125 million in 2017. This increase resulted principally from a 22% increase in the average price per ton of steel products
in 2018 compared to 2017.
Shipments of finished steel products decreased 2%,
to 1.374 million tons in 2018, compared to 1.404 million tons in 2017.
Cost of Sales
Our cost of sales increased 18%, from Ps. 13,340 million
in 2017 to Ps. 15,716 million in 2018, which increase is mainly attributable to a 20% increase in the average cost per ton of steel products
sold. As a percentage of net sales, our cost of sales was 77% in 2018, compared to 78% in 2017.
Gross Profit
Our gross profit increased 27%, to Ps. 4,792 million
in 2018 compared to Ps. 3,785 million in 2017. This increase is attributable mainly to an increase of 22% in the average price of steel
products sold. As a percentage of net sales, our gross profit was 23% in 2018, compared to 22% in 2017.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) decreased 21%, to Ps. 592 million in 2018, compared to Ps. 754 million in 2017. In 2018 our general and administrative
expenses included Ps. 0 million of amortization of the tangible and intangible assets and in 2017 our general and administrative expenses
included Ps. 103 million, 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 3% in 2018 and 4% in 2017. Depreciation and amortization expense were Ps. 129 million in 2018 compared to Ps. 211 million in 2017.
Other Expense (Income), Net
We recorded other income, net, of Ps. 11 million in
2018, reflecting (i) an income of Ps. 10 million related to the sale of scrap, (ii) income of Ps. 6 million for recovery of insurance
companies, (iii) other expense of Ps. 9 million in the land treatment at Pacific Steel and (iv) other income, net, related to other financial
operations of Ps. 4 million.
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 transportation
and other expenses of acquired equipment by the Tlaxcala plant from the Republic plant, (iii) other expense of Ps. 8 million in the land
remediation at Pacific Steel and (iv) other income, net, related to other financial operations of Ps. 7 million.
Interest Income
We recorded an interest income of Ps. 307 million in
2018 compared to Ps. 252 million in 2017. This increase is attributable mainly to higher interest rates in the U.S. and Mexico.
Interest Expense
We recorded an interest income of Ps. 52 million in
2018, corresponding mainly to related party transactions that are eliminated in the consolidated statement of income, compared to Ps.
7 million of interest expense in 2017.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 445 million
in 2018 compared to an exchange loss of Ps. 1,292 million in 2017; this foreign exchange reflected the 0.4% appreciation of the Mexican
peso against the dollar in 2018.
Income Tax
In 2018, we recorded an income tax provision of Ps.
905 million, which included an income tax provision of Ps. 497 million and an income tax provision for deferred income taxes of Ps. 408
million. In 2017, we recorded an income tax provision of Ps. 787 million, which included an income tax provision of Ps. 131 million and
an income tax provision for deferred income taxes of Ps. 656 million.
According to the Income Tax Law in Mexico, the tax
rate for the year 2018 and years thereafter is 30%.
Net Income
We recorded net income of Ps. 4,110 million in 2018,
compared to net income of Ps. 1,098 million in 2017. This increase is attributable mainly to; (i) an increase of 22% in the average price
of steel products sold, and (ii) a foreign exchange gain of Ps. 445 million in 2018 compared to Ps. 1,292 million of foreign exchange
loss in 2017.
USA Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2017 and 2018
Net Sales
Net sales increased 10%, to Ps. 9,246 million in 2018
compared to Ps. 8,371 million in 2017. This increase resulted principally from an increase of 11% in the average price of steel products.
Shipments of finished steel products decreased 0.5%,
to 385,000 tons in 2018, compared to 387,000 tons in 2017.
The average price of steel products in Mexican pesos
increased 11% in 2018 compared to 2017.
Cost of Sales
Our cost of sales increased 19%, from Ps. 7,814 million
in 2017 to Ps. 9,294 million in 2018, which increase is mainly attributable to an increase of 20%, approximately, in the average cost
per ton of steel products sold. Cost of sales as a percentage of net sales was 101% in 2018, compared to 93% in 2017.
Gross Profit (Loss)
Our gross loss was Ps. 48 million in 2018 compared
to a Ps. 557 million gross profit in 2017. As a percentage of net sales, our gross loss was (1%) in 2018 mainly attributable to an increase
of 20%, approximately, in the average cost per ton of steel products sold, compared to a 7% gross profit in 2017. 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 raw material purchases as a result of the time lag between the production and sales cycles.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) increased 4%, to Ps. 268 million in 2018, compared to Ps. 257 million in 2017.
Administrative expenses as a percentage of net sales
were 3% in 2018 and 3% in 2017. Depreciation and amortization expense were Ps. 25 million in 2018 compared to Ps. 37 million in 2017.
Other Income, Net
We recorded other income, net, of Ps. 4 million in
2018, related to other financial operations.
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.
Interest Income
We recorded an interest income of Ps. 6 million in 2018 compared
to Ps. 0 million in 2017.
Interest Expense
We recorded an interest expense of Ps. 100 million in 2018
compared to Ps. 51 million in 2017.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange gain of Ps. 7 million
in 2018 compared to an exchange loss of Ps. 26 million in 2017.
Income Tax
In 2018 we recorded an income tax provision of Ps.
7 million for deferred income taxes. In 2017 we recorded an income tax provision of Ps. 322 million for deferred income taxes.
Net Income (Loss)
We recorded a net loss of Ps. 406 million in 2018,
compared to a net income of Ps. 6 million in 2017. Our net loss in 2018 is attributable mainly to an increase of 20% in the average cost
of steel products sold, compared to 2017, which impacted our margin since prices for steel products charged to our customers were gradually
lower than our costs of raw material purchases as a result of the time lag between the production and sales cycles.
Brazil Segment
Statements of Comprehensive Income
Comparison of Years Ended December 31, 2017 and 2018
Net Sales
Net sales increased to Ps. 5,924 million in 2018 compared
to Ps. 3,204 million in 2017. This increase resulted principally from an increase of 133,000 tons of shipments of finished steel products
and the 28% increase in the average price per ton of steel products.
Shipments of finished steel products increased to 433,000
tons in 2018 (including the shipment of the new plants acquired in 2018, which began to consolidate operations in May 2018: Cariacica
with 115,000 tons and Itauna with 41,000 tons) compared to 300,000 tons in 2017.
Cost of Sales
Our cost of sales increased to Ps. 5,553 million in
2018 compared to Ps. 2,840 million in 2017, which increase is mainly attributable to the increase of the shipments of finished steel products
of 133,000 tons in 2018 and a 35% increase in the average cost per ton of steel products sold compared to 2017. Cost of sales as a percentage
of net sales was 94% in 2018, compared to 89% in 2017.
Gross Profit
Our gross profit was Ps. 371 million in 2018 compared
to Ps. 364 million of gross profit in 2017. The gross profit in the year 2018 remains practically the same as in 2017 due to the fact
that the increase by 133,000 tons shipped and the increase in prices of 28% in the tons shipped did not offset the increase of 35% in
the average cost of steel products sold. As a percentage of net sales, our gross profit was 6% in 2018, compared to 11% of gross profit
in 2017.
Administrative Expenses
Our administrative expenses (including depreciation
and amortization) were Ps. 220 million in 2018 compared to Ps. 228 million in 2017. Operating expenses as a percentage of net sales were
4% in 2018 compared to 7% in 2016.
Depreciation and amortization expenses were Ps. 3 million
in 2018 compared to Ps. 36 million in 2017.
Other Expense, Net
We did not record other expense, net, in 2018 or 2017.
Interest Expense
We recorded an interest expense of Ps. 103 million in 2018
compared to Ps. 65 million in 2017.
Foreign Exchange Gain (Loss)
We recorded a foreign exchange loss of Ps. 603 million
in 2018 compared to an exchange gain of Ps. 2 million in 2017. This foreign exchange loss reflected the 17.1% depreciation of the Brazilian
real against the dollar in 2018 compared to 2017.
Income Tax
In 2018 we recorded an income tax profit provision
of Ps. 160 million, which included an income tax provision of Ps. 15 million and an income tax profit provision for deferred income taxes
of Ps. 175 million, compared to Ps. 13 million of income tax provision in 2017.
Net Income (Loss)
We recorded a net loss of Ps. 395 million in 2018 compared
to Ps. 59 million of net income in 2017. Our net loss in 2018 is attributable mainly to a foreign exchange loss of Ps. 603 million in
2018 compared to an exchange gain of Ps. 2 million in 2017.
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 consolidated 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.
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.$41.5 (Ps. 827 million) as of December 31, 2020 and U.S.$41.5
million (Ps. 783 million) as of December 31, 2019, pertaining to the Lorain, Ohio, facility after recording the impairment charge of U.S.$130.7
million (Ps. 2,701 million) in 2015 (the impairment charge did not impact the cash flows, as it was not a cash expenditure). Management
further assessed if there were any impairments at the Company’s other asset groups in accordance with IFRS and determined that as of December
31, 2020, no other asset groups were impaired based on current projections. No further impairment was considered necessary or appropriate.
As discussed in note 9 to our audited financial statements
included elsewhere in this Annual Report, management periodically evaluates the potential degradation of coke inventory to determine whether
it remains suitable as a blast furnace input for our operations or, alternatively, should be made available for sale to other companies
using other blast furnaces. Each year we hire a third-party expert to evaluate the impairment of coke and determine its fair value. The
fair value of coke has been decreasing, as can be seen in the following table, and its valuation is impacted by the exchange rate of the
peso against the U.S. dollar:
|
|
Net
Tons
|
Metric
Tons
|
U.S.$
Cost(1)
|
Cost
U.S.$/MT
|
Market
U.S.$/MT(2)
|
Market
Value(1)
|
12/31/2018
|
Coke inventory
|
150,509
|
136,541
|
U.S.$99,932,739.59
|
U.S.$731.88
|
U.S.$355.00
|
U.S.$48,463,173.95
|
2019
|
Sale of coke
|
0
|
0
|
0
|
|
|
|
12/31/2019
|
Coke inventory
|
150,509
|
136,541
|
U.S.$99,932,739.59
|
U.S.$731.88
|
U.S.$290.00
|
U.S.$39,602,543.72
|
2020
|
Sale of coke
|
0
|
0
|
0
|
|
|
|
12/31/2020
|
Coke inventory
|
150,509
|
136,541
|
U.S.$99,932,739.59
|
U.S.$731.88
|
U.S.$350.00
|
U.S.$47,789,350.00
|
-1
|
In 2020, the applicable exchange rate
was 19.95 pesos per 1 U.S. dollar. In 2019, the applicable exchange rate was 18.87 pesos per 1 U.S. dollar. In 2018, the applicable
exchange rate was 19.66 pesos per 1 U.S. dollar.
|
-2
|
Market price of Furnace coke quoted by Platts “SBB STEEL MARKETS DAILY” - 66/65 CCSR - FOB N.China
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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, 2019
and 2020, 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, 2019 and 2020, there was no impairment charge
related to the San Luis facilities.
As of December 31, 2020, the main key assumptions used
in the valuation models of the San Luis reporting unit are as follows:
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sales: an increase of 46.68% was estimated in sales volume, considering that the increase in operations of the plant for fabrication of industrial wires will be consolidated; for sales prices, only has been considered an increase proportional to the estimated inflation rate has been considered. For the valuation model purposes, starting in the year 2022, the same volumes and sales prices determined for the 2021 budget had been considered; this is, that the figures are maintained constant for the years.
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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:
Amendments applicable as of 2021
In August 2020, the IASB issued a document entitled
“Reform of the Interest Rate Benchmark - Phase 2, which modify IFRS 4.- Insurance Contracts, IFRS 7.- Financial Instruments: Disclosures,
IFRS 9.- Financial Instruments, IFRS 16.- Leases and IAS 39.- Financial Instruments: Recognition and Measurement. Amendments for Phase
2 introduce matters that could affect financial information during the reform of a benchmark interest rate, including the effects of changes
in contractual cash flows or hedging relationships arising from the replacement of a benchmark interest rate with an alternative interest
rate. The Phase 2 amendment objectives are:
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Assist companies in applying Standards when changes are made to contractual cash flows or hedging relationships because of the interest benchmark rate reform; and
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Providing useful information to users of financial statements.
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Amendments applicable as of 2022
In May 2020, the following amendments were issued:
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Reference to the conceptual framework:
IFRS 3.- Business Combinations, the amendments correspond only to references
to the conceptual framework.
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Onerous contracts: Cost of fulfilling a contract:
IAS 37.- Provisions, Contingent Liabilities and Contingent Assets; this
standard defines an onerous contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic
benefits expected to be received under it. The amendments clarify that for the purpose of assessing whether a contract is onerous, the
cost of fulfilling the contract includes both the incremental costs of fulfilling that contract and an allocation of other costs that
relate directly to fulfilling contracts.
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Property, plant and equipment: Revenues from the use previously foreseen
IFRS 16.- Property, plant and equipment, this amendment prohibits an entity
from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing
the asset for its intended use. Instead, a company will recognize such sales proceeds and related cost in profit or loss.
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Annual improvements to IFRS Standards 2018-2020 were issued, effective
January 1, 2022:
IFRS 1 First-time Adoption of International Financial Reporting Standards
- some options are established for the application of the Standards to Subsidiaries as a first-time adopter of IFRS
IFRS 9 Financial Instruments - this IFRS establishes that a substantial
modification of the current conditions of an existing financial liability or part thereof shall be accounted for as a cancellation of
the original financial liability and the recognition of a new financial liability. This amendment establishes that the conditions will
be substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the
remaining cash flows of the original financial liability
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Amendments applicable as of 2023
In January 2020, the IASB issued an amendment to
IAS 1.- Presentation of Financial Statements, which clarifies that in order to reclassify a current liability as a non-current liability,
the requirement for an entity to have the right to defer settlement of the liability for at least 12 months after the reporting period.
At the effective date of this amendment, July 2020, it was deferred until January 1, 2023.
At the date of issuance
of our consolidated financial statements, these new standards have not had any effect on our financial information.
B.
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Liquidity and Capital Resources
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On December 31, 2020, our total consolidated debt was
Ps. 6,020 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, 2018, the credits to Industrias CH and its subsidiaries and affiliates were liquidated
and as of December 31, 2018, Republic had Ps. 985 million (comprised of U.S.$38 million and Ps. 227 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 million (U.S.$214
million). As of December 31, 2018, we had cash and cash equivalents of Ps. 6,987 million and as of December 31, 2019 we had cash and
cash equivalents of Ps. 7,446 million. As of December 31, 2020 we had cash and cash equivalents of Ps. 7,728 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, 2018, 2019 and 2020:
Principal Cash Flows
|
Years ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
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(millions of pesos)
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Funds provided by operating activities
|
3,224
|
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1,043
|
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3,634
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Funds used in investing activities
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(820)
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(107)
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(833)
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Funds used in financing activities
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(2,641)
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(211)
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(2,086)
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Our net funds provided by operations were Ps. 3,634
million in 2020 compared to Ps. 1,043 million of net funds provided by operations in 2019. The decrease of Ps. 1,110 million in the net
funds provided by operations between 2019 and 2018 originated mainly from the net loss for the year 2019. Our net funds provided by operations
were Ps. 3,224 million in 2018 compared to Ps. 3,184 million of net funds provided by operations in 2017. The increase of Ps. 40 million
in the net funds provided by operations between 2018 and 2017 originated mainly from the higher net income for the year 2018.
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. 833 million in 2020 compared to Ps. 107 million in 2019. In 2020 the acquisition of property, plant and equipment
was Ps.951 million, we had interest income of Ps. 108 million and other non-current assets used of Ps. 11 million. Our net funds used
in investing activities were Ps. 107 million in 2019
compared to Ps. 820 million in 2018. In 2019, the acquisition of property,
plant and equipment was Ps. 1,271 million, we received payments for loans granted to related parties for Ps. 1,071 million, we had interest
income of Ps. 145 million and other non-current assets used of Ps. 52 million.
Our net funds used by financing activities in 2020
were Ps. 2,086 million, compared to Ps. 211 million used by financing activities in 2019. In 2020, there was an increase of Ps. 42 million
in the buy-back of our own shares, we paid dividends of Ps.1,990 and we paid interest of Ps. 54 million. Our net funds used by financing
activities in 2019 were Ps. 211 million, compared to Ps. 2,641 million used by financing activities in 2018. In 2019, there was an increase
of Ps. 156 million in the buy-back of our own shares, and we paid interest of Ps. 55 million.
As of December 31, 2020, we have the following commitments
for capital expenditures:
In January 2013, the Company entered into a 15-year
product supply agreement with Air Products and Chemicals, Inc. The agreement required Air Products and Chemicals to 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 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 ended 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.$1.67 million (Ps. 33 million) and the placement of the letters of credit is in process. The term
of execution of the project is 16 months. The budget already exercised for 2020 corresponds to U.S.$ 24 million. The last adjustments
are being made to start the production of bars from January 2021, rebar in May and profiles in June.
In order to maintain and increase the continuity
and quality of the electric supply in all the Group’s clans, the scheme changed from Basic Supply (SSB) to Qualified Supply Service
(SSC), with the provision of acquiring energy in the wholesale electricity market. With the implementation of this project, which
only requires modernization of the set of equipment that records the consumption measurements of the electrical substations of each
plant, we are seeking to achieve a more efficient, safe, clean and transparent electrical service and more competitive prices than
our current pricing. We estimate the cost of this project is U.S.$1.850 million, which we expect to complete by November 2021.
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”) for 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 2021, net sales increased by
31% as compared to the fourth quarter of 2020. Sales in tons of finished steel increased by 13% in the first quarter of 2021 as compared
to the fourth quarter of 2020. Prices of finished products sold in the first quarter of 2021 increased by approximately 16% as compared
to the fourth quarter of 2020.
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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Tabular Disclosure of Contractual Obligations
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The table below sets forth our significant short-term
and long-term contractual obligations as of December 31, 2020:
Maturity
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Less than 1
year
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1– 3 years
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3– 5 years
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More than
5 years
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Total
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(millions of pesos)
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Short-term debt obligations
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6
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—
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—
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—
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6
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Long-term contractual obligations (see paragraph below)
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1
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—
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—
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1
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Total
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7
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—
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—
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7
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Republic leased certain equipment, office space and
computers through operating contracts under non-cancelable operating leases. These lease contracts expired during 2020. During 2020 and
2019, the expenses for operating leases were Ps. 0 million (U.S.$0.0 million) and Ps. 5.8 million (U.S.$0.3 million), respectively. As
of December 31, 2019, total future minimum lease payments under non-cancelable operating leases are Ps. 0.1 million (U.S.$0.006 million)
in 2020. Currently 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 expired on May 31, 2018. The agreement was extended in 2018
through May 31, 2021. Republic recognized income of Ps. 21.9 million (U.S.$1.1 million) and of Ps. 34.7 million (U.S.$1.8 million) from
this agreement in 2020 and in 2019, respectively.
All information that is not historical in nature and
disclosed under Item 5. “Operating and Financial Review and Prospects” is deemed to be a forward-looking statement. See “Forward
Looking Statements.”
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 2020 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.
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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
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Director Since
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Rufino Vigil González
|
2001
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Raúl Arturo Pérez Trejo
|
2003
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Luis García Limón
|
2011
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Rodolfo García Gómez de Parada
|
2001
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Alfonso Barragán Galindo
|
2019
|
Biographical Information of our Board of Directors
Alfonso Barragán Galindo. Mr.
Barragán was born in 1953. He is an independent director for purposes of Mexican law and has been appointed to our board of directors
and the Audit Committee in 2019. Mr. Barragán is a labor lawyer and since 1978 has worked at La Comer, a group of self-service
stores for which he is the Director of the Legal Department since 2016.
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. He has been the tax advisor of Industrias CH since 1991 and also serves as member of the board of directors of a group
of retail stores since 1990.
Luis García Limón. Mr.
García was born in 1944. He is 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, and is the chairman of our Audit Committee. Mr. Pérez has also served since 1992 as the chief financial officer
of a group that produces and sells structural steel racks for warehousing, aluminum and other industrial storage.
Rufino Vigil González. Mr. Vigil
was born in 1948. He is currently the chairman of our board of directors and our chief executive officer and has been a member of the
board of directors since 2001. Since 1973, Mr. Vigil has been chief executive officer of Operadora de Manufacturera de Tubos, S.A. de
C.V., 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. In December 2019 he was appointed general director.
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
|
Rufino Vigil González
|
|
Chief Executive Officer
|
|
2001
|
Mario Moreno Cortez
|
|
Coordinator of Finance
|
|
2012
|
Juan José Acosta Macías
|
|
Chief Operating Officer
|
|
2004
|
Rufino Vigil González. Mr.
Vigil was born in 1948. He is currently the chairman of our board of directors and our chief executive officer and has been a member of
the board of directors since 2001. Since 1973, Mr. Vigil has been chief executive officer of Operadora de Manufacturera de Tubos, S.A.
de C.V., 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. In December 2019 he was appointed general director.
Mario Moreno Cortez. Mr. Moreno was born
in 1968. He is currently our Finance coordinator. 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 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.
Role of Mr. Sergio Vigil González:
Mr. Sergio Vigil González, the brother
of our controlling shareholder and our chairman and Chief Executive Officer, Rufino Vigil González, is the chief executive officer
of Industrias CH, which, together with its wholly-owned subsidiaries, currently hold approximately 52% of our series B shares. Mr. Vigil
also functions in a senior management role for the Company, although he holds no formal title at the Company. In this function, Mr.
Vigil directs business strategies for the Company, negotiates potential acquisitions and directs intercompany loans, among other things. Our
board of directors is aware of Mr. Vigil’s role at the Company and he is formally authorized by specific authority on a case-by-case basis
of our board of directors as a signatory of the Company. For example, in May 2018, Mr. Sergio Vigil executed contracts on behalf of the
Company with respect to the acquisition and lease transfer of two plants in Brazil from Arcelor Mittal Brasil, S.A. Mr. Vigil does not
receive any compensation for his role.
For the years ended December 31, 2020 and 2019, we
paid no fees to our five directors, and the aggregate compensation our executive officers earned was approximately Ps. 90.6 million and
Ps. 106.6 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.
As described in Item 6.A above, our board of directors
is responsible for managing our business. The current members of our board of directors were elected to such position at our annual ordinary
shareholders’ meeting held on April 23, 2021, for a term of one year. None of our directors or executive officers are entitled to benefits
upon termination under their service contracts with us, except for what is due to 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 (“Audit
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, 2021, and Alfonso Barragán Galindo 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 2020.
As of December 31, 2020, we had 4,448 employees
(2,436 were employed at our Mexico facilities, of whom 1,063 were unionized, 773 were employed at Republic facilities, of whom 599
were unionized and 1,239 were employed at our Brazil plants, of whom 1,148 were unionized) compared to 4,201 employees as of
December 31, 2019 (2,439 were employed at our Mexico facilities, of whom 1,071 were unionized, 836 were employed at Republic
facilities, of whom 662 were unionized and 926 were employed at our Brazil plant, of whom 842 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 and biannually,
respectively, 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.
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Guadalajara facilities: Sindicato de Trabajadores en la Industria Siderúrgica y Similares en el Estado de Jalisco. The contract expires on February 18, 2022.
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Mexicali facilities: Sindicato de Trabajadores de la Industria Procesadora y Comercialización de Metales de Baja California. The contract expires on January 15, 2022.
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Apizaco facilities: Sindicato Nacional de Trabajadores de Productos Metálicos, Similares y Conexos de la República Mexicana. The contract expires on January 15, 2022.
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Cholula facilities: Sindicato Industrial “Acción y Fuerza” de Trabajadores Metalúrgicos Fundidores, Mecánicos y Conexos CROM del Estado de Puebla. The contract expires on January 31, 2022.
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San Luis facilities: At the Aceros San Luis facility: Sindicato de Empresas adherido a la CTM, the contract expires on January 15, 2022; 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, 2022.
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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. Republic’s benefit plans to its employees are described below.
Collective Bargaining Agreements
As of December 31, 2020, 77% of Republic’s workers
are covered by a collective bargaining agreement with the United Steelworkers (USW) that was extended in August 2019 through August 15,
2022. The extended agreement renews all the provisions, understandings and agreements set forth in the January 1, 2012 Basic Labor
Agreement. 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 changed to U.S.$4.00 (Ps. 83)
per hour for each hour worked by USW represented employees. Effective August 16, 2019, the Company is no longer obligated to fund the
Benefit Trust.
For the Mexican operations, approximately 44% of the
employees are under collective bargaining agreements, which expire as described above.
For the Brazil operations, approximately 93% 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, 2020 (plant in Pindamonhangaba) and Sindicato dos Trabalhadores nas
Industrias Metalúrgicas, Mecânicas, de Material Elétrico e Eletrônico do Estado do Espirito Santo (plant
in Cariacica), which expires on September 30, 2021.
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’s obligations to the plan are based upon
fixed contribution requirements. The Company contributes a fixed dollar amount of U.S.$1.68 (Ps. 33) per hour for each covered employee’s
contributory hours, as defined under the plan.
Participation in a multi-employer pension plan agreed
to under the terms of a collective bargaining agreement differs from a traditional qualified single employer defined benefit pension plan.
The SPT shares risks associated with the plan in the following respects:
- Contributions to the SPT by the Company may be used to provide
benefits to employees of other participating employers;
- If a participating employer stops contributing to the SPT,
the unfunded obligations of the plan may be borne by the remaining participating employers; and
- If Republic chooses to stop participating in the SPT, the Company
may be required to pay an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
On March 21, 2011, the Board of Trustees of the SPT
elected funding relief which has the effect of decreasing the amount of required minimum contributions in near-term years, but will increase
the minimum funding requirements during later plan years. As a result of the election of funding relief, the SPT’s zone funding under
the Pension Protection Act may be impacted.
In addition to the funding relief election, the Board
of Trustees also elected a special amortization rule, which allows the SPT to separately amortize investment losses incurred during the
SPT’s December 31, 2008 plan year-end over a 29 year period, whereas they were previously required to be amortized over a 15 year period.
Republic’s participation in the SPT for the annual
periods ended December 31, 2020 and 2019, is outlined in the table below.
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Pension
Protection Act
Zone Status(a)
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Republic Steel Contributions
(U.S.$ in thousands)
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Surcharge Imposed(c)
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Pension
Fund
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EIN/ Pension
Plan Number
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2020
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2019
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FIP/RP Status Pending/ Implemented(b)
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2020
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2019
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2020
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2019
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Expiration of
Collective Bargaining
Agreement
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Steelworkers
Pension Trust
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23-6648508/499
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Green
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Green
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No
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$
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2,001
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$
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2,476
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No
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No
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August 15, 2022
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(a)
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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.
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(b)
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Indicates if a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented.
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(c)
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Indicates whether there were charges to Republic from the plan.
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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 2020 and 2019 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 million (Ps. 5 million) million per quarter, effective
August 16, 2016. Effective August 16, 2019, Republic is no longer obligated to fund the Benefit Trust through the expiration of the extended
agreement. For the years ended December 31, 2020 and 2019, the Company recorded expenses of Ps. 21.9 million (U.S.$1.1 million) and
Ps. 21.2 million (U.S.$1 million), respectively, related to the Benefit Trust.
Republic recorded combined expenses of Ps. 61.8 million
(U.S.$3.1 million) and Ps. 69.5 million (U.S.$3.6 million) for the years ended December 31, 2020 and 2019, 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,
2020 and 2019, the Company recorded expense of Ps. 21.9 million (U.S.$1.1 million) and Ps. 21.2 million (U.S.$1 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 2020 and 2019.
Republic has a profit sharing plan for all salaried
and nonunion hourly employees. During 2020 and 2019, the profit sharing plan was based upon achieving certain inventory and shipment targets.
No expense was recorded during the years ended December 31, 2020 and in 2019,
Industrias CH and its direct wholly-owned subsidiaries
currently hold approximately 52% of our series B shares. Mr. Rufino Vigil González, our chairman and Chief Executive Officer, owned,
directly or indirectly, approximately 67% of the shares of Industrias CH. Other than Mr. Rufino Vigil, each director and member of senior
management beneficially owns less than 1% of our series B shares. In addition, see Item 7.A. “Major Shareholders” for the beneficial
share ownership of Industrias CH.
Item
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10. Additional Information
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Not applicable.
B.
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Memorandum and Articles of Association
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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 SBQ steel and structural products.
The following is a summary of certain rights of holders
of our capital stock, including brief summaries of material provisions of our by-laws and Mexican law. This summary is not exhaustive
and does not contain all information that may be important to you. For more complete information, you should read our by-laws, which have
been filed as an exhibit to this annual report and incorporated by reference herein.
Board of Directors
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 breach 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 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 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 they 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:
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our transformation from one type of corporation to another;
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to elect one member of our board of directors pursuant to the provisions of our by-laws and the Securities Market Law;
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any merger or corporate spin-off in which we are not the surviving entity;
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our dissolution or liquidation;
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cancellation of the registration of our shares with the National Registry of Securities; and
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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.
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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:
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voluntary dissolution of the company;
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an increase or decrease in a company’s minimum fixed capital;
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change in corporate purpose or nationality;
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any transformation, merger or spin-off involving the company;
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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 fail 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.
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. 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 outstanding shares. 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, 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 provided in the Depositary Agreement, which provides that 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 3payment 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 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. 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 (stockholder´s equity) 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 of 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 of 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, 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. In 2018, we repurchased 27,553,643 shares, and we resold 150,000. At December 31,
2018, we had 31,066,207 treasury shares. In the year 2018 we registered a loss of Ps. 4.2 million in the repurchase of shares. In
2019, we repurchased 2,663,719 shares, none of which were resold. At December 31, 2020, we had 34,223,573 treasury shares. In 2020,
we did not register a gain or loss 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 corporations 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).
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 to 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 if such provisions (i) are approved by a
majority of the shareholders, with no more than 5% of the outstanding capital shares voting against such provisions, (ii) do not exclude
any shareholder(s) or group of shareholder(s) and (iii) do not restrict, in an absolute manner, a change of control
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 66.67% of the voting stock which is not owned by the interested shareholder.
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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 fail 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 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, a
corporation created or organized in or under the laws of the United States or any state thereof (including the District of
Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust where a
court within the United States is able to exercise primary supervision over the administration of the trust and one or more United
States persons (as defined in the U.S. Internal Revenue Code of 1986, as amended) have the authority to control all substantial
decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust)
(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 shares (measured by vote or value). In
addition, the summary does not address the effects of the U.S. Medicare tax on net investment income, the indirect effects on
persons who hold equity interests in a holder, 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 certain U.S. expatriates, REITs, RICs, 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, taxpayers
that are required to prepare certified financial statements or file financial statements with certain regulatory or governmental
agencies, 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, estates and trusts, partnerships, S corporations 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 such partnership or a partner in such partnership generally will depend upon the status of the
partner and the activities of the partnership. Partnerships holding series B
shares or ADSs, and partners in such partnerships should consult their
own tax advisors regarding the tax consequences of an investment in series B shares or ADSs.
The summary is based upon the federal income tax laws
of the United States and Mexico as in effect and available 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 note that
no rulings have been or are expected to be sought from the U.S. Internal Revenue Service (the “IRS”) with respect to any of
the U.S. federal tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. 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 residence in Mexico. When the individual in question has a residence 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 2020. 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 2020, 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 generally will 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 IRS
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 generally
will 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 U.S. federal income tax 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 2020 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 taxable disposition of the series
B shares or ADSs, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount
realized on the sale or other taxable disposition and such U.S. holder’s
U.S. federal income tax basis in the series B shares or ADSs. Gain or loss
recognized by a U.S. holder on such sale or other taxable disposition generally will be long-term capital gain or loss if, at the time
of the sale or other taxable 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 U.S. 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.
Gain, if any, realized by a U.S.
holder on the sale or other taxable disposition of series B shares or ADSs will be treated as U.S. source income for U.S. foreign tax
credit purposes. Consequently, if a Mexican withholding tax is imposed on the sale or disposition of the units or ADSs, a U.S. holder
that does not receive sufficient foreign source income from other sources may not be able to derive effective U.S. foreign tax credit
benefits in respect of these Mexican taxes. U.S. holders should consult their own tax advisors regarding the application of the foreign
tax credit rules to their investment in, and disposition of, series B shares or ADSs.
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 U.S. federal income 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. 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.
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 2018, 2019 and
2020 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.
Foreign Account Tax Compliance Act (“FATCA”)
Sections 1471 through 1474 of the Code impose a
30% withholding tax on certain types of payments made to foreign financial institutions, unless the foreign financial institution
enters into an agreement with the U.S. Treasury to, among other things, undertake to identify accounts held by certain U.S. persons
or U.S.-owned entities, annually report certain information about such accounts, and withhold 30% on certain payments to account
holders whose actions prevent it from complying with these and other reporting requirements, or unless the foreign financial
institution is otherwise exempt from those requirements. In addition, FATCA imposes a 30% withholding tax on the same types of
payments to a non-financial foreign entity unless the entity certifies that it does not have any substantial U.S. owners or the
entity furnishes identifying information regarding each substantial U.S. owner. Failure to comply with the additional certification,
information reporting and other specified requirements imposed under FATCA could result in the 30% withholding tax being imposed on
certain “pass-through” payments with respect to series B shares or ADSs held through a non-U.S. entity. However, under
current guidance, withholding under FATCA will apply to certain “pass-through” payments no earlier than the date that is
two years after publication of final U.S. Treasury Regulations defining the term “foreign pass-through payments.”
Prospective investors should consult their own tax advisors regarding FATCA and its effect on them.
F.
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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 Exchange Act. Accordingly, we file reports and other information with the SEC, including annual reports on Form 20-F and reports on
Form 6-K. The SEC 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 SEC.
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.
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Subsidiary Information
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Not applicable.