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Grupo Simec, S.A.B. De C.V. (SIM) SEC Filing 20-F Annual Report for the fiscal year ending Friday, December 31, 2021

SEC Filings

SIM Annual Reports

Group Simec Sa De Cv

CIK: 887153 Ticker: SIM

 

 

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-11176

 

 

 

GRUPO SIMEC, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

 

 

 

GROUP SIMEC

(Translation of registrant’s name into English)

 

UNITED MEXICAN STATES

(Jurisdiction of incorporation or organization)

 

 

 

Calzada Lázaro Cárdenas 601
Colonia La Nogalera
, Guadalajara,
Jalisco, México 44440

(Address of principal executive offices)


Mario Moreno Cortez, telephone number 011-52-33 3770-6700, e-mail mmoreno@gruposimec.com.mx

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

American Depositary Shares (each representing one Series B share)

Series B Common Stock

  SIM  

NYSE American

NYSE American*

 

 

*Not for trading, but only in connection with the registration of American depositary shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Series B Common Stock — 462,580,731 shares as of December 31, 2021

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer    ☒ Accelerated filer    ☐

Non-accelerated filer    ☐

    Emerging growth company    

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐ International Financial Reporting Standards as issued
by the International Accounting Standards Board ☒
Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 

 

 

 

 

Table of Contents

 

    Page
PART I   1
     
Item 1. Identity of Directors, Senior Management and Advisers 1
     
Item 2. Offer Statistics and Expected Timetable 1
     
Item 3. Key Information 1
     
Item 4. Information on the Company 15
     
Item 4A. Unresolved Staff Comments 38
     
Item 5. Operating and Financial Review and Prospects 38
     
Item 6. Directors, Senior Management and Employees 67
     
Item 7. Major Shareholders and Related Party Transactions 74
     
Item 8. Financial Information 77
     
Item 9. The Offer and Listing 80
     
Item 10. Additional Information 80
     
Item 11. Quantitative and Qualitative Disclosures About Market Risk 93
     
Item 12. Description of Securities Other than Equity Securities 94
     
PART II 96
     
Item 13. Defaults, Dividends Arrearages and Delinquencies 96
     
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 96
     
Item 15. Controls and Procedures 96
     
Item 16. Reserved 99
     
Item 16A. Audit Committee Financial Expert 99
     
Item 16B. Code of Ethics 99
     
Item 16C. Principal Accountant Fees and Services 100
     
Item 16D. Exemptions from the Listing Standards for Audit Committees 100
     
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 100
   
Item 16F. Change in Registrant’s Certifying Accountant 100
     
Item 16G. Corporate Governance 101
     
Item 16H. Mine Safety Disclosure 101
     
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 101
     
PART III 102
     
Item 17. Financial Statements 102
     
Item 18. Financial Statements 102
     
Item 19. Exhibits 102

 

i

 

 

CERTAIN TERMS

 

Grupo Simec, S.A.B. de C.V. is a corporation (sociedad anónima bursátil de capital variable) organized under the laws of the United Mexican States (“Mexico”). Unless the context requires otherwise, when used in this annual report, the terms “we,” “our,” “the company,” “our company” and “us” refer to Grupo Simec, S.A.B. de C.V., together with its consolidated subsidiaries.

 

References in this annual report to “U.S. dollars” or “U.S.$” are to the lawful currency of the United States of America. References in this annual report to “pesos” or “Ps.” are to the lawful currency of Mexico. References in this annual report to “real” are to the lawful currency of Brazil. References to “tons” in this annual report refer to tons; a metric ton equals 1,000 kilograms or 2,204 pounds. We publish our financial statements in pesos.

 

The terms “special bar quality steel” or “SBQ steel” refer to steel that is hot rolled or cold finished into round square, or hexagonal steel bars that generally contain higher proportions of alloys than lower quality grades of steel. SBQ steel is produced with precise chemical specifications and generally is made to order following client specifications.

 

This annual report contains translations of certain peso amounts to U.S. dollars at specified rates solely for your convenience. These translations do not mean that the peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated these U.S. dollar amounts from pesos at the exchange rate of Ps. 20.5157 per U.S.$1.00, the interbank transactions rate in effect on December 31, 2021. On May 17, 2022, the interbank transactions rate for the peso was Ps. 20.1443 per U.S.$1.00.

 

FORWARD LOOKING STATEMENTS

 

This annual report contains certain statements regarding our business that may constitute “forward looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. When used in this annual report, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects” and similar expressions are intended to identify forward looking statements, although not all forward looking statements contain those words. These statements, including, but not limited to, our statements regarding the ongoing effects of the coronavirus (COVID-19) pandemic on both our projected customer demand and supply chain, as well as our operations and financial performance, our strategy for raw material acquisition, products and markets, production processes and facilities, sales and distribution and exports, growth and other trends in the steel industry and various markets, operations and liquidity and capital resources, are based on management’s beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from those expressed in any forward looking statement. In light of these risks and uncertainties, we cannot assure you that forward looking statements will prove to be accurate. Factors that might cause actual results to differ materially from forward looking statements include, but are not limited to, the following:

 

  the overall global economic environment and risks associated with the COVID-19 pandemic;

 

  factors relating to the steel industry (including the cyclicality of the industry, finished product prices, worldwide production capacity, the high degree of competition from Mexican, U.S. and foreign producers and the price of ferrous scrap, iron ore and other raw materials);

 

  our inability to operate at high capacity levels;

 

  the costs of compliance with Mexican, Brazilian and U.S. environmental laws;

 

  future capital expenditures and acquisitions;

 

  future devaluations of the peso and the real;

 

  the imposition by Mexico and Brazil of foreign exchange controls and price controls;

 

  the influence of economic and market conditions in other countries on Mexican securities; and

 

  the factors discussed in Item 3.D – “Risk Factors” below.

 

Forward looking statements speak only as of the date of this filing, and we undertake no obligation to publicly update or to revise any forward looking statements after the date of this annual report because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward looking events and circumstances discussed in this annual report might not occur.

 

ii

 

 

PART I 

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Reserved

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Investing in our series B shares and ADSs involves a high degree of risk. You should consider carefully the following risks, as well as all the other information presented in this annual report, before making an investment decision. Any of the following risks, if they were to occur, could materially and adversely affect our business, results of operations, prospects and financial condition. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially and adversely affect our business, results of operations, prospects and financial condition. In either event, the market price of our series B shares and ADSs could decline significantly, and you could lose all or substantially all of your investment.

 

Risks Related to Our Business

 

Our results of operations are significantly influenced by the cyclical nature of the steel industry.

 

The steel industry is highly cyclical and sensitive to regional and global macroeconomic conditions. Global demand for steel as well as global production capacity levels significantly influence prices for our products, and changes in global demand or supply for steel in the future will likely impact our results of operations. Steel prices are sensitive to macroeconomic fluctuations in the global economy, and substantial price decreases during periods of economic weakness have not always been offset by price increases during periods of economic strength. The steel industry has suffered in the past, especially during downturn cycles, from substantial over-capacity relative to local demand. Currently, as a result of the increase in steel production capacity in recent years, there are signs of excess capacity in steel markets, which is impacting the profitability of the steel industry. During 2019 and 2020, global steel prices decreased, a trend which accelerated due to the global COVID-19 pandemic. In 2021, global steel prices increased significantly after a global economic recovery. We cannot give you any assurance as to prices of steel in the future.

 

The U.S. economy has experienced a strong recovery from the conditions experienced at the onset of the COVID-19 pandemic, but new variants of COVID-19 and the continued abatement of the COVID-19 pandemic, labor shortages, supply chain disruptions, new or proposed legislation related to governmental spending, inflation and increases in interest rates have impacted, and will continue to impact, economic growth. Even with this economic recovery, challenges from global production overcapacity in the steel industry and ongoing uncertainties, both in the United States and in other regions of the world, remain. We are unable to predict with certainty the duration of current economic conditions or the magnitude and timing of changes in economic activity. Future economic downturns, prolonged slow growth or stagnation in the economy, a sector-specific slowdown in one of our key end-use markets, such as nonresidential construction, or changes in inflation could materially adversely affect our business, results of operations, financial condition and cash flows, especially in light of the capital-intensive nature of our business.

 

1

 

 

The COVID-19 pandemic, as well as similar epidemics and other public health emergencies in the future, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

Our operations expose us to risks associated with pandemics, epidemics and other public health emergencies, such as the ongoing COVID-19 pandemic which spread from China to many other countries including the United States. The COVID-19 pandemic has had and may have further negative impacts on our operations, supply chain, transportation networks and customers, which may compress our margins or impact demand for our steel products, including as a result of preventative and precautionary measures that we, other businesses and governments have taken or may take in the future. The COVID-19 pandemic and governmental actions in response have adversely affected the economies of many countries and caused periodic disruption to and increased volatility in financial markets. The progression of the COVID-19 pandemic, including due to new variants of COVID-19, could also negatively impact our business or results of operations through the temporary closure of our operating facilities or those of our customers or suppliers.

 

In addition, the ability of our employees, our suppliers’ and customers’ employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19. Our customers may be directly impacted by business interruptions or weak market conditions and may not be willing or able to fulfill their contractual obligations. Furthermore, the progression of and global response to the COVID-19 pandemic has caused and increased the risk of further delays in construction activities and equipment deliveries related to our capital projects, including potential delays in obtaining permits from government agencies, as well as changes in the prices and availability of labor and equipment for capital projects. The extent of such delays and other effects of COVID-19 on our capital projects, certain of which are outside of our control, is unknown, but they could impact or delay the timing of anticipated benefits on capital projects.

 

The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new variants of the virus, information concerning the severity of the pandemic, the adoption rate of vaccines, and the effectiveness of actions globally to contain or mitigate the effects of the pandemic. The current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.

 

We may not be able to pass along price increases for raw materials to our customers to compensate for fluctuations in price and supply.

 

Prices for raw materials necessary for production of our steel products have fluctuated significantly in the past and may do so in the future. Significant increases in raw material prices could adversely affect our gross profit. During periods when prices for scrap metal, iron ore, ferroalloys, coking coal and other raw materials have increased, our industry has historically sought to maintain profit margins by passing along increased raw material costs to customers by means of price increases. For example, prices of scrap metal in 2017 increased approximately 31%, in 2018 increased approximately 19%, in 2019 decreased approximately 20%, in 2020 increased approximately 9% and increased approximately 62.6% in 2021; while prices of ferroalloys in 2017 increased approximately 22%, in 2018 increased approximately 10%, in 2019 increased approximately 1%, in 2020 decreased approximately 20%, and in 2021 increased approximately 32.9%. We may not be able to pass along these and other cost increases in the future and, therefore, our profitability may be materially and adversely affected. Even when we can successfully increase our prices, interim reductions in profit margins frequently occur due to a time lag between the increase in raw material prices and the market acceptance of higher selling prices for finished steel products. We cannot assure you that our customers will agree to pay increased prices for our steel products that compensate us for increases in our raw material costs.

 

We purchase our raw materials either in the open market or from certain key suppliers. Both scrap metal and ferroalloy prices are negotiated on a monthly basis with our suppliers and are subject to market conditions. We cannot assure you that we will be able to continue to find suppliers of these raw materials in the open market, that the prices of these materials will not increase or that the quality will remain the same. In addition, if any of our key suppliers fails to deliver or we fail to renew our supply contracts, we could face limited access to some raw materials, or higher costs and delays resulting from the need to obtain our raw materials requirements from other suppliers.

 

The energy costs involved in our production processes are subject to fluctuations that are beyond our control and could significantly increase our costs of production.

 

Energy costs constitute a significant component of our costs of operations. Our energy cost was 10.6% of our manufacturing costs for 2021 compared to 11.1% for 2020, 14.3% for 2019, 12.4% for 2018, and 13.1% for 2017, 13.5%. Our energy costs are driven by the dependence of our production processes on adequate supplies of electricity and natural gas. A substantial increase in the cost of electricity or natural gas could have a material adverse effect on our gross profit. In addition, a disruption or curtailment in supply could have a material adverse effect on our production and sales. Prices for electricity increased approximately 22% in 2017, in 2018 increased approximately 14%, in 2019 increased approximately 1%, in 2020 decreased approximately 9.8% and in 2021 increased approximately 2.8%; and prices for natural gas increased approximately 22% in 2017, increased approximately 28% in 2018 and increased approximately 1.8% in 2019, decreased approximately 18% in 2020 and increased approximately 37% in 2021.

 

2

 

 

We pay special rates to the Mexican federal electricity commission (Comisión Federal de Electricidad or “CFE”) for electricity. We also pay special rates to Pemex, Gas y Petroquímica Básica, (“PEMEX”), the national oil company of Mexico, for natural gas used at our facilities in Mexico. We cannot assure you that these special rates will continue to be available to us or that these rates may not increase significantly in the future, particularly in light of recent energy reforms in Mexico. In accordance with the energy reform in Mexico, the Republic’s Congress approved the Law of the Electricity Industry and the Regulation of the Law of the Electricity Industry, which regulate some articles of the Constitution of the United Mexican States and have the purpose of regulating the planning and control of the National Electric System (SEN), the Public Service of Transmission and Distribution (T&D) of electric energy and other activities of the electric industry. The Mexican State will establish and execute the policies, regulation and surveillance of the electricity industry through the Secretary of Energy (SENER), which is empowered to establish, conduct and coordinate the country’s energy policies in matters of electricity, direct the process of planning and preparation of the SEN development program, establishing the criteria for granting Clean Energy Certificates, monitoring the operation of the Wholesale Electricity Market (the Market) and the determinations of the National Center for Energy Control (CENACE), among others. The Energy Regulatory Commission (CRE) is empowered to grant qualified user generation permits, among others, to determine the consideration methodologies applicable to Exempt Generators, to issue and apply the tariff regulation to which the T&D, the operation of the Providers of Basic Services, the operation of CENACE and Related Services not included in the Market, as well as the final rates of the Basic Supply that are not determined by the Federal Executive, authorize the contract models that CENACE enters into with Market Participants , among others. In the United States of America, we have contracts in place with special rates from the electric utilities. We cannot assure you that these special rates will continue to be available to us or that these rates may not increase significantly in the future. In certain deregulated electric markets in the United States of America, we have third party electric generation contracts under a fixed price arrangement. These contracts mitigate our price risk for electric generation from the volatility in the electric markets. In addition, we purchase natural gas from various suppliers in the United States of America and Canada. These purchase prices are generally established as a function of monthly New York Mercantile Exchange settlement prices. We also contract with different natural gas transportation and storage companies to deliver the natural gas to our facilities. In addition, we enter into futures contracts to fix and reduce volatility of natural gas prices both in Mexico and the United States of America, as appropriate. As of December 31, 2021, we have not entered into derivative financial instruments in Mexico, the United States of America or Brazil. We have not always been able to pass the effect of increases in our energy costs on to our customers and we cannot assure you that we will be able to pass the effect of these increases on to our customers in the future. We also cannot assure you that we will be able to maintain futures contracts to reduce volatility in natural gas prices. Changes in the price or supply of electricity or natural gas would materially and adversely affect our business and results of operations.

 

We face significant competition from other steel producers, which may adversely affect our profitability and market share.

 

Competition in the steel industry is intense, which exerts a downward pressure on prices, and, due to high start-up costs, the economics of operating a steel mill on a continuous basis may encourage mill operators to establish and maintain high levels of output even in times of low demand, which further decreases prices and profit margins. The recent trend of consolidation in the global steel industry may further increase competitive pressures on independent producers of our size, particularly if large steel producers formed through consolidations, which have access to greater resources than us, adopt predatory pricing strategies that decrease prices and profit margins. If we are unable to remain competitive with these producers, our profitability and market share would likely be materially and adversely affected.

 

A number of our competitors in Mexico, the United States of America, Brazil and Canada have undertaken modernization and expansion plans, including the installation of production facilities and manufacturing capacity for certain products that compete with our products. As these producers become more efficient, we will face increased competition from them and may experience a loss of market share. In each of Mexico, the United States of America and Brazil, we also face competition from international steel producers. Increased international competition, especially when combined with excess production capacity, would likely force us to lower our prices or to offer increased services at a higher cost to us, which could materially reduce our profit margins.

 

Competition from other materials could significantly reduce demand and market prices for steel products.

 

In many applications, steel competes with other materials that may be used as steel substitutes, such as aluminum (particularly in the automobile industry), cement, composites, glass, plastic and wood. Additional substitutes for steel products could significantly reduce demand and market prices for steel products and thereby affect our results of operations.

 

3

 

 

A sudden slowdown in consumption in, or increase in exports from, China could have a significant impact on international steel prices, affecting our profitability.

 

As demand for steel has surged in China, steel production capacity in that market has also increased, and China is now the largest worldwide steel producing country, accounting for approximately 60% of the worldwide steel production. Due to the size of the Chinese steel market, a slowdown in steel consumption in that market, could cause a sizable increase in the volume of Chinese steel offered in the international steel markets, exerting a downward pressure on sales and margins of steel companies operating in other markets and regions, including us.

 

Implementing our growth strategy, which may include additional acquisitions, may adversely affect our operations.

 

As part of our growth strategy, we may seek to expand our existing facilities, build additional plants, acquire additional steel production assets, enter into joint ventures or form strategic alliances that we expect will expand or complement our existing business. If we undertake any of these transactions, they will likely involve some or all of the following risks:

 

  disruption of our ongoing business;

 

  diversion of our resources and of management’s time;

 

  decreased ability to maintain uniform standards, controls, procedures and policies;

 

  difficulty managing the operations of a larger company;

 

  increased likelihood of involvement in labor, commercial or regulatory disputes or litigation related to the new enterprise;

 

  potential liability to joint venture participants or to third parties;

 

  difficulty competing for acquisitions and other growth opportunities with companies having greater financial resources; and

 

  difficulty integrating the acquired operations and personnel into our existing business.

 

We will require significant capital for acquisitions and other strategic plans, as well as for the maintenance of our facilities and compliance with environmental regulations. We may not be able to fund our capital requirements from operating cash flow and we may be required to issue additional equity or debt securities or obtain additional credit facilities, which could result in additional dilution to our shareholders. We cannot assure you that adequate equity or debt financing would be available to us on favorable terms or at all. If we are unable to fund our capital requirements, we may not be able to implement our growth strategy.

 

We intend to continue to pursue a growth strategy, the success of which will depend in part on our ability to acquire and integrate additional facilities. Some of these acquisitions may be outside of Mexico, the United States of America, Canada and Brazil. Acquisitions involve special risks, in addition to those described above, that could adversely affect our business, financial condition and results of operations, including the assumption of legacy liabilities and the potential loss of key employees. We cannot assure you that any acquisition we make will not materially and adversely affect us or that any such acquisition will enhance our business. We are unable to predict the likelihood of any additional acquisitions being proposed or completed in the near future or the terms of any such acquisitions.

 

Tariffs, anti-dumping and countervailing duty claims imposed in the future could harm our ability to export our products outside of Mexico, and changes in Mexican tariffs on steel imports could adversely affect the profitability and market share of our Mexican steel business.

 

International trade-related administrative proceedings, legal actions and restrictions pose a constant risk for our international operations and sales throughout the world. Countries may impose restrictive import duties and other restrictions on imports under various national trade laws. The timing and nature of the imposition of trade-related restrictions potentially affecting our exports are unpredictable. Trade restrictions on our exports could adversely affect our ability to sell products abroad and, as a result, our profit margins, financial condition and overall business could suffer.

 

One significant source of trade restrictions results from the imposition of “antidumping” and “countervailing” duties, as well as “safeguard measures.” These duties can severely limit or altogether prevent exports to relevant markets. For example, in October 2014, the United States of America International Trade Commission (USITC) determined that the U.S. steel industry was materially injured by imports of steel concrete reinforcing bars from Mexico that are sold in the United States of America at less than fair value, and from Turkey, that are subsidized by the government of Turkey. As a result of the USITC’s affirmative determinations, the U.S. Department of Commerce issued an antidumping duty order on imports of this product from Mexico and a countervailing duty order on imports of this product from Turkey. The U.S. government imposed tariffs of 66.7% against imports for rebar from Deacero, S.A.P.I de C.V. and us and tariffs of 20.58% for rebar imports from all other producers in Mexico, including Simec. On June 8, 2017, the United States of America International Trade Commission (USITC) issued a final resolution in our favor, determining that the tariff is 0%. On January 6, 2021, a preliminary dumping rate of 66.7% was imposed on our exports of rebar to the United States of America; following the U.S. Department of Commerce’s physical review carried out at our San Luis Potosí plant, arguing deficiencies and adverse facts during the information process. Such dumping rate is being challenged by our lawyers. As of May 11, 2022, our lawyers state that the dispute is in its early stage and no outcome is possibly predicted.

 

4

 

Many of our products are subject to existing duties, tariffs, anti-dumping duties and quotas that may limit the quantity of some types of goods that we import into the United States of America. Furthermore, certain of our competitors may be better positioned than us to withstand or react to border taxes, tariffs or other restrictions on global trade and as a result we may lose market share to such competitors. Due to broad uncertainty regarding the timing, content and extent of any regulatory changes in the U.S. or elsewhere, we cannot predict the impact, if any, that these changes could have to our business, financial condition and results of operations. See “Risks Related to Mexico—Developments in other countries could adversely affect the Mexican economy, our financial performance and the price of our shares.”

 

We and our auditors identified material weaknesses in our internal controls over financial reporting from 2017 through 2021, which resulted in our conducting a thorough review and implementing remedial measures in 2019, 2020 and 2021

 

In connection with the preparation of our financial statements as of and for each of the years ended December 31, 2019, 2020 and 2021, we and our auditors identified material weaknesses (as defined under standards established by the U.S. Public Company Accounting Oversight Board) in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

For details about our internal control deficiencies and remediation, see Items 15.B. “Controls and Procedures—Management’s Annual Report on Internal Control Over Financial Reporting – Material Weaknesses,” 15.C. “Attestation Report of the Independent Registered Public Accounting Firms” and 15.D. “Changes in Internal Control over Financial Reporting.”

 

The operation of our facilities depends on good labor relations with our employees.

 

As of December 31, 2021, approximately 87% of our non-Mexican and 48% of our Mexican employees were members of unions. The compensation terms of our labor contracts are adjusted on an annual basis, and all other terms of the labor contracts are renegotiated every two years. In addition, collective bargaining agreements are typically negotiated on a facility-by-facility basis for our Mexican facilities. Any failure to reach an agreement on new labor contracts or to negotiate these labor contracts could result in strikes, boycotts or other labor disruptions. These potential labor disruptions could have a material and adverse effect on our business. Labor disruptions or significant negotiated wage increases could reduce our sales or increase our costs, which could in turn have a material adverse effect on our results of operations.

 

Operations at our Lackawanna, New York, facility depend on our continuing right to use certain property and assets of an adjoining facility and the termination of any such rights would interrupt our operations and have a material adverse effect on our results of operations and financial condition.

 

The operations of our Lackawanna facility depend upon certain service and utility arrangements and understandings with third parties relating to, among other things, our use of industrial water, compressed air, sanitary sewer and electrical power. We have entered into a written agreement, subject to automatic one-year renewals and terminable by either party, for the provision of compressed air to our Lackawanna facility and an option to purchase the equipment at various times and at stated prices. The water pump that services our plant is located on property owned and maintained by another third party, which also continues to furnish industrial water to us on a month-to-month basis. The electric system which services the compressed air equipment, as well as the electric system which services the property on which the compressed air equipment is located, is routed through our electric meter located at a substation on adjacent property owned by the third party providing the compressed air to our facility. In the event of a termination of any of our rights, either due to a failure to negotiate a satisfactory outcome with the third parties providing these services or for any other reason, we could be required to cease all or substantially all of our operations at the Lackawanna facility. Because we produce certain types of products in our Lackawanna facility that we do not produce in our other facilities, an interruption of production at our Lackawanna facility would result in a substantial loss of revenue and could damage our relationships with customers.

 

5

 

 

Our sales in the United States of America are concentrated and could be significantly reduced if one of our major customers reduced its purchases of our products or was unable to fulfill its financial obligations to us.

 

Our sales in the United States of America are concentrated among a relatively small number of customers. Any of our major customers can stop purchasing our products or significantly reduce their purchases at any time. During 2021, 2020, 2019, 2018, and 2017, sales to our ten largest customers in the United States of America accounted for approximately 66.6%, 68%, 65%, 68.4% and 68.7% of our consolidated revenues in the United States of America, respectively, and approximately 14.8%, 15.5%, 20.8%, 13.8% and 17.7% of our total consolidated revenues, respectively. A disruption in sales to one or more of our largest customers would adversely affect our cash flow and results of operations.

 

We cannot assure you that we will be able to maintain our current level of sales to our largest customers or that we will be able to sell our products to other customers on terms that are favorable to us or at all. The loss of, or substantial decrease in the amount of purchases by, or a write-off of any significant receivables from, any of our major customers would materially and adversely affect our business, results of operations, liquidity and financial condition.

 

Unanticipated problems with our manufacturing equipment and facilities could have an adverse impact on our business.

 

Our capacity to manufacture steel products depends on the suitable operation of our manufacturing equipment, including blast furnaces, electric arc furnaces, continuous casters, reheating furnaces and rolling mills. Breakdowns requiring significant time and/or resources to repair, as well as the occurrence of unexpected adverse events, such as fires, explosions or adverse meteorological conditions, could cause production interruptions that could adversely affect our results of operations.

 

We have not obtained insurance against all risks, and do not maintain insurance covering losses resulting from catastrophes or business interruptions (such as interruptions attributable to the COVID-19 pandemic). In the event we are not able to quickly and cost-effectively remedy problems creating any significant interruption of our manufacturing capabilities, our operations could be adversely affected. In addition, in the event any of our plants were destroyed or significantly damaged or their production capabilities otherwise significantly decreased, we would likely suffer significant losses, and capital investments necessary to repair any destroyed or damaged facilities or machinery would adversely affect our profitability, liquidity and financial condition.

 

If we are unable to obtain or maintain quality and environmental management certifications for our facilities, we may lose existing customers and fail to attract new customers.

 

Most of our automotive parts customers in Mexico and the United States of America require that we have ISO 9001, TS 16949 and ISO 14001 certifications. All of the Mexican and U.S. facilities that sell to automotive parts customers are currently certified, as required. If the foregoing certifications are canceled, approvals are withdrawn or necessary additional standards are not obtained in a timely fashion, our ability to continue to serve our targeted market, retain our customers or attract new customers may be impaired. For example, our failure to maintain these certifications could cause customers to refuse shipments, which could materially and adversely affect our revenues and results of operations. We cannot assure you that we will be able to maintain these required certifications.

 

In the SBQ steel market, all participants must satisfy quality audits and obtain certifications in order to obtain the status of “approved supplier.” The automotive industry has put these stringent conditions in place for the production of auto parts to assure vehicle quality and safety. We currently are an approved supplier for our automotive parts customers. Maintaining these certifications is key to preserving our market share, because they can be a barrier to entry in the SBQ steel market, and we cannot assure you that we will be able to do so.

 

Failure to comply with environmental laws and regulations may result in fines, penalties or other significant liabilities or prevent us from operating our facilities.

 

Our operations are subject to a broad range of environmental laws and regulations governing our impact on air, water, soil and groundwater and exposure to hazardous substances. The costs of complying with and the imposition of liabilities pursuant to, environmental laws and regulation can be significant. Despite our efforts to comply with environmental laws and regulations, environmental incidents or events that negatively affect the operations of our facilities may occur. In addition, we cannot assure you that we will at all times operate in compliance with environmental laws and regulations. If we fail to comply with these laws and regulations, we may be assessed fines or penalties, be required to make large expenditures to comply with such laws and regulations, or be forced to shut down non-compliant operations and face lawsuits by third parties. In addition, environmental laws and regulations are becoming increasingly stringent and it is possible that future laws and regulations may require us to undertake material environmental compliance expenditures and require modifications in our operations. Furthermore, we need to maintain existing and obtain future environmental permits in order to operate our facilities. The failure to obtain necessary permits or consents or the loss of any permits could result in significant fines or penalties or prevent us from operating our facilities. We may also be subject, from time to time, to legal proceedings brought by private parties or governmental agencies with respect to environmental matters, including matters involving alleged property damage or personal injury that could result in significant liability. Certain of our facilities in the United States of America have been subject of administrative action by federal, state and local environmental authorities. See Item 8. “Financial Information—Legal Proceedings.”

 

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Greenhouse gas policies and regulations, particularly any binding restriction on emissions of greenhouse gases such as carbon dioxide, could negatively impact our steelmaking operations.

 

Our steel making operations in the United States of America and in Mexico use electric arc furnaces where carbon dioxide generation is primarily linked to energy use. In the United States of America, the Environmental Protection Agency has issued rules imposing inventory and reporting obligations to which some of our facilities are subject, and has also issued rules that will affect preconstruction permits for our facilities where increases in greenhouse gas pollutants are contemplated. The U.S. Congress has debated various measures for regulating greenhouse gas emission (such as carbon dioxide) and may enact them in the future. Such laws and regulations may also result in higher costs for coking coal, natural gas and electricity generated by carbon-based systems (such as coal-fired electric generating facilities). Such future laws and regulations, whether in the form of a cap-and-trade emissions permit system, a carbon tax or other regulatory regime may have a negative effect on our operations. Climate change policy is evolving at regional, national and international levels, and political and economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. As signatories to the United Nations Framework Convention on Climate Change (the “UNFCCC”), Mexico became subject to the Paris Agreement to fight climate change, which was approved at the 21th session of the UNFCCC conference in 2015. The United States of America is also a member of the Paris Agreement.

 

If we are required to remediate contamination at our facilities, we may incur significant liabilities.

 

Certain of our U.S. facilities are currently engaged in the investigation and/or remediation of environmental contamination. Most of these investigations relate to legacy activities by prior owners. We may in the future be subject to similar investigations or required to undertake similar remediation measures at other facilities. We recognize a liability for environmental remediation when it becomes probable that such remediation will be required and the amount can be reasonably estimated. As estimated costs to remediate change, or when new liabilities become probable, we adjust the record liabilities accordingly. However, due to the numerous variables associated with the judgments and assumptions that are part of these estimates and changes in governmental regulations and environmental technologies over time, we cannot assure you that our environmental reserves will be adequate to cover such liabilities or that our environmental expenditures will not differ significantly from our estimates or materially increase in the future. Failure to comply with any legal obligations requiring remediation of contamination could result in liabilities, imposition of cleanup liens and fines, and we could incur large expenditures to bring our facilities into compliance. See Item 8. “Financial Information—Legal Proceedings.”

 

We could incur losses due to product liability claims.

 

We could experience losses from defects or alleged defects in our steel products that subject us to claims for monetary damages. For example, many of our products are used in automobiles and it is possible that a defect in a vehicle could result in product liability claims against us. In accordance with normal commercial sales, some of our products include warranties that they meet certain agreed upon manufacturing specifications. We cannot assure you that future product liability claims will not be brought against us.

 

We depend on our senior management and their unique knowledge of our business and of the SBQ steel industry, and we may not be able to replace key executives if they leave.

  

We depend on the performance of our executive officers and key employees. Our senior management has significant experience in the steel industry, and the loss of any member of senior management or our inability to attract and retain additional senior management could materially and adversely affect our business, results of operations, prospects and financial condition. We believe that the SBQ steel market is a niche market where specific industry experience is key to success. We depend on the knowledge of our business and the SBQ steel industry of our senior management team. In addition, we attribute much of the success of our growth strategy to our ability to retain most of the key senior management personnel of the companies and businesses that we have acquired. Competition for qualified personnel is significant, and we may not be able to find replacements with sufficient knowledge of, and experience in, the SBQ steel industry for our existing senior management or any of these individuals if their services are no longer available. Our business could be adversely affected if we cannot attract or retain senior management or other necessary personnel.

 

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Our tax liability may increase if the tax laws and regulations in countries in which we operate change or become subject to adverse interpretations.

 

Taxes payable by companies in the countries in which we operate are substantial and include income tax, value-added tax, excise duties, profit taxes, payroll related taxes, property taxes and other taxes. Tax laws and regulations in some of these countries may be subject to change, varying interpretation and inconsistent enforcement. Ineffective tax collection systems and continuing budget requirements may increase the likelihood of the imposition of onerous taxes and penalties which could have a material adverse effect on our financial condition and results of operations. In addition to the usual tax burden imposed on taxpayers, these conditions create uncertainty as to the tax implications of various business decisions. This uncertainty could expose us to significant fines and penalties and to enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden. In addition, many of the jurisdictions in which we operate, including Mexico, have adopted transfer pricing legislation. If tax authorities impose significant additional tax liabilities as a result of transfer pricing adjustments, it could have a material adverse effect on our financial condition and results of operations. It is possible that tax authorities in the countries in which we operate will introduce additional tax raising measures. The introduction of any such provisions may affect our overall tax efficiency and may result in significant additional taxes becoming payable. Any such additional tax exposure could have a material adverse effect on our financial condition and results of operations.

 

If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

 

We are increasingly dependent on information technology networks and systems to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for digital marketing activities and electronic communications among us and our clients, suppliers and also among our subsidiaries and facilities. Security breaches or infrastructure flaws can create system disruptions, shutdowns or unauthorized disclosures of confidential information. If we are unable to prevent such breaches or flaws, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information.

 

Cyber threats are rapidly evolving and those threats and the means for obtaining access to information in digital and other storage media are becoming increasingly sophisticated. Cyber threats and cyber-attackers can be sponsored by countries or sophisticated criminal organizations or be the work of a single “hacker” or small groups of “hackers.”

 

Insider or employee cyber and security threats are increasingly a concern for all companies, including ours. Nevertheless, as cyber threats evolve, change and become more difficult to detect and successfully defend against, one or more cyber-attacks might defeat our or a third-party service provider’s security measures in the future and obtain the personal information of customers or employees. Employee error or other irregularities may also result in a defeat of security measures and a breach of information systems. Moreover, hardware, software or applications we use may have inherent defects of design, manufacture or operations or could be inadvertently or intentionally implemented or used in a manner that could compromise information security. A security breach and loss of information may not be discovered for a significant period of time after it occurs. While we have no knowledge of a material security breach to date, any compromise of data security could result in a violation of applicable privacy and other laws or standards, the loss of valuable business data, or a disruption of our business. A security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or confidential information could give rise to unwanted media attention, materially damage to our customer relationships and reputation, and result in fines, fees, or liabilities, which may not be covered by our insurance policies.

 

Risks Related to Global Economic Conditions

 

Global economic conditions, like the recent financial crisis and the Russian invasion of Ukraine, are expected to continue to have an adverse effect on our results of operations, financial condition and cash flows.

 

The ongoing global pandemic resulting from the spread of COVID-19 has had a significant effect on economies, businesses and individuals around the world. Efforts by governments around the world, including in the U.S. and Mexico, to contain COVID-19 have involved, among other things, border closings and other significant travel restrictions; mandatory stay-at-home and work-from-home orders; mandatory business closures; public gathering limitations; and prolonged quarantines. These efforts and other governmental, business and individual responses to the COVID-19 pandemic have led to significant disruptions to commerce, supply chains, credit losses, lower consumer demand for goods and services and general uncertainty regarding the near-term and long-term effects of COVID-19 on the domestic and international economy and on public health. Global steel production has been and will continue to be affected by volatility in the market due to the ongoing COVID-19 pandemic and uncertainty remains around the extent and duration of the pandemic, the emergence of new and more contagious variants of the virus and the effectiveness of vaccine programs. We expect steel consumption in the automotive and construction industries to be lower due to delays and reduced demand for steel products in North America and globally. These developments and other consequences of the COVID-19 outbreak have and could continue to materially adversely affect our results of operations, financial condition and cash flows.

 

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The ongoing COVID-19 pandemic could negatively affect our internal controls over financial reporting as a portion of our workforce could be required to work from home and, therefore, new processes, procedures, and controls could be required to respond to changes in our business environment.

 

In addition, the COVID-19 outbreak continues to significantly increase economic and demand uncertainty. The current outbreak and continued spread of COVID-19 and the emergence of new and more contagious variants could cause a global recession, which would have a further material adverse effect on our results of operations, financial condition and cash flows. Global activity levels started to improve during the second half of 2020; however, the full extent to which the COVID-19 outbreak will affect our operations, and the steel industry generally, remains highly uncertain, differs from country to country and will ultimately depend on future developments which cannot be predicted at this time, including the duration and scope of the restrictions put in place in different locations to reduce the rate of infections and hospitalizations, the development and spread of variants of COVID-19 and the effectiveness of vaccines as new variants of COVID-19 appear and spread, levels of unemployment, the length of time required for demand to return and normal economic and operating conditions to resume. While some restrictions were lifted in the second and third quarters of 2020, new restrictions were implemented in the fourth quarter of 2020 due to second wave and new restrictions were implemented in the first part and last quarter of 2021. We cannot predict whether restrictions will be further relaxed, reinstated or made more stringent. The effects of the COVID-19 pandemic may also have the effect of exacerbating many of the other risks described in this Item 3.D. “Risk Factors.”

 

Global economic conditions, such as the financial crisis and economic recession relating to the COVID-19 pandemic and the Russian invasion of Ukraine have in the past, and may continue to, significantly impact our business.

 

The corresponding reduction in demand across the economy in general and in the automotive, construction and manufacturing sectors due to the global pandemic has reduced demand for steel products in North America and globally. These economic conditions significantly impacted, and will continue to significantly impact, our business and results of operations. Although the reasons mentioned before, demand, production levels and prices in certain segments and markets have recovered and stabilized to a certain degree in 2021. On February 24, 2022, Russia invaded Ukraine, which, due to geopolitical reasons, increased the uncertainty and could delayed the global economic recovery. If global macroeconomic conditions deteriorate, the outlook for steel producers would be adversely affected. It is difficult to predict the duration or severity of a new global economic downturn, or to what extent it will affect us. An unsustainable recovery and persistently weak economic conditions in our key markets could depress demand for our products and adversely affect our business and results of operations. We sell our products to the automotive and construction-related industries, both of which reported substantially lower customer demand during and after the latest global recession and have recently exhibited reduced demand for steel products due to the ongoing financial recession. As a result, our operating levels in recent years declined compared to pre-recession levels. In 2017 there was a slight increase in sales to the automotive industry compared to 2016, in 2018 we experienced a slight decrease in our sales to the automotive industry compared to 2017 and in 2020 and 2019 we experienced a decrease in our sales to the automotive industry compared to 2018. We experienced a rise in net sales of our SBQ steel of 17% in 2021 compared to 2020.

 

Moreover, if the global economic downturn continues for a prolonged period, or a new global financial crisis occurs, we may face increased risk of insolvency and other credit related issues of our customers and suppliers, as we faced with our customers and suppliers particularly in industries that were hard hit by the latest recession, such as automotive, construction and appliance. Also, there is the possibility that our suppliers face similar risks. The decrease in available credit may increase the risk default of our clients and that our suppliers might delay the raw materials delivery. The impact of global economic conditions on these industries may have a significant effect on our results of operations.

 

Finally, if global economic conditions continue to deteriorate, we may be required to undertake asset impairments, as we have been required to undertake in the past.

 

Because a significant portion of our sales are to the automotive industry, a decrease in automotive manufacturing could reduce our cash flows and adversely affect our results of operations.

 

Direct sales of our products to automotive assemblers and manufacturers accounted for approximately 37% of our net sales of our SBQ steel products in 2021. Demand for our products is affected by, among other things, the relative strength or weakness of the North American automotive industry. Any reduction in vehicles manufactured in North America, the principal market for our SBQ steel products, has had and will continue to have an adverse effect on our results of operations. We also sell to independent forgers, components suppliers and steel service centers, all of which sell to the automotive market as well as other markets. Developments affecting the North American automotive industry, may adversely affect us.

 

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Our customers in the automotive industry continually seek to obtain price reductions from us, which may adversely affect our results of operations.

 

A challenge that we and other suppliers of intermediary products used in the manufacture of automobiles face is continued price reduction pressure from our customers in the automobile manufacturing business. Downward pricing pressure has been a characteristic of the automotive industry in recent years and it is migrating to all our vehicular markets. Virtually all automobile manufacturers have aggressive price reduction initiatives that they impose upon their suppliers, and such actions are expected to continue in the future. In the face of lower prices to customers, we must continue to reduce our operating costs in order to maintain profitability. We have taken and continue to take steps to reduce our operating costs to offset customer price reductions; however, price reductions are adversely affecting our profit margins and are expected to do so in the future. If we are unable to offset customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, or if we are unable to avoid price reductions from our customers, our results of operations could be adversely affected.

 

Sales may fall as a result of fluctuations in industry inventory levels.

 

Inventory levels of steel products held by companies that purchase our products can vary significantly from period to period. These fluctuations can temporarily affect the demand for our products, as customers draw from existing inventory during periods of low investment in construction and the other industry sectors that purchase our products and accumulate inventory during periods of high investment and, as a result, these companies may not purchase additional steel products or maintain their current purchasing volume. Accordingly, we may not be able to increase or maintain our current levels of sales volumes or prices.

  

Risks Related to Mexico

 

Adverse economic conditions in Mexico may adversely affect our financial performance.

 

A substantial portion of our operations are conducted in Mexico and our business is affected by the performance of the Mexican economy. The Mexican economy, as measured by gross domestic product, was growing until 2019: growing 2% in 2017 and 2018 by 2%, contracted by 0.1% in 2019, contracted by 8.5% in 2020 and grew by 5% in 2021(according to figures of the Instituto Nacional de Estadística y Geografía (INEGI)). Mexico has historically experienced prolonged periods of economic crises, caused by internal and external factors over which we have no control. Those periods have been characterized by exchange rate instability, high inflation, high domestic interest rates, changes in oil prices, economic contraction, a reduction of international capital flows, balance of payment deficits, a reduction of liquidity in the banking sector and high unemployment rates. Decreases in the growth rate of the Mexican economy, or periods of negative growth, or increases in inflation may result in lower demand for our products. The Mexican government recently cut spending in response to a downward trend in international crude oil prices, and it may further cut spending in the future. These cuts could adversely affect the Mexican economy and, consequently, our business, financial condition, operating results and prospects. We cannot assure you that economic conditions in Mexico will not worsen, or that those conditions will not have an adverse effect on our financial performance.

 

Political, social and other developments in Mexico could adversely affect our business.

 

Political, social and other developments in Mexico may adversely affect our business. Social unrest, such as strikes, suspension of labor, demonstrations, acts of violence and terrorism in the Mexican states in which we operate could disrupt our financial performance. Additionally, the Mexican government has exercised, and continues to exercise, significant influence over the economy. Accordingly, Mexican federal governmental actions and policies concerning the economy, the regulatory framework, the social or political context, and state-owned and stated controlled entities or industries could have a significant impact on private sector companies and on market conditions, prices and returns of Mexican securities. In the past, governmental actions have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports.

 

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy.

 

The Mexican federal government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican federal governmental actions and policies concerning the economy, state-owned enterprises and state controlled, funded or influenced financial institutions could have a significant impact on private sector entities in general and on us in particular, and on market conditions, prices and returns on securities of Mexican companies. The Mexican federal government occasionally makes significant changes in policies and regulations, and may do so again in the future. Actions to control inflation and other regulations and policies have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports. Tax legislation in Mexico is subject to continuous change and we cannot assure you whether the Mexican government may maintain existing political, social, economic or other policies, or whether changes may have a material adverse effect on our financial performance.

 

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Violence in Mexico may adversely impact the Mexican economy and have a negative effect on our financial performance.

 

Mexican drug related violence and other organized crime have escalated significantly since 2006, when the Mexican federal government began increasing the use of the army and police to fight drug trafficking. Drug cartels have carried out attacks largely directed at competing drug cartels and law enforcement agents; however, they also target companies and their employees, including companies’ industrial properties, including through extortion, theft from trucks or industrial sites, kidnapping and other forms of crime and violence. This increase in violence and criminal activity has led to increased costs for companies in the form of stolen products and added security and insurance. Corruption and links between criminal organizations and authorities also create conditions that affect our business operations, as well as extortion and other acts of intimidation, which may have the effect of limiting the level of action taken by federal and local governments in response to such criminal activity. We cannot assure you that the levels of violent crime in Mexico, over which we have no control, will not have an adverse effect on the country’s economy and, as a result, on our financial performance.

 

Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial performance.

 

The peso historically has been subject to significant depreciation against the U.S. dollar. Depreciation of the Mexican peso relative to the U.S. dollar decreases a portion of our revenues in U.S. dollar terms, as well as increases the cost of a portion of the raw materials we require for production and any debt obligations denominated in U.S. dollars, and thereby may negatively affect our results of operations. The Mexican Central Bank may from time to time participate in the foreign exchange market to minimize volatility and support an orderly market. The Mexican Central Bank and the Mexican government have also promoted market-based mechanisms for stabilizing foreign exchange rates and providing liquidity to the exchange market, such as using over-the-counter derivatives contracts and publicly-traded futures contracts on the Chicago Mercantile Exchange. However, the Peso is currently subject to significant fluctuations against the U.S. dollar and may be subject to such fluctuations in the future. Since the second half of 2008, the value of the Mexican peso relative to the U.S. dollar has fluctuated significantly. According to the U.S. Federal Reserve Board, during this period the exchange rate registered a low of Ps. 9.91 to U.S.$1.00 on August 5, 2008, and a high of Ps. 21.89 to U.S.$1.00 on January 19, 2017. In 2018, the exchange rate registered a low of Ps.17.98 to U.S. $1.00 and a high of Ps.20.72 to U.S. $1.00. In 2019, the exchange rate registered a low of Ps. 18.76 to U.S.$1.00 and a high of Ps. 20.12 to U.S.$1.00. In 2020, the exchange rate registered a low of Ps. 18.57 to U.S.$1.00 and a high of Ps. 24.86 to U.S.$1.00. In 2021, the exchange rate registered a low of Ps.19.58 to U.S. $1.00 and a high of Ps. 21.82.

 

A severe depreciation of the Mexican peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer and to convert Mexican pesos into U.S. dollars and other currencies. While the Mexican government does not currently restrict, and since 1982 has not 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, the Mexican government could impose restrictive exchange rate policies in the future.

 

Currency fluctuations or restrictions on transfer of funds outside Mexico may have an adverse effect on our financial performance, and could adversely affect the U.S. dollar value of the price of our Series B shares and the ADSs.

 

On February 17, 2016, the Mexican Central Bank increased the reference rate from 3.25% to 3.75%, and has been increasing the reference rate regularly since then, up to 8.25% in March 2019, then back down to 4% as of April 23, 2021. The reference rate was increased to 6.5% on March 25, 2022. We cannot assure you that, as a result of future increases by U.S. Federal Reserve of the target range for the federal funds rate in the United States of America, the Mexican economy or the value of securities issued by Mexican companies will not be affected, including as a result of any precipitous unwinding of investments in emerging markets, depreciations and increased volatility in the value of their currency and higher interest rates.

 

High inflation rates in Mexico may affect demand for our products and result in cost increases.

 

Mexico has historically experienced high annual rates of inflation. However, as of January 1, 2008, the Mexican economy in a non-inflationary environment given the low inflation rates of recent years. 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 6.8% for 2017, 4.8% for 2018, 2.8% for 2019, 3.2% for 2020 and 7.4% for 2021. High inflation rates could adversely affect our business and results of operations by reducing consumer purchasing power, thereby adversely affecting demand for our products, increasing certain costs beyond levels that we could pass on to consumers, and by decreasing the benefit to us of revenues earned if the inflation rate exceeds the growth in our pricing levels.

 

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Developments in other countries could adversely affect the Mexican economy, our financial performance and the price of our shares.

 

The Mexican economy and the market value of Mexican companies may be, to varying degrees, affected by economic and market conditions globally, in other emerging market countries and major trading partners, in particular the United States of America. Although economic conditions in other countries may differ significantly from economic conditions in Mexico, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers or of Mexican assets. In recent years, for example, prices of both Mexican debt securities and equity securities decreased substantially as a result of developments in Russia, Asia, Europe and Brazil. Also, credit issues in the United States of America have in the past resulted in significant fluctuations in global financial markets, including Mexico.

 

In addition, in recent years economic conditions in Mexico have become increasingly correlated with economic conditions in the United States of America and Canada as a result of the Tratado entre Mexico, Estados Unidos y Canada (TMEC) or the United States of America, Mexico and Canada Agreement (USMCA) which entered into effect on July 1, 2020; increased economic activity between the three countries, and the remittance of funds from Mexican immigrants working in the United States of America to Mexican residents. Adverse economic conditions in the US, changes to the TMEC and other related events could have and adverse effect on the Mexican economy. We cannot assure that events in other countries, the United States of America or another event could negatively impact our financial situation.

 

Moreover, the financial recession originated by the effects to stop the COVID-19 pandemic, the recent confrontation between the United States of America and China and the negative effect on the worldwide markets due to the recent Russian invasion of Ukraine, may also affect the global and Mexican economies. We cannot assure you that events in other emerging market countries, in the United States of America or elsewhere will not adversely affect our financial performance.

 

We could be adversely affected by violations of the Mexican Federal Anticorruption Law in Public Contracting, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

 

The Mexican Federal Anticorruption Law (Ley Federal de Anticorrupción en Contrataciones Públicas), the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials and other persons for the purpose of obtaining or retaining business. There can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and could have an adverse effect on our business, financial condition and results of operations.

 

Our financial statements are prepared in accordance with IFRS and therefore are not directly comparable to financial statements of other companies prepared under U.S. GAAP or other accounting principles.

 

All Mexican companies listed on the Mexican Stock Exchange must prepare their financial statements in accordance with IFRS which differs in certain significant respects from U.S. GAAP. Items on the financial statements of a company prepared in accordance with IFRS may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with 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.

 

Mexico has different corporate disclosure and accounting standards than those in the United States of America and other countries.

 

A principal objective of the securities laws of the United States of America, Mexico and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with more highly developed capital markets, including the United States of America. The disclosure standards imposed by the Mexican Stock Exchange may be different than those imposed by securities exchanges in other countries or regions such as the United States of America. As a foreign private issuer, we are not subject to U.S. proxy rules and are exempt from certain reports under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), as we are not required to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic reporting companies whose securities are registered under the Exchange Act. These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to a U.S. domestic reporting company.

 

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Risks Related to Brazil

 

Brazilian political and economic conditions, and the Brazilian government’s economic and other policies, may negatively affect our business, operations and financial condition.

 

The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil.

 

Our results of operations and financial condition may be adversely affected by factors such as:

 

  fluctuations in exchange rates;

 

  exchange control policies;

 

  interest rates;

 

  inflation;

 

  tax policies;

 

  expansion or contraction of the Brazilian economy, as measured by rates of growth in gross domestic product (“GDP”);

 

  changes in labor regulation;

 

  energy shortages;

 

  the Brazilian government’s response to the COVID-19 pandemic and, inter alia, its impacts on water consumption, labor laws and other regulations affecting our industry;

 

  social and political instability;

 

  liquidity of domestic capital and lending markets; and

 

  other political, diplomatic, social and economic developments in or affecting Brazil.

 

Risks Related to Ownership of our ADRs

 

We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that you receive.

 

We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that you receive.

 

As a foreign private issuer whose ADRs are listed on the NYSE American, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NYSE American. Among other things, as a foreign private issuer we may also follow home country practice with regard to, the composition of the board of directors, director nomination procedure, compensation of officers and quorum at shareholders’ meetings. See Item 10.B “Memorandum and Articles of Association”.

 

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The market price of our ADRs has been, and may continue to be, highly volatile, and such volatility could cause the market price of our ADRs to decrease and could cause you to lose some or all of your investment in our ADRs.

 

The stock market in general and the market prices of the ADRs on NYSE American, in particular, are or will be subject to fluctuation, and changes in these prices may be unrelated to our operating performance. During the first quarter of 2022, the market price of our ADRs fluctuated from a high of $30.50 per ADR to a low of $24.11 per ADR, and the price of our ADRs continues to fluctuate. We anticipate that the market prices of our securities will continue to be subject to wide fluctuations. The market price of our securities may be subject to a number of factors, including:

 

 

announcements of new products by us or others;

     

announcements by us of significant acquisitions, strategic partnerships, in-licensing, joint ventures or capital commitments;

     

 

the developments of the businesses and projects of our various subsidiaries;
     

 

 

expiration or terminations of licenses, research contracts or other collaboration agreements;

     

 

public concern as to the safety of the products we sell; 

     

 

the volatility of market prices for shares of companies with whom we compete;

             

 

developments concerning intellectual property rights or regulatory approvals;
     

 

variations in our and our competitors’ results of operations;

     

 

changes in revenues, gross profits and earnings announced by us;

     

 

changes in estimates or recommendations by securities analysts, if the ADSs are covered by analysts;

     

 

fluctuations in the share price of our publicly traded subsidiaries;

     

 

changes in government regulations or patent decisions; and

     

 

general market conditions and other factors, including factors unrelated to our operating performance.

 

These factors may materially and adversely affect the market price of our securities and result in substantial losses by our investors.

 

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Our controlling shareholder, Industrias CH, S.A.B. de C.V. (“Industrias CH”), is able to exert significant influence on our business and policies and its interests may differ from those of other shareholders.

 

Industrias CH, which is controlled by the chairman of our board of directors, Rufino Vigil González, owns approximately 54% of our shares as of April 25, 2022. Industrias CH nominated all current members of our board of directors and can exercise substantial influence and control over our business and policies, including the timing and payment of dividends. Industrias CH’s interests may differ significantly from those of other shareholders. Furthermore, as a result of Industrias CH’s significant equity position, there is currently limited liquidity in our series B shares and the ADSs.

 

Mr. Sergio Vigil González is the chief executive officer of Industrias CH, and he 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 our board of directors authorizes him by specific authority as a signatory of the Company. Mr. Vigil is the brother of our controlling shareholder and chairman of our board of directors, Rufino Vigil González. 

 

We have had a number of related party transactions with our affiliates.

 

Historically, we have engaged in a number and variety of transactions with our affiliates, including entities that Industrias CH owns or controls. While we believe that these transactions were made on terms that were not less favorable to us than those obtainable on an arm’s-length basis, there was no independent determination of that fact. We expect that in the future we will continue to enter into transactions with our affiliates, and some of these transactions may be significant. See Item 7.B “Related Party Transactions.”

 

We cannot assure you that the ADSs will not be delisted from the NYSE American, which could negatively impact the price of the ADSs and our ability to access the capital markets.

 

We cannot assure you that the ADSs will not be delisted from the NYSE American, which could negatively impact the price of the ADSs and our ability to access the capital markets.

 

The listing standards of the NYSE American provide that a company, in order to qualify for continued listing, must maintain a minimum share price of $1.00 and satisfy standards relative to minimum shareholders’ equity, minimum market value of publicly held shares and various additional requirements. If we fail to comply with all listing standards applicable to issuers listed on the NYSE American, the ADSs may be delisted. If the ADSs are delisted, it could reduce the price of the ADSs and the levels of liquidity available to our shareholders. In addition, the delisting of the ADSs could materially and adversely affect our access to the capital markets and any limitation on liquidity or reduction in the price of the ADSs could materially and adversely affect our ability to raise capital. Delisting from the NYSE American could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Overview

 

We are a diversified manufacturer, processor and distributor of SBQ steel and structural steel products with production and commercial operations in the United States of America, Mexico and Brazil. We believe that, in 2017, 2018, 2019, 2020 and 2021, we were an important producer of SBQ products in both the United States of America and Mexico, in each case in terms of shipped volume. We also believe that in 2017, 2018, 2019, 2020 and 2021, we were an important producer of structural and light structural steel products in Mexico in terms of shipped volume.

 

Our SBQ products are used across a broad range of highly engineered end-user applications, including axles, hubs and crankshafts for automobiles and light trucks, machine tools and off-highway equipment. Our structural steel products are mainly used in the non-residential construction market and other construction applications.

 

We focus on the Mexican and U.S. specialty steel markets by providing high value-added products and services from our strategically located plants. The quality of our products and services, together with cost benefits generated by our facility locations, has allowed us to develop long standing relationships with many of our SBQ clients, which include Mexico and U.S.-based automotive and industrial equipment manufacturers and their suppliers. In addition, our facilities located in the North West and Central parts of Mexico allow us to serve the structural steel and construction markets in those regions and South West California with an advantage in the cost of freight over competitors which do not have production facilities in such regions.

 

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Our legal name is Grupo Simec, S.A.B. de C.V. and our commercial name for advertising and publicity purposes is Simec. We are a sociedad anónima bursátil de capital variable, organized under the laws of Mexico. We are domiciled in the city of Guadalajara, Jalisco, and our principal administrative office is located at Calzada Lázaro Cárdenas 601, Guadalajara, Jalisco, Mexico 44440. Our telephone number is +52-33-3770-6700. The address of our website is www.gsimec.com.mx.

 

The SEC maintains a website (http://www.sec.gov), which contains reports, information statements and other information regarding issuers that file electronically with the SEC. 

 

Our History

 

Our steel operations commenced in 1969 when a group of families from Guadalajara, Jalisco, formed Compañía Siderúrgica de Guadalajara, S.A. de C.V. (“CSG”), a mini-mill steel company. In 1980, Grupo Sidek, S.A. de C.V. (“Sidek”), our former parent company, was incorporated and became the holding company of CSG. In 1990, Sidek consolidated its steel and aluminum operations into a separate subsidiary, Grupo Simec, S.A. de C.V., a Mexican corporation with limited liability, organized under the laws of Mexico.

 

In March 2001, Sidek consummated the sale of its entire approximate 62% controlling interest in our company to Industrias CH. Industrias CH subsequently increased its equity position in us through various conversions of debt to equity and capital contributions and currently holds, together with its direct, wholly-owned subsidiaries, approximately 82.5% of our series B shares.

 

In August 2004, we acquired the Mexican steel-making facilities of Industrias Ferricas del Norte S.A. (Corporacion Sidenor of Spain, or “Grupo Sidenor”) located in Apizaco, Tlaxcala and Cholula, Puebla. We refer to this acquisition as the “Atlax Acquisition.”

 

In July 2005, we and Industrias CH acquired 100% of the capital stock of Republic, a U.S. producer of SBQ steel. We acquired 50.2% of Republic’s stock through our majority owned subsidiary, SimRep, and Industrias CH purchased the remaining 49.8% through SimRep. Industrias CH currently owns 0.59% of the capital stock, and Grupo Simec the remaining 99.41%.

 

On May 30, 2008, we acquired Aceros DM and certain affiliated companies (“Grupo San”), a long products steel mini-mill and the second-largest corrugated rebar producer in Mexico. Grupo San’s operations are based in San Luis Potosí, Mexico. Its plants have a production capacity of 700 thousand tons of finished products annually.

 

On September 3, 2010, we formed a Brazilian entity denominated GV do Brazil Indústria e Comércio de Aço Ltda. On August 5, 2011, we acquired 1,300,000 square meters of land on Pindamonhangaba, São Paulo State, Brazil, for the construction of a new steel facility. In November 2015, our steel plant in Brazil started operations. This facility has a production capacity of 450,000 tons of finished goods of rebar and wire, and 800 employees.

 

On January 16, 2015, we entered into a cooperation agreement with the government of the State of Tlaxcala, Mexico, to build a new steel facility on land adjacent to our existing plant in Tlaxcala with a production capacity of 600,000 tons of bar quality steel (SBQ). We started steelmaking operations at this facility in July 2018.

 

On May 1, 2018, Grupo Simec, S.A.B de C.V. entered into a contract with Arcelor Mittal Brasil, S.A. for the acquisition of the steel products plants of Cariacica, in Espíritu Santo, and the transfer of the lease contract and subsequent purchase for the plant in Itauna, in Minas Gerais, both in Brazil. The production capacity of the Cariacica plant is 600,000 tons of liquid steel per year and 348,000 tons of rolled steel products per year and the production capacity of the Itauna plant is 120,000 tons of rolled steel products per year.

 

On January 1, 2019, Grupo Simec, S.A.B. de C.V. increased its equity position to 99.41% in SimRep Corporation, by acquiring 83,862 ordinary shares, priced at U.S.$3.454 each, as repayment of outstanding debt, for a total subscription of U.S.$290 million.

 

On June 11, 2021, the fixed assets of a wire production plant in Silao, Guanajuato, were purchased; which is operated by CHQ Wire México, S.A. de C.V. (formerly Malla San 1, S.A. de C.V.).

 

In 2021, a turnkey contract was signed between Republic and GV Do Brasil, for the construction of a plant in Pindamonghagaba. This project has an assigned budget of 200 million dollars.

 

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Principal Capital Expenditures

 

We continually seek to improve our operating efficiency and increase sales of our products through capital investments in new equipment and technology. These capital expenditures are financed primarily with funds that we segregate monthly from the results of operations generated by each facility.

 

We currently estimate capital expenditures for the year 2022 will be approximately Ps. 56.412.7 million (U.S.$2,749.7 million), which consists of Ps. 335.4 million (U.S.$15.6 million) of estimated capital expenditures in our Republic facilities, Ps. 8.3 million (U.S.$0.4 million) consisting of capital expenditures in our facilities in Mexico and Ps. 56,069 million (U.S.$2,733.0 million) consisting of capital expenditures in our facilities in Brazil. This estimate is subject to uncertainty and actual capital expenditures in 2022 may differ significantly from such estimate.

 

In 2021, we spent Ps. 119.1 million (U.S.$5.54 million) on capital investments for Republic’s facilities. We spent Ps. 1,079.6 million (U.S.$52.6 million) on capital improvements at our facilities in Mexico, including Ps. 420 million (U.S.$20.5 million) at the Apizaco facility, Ps. 428.3 million (U.S.$20.9 million) at the Mexicali facility, Ps. 3 million (U.S.$0.1 million) at the Guadalajara facility, and Ps. 200 million (U.S.$9.7 million) at the San Luis facilities.

 

In 2020, we spent Ps. 49.5 million (U.S.$2.5 million) on capital investments for Republic’s facilities, including Ps. 10.8 million (U.S.$0.5 million) at the Lorain, Ohio facility, Ps. 8.6 million (U.S.$0.4 million) at the Lackawanna, New York facility, Ps. 21.5 million (U.S.$1.1 million) at the Canton, Ohio facility and Ps. 8.6 million (U.S.$0.4 million) at the Massillon, Ohio facility. We spent Ps. 270.2 million (U.S.$13.6 million) on capital improvements at our facilities in Mexico, including Ps. 180 million (U.S.$9 million) at the Apizaco facility, Ps. 32.2 million (U.S.$1.6 million) at the Mexicali facility, Ps. 15 million (U.S.$0.7 million) at the Guadalajara facility, and Ps. 43 million (U.S.$2.1 million) at the San Luis facilities. We also spent Ps. 631.5 million (U.S.$31.6 million) on capital investments at our steel facility in Pindamonhangaba, Sao Paulo State, Brazil.

 

In 2019, we spent Ps. 278.5 million (U.S.$14.7 million) on capital investments for Republic’s facilities, including Ps. 47.9 million (U.S.$2.5 million) at the Lorain, Ohio facility, Ps. 44.1 million (U.S.$2.3 million) at the Lackawanna, New York facility, Ps. 162.1 million (U.S.$8.6 million) at the Canton, Ohio facility, Ps. 20.5 million (U.S.$1.1 million) at the Solon, Ohio facility, and Ps. 3.9 million (U.S.$0.2 million) at the Massillon, Ohio facility. We spent Ps. 785.8 million (U.S.$41.6 million) on capital improvements at our facilities in Mexico, including Ps. 427.9 million (U.S.$22.6 million) at the Apizaco facility, Ps. 294.2 million (U.S.$15.6 million) at the Mexi3cali facility, Ps. 9.3 million (U.S.$0.5 million) at the Guadalajara facility, and Ps. 54.4 million (U.S.$2.9 million) at the San Luis facilities. We also spent Ps. 207.1 million (U.S.$11 million) on capital investments at our steel facility in Pindamonhangaba, Sao Paulo State, Brazil.

 

B. Business Overview

 

In the United States of America, Mexico and Brazil, we own and operate 19 state-of-the-art steel making, processing and/or finishing facilities with a combined annual crude steel installed production capacity of 6.0 million tons and a combined annual installed rolling capacity of 5.2 million tons. We own both mini-mill and integrated steel making facilities, which give us the flexibility to optimize our production and reduce production costs based on the relative prices of raw materials (e.g., scrap for mini-mills and iron ore for blast furnace).

 

We currently own and operate:

 

  a mini-mill in Guadalajara, Jalisco, Mexico;

 

  a mini-mill in Mexicali, Baja California Norte, Mexico;

 

  two mini-mills in Apizaco, Tlaxcala, Mexico;

 

  a cold finishing facility in Cholula, Puebla, Mexico;

 

  two mini-mills in San Luis Potosí, San Luis Potosí, Mexico;

 

  a mini mill in Canton, Ohio, an integrated facility in Lorain, Ohio and value-added rolling and finishing facilities in Lorain and Massillon, Ohio; Lackawanna, New York and Solon, Ohio, all of which we own through our majority-owned subsidiary, Republic, and

 

  a mini-mill and rebar and wire rod rolling mill in Pindamonhangaba, São Paulo (Brazil), a mini-mill in Cariacica, Espirito Santo (Brazil) and we own and operate rolling and finishing facilities in Itauna, Minas Gerais (Brazil).

 

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In 2021, we had net sales of Ps. 55.6 billion, gross profit of Ps. 15.6 billion and net profit of Ps. 9.4 billion. In 2021, approximately 15% of our consolidated sales were in our segment in the United States of America, approximately 53% were in our segment in Mexico and approximately 32% were in our segment in Brazil.

 

Business Strategy

 

We seek to further consolidate our position as a leading producer, processor and distributor of SBQ steel in North America and structural steel in Mexico. We also seek to expand our presence in the steel industry by identifying and pursuing growth opportunities and value enhancing initiatives. Our strategy includes:

 

Improving our cost structure.

 

We are continually working to reduce our operating cost and non-operating expenses and plan to continue to do so by reducing overhead expenses and operating costs through sharing best practices among our operating facilities and maintaining a conservative capital structure.

 

Focusing on high margin and value-added products.

 

We prioritize the production of high margin steel products over volume and utilization levels. We plan to continue to base our production decisions on achieving relatively high margins.

 

Building on our strong customer relationships.

 

We intend to strengthen our long-standing customer relationships by maintaining strong customer service and proactively responding to changing customer needs.

 

Pursuing strategic growth opportunities.

 

We have successfully grown our business by acquiring, integrating and improving under-performing operations. In addition, we intend to continue to pursue acquisition opportunities that will allow for disciplined growth of our business and value creation for our shareholders. We also intend to pursue organic growth by reinvesting the cash generated by our operating activities to expand the capacity and increase the efficiency of our existing facilities.

 

Our Products

 

We produce a wide range of value-added SBQ steel, long steel and medium-sized structural steel products. In our Mexican facilities, we produce I-beams, channels, structural and commercial angles, hot rolled bars (round, square and hexagonals), flat bars, rebars, cold finished bars and wire rods. In our U.S. facilities, we produce hot rolled bars, cold finished bars, semi-finished tube rounds and other semi-finished trade products. In our Brazil facilities, we produce rebars, I-beams, channels, structural and commercial angles. The following is a description of these products and their main uses:

 

  I-beams. I-beams, also known as standard beams, are “I” form steel structural sections with two equal parallel sides joined together by the center with a transversal section, forming 90º angles. We produce I-beams in our Mexican and Brazil facilities and they are mainly used by the industrial construction sector as structure supports.

 

  Channels. Channels, also known as U-Beams because of their “U” form, are steel structural sections with two equal parallel sides joined together by its ends with a transversal section, forming 90º angles. We produce channels in our Mexican and Brazil facilities, and they are mainly used by industrial construction sector as structure supports and for stocking systems.

 

  Angles. Angles are two equal sided sections joined by their ends with a 90º angle, in an “L” form. We produce angles in our Mexican and Brazil facilities, and they are used mainly by the construction and furniture industries as joist structures and framing systems.

 

  Hot rolled bars. Hot rolled bars are round, square and hexagonal steel bars that can be made of special or commodity steel. The construction, auto part and furniture industries mainly use the round and square bars. The hexagonal bars are made of special steel and are mainly used by the hand tool industry. We produce the steel sections in our Mexican and U.S. facilities.

 

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  Flat bars. Flat bars are rectangular steel sections that can be made of special or commodity steel. We produce flat bars at our Mexican facilities. The auto part industry mainly uses special steel as springs, and the construction industry uses the commodity steel flat bars as supports.

 

  Rebar. Rebar is reinforced, corrugated round steel bars with sections from 0.375 to 1.5 inches in diameter, and we produced rebar in our Mexican facilities and in our Brazil facilities. Rebar is only used by the construction industry to reinforce concrete. Rebar is considered a commodity product due to its general acceptance by most consumers of industry standard specifications.

 

  Cold-finished bars. Cold-finished bars are round and hexagonal SBQ steel bars transformed through a diameter reduction process. This process consists of (1) reducing the cross-sectional area of a bar by drawing the material through a die without any pre-heating or (2) turning or “peeling” the surface of the bar. The process changes the mechanical properties of the steel, and the finished product is accurate to size, free from scale with a bright surface finish. We produce these bars in our Mexican and U.S. facilities, primarily to supply the auto part industry.

 

The following table sets forth, for the periods indicated, our sales volume for basic steel products.

 

Steel Product Sales Volume

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
   (thousands of tons) 
I-Beams   76.6    72.5    86.6    95.3    116.0 
Channels   54.3    48.7    54.3    40.0    32.3 
Angles(1)   155.9    156.7    217.7    281.9    217.1 
Hot-rolled bars (round, square and hexagonal rods)   560.0    564.9    534.6    535.8    618.7 
Flat bar   150.0    168.7    188.4    80.3    102.9 
Rebar   854.9    924.2    1,033.8    1,100.2    1,007.3 
Cold finished bars   149.4    151.9    131.4    185.1    183.8 
Other semi-finished trade products(2)   8.4    14.0    0.6    0.0    0.0 
Electro-Welded wire mesh   18.7    18.5    14.0    18.6    19.9 
Wire rod   34.9    48.7    57.9    32.3    151.8 
Electro-Welded wire mesh panel   24.9    22.1    18.4    29.2    26.5 
Other   3.2    0.9    11.2    42.1    27.9 
Total steel sales   2,091.2    2,191.8    2,348.9    2,440.8    2,504.2 

 

 

(1)Includes structural angles and commercial angles.

 

(2)Includes billets and blooms (wide section square and round bars).

 

Sales and Distribution

 

We sell and distribute our steel products throughout North America. We also export steel products from Mexico to Central and South America and Europe. In 2021, approximately 37% of our steel product sales in tons represented SBQ steel products, of which we sold 39% to the auto part industry, 38% to service centers and the remaining 23% to other industries.

 

In 2021, direct sales in tons to the automotive industry increased by 4% compared to 2020. In 2020, direct sales in tons to the automotive industry decreased by 43% compared to 2019. In 2019, direct sales in tons to the automotive industry decreased by 13% compared to 2018.

 

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The following table sets forth, for the periods indicated, our product sales as a percentage of our total product sales in tons to Mexico, and to the U.S., Canada, and Brazil and other countries.

 

Steel Product Sales By Region

 

   Mexico  United States of America, Canada,
Brazil and Other Countries
   Years ended December 31,
   2017  2018  2019  2020  2021  2017  2018  2019  2020  2021
I-Beams  98%   94%   82%   82%   71%   2%   6%   18%   18%   29%
Channels   55%   56%   44%   55%   86%   45%   44%   56%   45%   14%
Angles   83%   67%   52%   37%   53%   17%   33%   48%   63%   47%
Hot-rolled bars (round, square and hexagonal rods)   39%   32%   38%   48%   39%   61%   68%   62%   52%   61%
Flat bar   96%   68%   61%   72%   75%   4%   32%   39%   28%   25%
Rebar   63%   67%   56%   50%   51%   37%   33%   44%   50%   49%
Cold drawn finished bars   73%   77%   76%   46%   50%   27%   23%   24%   54%   50%
Other semi-finished trade products   —     —     —     —     —     100%   100%   100%   100%   
Electro-Welded wire mesh   100%   100%   100%   100%   100%                    
Wire rod   100%   100%   100%   89%   74%               11%   26%
Electro-Welded wire mesh panel   100%   100%   100%   100%   100%                    
Other   —    75%   0%   1%   10%   100%   25%   100%   99%   90%
Total (weighted average)   63%   60%   55%   51%   52%   37%   40%   45%   49%   48%

 

During 2021, approximately 11% of our sales by volume came from the U.S. segment, with almost 100% of such sales representing SBQ product and 34.2% of our sales by volume came from the Brazil segment. The Mexican segment represents approximately 54.8 of our sales by volume, with SBQ products representing approximately 23.7% of such sales and the remainder representing commercial steel products.

 

Approximately 24% of our sales in the United States of America and Canadian markets came from contractual long-term agreements that establish minimum quantities and prices, which are adjustable based on fluctuations of prices of key production materials. The remainder of our sales in the United States of America and Canadian markets were spot sales either directly to end customers through our sales force or through independent distributors. We sell to customers in the United States of America and Canadian markets through a staff of professional sales representatives and sales technicians located in the major manufacturing centers of the Midwest, Great Lakes and Southeast regions of the United States of America.

 

We sell to the Mexican market through a group of approximately 100 independent distributors, who also carry other steel companies’ product lines, and through our wholly-owned distribution center in Guadalajara. Our sales force and distribution center are an important source of information concerning customer needs and market developments. By working through our distributors, we believe that we have established and can maintain market leadership with small-and mid-market end-users throughout Mexico. We believe that our domestic customers are highly service-conscious.

 

We distribute our exports outside North America primarily through independent distributors who also carry other product lines.

 

During 2021 and 2020, we received orders for our products in our Mexican facilities on average approximately two weeks before producing those products. We generally filled orders for our U.S. and Canadian SBQ steel products within one to 12 weeks of the order depending on the product, customer needs and other production requirements. Customer orders are generally cancelable without penalty prior to finishing size rolling and depending on customers’ changing production schedules. Accordingly, we do not believe that backlog is a significant factor in our business. A substantial portion of our production is ordered by our customers prior to production.

 

In our Republic plants, we have long-term relationships with most of our major customers, in some cases for 10 to 20 years or longer. Our major direct and indirect customers include: leading automotive and industrial equipment manufacturers General Motors Corporation, Ford Motor Company, Chrysler LLC, Honda of America Mfg, Inc. and Nissan North America, Inc.; first tier suppliers to automotive and industrial equipment manufacturers such as American Axle & Manufacturing Holdings, Inc. and Nexteer, NSK and NTN Driveshafts, Inc.; service centers, which include AM Castle & Co., Earle M. Jorgensen Co., and Eaton Steel Bar Company.

 

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Our U.S. facilities are strategically located to serve the majority of consumers of SBQ products in the United States of America. Our U.S. facilities ship products between their mills and finished products to customers by rail and truck. Customer needs and location, determine the type of transportation used for deliveries. The proximity of our rolling mills and cold finishing plants to our U.S. customers allows us to provide competitive rail and truck freight rates and flexible deliveries in order to satisfy just-in-time and other customer manufacturing requirements. We believe that the ability to meet the product delivery requirements of our customers in a timely and flexible fashion is a key to attracting and retaining customers as more SBQ product consumers reduce their in-plant raw material inventory. We optimize freight costs by using our significantly greater scale of operations to maintain favorable transportation arrangements, continuing to combine orders in shipments whenever possible and “backhauling” scrap and other raw materials.

 

Our first plant in Brazil began production in June 2015 with 30,000 tons and 4,000 tons sold in the same year, all of which correspond to rebar. Sales have increased since 2015, and by consolidating the expansion within the Brazilian territory, we have reached sales of approximately 860,000 tons for 2021, increasing the variety of products offered in the market. Our main objective is to sell our products through independent distributors, aimed at the construction market by providing the highest quality service and products, a key factor in attracting and retaining customers. We consider the demand for steel in Brazil to be distributed within the first three sectors as follows, 41% for civil construction, later the automotive industry with 21% and finally capital goods with 20%. Our sales policy in Brazil has been well accepted by our customers, and our sales increased steadily, creating an opportunity in the Brazilian steel market.

 

Our major customers in 2021 include: Marson Distribuicao, Ltda, Aco e Aco Vergalhoes Ltda, Udiaco Comercio e Industria de Ferro e Aco Ltda, Comercio de Ferro Arevalo & Junior Eireli, Lorenfer Industris e Comercio de Produtos Metalurgicos Ltda, A P Sobreira ME, H E Bonamigo Eireli ME, Aco Fera Com Ferro e Aco Ltda, Cedisa Central de Aco, SA, Automolas Equipamentos Ltda, Fama Do Brasil, SA, MKRAFT Comercio de Metais Ltda and, RDG Acos Do Brasil, SA.

 

Due to the quality of our products, our business has experienced a continued growth in sales. 

 

Competition

 

Competition in the steel industry is significant. Competition in the steel industry exerts a downward pressure on prices, and, due to high start-up costs, the economics of operating a steel mill on a continuous basis may encourage mill operators to establish and maintain high levels of output even in times of low demand, which further decreases prices and profit margins. The recent trend of consolidation in the global steel industry may further increase competitive pressures on independent producers of our size, particularly if large steel producers formed through consolidations, which have access to greater resources than us, adopt predatory pricing strategies that decrease prices and profit margins. If we are unable to remain competitive with these producers, our profitability and market share would likely be materially and adversely affected.

 

A number of our competitors in the United States of America, Mexico and Brazil have undertaken modernization and expansion plans, including the installation of production facilities and manufacturing capacity for certain products that compete with our products. As these producers become more efficient, we will face increased competition from them and may experience a loss of market share. In each of Mexico, Brazil and the United States of America we also face competition from international steel producers. Increased international competition, especially when combined with excess production capacity, would likely force us to lower our prices or to offer increased services at a higher cost to us, which could materially reduce our profit margins.

 

Mexico

 

We compete in the Mexican domestic market and in its export markets for non-flat steel products primarily on the basis of price and product quality. In addition, we compete in the domestic market based upon our responsiveness to customer delivery requirements. The flexibility of our production facilities allows us to respond quickly to the demand for our products. We also believe that the geographic locations of our various facilities throughout Mexico and variety of products help us to maintain our competitive market position in Mexico and in the southwestern United States of America. We believe that our Mexicali mini-mill, one of the closest mini-mills to the southern California market, is competitive in terms of production and transportation costs in northwestern Mexico and southern California.

 

We believe that our competitors’ closest plants to the southern California market are: Nucor Corporation, located in Plymouth, Utah; Commercial Metals Company, located in Meza, Arizona; Thyssenkrupp Steel North America, Inc., located in Santa Fe Springs, California; Deacero, S.A. de C.V. (“Deacero”), located in Saltillo, Coahuila, México and Gerdau Corsa, S.A.P.I. de C.V. (“Gerdau Corsa”), located in Tijuana, Baja California, Mexico. We believe that we have an advantage over certain competitors due to the labor cost in our Mexican operations.

 

In 2021, we sold approximately 275,545 tons of I-beams, channels and angles at least three inches in width which represented approximately 11% of our total finished product sales for the year. In 2020, we sold approximately 417,200 tons of I-beams, channels and angles at least three inches in width which represented approximately 17% of our total finished product sales for the year. We believe that the domestic competitors in the Mexican market for structural steel are Gerdau Corsa, Deacero, Grupo Acerero, S.A. de C.V., Grupo Collado, S.A. de C.V. and Siderúrgica del Golfo, S.A. de C.V. (a wholly-owned subsidiary of Industrias CH). We estimate that our share of Mexican production of structural steel was 14.8% in 2021 and 18.6% in 2020, according to information provided by the Cámara Nacional de la Industria del Hierro y del Acero (CANACERO).

 

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In 2021, we sold approximately 817,917 tons of hot rolled and cold finished steel bars and 709,328 tons in 2020. Our other major product lines are rebar and light structural steel (angles less than three inches in width and flat bar), for which our share of domestic production was 14.3% and 16.1%, respectively, in 2021 and 15.3% and 18.1%, respectively, in 2020. Rebar and light structural steel together accounted for approximately 1,187,206 tons, or 47.4%, of our total production of finished steel products in Mexico, the United States of America and Brazil in 2021. Rebar and light structural steel together accounted for approximately 1,291,987 tons, or 52.9%, of our total production of finished steel products in Mexico, the United States of America and Brazil in 2020. We compete in the Mexican market with a number of producers of these products, including Deacero, Talleres y Aceros, S.A., Grupo Acerero, S.A. de C.V., ArcelorMittal Lazaro Cardenas, S.A. de C.V., Ternium Mexico, S.A. de C.V., Grupo Acerero Fonderia, Suacero, S.A. de C.V. and Gerdau Corsa.

 

We believe that we have been able to maintain our domestic market share and profitable pricing levels in Mexico in part because the central Mexico sites of the Guadalajara, Apizaco, Cholula and San Luis facilities afford us cost advantages relative to certain U.S. producers when shipping to customers in central and southern Mexico, and our flexible production facility has given us the ability to ship specialty products in relatively small quantities with short lead times. The Mexicali mini-mill has helped to increase sales in northwestern Mexico and the southwestern United States of America because its proximity to these areas reduces our freight costs.

 

United States of America and Canada

 

In the United States of America, we compete primarily with both domestic SBQ steel producers and importers. Our U.S. domestic competition for hot-rolled engineered bar products is both large U.S. domestic steelmakers and specialized mini-mills. Non-U.S. competition may impact segments of the SBQ market, particularly where certifications are not required, and during periods when the U.S. dollar is strong compared with foreign currencies.

 

The principal areas of competition in our markets are product quality and range, delivery reliability, service and price. Special chemistry and precise processing requirements characterize SBQ steel products. Maintaining high standards of product quality, while keeping production costs low, is essential to our ability to compete in our markets. The ability of a manufacturer to respond quickly to customer orders currently is, and is expected to remain, important as customers continue to reduce their in-plant raw material inventory.

 

We believe our principal competitors in the United States of America market, depending on the product, include Nucor, Corporation, Cascade Rolling Mills, Commercial Metals Company, Vinton Steel and Gerdau.

 

Brazil

 

Our main competitors in the Brazilian market are ArcelorMittal Brazil, CSN, Gerdau, Sinobras, Usiminas, Ternium Do Brasil, V & M do Brasil and Villares Metals.

 

The Brazilian steel industry is comprised of 12 business groups operating 31 mills in 10 Brazilian states, making Brazil the 9th largest producer in the world.

 

The main competitors in Brazil are:

 

  Gerdau Aços Especiais (Usina Pindamonhangaba)

 

  Gerdau Aços Especiais (Usina Mogi das Cruzes)

 

  ArcelorMittal Aços Longos (Piracicaba)

 

  Usiminas (Cubatão)

 

  Gerdau Aços Longos (Usina São Paulo)

 

  Gerdau Aços Longos (Usina Araçariguama)

 

  Villares Metals

 

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Certifications

 

ISO is a worldwide federation of national standards bodies which have united to develop internationally accepted standards so that customers and manufacturers have a system in place to provide a product of known quality and standards. The standards set by ISO cover every aspect of quality from management responsibility to service and delivery. We believe that adhering to the stringent ISO procedures not only creates efficiency in manufacturing operations, but also positions us to meet the strict standards that our customers require. We are engaged in a total quality program designed to improve customer service, overall personnel qualifications and team work. The facilities at Apizaco and Cholula have received ISO/TS 16949:2009 certification from International Quality Certifications, effective until September 2022.

 

As of April 1, 2022 all of Republic Steel’s plants are certified to ISO9001:2015 and IATF16949:2016. Our plants in Canton, Ohio, Lackawanna, New York, and Massillon, Ohio, are certified to IATF16949, effective until January 2024. The plant in Solon, Ohio, is certified to ISO 9001:2015, and the current certification is effective until January 2024. The IATF 16949:2016 standard, developed by the International Automotive Task Force, is the result of the harmonization of the supplier quality requirements of vehicle manufacturers worldwide and provides for a single quality management system of continuous improvement, defect prevention and reduction of variation and waste in the supply chain. It places greater emphasis on management’s commitment to quality and customer focus. ISO 9001 is a set of international quality control standards for management and practices.

 

Through these certifications, Republic’s Environmental, Health & Safety Management System is structured upon training, communication, employee participation, document control, objective and target setting, and management’s periodic reviews to implement our commitments to environmental protection and providing a safe and clean workplace.

 

Raw Materials

 

Prices for raw materials necessary for production of our steel products have fluctuated significantly in the past and significant increases in raw material prices could adversely affect our profit margins. During periods when prices for scrap metal, iron ore, ferroalloys, coking coal and other raw materials have increased, our industry has historically sought to maintain profit margins by passing along increased raw materials costs to customers by means of price increases. For example, prices of scrap metal increased approximately 30.8% in 2017, 19.4% in 2018, decreased 20% in 2019, increased 9% in 2020 and increased 62% in 2021, and prices of ferroalloys increased approximately 22% in 2017, 9.7% in 2018, decreased approximately 1% in 2019, decreased 20% in 2020 and increased 32.9% in 2021. We may not be able to pass along these and other cost increases in the future and even when we can successfully increase our prices, interim reductions in profit margins frequently occur due to a time lag between the increase in raw material prices and the market acceptance of higher selling prices for finished steel products.

 

We purchase our raw material requirements either in the open market or from certain key suppliers. If any of our key suppliers fails to deliver or we fail to renew our supply contracts, we could face limited access to some raw materials, or higher costs and delays resulting from the need to obtain our raw materials requirements from other suppliers.

 

In 2021, our cost of sales in Mexico, as a percentage of sales in Mexico, was 72%, compared to our U.S. operations where our cost of sales, as a percentage of sales in the United States of America, was 87%, as a percentage of sales in Brazil, was 65% and our consolidated cost of sales, as a percentage of consolidated sales, was 72%. The higher cost of sales of facilities is mainly a result of higher labor costs prevailing in our U.S. operations, and the higher costs of the raw materials that our U.S. operations use in the production of SBQ steel.

 

Scrap metal, electricity, ferroalloys, electrodes and refractory products are the principal materials that we use to manufacture our steel products.

 

Scrap metal. Scrap metal is among the most important components for our steel production and accounted for approximately 70% of our consolidated manufacturing conversion cost in 2021 (67% of the manufacturing conversion cost in our Mexico operations, 43% of the manufacturing conversion cost in our U.S. operations and 72% in our Brazil operations), compared to 60% of our consolidated manufacturing conversion cost in 2020 (62% of the manufacturing conversion cost in our Mexico operations, 40% of the manufacturing conversion cost in our U.S. operations and 65% in our Brazil operations). Scrap metal is principally generated from automobile, industrial, naval and railroad industries. The market for scrap metal is influenced by availability, freight costs, speculation by scrap brokers and other conditions largely beyond our control. Fluctuations in scrap costs directly influence the cost of sales of finished goods.

 

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We purchase raw scrap from dealers in Mexico and the San Diego area, and we process the raw scrap into refined scrap metal at our Guadalajara, San Luis, Mexicali and Apizaco facilities. We meet our refined scrap metal requirements through: (i) our wholly-owned scrap processing facilities, which in the aggregate provided us with approximately 15.9% and 17.1% of our refined scrap tonnage in 2021 and 2020, respectively, and (ii) purchases from third party scrap processors in Mexico and the southwestern United States of America, which, in the aggregate, provided us with approximately 84.1% and 82.9%, respectively, in 2021 and approximately 81.5% and 1.4%, respectively, in 2020 of our refined scrap metal requirements. We are a large scrap collector in the Mexicali, Tijuana and Hermosillo regions, and, by primarily dealing directly with small Mexican scrap collectors, we believe we have been able to purchase scrap at prices lower than those in the international and Mexican markets. We purchase scrap on the open market through a number of brokers or directly from scrap dealers for our U.S. facilities. We purchase scrap on the open market through a number of brokers or directly from scrap dealers for our Brazil facilities. We do not depend on any single scrap supplier to meet our scrap requirements.

 

Ferroalloys, Electrodes and Refractory Products. In our Mexican operations, ferroalloys, electrodes and refractory products collectively accounted for approximately 10% of our manufacturing conversion cost in 2021, compared to 13% in 2020, in our U.S. and Canadian facilities accounted for 9% of our manufacturing conversion cost in 2021, compared to 19% in 2020 and in our Brazil facilities accounted for approximately 7% of our manufacturing conversion cost in 2021 compared to 9% in 2020.

 

Ferroalloys are essential for the production of steel and are added to the steel during manufacturing process to reduce undesirable elements and to enhance its hardness, durability and resistance to friction and abrasion. For our Mexican operations, we buy most of our manganese ferroalloys from Compañía Minera Autlán, S.A., Autlán Metal Services, S.A. de C.V., Elmet, S.A. de C.V., Marco Metales de Mexico, S. de R.L. de C.V., and Distribuidora de Aleaciones y Metales, S.A. de C.V. Our U.S. facilities purchase most of their ferroalloys from Affival, Gottlieb, Kennecott, Vale Americas, Minerais U.S. LLC and Glencore LTD. Our Brazil facilities purchase most of their ferroalloys from Multiligas Eireli. Ltda, Comercial Cometa Industria y Comercio Ltda., Fertileg Ferro Liga Ltda, Granha Ligas Ltda., Cia de Ferro Ligas de Bahia Ferbasa and Bareste Industria e Comercio Ltda.

 

For our Mexican operations, we obtain electrodes used to melt raw materials (scrap metal) from Jilin Carbon Co. Ltd., Interfer Edelsthal H, Cimm Carbon Group Co, Duracarbon Latinoamerica LCC, FRC Global Inc, CNBM International Corp, Dalian Xihua Refractories, and HEG Limited. Our U.S. facilities purchase most of their electrodes from Sangraf and Tokai ATC. Our Brazil facilities purchase most of their electrodes from Jilin Carbon Import and Export Company and Dura Carbon Singapur.

 

Refractory products include firebricks, which line and insulate furnaces, ladles and other transfer vessels. We purchase our refractory products for our Mexican operations from Vesuvius de México, S.A. de C.V., Magnesita Refractories México, S.A. de C.V., Magna Refractarios México, S.A. de C.V., FRC Global Inc, Puyang Refractieres Fumas, Manyezit Sanayi A.S., Calderys France S.A.S., and Refratechnik Steel GmbH. Our U.S. facilities purchase most of their refractory products from RHI Inc, Vesuvius USA, Corp., Magna Refractories Inc., Harbison-Walker Refractories Company and Magnesita Refractories Co. Our Brazil facilities purchase most of their refractory products from Magnesitas Navarrasm S.A., Vesivius, Samboba and Magnesita Refractaries Mexico S.A. de C.V.

 

Electricity. In 2021 and 2020, electricity accounted for approximately for 7% and 10% of our consolidated manufacturing conversion cost, respectively. Electricity accounted for 7% and 11% in 2021 and 2020 of our manufacturing conversion in our Mexico facilities and is supplied by the Comisión Federal de Electricidad (CFE) for basic service and Iberdrola for qualified service. It accounted for 4% in 2021 and 8% in 2020 of the manufacturing conversion cost in our U.S. operations and is supplied by American Electric Power Company, Archer Energy, National Grid, The Illumination Company, New York Power and Ohio Edison. It accounted for 8% and 9% in 2021 and 2020, respectively, of the manufacturing conversion cost in our Brazil operations and is supplied by Ecom Energia Ltda., Comercializadora de Energiaeletrica Ltda. and Comerc Ltda. We, like most high volume users of electricity in Mexico, pay special rates to CFE for electricity. Energy prices in Mexico have historically been very volatile and subject to dramatic price increases in short periods of time. In the late 1990s, the CFE began to charge for electricity usage based on the time of use during the day and the season (summer or winter). As a result, we have modified our production schedule in order to reduce electricity costs by limiting production during periods when peak rates are in effect. We cannot assure that any future cost increases will not have a material adverse effect on our business.

 

Natural Gas. Natural gas (including “combustoleo” fuel oil which is an oil derivative that is less refined than gasoline and diesel fuel oil that can be used instead of gasoline in our Mexicali plant) consisted of approximately 3% of our consolidated manufacturing conversion cost (2% of the manufacturing conversion cost of our Mexican operations, 1% of the manufacturing conversion cost of our U.S. operations and 2% of our Brazil operations) in 2021 and approximately 3% of our consolidated manufacturing conversion cost (3% of the manufacturing conversion cost of our Mexican operations, 2% of the manufacturing conversion cost of our U.S. operations and 3% of our Brazil operations) in 2020. In previous years we have entered into natural gas cash-flow exchange contracts or swaps where we receive a floating price and pay a fixed price to hedge our risk of from fluctuations in natural gas prices. Fluctuations in natural gas prices from volume consumed are recognized as part of our operating costs. As applicable, we recognized the fair value of instruments either as liabilities or assets. We periodically evaluated the changes in the cash flows of derivative instruments to analyze if the swaps are highly effective for mitigating the exposure to natural gas price fluctuations. At December 31, 2021 and 2020, we did not have natural gas cash-flow exchange contracts or swaps. For the derivatives that qualified for hedge accounting, their fair value was adjusted through the stockholders’ equity under the caption fair value of derivative financial instruments until such time as the related item in the derivative hedges is recognized as income.

 

We do not enter into contracts for speculation purposes.

 

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Regulation

 

U.S. Operations

 

Our U. S. operations are subject to U.S. federal, state and local environmental laws and administrative regulations concerning, among other things the management of hazardous materials and the discharge of pollutants to the atmosphere and to surface waters. Our U.S. operations have been the subject of administrative action by federal, state (or provincial) and local environmental authorities. The resolution of any of these claims may result in significant liabilities. See Item 3.D. “Risk Factors—Risk Factors Related to our Business—In the event of environmental violations at our facilities we may incur significant liabilities” and Item 8. “Financial Information—Legal Proceedings.”

 

Environmental Matters

 

We are subject to a broad range of environmental laws and regulations, including those governing the following:

 

discharges to the air, water and soil;

 

  the handling and disposal of solid and hazardous wastes;

 

  the release of petroleum products, hazardous substances, hazardous wastes, or toxic substances to the environment; and

 

  the investigation and remediation of contaminated soil, sediment and groundwater.

 

We monitor our compliance with these laws and regulations through our environmental management system, and believe that we currently are in substantial compliance with them, although we cannot assure you that we will at all times operate in compliance with all such laws and regulations. If we fail to comply with these laws and regulations, we may be assessed fines or penalties or be subject to injunctive relief which could have a material adverse effect on us.

 

Future changes in the applicable environmental laws and regulations, or changes in the regulating agencies’ approach to enforcement or interpretation of their regulations, could cause us to make additional capital expenditures beyond what we currently anticipate.

 

Our Lorain, Ohio plant (which is not currently in operation) and our Canton, Ohio facility each are subject to the Maximum Achievable Control Technology (“MACT”) standard for Electric Arc Furnaces as an “area source.” Revisions of this standard are under development and, when promulgated, may impose additional restrictions on our Lorain and Canton operations including those relating to mercury emissions and control.

 

Our steelmaking operations in the United States of America and in Mexico use electric arc furnaces where carbon dioxide generation is primarily linked to energy use. In the United States of America, the federal environmental agency has issued rules imposing inventory and reporting obligations to which some of our facilities are subject, and has also issued rules that will affect preconstruction permits for our facilities where increases in greenhouse gas pollutants are contemplated. The U.S. Congress has debated various measures for regulating greenhouse gas emission (such as carbon dioxide) and may enact them in the future. Such laws and regulations may also result in higher costs for coking coal, natural gas and electricity generated by carbon-based systems (such as coal-fired electric generating facilities). Such future laws and regulations, whether in the form of cap-and-trade emissions permit system, a carbon tax or other regulatory regime may have a negative effect on our operations. Climate change policy is evolving at regional, national and international levels, and political and economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. As signatories to the UNFCCC, Mexico became subject to the Paris Agreement to fight climate change, which was taken by the parties at the 21th session of the UNFCCC conference of the Parties in 2015. In August 2017, the U.S. State Department officially informed the United Nations of the United States of America withdrawal from the Paris Agreement. Following the 2020 U.S. presidential election, the U.S. formally rejoined the Paris Agreement in February 2021. As a result, some of our significant facilities may ultimately be subject to future regional, provincial and/or federal climate change regulations to manage greenhouse emissions. More stringent greenhouse policies and regulations could adversely affect our business and results of operations.

 

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Various federal, state (or provincial) and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials (“ACMs”). These laws, regulations and ordinances may impose liability for the release of ACMs and may permit third parties to seek recovery from owners or operators of facilities at which ACMs were or are located for personal injury associated with exposure to ACMs. We are aware of the presence of ACMs at our facilities, but we currently believe that such materials are being managed in accordance with applicable law.

 

In the United States of America, the federal environmental protection agency has in the past introduced regulation regarding the phasing out of polychlorinated biphenyl (“PCB”) containing fluid in equipment that we currently use at many of our U.S. facilities. If any such rules are enacted, our facilities may be required to reduce the levels of PCBs in our equipment, which will in turn may require us to incur costs for the removal and disposal of PCB containing oils, sampling and possible replacement of equipment in the event PCB levels cannot be reduced to acceptable levels.

 

Also in the United States of America, more stringent standards for particulate matter were promulgated in 2012. As these new more stringent standards were implemented through the different state programs, we experienced higher costs associated with any preconstruction permitting of new or modified sources at our U.S. facilities in 2014 and subsequent years. These costs were related to extensive dispersion modeling and/or pre-construction monitoring not previously required.

 

Mexican Operations

 

We are subject to Mexican federal, state and municipal laws, administrative regulations and Mexican Official Rules (Normas Oficiales Mexicanas) relating to a variety of environmental matters, anti-trust matters, trade regulations, and tax and employee matters.

 

Among other matters, Mexican tax returns are open for review generally for a period of five years, and, according to Mexican tax law, the purchaser of a business may become jointly and severally liable for unpaid tax liabilities of the business prior to its acquisition, which may have an impact on the liabilities and contingencies derived from any such acquisitions. Although we believe that we are in compliance with all material Mexican federal, state and municipal laws, administrative regulations and Mexican Official Rules, we cannot assure you that the interpretation of the Mexican authorities of the laws and regulations affecting our business or the enforcement thereof will not change in a manner that could increase our costs of doing business or could have a material adverse effect on our business, results of operations, financial condition or prospects.

 

Environmental Matters

 

We are subject to various Mexican federal, state and municipal laws, administrative regulations and Mexican Official Rules (Normas Oficiales Mexicanas) relating to the protection of human health, the environment and natural resources.

 

The major federal environmental laws applicable to our operations, among others, are: (i) the General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente or “LGEEPA”) and its regulations, which are administered and overseen by the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales or “SEMARNAT”) and enforced by the Ministry’s enforcement branch, the Federal Attorney’s Office for the Protection of the Environment (Procuraduría Federal de Protección al Ambiente or PROFEPA”); (ii) the General Law for the Prevention and Integral Management of Waste (Ley General para la Prevención y Gestión Integral de los Residuos or the “Law on Wastes”), which is also administered by SEMARNAT and enforced by PROFEPA; (iii) the National Waters Law (Ley de Aguas Nacionales) and its regulations, which are administered and enforced by the National Waters Commission (Comisión Nacional de Agua), also a branch of SEMARNAT; and (iv) the Federal Law on Environmental Responsibility (Ley Federal de Responsabilidad Ambiental), which is also administered by SEMARNAT and enforced by PROFEPA.

 

In addition to the foregoing, Mexican Official Rules, which are technical standards issued by applicable regulatory authorities pursuant to the General Normalization Law (Ley General de Metrología y Normalización) and to other laws that include the environmental laws described above, establish standards relating to air emissions, waste water discharges, the generation, handling and disposal of hazardous wastes and noise control, among others. Mexican Official Rules regarding soil contamination and waste management were enacted in order to protect these potential contingencies. Although not enforceable, the internal administrative criteria on soil contamination established by PROFEPA is widely used as guidance in cases where soil remediation, restoration or clean-up is required.

 

LGEEPA sets forth the legal framework applicable to the generation and handling of hazardous wastes and materials, the release of contaminants into the air, soil and water, as well as the environmental impact assessment of the construction, development and operation of different projects, sites, facilities and industrial plants similar to the ones owned and/or operated by us and our subsidiaries. In addition to LGEEPA, the Law on Wastes regulates the generation, handling, transportation, storage and final disposal of hazardous waste.

 

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LGEEPA also mandates that companies that contaminate soil be responsible for the clean-up. Furthermore, the Law on Wastes provides that owners and lessors of real property with soil contamination are jointly and severally liable for the remediation of such contaminated sites, irrespective of any recourse or other actions such owners and lessors may have against the contaminating party, and aside from the criminal or administrative liability to which the contaminating party may be subject. The Law on Wastes also restricts the transfer of contaminated sites.

 

PROFEPA can bring administrative, civil and criminal proceedings against companies that violate environmental laws, regulations and Mexican Official Rules, and has the power to impose a variety of sanctions. These sanctions may include, among others, monetary fines, revocation of authorizations, concessions, licenses, permits or registries, administrative arrests, seizure of contaminating equipment, and in certain cases, temporary or permanent closure of facilities.

 

Additionally, as part of its inspection authority, PROFEPA is entitled to periodically visit the facilities of companies whose activities are regulated by Mexican environmental legislation, and verify compliance. Similar rights are granted to state environmental authorities pursuant to applicable state environmental laws.

 

Companies in Mexico are required to obtain proper authorizations, concessions, licenses, permits and registrations from competent environmental authorities for the performance of activities that may have an impact on the environment or may constitute a source of contamination. Such companies in Mexico are also required to comply with a variety of reporting obligations that include, among others, providing PROFEPA and SEMARNAT with periodic reports regarding compliance with various environmental laws. Among other permits, the operations and related activities of the steel industry are subject to the prior obtainment of an environmental impact authorization granted by SEMARNAT.

 

We believe that we have obtained all the necessary authorizations, concessions, general operating licenses, permits and registries from the applicable environmental authorities to duly operate our facilities, plants and sites, and sell our products and that we are in material compliance with applicable environmental legislation. We, through our subsidiaries, have made significant capital investments to assure our production and operation facilities comply with requirements of federal, state and municipal law and administrative regulation, and to remain in compliance with our current authorizations, concessions, licenses, permits and registries.

 

Mexican environmental laws and administrative regulations have become increasingly stringent over the last decade, and this trend is likely to continue, influenced recently by the North American Agreement on Environmental Cooperation entered into by Mexico, the United States of America and Canada in connection with the USMCA. In this regard, any obligation to remedy environmental damages caused by us or any contaminated sites owned or leased by us could require significant unplanned capital expenditures and be materially adverse to our financial condition and results of operations.

 

Water

 

In Mexico, the National Waters Law regulates water resources. In addition, the Mexican Official Rules govern the quality of water. A concession granted by the National Waters Commission is required for the use and exploitation of national waters. Some of our facilities in Mexico have renewable concessions to use and exploit underground waters from wells in order to meet the water requirements of our production processes. We pay the National Waters Commission duties per cubic meter of water extracted under our concessions. We believe we are in substantial compliance with all the requirements imposed by each of the concessions we have obtained.

 

Pursuant to the National Waters Law, companies that discharge waste into national water bodies must comply with certain requirements, including maximum permissible contamination or pollution levels. Periodic reports on water quality must be provided by dischargers to applicable authorities. Liability may result from the contamination of underground waters or recipient water bodies. We believe that we are in substantial compliance with all water and waste water legislation applicable to us.

 

Antitrust Matters

 

We are also subject to the Mexican Antitrust Law (Ley Federal de Competencia Económica), which regulates monopolies and monopolistic practices in Mexico and requires Mexican government approval of certain mergers, acquisitions and joint ventures. We believe that we are currently in material compliance with the Mexican Antitrust Law. However, due to our growth strategy of acquiring new businesses and assets and because we are a large manufacturer with a significant share of the markets in Mexico with respect to certain of our products, we may be subject to greater regulatory scrutiny in the future.

 

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Measurements Law

 

Mexico’s Ministry of Economy (Secretaría de Economía), through the General Rules Department (Dirección General de Normas or “DGN”), promulgates regulations regarding many products that we manufacture. Specifically, pursuant to the Measurements Law (Ley Federal sobre Metrología y Normalización), the DGN issues specifications on the quality and safety standards for our product lines. We believe that all of our products are in material compliance with all applicable DGN regulations.

 

Brazil operations

 

We produce according to technical specifications of the Brazilian standard ABNT NBR 7480:2007 for steel bars and wires designed for the reinforcement for concrete structures. Our products are also registered with the Brazilian National Institute of Metrology, Quality and Technology (INMETRO), in accordance with Resolution CONMETRO No. 05, dated May 6, 2008, and comply with conformity assessment regulations, including Ordinance No. 73, dated March 17, 2010, and with compulsory product certification regulations.

 

We have received environmental permits from the Sao Paulo State, for which hydrological studies and feasibility of groundwater have been conducted, such permits include a license granted by the Ministry of Environment of Sao Paulo and an operations license granted by the Ministry of Environment CETESBE Sao Paulo State Companhia.

 

Trade Regulation Matters

 

We have experienced significant competition from imports into Mexico in the past as a result of excess worldwide steel production capacity, particularly in periods of economic slowdown, and as a consequence of the Peso’s appreciation, making imports cheaper and more competitive in peso terms. In 2003, imports declined as international market conditions improved and the peso weakened. Recently, the Mexican government, at the request of CANACERO, has taken several measures to prevent unfair trade practices such as dumping the steel import market. The overall climate for imports in Mexico is influenced by the free trade agreements that Mexico has entered into with other countries, as well as the level of tariffs and anti-dumping duties (some of which are described below).

 

We have benefited from the free trade agreements that Mexico has entered into. Specifically, we have directly benefited from our ability to export finished steel products directly to export markets and compete with similar products manufactured in those markets. We have also indirectly benefited from increased demand from our domestic customers who similarly manufacture their products to foreign markets under free trade agreements. Nevertheless, we cannot assure you that the trade agreements affecting our business or the enforcement thereof will not change in a manner that could have a material adverse effect on our business, results of operations, financial condition or prospects.

 

United States of America-Mexico-Canada Agreement (USMCA) previously North American Free Trade Agreement (NAFTA)

 

NAFTA became effective on January 1, 1994. NAFTA provided for the progressive elimination over a period of ten years of the 10% duties formerly in effect on most steel products imported into Mexico from the United States of America and Canada, including those that compete with our main product lines. After a 13 month negotiation period, on September 30, 2018, the United States of America, Mexico and Canada signed the United States of America-Mexico-Canada Agreement (the USMCA), which replaced NAFTA on July 1, 2020. See “Item 3.D. Risk Factors—Risks Related to Mexico—Developments in other countries could adversely affect the Mexican economy, our financial performance and the price of our shares.” The new agreement has benefits on custom expenses, an orderly economic competition, clear rules for investment and its protection.

 

Mexican-European Community Free Trade Agreement. The Mexican-European Free Trade Agreement, or “MEFTA,” became effective on July 1, 2000, and taxes applying to a large quantity of imported goods were eliminated or reduced. The goal of this trade agreement is to establish a bilateral and preferential, progressive and reciprocal framework to encourage the development of trade in goods and services, taking into account the sensitivity of certain products and services sectors, and in accordance with relevant rules of the World Trade Organization (WTO). The Joint Council is responsible for deciding the arrangements and timetable for the liberalization of duties and non-duty barriers to trade in goods, in accordance with the relevant WTO rules. This agreement was modified in 2018.

 

Mexico-Japan Economic Association (the “Association”). On January 1, 2004, Japan and the other members of the G-7, agreed to reduce the steel tariffs to zero percent, so Mexico has benefited from this rate since such date. However, Mexico is sensitive to the steel exports coming from Japan, so the Association was negotiated in the following terms: (i) the specialized steel that is not produced in Mexico, and that is used to produce vehicles, spare parts, electronics, machinery and heavy equipment, was released from any tariffs, as from the effective date of the Association, (ii) the steel products coming from Japan currently have a zero percent rate, (iii) the products to be imported from the under the programs established by the Association, will pay the tariffs pursuant to the fixed tariffs established in such Sector Programs, so the electronic and vehicles industries will be exempted as of the effective date of the Association.

 

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Other Trade Agreements. In the last several years, Mexico has signed other free trade agreements with Israel (2000), Iceland, Norway, Liechtenstein and Switzerland (2001), and with the following Latin American countries: Chile (1992 and amended in 1999); Venezuela and Colombia (1995); Costa Rica (1995); Bolivia (1995); Nicaragua (1998); Honduras, El Salvador and Guatemala (2001); and Uruguay (2003). We do not anticipate any significant increase in competition in the Mexican steel market as a result of these trade agreements due to their minimal steel production or, in the case of Venezuela and Chile, minimal share of the Mexican market. Venezuela stepped off the free trade agreement with Mexico and Colombia.

 

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). On February 4, 2016, Mexico, along with Australia, Brunei, Canada, Chile, United States of America, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam, signed the Transpacific Partnership Trade Agreement, in the City of Auckland, New Zealand, which was intended to grant Mexican products access to six markets (Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam) with approximately 155 million of potential consumers, which were not covered by any other trade agreement. In January 2017, the United States of America withdrew from the agreement, after which the remaining 11 countries reached a revised agreement and renamed it the CPTPP. On December 30, 2018, it became effective without U.S. participation.

 

The CPTPP eliminates or reduces tariff and non-tariff barriers across substantially all trade in goods and services and covers the full spectrum of trade, including goods and services trade and investment, so as to create new opportunities and benefits for the businesses, workers, and consumers of the countries’ members. The CPTPP is intended to facilitate the development of production and supply chains, and seamless trade, enhancing efficiency and supporting the goal of creating and supporting jobs, raising living standards, enhancing conservation efforts, and facilitating cross-border integration, as well as opening domestic markets. The CPTPP is intended to promote innovation, productivity, and competitiveness by addressing new issues, including the development of the digital economy, and the role of state-owned enterprises in the global economy. Finally, the CPTPP includes new elements that seek to ensure that economies at all levels of development and businesses of all sizes can benefit from trade. It also includes specific commitments on development and trade capacity building.

  

Dumping and Countervailing Duties.

 

We are or have been a party to, or have been affected by, numerous steel dumping and countervailing duty claims. Many of these claims have been brought by Mexican steel producers against international steel companies, while others have been brought against Mexican steel companies. In certain instances, such cases have resulted in duties being imposed on certain imported steel products and, in a few instances, duties have been imposed on Mexican steel exports. In the aggregate, these duties have not had a material impact on our results of operations.

 

On September 11, 2013, the United States of America International Trade Commission (USITC) started an official anti-dumping investigation against rebar exports from Mexico and Turkey promoted by Nucor, Gerdau, Commercial Metals, and Cascade Steel Buyer.

 

On October 14, 2014, the USITC determined that the U.S. steel industry was materially injured by imports of steel concrete reinforcing bar from Mexico that are sold in the United States of America at less than fair value and from Turkey that are subsidized by the government of Turkey. As a result of the USITC’s affirmative determinations, the U.S. Department of Commerce issued an antidumping duty order on imports of this product from Mexico and a countervailing duty order on imports of this product from Turkey. The U.S. government imposed tariffs of 66.7% against imports for rebar from Deacero, S.A.P.I de C.V. and us and tariffs of 20.58% for rebar imports from all other producers in Mexico, which tariffs were rescinded in June 2017.

 

On January 6, 2021, a preliminary dumping rate of 66.7% was imposed on our exports of rebar to the United States of America; following the U.S. Department of Commerce’s physical review carried out at our San Luis Potosí plant, arguing deficiencies and adverse facts during the information process. Such dumping rate is being challenged by our lawyers. As of May 11, 2022, our lawyers state that the dispute is in its early stage and no outcome is possibly predicted.

 

Labor. In July 2017, the Brazilian government issued Law No.13,467 (Labor Reform Law), which resulted in significant changes to labor regulations. This law extends the workday from 8 hours to 12 hours, provided that there is a 36 hour break afterwards. With regard to negotiations with any labor union, Law No. 13,467 provides that certain rights, such as constitutional rights and women’s rights, cannot be part of the negotiations, as the Constitution and existing law prevails over any collective bargaining agreement. In addition, Law No.13,467 allows companies to outsource any activity, including the company’s principal activity and activities that a company’s own employees are carrying out. Furthermore, the law provides that a claimant seeking to enforce his or her rights under this law will have to pay all costs and expenses related to the lawsuit and limits any compensation for moral damages to certain thresholds. We are currently in compliance with theses labor regulations.

 

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C. Organizational Structure

 

The chart below sets forth a summary of our corporate structure.

 

 

 

(1)Includes the following subsidiaries: Compañía Siderúrgica del Pacífico, S.A. de C.V. (99.99%); Coordinadora de Servicios Siderúrgicos de Calidad, S.A. de C.V. (100.00%); Industrias del Acero y del Alambre, S.A. de C.V. (99.99%); Procesadora Mexicali, S.A. de C.V. (99.99%); Servicios Simec, S.A. de C.V. (100.00%); Sistemas de Transporte de Baja California, S.A. de C.V. (100.00%); Operadora de Metales, S.A. de C.V. (100.00%); Operadora de Servicios Siderúrgicos de Tlaxcala, S.A. de C.V. (100.00%); Administradora de Servicios Siderúrgicos de Tlaxcala, S.A. de C.V. (100.00%); Operadora de Servicios de la Industria Siderúrgica ICH, S.A. de C.V. (100.00%); Arrendadora Simec S.A. de C.V. (99.99%); CSG Comercial, S.A. de C.V. (99.95%); Compañía Siderúrgica de Guadalajara, S.A. de C.V. (99.99%); Simec Acero, S.A. de C.V. (100.00%); Undershaft Investment N. V., (100.00%); Simec USA Corp. (100.00%); Pacific Steel Projects Inc. (100.00%); Simec Steel Inc. (100.00%); Simec International, S.A. de C.V.(100.00%); Corporativos G&DL, S.A. de C.V. (100.00%); Simec International 6, S. A. de C. V., (100.00%), Simec International 7, S. A. de C. V., (100.00%), Simec International 9, S.A.P.I. de C.V., (100.00%); Corporación ASL, S.A. de C.V. (99.99%); Siderúrgica del Occidente y Pacífico, S.A. de C.V. (100.00%), Gases Industriales de Tlaxcala, S.A. de C.V. (100.00%),  GSIM de Occidente, S.A. de C.V.(100.00%), Siderúrgicos Noroeste, S.A. de C.V.(100.00%), Fundiciones de Acero Estructrual, S.A. de C.V. (100.00%) and Simec Siderúgico, S.A. de C.V. (100.00%).

 

(2)Our principal Mexican facilities consist of steel-making facilities in Guadalajara, Jalisco; Mexicali, Baja California; Apizaco, Tlaxcala, and San Luis Potosí; and cold finishing facilities in Cholula, Puebla. These facilities were operated by Simec International 6, S.A. de C.V.(100.00%) until October 31, 2012 (began operations in November 2010). Since November 1, 2012 these facilities were operated by Orge, S.A. de C.V. (100.00%) (incorporated in October, 2012). These facilities were operated by RRLC, S.A.P.I. de C.V. (100.00%) (incorporated in 2015) and Grupo Chant, S.A.P.I. de C.V. (100.00%) (incorporated in 2015), since April, 2015 and October 2015, respectively. These facilities were operated by GSIM de Occidente, S.A. de C.V. (incorporated in 2016) and Aceros Especiales Simec Tlaxcala, S.A. de C.V.(100.00%) (incorporated in 2015), since March 2016 and July 2016, respectively. The Guadalajara plant is currently operated by Corporación ASL, S.A. de C.V., the Mexicali plant by Simec International 6,S,A, de C.V., the Apizaco and Cholula plants by Simec international, S.A. de C.V., the new Tlaxcala plant by Aceros Especiales Simec Tlaxcala, S.A. de C.V., the San Luis plants by Aceros DM, S.A. de C.V., Aceros San Luis, S.A. de C.V., Malla San 2, S.A. of C.V. and Fundiciones de Acero Estructural, S.A. de C.V: and the Silao plant by CHQ Wire México, S.A. of C.V. (formerly Malla San 1, S.A. de C.V. The group’s marketer is Simec Acero, S.A. de C.V.

 

(3)SimRep, Co. owns 100% of Republic Steel, Inc. Our principal U.S. facilities consist of a steel-making facility in Canton, Ohio; a steel- making and hot-rolling facility in Lorain, Ohio; a hot-rolling facility in Lackawanna, New York; and  three cold finishing facilities in Massillon, Ohio and Solon, Ohio; all, of which are owned directly by Republic.

 

(4)Grupo San facilities are conformed by Corporación Aceros DM, S.A. de C.V. (100.00%) and Subsidiaries, Aceros DM, S.A. de C.V. (100.00%) Acero Transportes SAN, S.A. de C.V. (100.00%), Aceros San Luis, S.A. de C.V. (100.00%), CHQ Wire México, S.A. de C.V. (100.00%) (formerly Malla San 1, S.A. de C.V.), Malla San 2, S.A. de C.V. (100.00%) and Alambres Trefilados de San Luis Potosí, S.A. de C.V. (100.00%).

 

(5)Our Brazil facilities are conformed by GV do Brasil Industria e Comercio de Aço LTDA., Companhia Siderúrgica do Espirito Santo, S.A. and the plant in Itauna, Minas Gerais.

 

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The following table identifies each of our significant operating subsidiaries, including its country of incorporation and our percentage ownership thereof at December 31, 2021:

 

Name of Subsidiary  Country of
Incorporation
  Ownership
Interest (%)
 
Simec International, S.A. de C.V.  Mexico   100.00%
Undershaft Investments, N.V.  Curaçao   100.00%
Pacific Steel, Inc.  United States of America   100.00%
SimRep Corporation and subsidiaries (Republic)  United States of America   100.00%
Compañía Siderúrgica del Pacífico, S.A. de C.V.  Mexico   99.99%
Coordinadora de Servicios Siderúrgicos de Calidad, S.A. de C.V.  Mexico   100.00%
Industrias del Acero y del Alambre, S.A. de C.V.  Mexico   99.99%
Procesadora Mexicali, S.A. de C.V.  Mexico   99.99%
Servicios Simec, S.A. de C.V.  Mexico   100.00%
Sistemas de Transporte de Baja California, S.A. de C.V.  Mexico   100.00%
Operadora de Metales, S.A. de C.V.  Mexico   100.00%
Operadora de Servicios Siderúrgicos de Tlaxcala, S.A. de C.V.  Mexico   100.00%
Administradora de Servicios Siderúrgicos de Tlaxcala, S.A. de C.V.  Mexico   100.00%
Operadora de Servicios de la Industria Siderúrgica ICH, S.A. de C.V.  Mexico   100.00%
Arrendadora Simec, S.A. de C.V. (in liquidation)  Mexico   100.00%
Compañía Siderúrgica de Guadalajara, S.A. de C.V.  Mexico   99.99%
CSG Comercial, S.A. de C.V.  Mexico   99.95%
Corporación Aceros DM, S.A. de C.V. and Subsidiaries  Mexico   100.00%
Corporación ASL, S.A. de C.V.  Mexico   99.99%
Simec International 6, S. A. de C. V.  Mexico   100.00%
Simec International 7, S. A. de C. V.  Mexico   100.00%
Simec International 9, S.A.P.I. de C. V.  Mexico   100.00%
Simec Acero, S.A. de C. V.  Mexico   100.00%
Simec USA, Corp.  United States of America   100.00%
Pacific Steel Projects, Inc.  United States of America   100.00%
Simec Steel, Inc.  United States of America   100.00%
Corporativos G&DL, S.A. de C.V.  Mexico   100.00%
GV do Brasil Industria e Comercio de Aço LTDA.  Brazil   100.00%
Orge, S.A. de C.V.  Mexico   100.00%
Siderúrgica del Occidente y Pacífico, S.A. de C.V.  Mexico   100.00%
RRLC, S.A.P.I. de C.V.  Mexico   100.00%
Grupo Chant, S.A.P.I. de C.V.  Mexico   100.00%
Aceros Especiales Simec Tlaxcala, S.A. de C.V.  Mexico   100.00%
Gases Industríales de Tlaxcala, S.A. de C.V.  Mexico   100.00%
GSIM de Occidente, S.A. de C.V.  Mexico   100.00%
Fundiciones de Acero Estructural, S.A. de C.V.  Mexico   100.00%
Siderúrgicos Noroeste, S.A. de C.V.  Mexico   100.00%
Companhia Siderúrgica do Espirito Santo, S.A.  Brazil   100.00%
Simec Siderúrgico, S.A. de C.V.  Mexico   100.00%

 

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D.Property, Plants and Equipment

 

Our Operations and Production Facilities

 

We conduct our operations at 19 facilities throughout North and South America. At December 31, 2021, our crude steel production capacity was 6 million tons, of which 1.2 million tons were based on an integrated blast furnace technology, and 4.8 million were based on electric arc furnace, or mini-mill, technology. Our Mexican facilities have 2.6 million tons of crude steel production capacity, operating six mini-mill facilities. Our U.S. operations have 2.3 million tons of crude steel production capacity and our Brazil operations have 1.1 million tons of crude steel production capacity. In addition, we have 5.2 million tons of rolling and finishing capacity, of which 2.6 million are located in Mexico, 1.7 million are located in the United States of America and Canada and 0.9 million are located in Brazil.

 

We operate nine mini-mills, six in Mexico, one in the United States of America and two in Brazil. The Mexican mini-mills are located in: one in Guadalajara, Jalisco; two in Apizaco, Tlaxcala; one in Mexicali, Baja California; as well as two in San Luis Potosí. Our mini-mill in the United States of America is located in Canton, Ohio. Our mini-mills in Brazil are located in Pindamonhangaba, São Paulo and Cariacica, Espírito Santo. We also own an integrated blast furnace and an electric arc furnace in Lorain, Ohio and a rolling mill in Lackawanna, New York. Processing mills are located in Massillon, Ohio and Solon, Ohio.

 

Because we own both mini-mill and integrated blast furnace production facilities, we can allocate production between each type of facility based on efficiency and cost. In addition, as long as our facilities are not operating at full capacity, we can allocate production based on the relative cost of basic inputs (iron ore, coking coal, scrap metal and electricity) to the facility where production costs would be the lowest. Our production facilities are designed to permit the rapid changeover from one product to another. This flexibility permits us to efficiently produce small volume orders to meet customer needs and to produce varying quantities of standard product. Production runs, or campaigns, occur on four to eight weeks cycles, minimizing customer waiting time for both standard and specialized products.

 

We can use scrap metal or iron ore to produce our finished steel products. We produce liquid steel using an electric arc furnace, alloying elements and carbon are added, and then is transported to continuous casters for solidification. The continuous casters produce long, square strands of steel that are cut into billet and transferred to the rolling mills for further processing or, in some cases, sold to other steel producers. In the rolling mills, the billet is reheated in a walking beam furnace with preheating burners, passed through a rolling mill for size reduction and conformed into final sections and sizes. The shapes are then cut into a variety of lengths. Our facility in Canton, Ohio is capable of producing billets and blooms.

 

Our mini-mill plants use an electric arc furnace to melt ferrous scrap and other metallic components, which are then cast into long, square bars called billets in a continuous casting process, all of which occurs in a melt shop. The billet is then transferred to a rolling mill, reheated and rolled into finished product. In contrast, an integrated steel mill heats iron pellets and other primary materials in a blast furnace to first produce pig iron, that must be refined in a basic oxygen furnace to liquid steel, and then cast to billet and finished product. Mini-mill plants typically produce certain steel products more efficiently because of the lower energy requirements resulting from their smaller size and because of their use of ferrous scrap. Mini-mills are designed to provide shorter production runs with relatively fast product changeover times. Integrated steel mills are more efficient in producing longer runs and are able to produce certain steel products that a mini-mill cannot.

 

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The production levels and capacity utilization rates for our melt shops and rolling mills for the periods indicated are presented below.

 

Production Volume and Capacity Utilization

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
   (tons in thousands) 
Melt shops                    
Steel billet production   2,288.0    2,359.0    2,497.1    2,879.7    3,005.9 
Annual installed capacity(1)   4,596.9    5,257.9    5,776.9    6,006.0    6,006.0 
Effective capacity utilization   49.8%   44.9%   43.2%   47.9%   50.5%
                          
Rolling mills                         
Total production   2,171.6    2,306.7    2,513.4    2,581.6    2,708.1 
Annual installed capacity(1)   4,000.0    4,480.0    4,896.0    5,185.0    5,205.0 
Effective capacity utilization   54.3%   51.5%   51.3%   49.8%   52.0%

 

 

(1)Annual installed capacity is determined based on the assumption that billet of various specified diameters, width and length is produced at the melt shops or that a specified mix of rolled products are produced in the rolling mills on a continuous basis throughout the year except for periods during which operations are discontinued for routine maintenance, repairs and improvements. Amounts presented represent annual installed capacity as of December 31 for each year.

 

Mexican Operations and Facilities

 

The following table presents production by product at each of our Mexican facilities as a percentage of total production at that facility for 2021.

 

Mexican Production per Facility by Product Location

 

Product  Guadalajara   Mexicali   Apizaco/
Cholula
   San Luis   Total 
   Production (%) 
I-Beams   27.2%   0.8%   0%   0%   6.1%
Channels   9.3%   2.5%   0%   0%   2.4%
Angles   34.9%   11.0%   0%   0%   9.1%
Hot rolled bars (round, square and hexagonal rods)   18.9%   1.6%   53.3%   1.1%   18.3%
Rebar   0.0%   82.1%   0.0%   73.2%   39.7%
Flat bars   9.3%   2.0%   18.4%   0.0%   6.9%
Cold finished bars   0.0%   0.0%   22.3%   0.0%   5.6%
Electro-Welded wire mesh   0.0%   0.0%   0.0%   3.6%   1.5%
Wire rod   0.0%   0.0%   6.0%   16.9%   8.4%
Electro-Welded wire mesh panel   0.0%   0.0%   0.0%   4.8%   1.9%
Other   0.4%   0.0%   0.0%   0.4%   0.1%
Total   100%   100%   100%   100%   100%

 

Guadalajara. Our Guadalajara mini-mill facility is located in central western Mexico in the state of Jalisco which is Mexico’s second largest city. Our Guadalajara facilities and equipment include one improved electric arc furnace utilizing water-cooled sidewalls and roof, one four-strand continuous caster, five reheating furnaces and three rolling mills. The Guadalajara mini-mill has an annual installed capacity of 370,000 tons of billet and an annual installed capacity of finished product of 480,000 tons. In 2021, the Guadalajara mini-mill produced 307,232 tons of steel billet and 313,599 tons of finished product, operating at 83% capacity for billet production an3333d 65% capacity for finished product production. The Guadalajara rolling facilities process billet production from our Mexicali and Apizaco mills. Our Guadalajara facility is 336 miles from Mexico City. Our Guadalajara facility mainly produces structural steel, SBQ steel, light structural steel and rebar.

 

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Guadalajara Mini-Mill

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
Steel sales (thousands of tons)   340    307    267    290    302 
Average finished product price per ton   Ps. 12,000    Ps. 13,896    Ps. 13,794     Ps. 13,235     Ps. 21,361  
Average scrap cost per ton   5,695    7,071    5,492    6,261    9,720 
Average manufacturing conversion cost per ton of finished product(1)   2,789    3,252    4,393    3,235    12,217 
Average manufacturing conversion cost per ton of billet(1)   1,927    2,674    2,836    2,305    2,853 

 

 

(1)Manufacturing conversion cost is defined as all production costs excluding the cost of scrap and related yield loss.

 

Mexicali. In 1993, we began operations at our mini-mill located in Mexicali, Baja California. The mini-mill is strategically located approximately 22 miles south of the California border and approximately 220 miles from Los Angeles.

 

Our Mexicali facilities and equipment include one electric arc furnace utilizing water-cooled sidewalls and roof, one four-strand continuous caster, one walking beam reheating furnace, one SACK rolling mill, a Linde oxygen plant and a water treatment plant. This facility has an annual installed capacity of 430,000 tons of steel billet and an annual installed capacity of finished product of 250,000 tons. Excess billet produced at the Mexicali facility is used primarily by the Guadalajara facility. This allows us to increase the utilization of the Guadalajara facility’s finishing capacity, which exceeds its production capacity. In 2021, the Mexicali mini-mill produced approximately 242,349 tons of billet, of which the Guadalajara mini-mill used 25,364 tons. Our Brazil mini mills used 36,422 tons. In 2021, the Mexicali mini-mill produced 164,572 tons of finished products. In 2021 we operated the Mexicali mini-mill at 56% capacity for billet production and at 66% capacity for finished product production. Our facility is strategically located and has access to key markets in Mexico and the United States of America, stable public sources of scrap, electricity, a highly skilled workforce and other raw materials. The Mexicali mini-mill also is situated near major highways and a railroad linking the Mexicali and Guadalajara mini-mills, allowing for coordinated production at the two facilities. Our Mexicali facility mainly produces structural steel, light structural steel and rebar. In 2021, 82% of the products produced at the Mexicali mini-mill were rebar, 11% were angles, 2% were hot rolled bars (round, square and hexagonal rods) and the remaining 5% were channels and flat bar.

 

Mexicali Mini-Mill

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
Steel sales (thousands of tons)   193    208    236    230    170 
Average finished product price per ton   Ps. 10,720     Ps. 13,538    Ps. 12,093     Ps. 13,126     Ps. 20,371  
Average scrap cost per ton   4,544    6,302    4,954    5,319    8,412 
Average manufacturing conversion cost per ton of finished product(1)   2,878    3,290    3,326    2,986    10,734 
Average manufacturing conversion cost per ton of billet(1)   2,013    2,249    2,413    2,517    2,489 

 

 

(1)Manufacturing conversion cost is defined as all production costs excluding the cost of scrap and related yield loss.

 

Apizaco mini-mills (mini-mill 1 and mini-mill 2) and Cholula facility. We have operated Apizaco mini-mill 1 and Cholula facility since August 1, 2004 and Apizaco mini-mill 2 since July, 2018. Mini-mill 1 and 2 are located in central Mexico in Apizaco, Tlaxcala. Our Apizaco facilities and equipment include two EBT Danieli electric arc furnace utilizing water-cooled sidewalls and roof, three ladle stations (two Danieli and the other Daido), two Daido degasification station, two Danieli four-strand continuous caster, three walking beam reheating furnaces and three rolling mills (two Danieli and the other Pomini). Mini-mill 1 has an annual installed capacity of 480,000 tons of steel billet and an annual installed capacity of finished product of 444,000 tons. In 2021, mini-mill 1 produced 306,521 tons of steel billet. In 2021, mini-mill 1 produced 320,537 tons of finished products. In 2021, we operated mini-mill 1 at 64% capacity for billet production and at 72% capacity for finished product production. Mini-mill 2 has an installed capacity of 650,000 tons of steel billet and an installed capacity of finished product of 600,000 tons. In 2021, mini-mill 2 produced 140,979 tons of steel billet. In 2021, mini-mill 2 produced 121,830 tons of finished products. In 2021, we operated mini-mill 2 at 22% capacity for billet production and at 20% capacity for finished product production. Our Apizaco mini-mills are 1,112 miles from Mexicali and less than 124 miles from Mexico City. Our Apizaco facilities mainly produce SBQ steel, light structural and rebar. Our Cholula facility is approximately 25 miles from our Apizaco facilities, which allows the integrated operations of the Apizaco mini-mills and Cholula facility. Our Cholula facilities and equipment include cold drawing and turning machines for peeling bars. This facility has an annual installed capacity of finished product of 120,000 tons. In 2021, the Cholula facility produced 74,483 tons of finished products, at 62% capacity. Our Cholula facility mainly produces cold finished SBQ steel.

 

In 2021, our plants in Apizaco and Cholula produced 447,500 tons of billet and 516,850 tons of finished product, operating at 40% of its billet capacity and 44% capacity for finished product.

 

In 2021, 53% of the products we produced at the Apizaco and Cholula facilities were hot rolled bars (round, square and hexagonals), 22% were flat merchant bar and 18% were cold finished products.

 

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Apizaco Mini-Mill and Cholula Facility

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
Steel sales (thousands of tons)   331    321    318    318    346 
Average finished product price per ton   Ps. 15,426    Ps. 17,935    Ps. 16,726     Ps. 16,268     Ps. 23,587  
Average scrap cost per ton   5,725    6,383    5,271    5,933    9,486 
Average manufacturing conversion cost per ton of finished product(1)   4,524    5,604    5,916    5,639    13,243 
Average manufacturing conversion cost per ton of billet(1)   2,796    3,767    4,047    3,446    3,871 

 

 

(1)Manufacturing conversion cost is defined as all production costs excluding the cost of scrap and related yield loss.

 

San Luis Operations and Facilities. We have operated our San Luis facilities since we acquired them on May 30, 2008. The facilities are located in central Mexico in the city of San Luis Potosí, in the state of San Luis Potosí. Our San Luis facilities and equipment include four electric arc furnaces, three continuous casters, three reheating furnaces, two rebar rolling mills and one wire rod rolling mill. As of December 31, 2021, these facilities had an annual installed capacity of 660,000 tons of billet and 610,000 tons of finished product. In 2021, the San Luis facilities produced 527,406 tons of steel billet. In 2021, the San Luis facilities produced 527,688 tons of finished product, operating at 80% capacity for billet production and 87% capacity for finished product production. Our San Luis facilities mainly produce rebar, light structural steel and wire rod. In 2021, 73% of the products produced at the San Luis facilities were rebar, 26% were electro-welded wire mesh, wire rod and electro-welded wire mesh panel, and the remaining 1% were other light structural steel products.

 

The following table sets forth, for the periods indicated selected operating data for our San Luis facilities. 

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
                     
Steel sales (thousands of tons)   540    538    546    496    554 
Average finished product price per ton   Ps. 10,870    Ps. 14,255    Ps. 12,225     Ps. 15,041     Ps. 20,494  
Average scrap cost per ton   5,859    6,822    5,378    6,407    9,894 
Average manufacturing conversion cost per ton of finished product(1)   2,414    3,094    3,026    2,719    12,173 
Average manufacturing conversion cost per ton of billet(1)   1,857    2,481    2,381    2,113    2,499 

 

 

(1)Manufacturing conversion cost is defined as all production costs excluding the cost of scrap and related yield loss.

 

U.S. Operations and Facilities

 

We have operated our Republic facilities (in Ohio and New York) since we acquired them from the shareholders of PAV Republic, Inc. on July 22, 2005. As of December 31, 2021, these facilities had an annual installed capacity of 2,296,000 tons of billet and 1,763,000 tons of finished product. In 2021, Republic facilities produced 634,000 tons of steel billet. For the same period, Republic facilities produced 331,000 tons of hot-rolled bars. Republic facilities produced 24,176 tons of cold finish bars. In 2021, Republic facilities produced 38,997 tons of wire products.

 

The following table sets forth, for the periods indicated selected operating data for our Republic facilities.

 

   Years ended December 31, 
   2017   2018   2019   2020   2021 
Steel sales (thousands of tons)   387    385    298    237    275 
Average finished product price per ton   Ps. 21,630     Ps. 24,016    Ps. 23,893     Ps. 23,511     Ps. 29,880  
Average scrap cost per ton   6,114    7,026    5,650    6,014    9,995 
Average manufacturing conversion cost per ton of finished product(1)   6,790    10,555    8,487    9,592    17,173 
Average manufacturing conversion cost per ton of billet(1)   4,915    6,842    6,862    6,838    7,267 

 

 

(1)Manufacturing conversion cost is defined as all production costs excluding the cost of scrap and related yield loss.

 

Lorain, Ohio. The Lorain facility operates an integrated steel mill, it has a blast furnace, two 220-ton basic oxygen furnaces, a 150-ton electric arc furnace, two ladle metallurgy facilities, a vacuum degasser, a five-strand continuous bloom caster, a six-strand billet caster, a billet rolling mill and two bar rolling mills.

 

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Our Lorain facility had, at December 31, 2021, an annual installed capacity of 1,049,000 tons of steel billet and 900,000 tons of finished product. This facility did not produce any steel billets or finished steel bars in 2021 as it has been idled since 2016.

 

Canton, Ohio. Our Canton facility mainly produces SBQ steel and includes two 200-ton top charge electric arc furnaces, a 5-strand bloom/billet caster, two ladle metallurgical furnaces, two vacuum degassers and two slag rakes. This facility also includes a combination Caster rolling facility that continuously casts blooms in a 4-strand caster, heats the blooms to rolling temperature in a walking beam furnace, then rolls billets through an 8-stand rolling mill in an inline operation. We installed and commissioned the electric arc furnace, the bloom/billet caster, ladle metallurgical furnace and vacuum degasser in 2005. Other Canton equipment includes a Mecana billet inspection line, four stationary billet grinders, a saw line and a quality verification line (or “QVL line”).

 

Canton produces blooms and billets for the three rolling mills in Republic facilities and for trade customers. We use the QVL inspection line to inspect finished bar produced in Lackawanna. As of December 2021, the Canton facility had annual installed capacity of 1,247,000 tons of steel billet. In 2021, this facility produced 332,000 tons of blooms, billets and other semi-finished trade product and was operated at 27% capacity of steel billet.

 

Lackawanna, New York. Our Lackawanna facility mainly produces SBQ steel and includes a three-zone walking beam billet reheat furnace, a recently upgraded 17 conventional stand mill with a 5 stand sizing mill and two saw lines capable of producing rounds, squares, and hexagons in both cut length and coils. This facility produces hot rolled bar sizes that range from 0.562” to 3.250” with coil weights up to 6,000 lb. Our Lackawanna facility’s finishing equipment includes a QVL inspection line and three saw lines. We sell a portion of the hot rolled bars produced at our Lackawanna facility to trade customers, and we also ship a portion of the finished bars to our cold finishing operations for further processing. As of December 31, 2021, the Lackawanna facility had annual installed capacity of 653,000 tons of hot rolled bars. In 2021, this facility produced 278,000 tons of hot rolled bars and was operated at 43% capacity of finished product.

 

Massillon, Ohio. Our Massillon facility mainly produces SBQ steel and contains a cold finishing facility which includes the machinery and equipment to clean, draw, turn, chamfer, anneal, grind, straighten and saw bars. Our Massillon facility had, at December 31, 2021, an annual installed capacity of 138,000 tons of finished product. During 2021, the Massillon facility was operated at 17% capacity of finished product and produced 24,000 tons of cold finished bars.

 

Solon, Ohio. Our Solon facility, acquired in February 2011, mainly produce Cold Heading Quality (CHQ) wire products and have wire drawing and finishing facilities that include the machinery and equipment to clean and coat, draw, and anneal wire. As of December 31, 2021, the Solon facility had installed capacities of 72,000, for wire products. During 2021, the Solon facility produced and shipped 29,000 tons of wire products and was operated at 40% capacity of finished product.

 

Hamilton, Ontario, Canada. Our Hamilton facility was shut down permanently during 2021.

 

Brazil.

 

We have three plants in Brazil: a mini-mill and rebar and wire-rod rolling mill in Pindamonhangaba, São Paulo, a mini-mill in Cariacica, Espirito Santo and rolling and finishing facilities in in Itauna, Minas Gerais. Our plant located in Pindamonhangaba, State of Sao Paulo, is 87 miles from the city of Sao Paulo, and is 218 miles from Rio de Janeiro. Our Pindamonhangaba facility and equipment include an electric arc furnace and a rebar and wire rod rolling mill. Our facility in Pindamonhangaba began operations in July 2015 and currently produces rebar, while the plants in Cariacica and Itauna began operations in May 2018, and include an electric arc furnace and two rebar and wire rod rolling mills. As of December 31, 2021, our plant in Pindamonhangaba had installed capacity to produce 520,000 tons of billet and 450,000 tons of finished product per year capacity. In 2021 our plant in Pindamonhangaba produced 378,700 tons of billet and 398,790 tons of finished product, operating at 73% of its capacity for billet and 89% capacity for finished product. Our plant in Cariacica had installed capacity to produce 600,000 tons of billet and 348,000 tons of finished product. In 2021, our plant in Cariacica produced 468,730 tons of billet and 328,907 tons of finished product, operating at 78% of its capacity for billet and 95% capacity for finished product. The plant in Itauna had installed capacity to produce 140,000 tons of finished product. In 2021, our plant in Itauna produced 126,685 tons of finished product, operating at 90% capacity for finished product.

 

In 2021, our plants in Brazil produced 847,43 tons of billet and 854,382 tons of finished product, operating at 76% of its billet capacity and 91% capacity for finished product.

 

The following table sets forth, for the period indicated, selected operating data for our Brazil facilities.

 

Years ended December 31,
2017 2018 2019 2020 2021
Steel sales (thousands of tons) 300 433 684 871 857
Average finished product price per ton

Ps. 10,680

Ps. 13,681

Ps. 12,456

Ps. 12,422

Ps. 20,973

Average scrap cost per ton 4,846 6,553 5,290 5,420 9,320
Average manufacturing conversion cost per ton of finished product(1) 3,181 4,240 3,912 2,928 11,628
Average manufacturing conversion cost per ton of billet(1) 2,403 2,957 2,649 2,000 3,173

 

 

(1)Manufacturing conversion cost is defined as all production costs excluding the cost of scrap and related yield loss.

 

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The following table shows the products that we produce, the equipment that we use and the volume that we produce in each of our separate production facilities:

 

Production per Facility by Product, Equipment and Volume

 

Location  Product (%)  Equipment  2021 Annual
Production Volume
(tons)
   Finished Product
Annual Installed
Capacity (tons)
 
Guadalajara  I-Beams (27%); Channels (9%); Angles (35%); Hot rolled bars (20%); Flat bars (9%),  electric arc furnace with continuous caster rolling mill and bar processing lines   313,599    480,000 
                 
Mexicali  Angles (11%); Rebar (82%); Channels (2%); Hot rolled bars (2%) Other (3%)  electric arc furnace with continuous caster and rolling mills   164,572    250,000 
                 
Apizaco and Cholula  SBQ (100%)  electric arc furnace with vacuum tank degasser, continuous caster, rolling mills, cold drawn and bar turning equipment   516,850    1,164,000 
                 
San Luis Potosí  Rebar (73%); Wire rod (17%); Electro-Welded wire mesh (4%); Electro-Welded wire mesh panel (5%); Bars (1%)  electric arc furnaces, whit continuous casters, rolling mill and wire rod rolling mill   527,688    610,000 
                 
Lorain(1)  SBQ (100%)  electric arc furnace, blast furnace, vacuum tank degasser, continuous caster, and rolling mills   0    900,000 
                 
Canton(2)  SBQ (100%)  electric arc furnace, vacuum tank degasser and continuous caster   Our billet and bloom for internal consumption    Our billet and bloom for internal consumption 
                 
Lackawanna  SBQ (100%)  rolling mill and wire rod rolling mill   278,000    653,000 
                 
Massillon  SBQ (100%)  cold drawn, bar turning and heat treating equipment   24,000    138,000 
                 
Solon  SBQ (100%)  equipment to clean and coat, draw, and anneal wire   29,000    72,000 
                 
Brazil  Rebar (54%); Angles (18%); Bars (11%); Flat bars (10%); Other (7%);  electric arc furnace, with continuous caster with rolling mills and wire rod rolling mill   854,382    938,000 

 

 

(1)Production capacity is for rolling only.
  

(2)Production capacity is for billets only.

 

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Item 4A. Unresolved Staff Comments

 

None.

 

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.

 

A. Operating Results

 

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. 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 2019, the total decrease in net revenue from sales of SBQ products compared to 2018 was 12%. In 2020, the total increase in net revenue from sales of SBQ products compared to 2019 was 16%. In 2021, the total increase in net revenue from sales of SBQ products compared to 2020 was 17%.

 

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.

 

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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 2019, 2020 and 2021, 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 of America.

 

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. For this reason we have changed our customer focus to different industries.

 

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 24% of our business uses a fixed base price that is negotiated annually, plus monthly scrap and alloy surcharges. The remaining 76% is transaction business, where we can adjust the base pricing as required. Scrap metal and commodity prices in 2019 decreased approximately 20%, in 2020 and 2021 they increased by 9% and 62%. 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, 2017 - 2021

 

   Year ended December 31, 
   2017   2018   2019   2020   2021 
Shipments (thousands of tons)   2,091    2,192    2,349    2,441    2,504 
Guadalajara and Mexicali   533    515    503    519    472 
Apizaco and Cholula   331    321    318    318    346 
San Luis facilities   540    538    546    496    554 
Republic facilities   387    385    298    237    275 
Brazil   300    433    684    871    857 
                          
Net sales (Ps. millions)   28,700    35,678    34,171    35,869    55,620 
Guadalajara and Mexicali   6,149    7,082    6,537    6,914    9,914 
Apizaco and Cholula   5,106    5,757    5,319    5,222    8,161 
San Luis facilities   5,870    7,669    6,675    7,525    11,354 
Republic facilities   8,371    9,246    7,120    5,549    8,217 
Brazil   3,204    5,924    8,520    10,659    17,974 
                          
Cost of sales (Ps. millions)   23,994    30,563    30,067    29,212    39,973 
Guadalajara and Mexicali   4,703    5,710    5,364    5,311    7,083 
Apizaco and Cholula   3,607    3,948    4,001    4,148    6,101 
San Luis facilities   5,030    6,058    5,569    6,000    8,154 
Republic facilities   7,814    9,294    7,753    5,677    7,159 
Brazil   2,840    5,553    7,380    8,075    11,476 
                          
Average price per ton (Ps.)   13,725    16,276    14,547    14,666    22,212 
Guadalajara and Mexicali   11,537    13,751    12,996    13,321    21,004 
Apizaco and Cholula   15,426    17,935    16,726    16,421    23,587 
San Luis facilities   10,870    14,255    12,225    15,171    20,495 
Republic facilities   21,630    24,016    23,893    23,437    29,880 
Brazil   10,680    13,681    12,456    12,237    20,973 
                          
Average cost per ton (Ps.)   11,475    13,943    12,800    11,968    15,964 
Guadalajara and Mexicali   8,824    11,087    10,664    10,138    15,006 
Apizaco and Cholula   10,897    12,299    12,582    13,044    17,633 
San Luis facilities   9,315    11,260    10,200    12,107    14,718 
Republic facilities   20,191    24,140    26,017    25,996    26,033 
Brazil   9,467    12,824    10,789    10,785    13,391 

 

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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 2021 was positive by 5.0% (according to preliminary figures of the INEGI) and negative 8.5% in 2020 (according to figures of the INEGI). The U.S. GDP increased 6.0% in 2021 (according to preliminary figures of the U.S. Department of Commerce) and decreased 3.5% in 2020. 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 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. Our average steel price increased approximately 55% in 2021 compared to 2020.

 

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 of America 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 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. In 2021, imports to Mexico in tons increased 32.8% compared to 2020 according to information of CANACERO.

 

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Steel imports to the United States of America accounted for an estimated 24% of the domestic U.S. steel market in 2021 and an estimated 18% in 2020. 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 of America could reduce future market prices and demand levels for steel in the United States of America. 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 of America 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 31% in 2017, increased approximately 19.4% in 2018, decreased 20% in 2019, increased 9% in 2020 and increased 9% in 2021; and prices of ferroalloys increased approximately 22% in 2017, increased approximately 9.6% in 2018, decreased approximately 1% and 20% in 2019 and 2020, respectively, and increased approximately 62.6% in 2021. As with other raw materials, iron ore and coking coal prices fluctuate significantly. However, in 2017, 2018, 2019, 2020 and 2021 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 of America. These prices are impacted by general demand and supply for energy in the United States of America 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 of America and Mexico decreased in response to the financial crisis, they have remained highly volatile. Prices for electricity increased approximately 22% in 2017, increased approximately 14% in 2018, increased approximately 0.1% in 2019, decreased approximately 10% in 2020 and increased 4.7% in 2021; and prices for natural gas increased approximately 22% in 2017, increased approximately 28% in 2018, increased approximately 1.8% in 2019, decreased 18% in 2020 and decreased 1% in 2021.

 

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 6.8% for 2017, 4.8% for 2018, 2.8% for 2019, 3.2% in 2020 and 7.4% in 2021. 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. According to the Mexican Central Bank (Banco de Mexico), during the period from 2019 to 2021, the exchange rate registered a low of Ps. 18.57 per U.S.$1.00 at February 17, 2020, and a high of Ps. 24.88 per U.S.$1.00 at April 27, 2020. The depreciation of the Mexican peso relative to the U.S. dollar in 2021 was 2.9%. The exchange rate at December 31, 2021 was 20.5157 compared to 19.9352 at December 31, 2020. On May 17, 2022, the exchange rate was Ps. 20.1443 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.

 

41

 

 

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 of America; 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, 2021 
   Mexico   United
States of
America
   Brazil   Operations
between
Segments
   Total 
   (in thousands of pesos) 
Net sales   29,678,133    8,216,595    17,725,628        55,620,356 
Cost of sales   21,337,462    7,159,354    11,471,370        39,968,186 
Gross profit (loss)   8,340,671    1,057,241    6,254,258        15,652,170 
Administrative expenses   907,798    256,875    877,969        2,042,642 
Other expense (income), net   77,530    (454,303)   (1,793)   (455,972)   (77,406)
Interest income   (65,631)   (317)           (65,948)
Interest expense   28,904    61,494    96,486    (99,439)   87,445 
Exchange (gain) loss, net   (325,389)   378    120,300    (120,300)   (325,011)
Income (loss) before income tax   7,717,459    1,193,114    5,161,296    (236,233)   13,835,636 
Income tax   2,472,751    477,380    1,439,638        4,389,769 
Net (loss) income   5,244,708    715,734    3,721,658    (236,233)   9,445,867 

 

Other Data  Mexico   United
States of
America
   Brazil   Operations
between
Segments
   Total 
Depreciation and amortization   667,167    270,119    237,852        1,175,108 
Total assets   47,917,643    10,836,083    8,815,051    (10,226,205)   57,342,572 
Total liabilities   7,665,924    5,544,135    12,396,190    (10,226,205)   15,380,044 
Additions of property, plant and equipment, net   367,496    288,487    410,439        1,066,422 

 

   For the year ended December 31, 2020 
   Mexico   United
States of
America
   Brazil   Operations
between
Segments
   Total 
   (in thousands of pesos) 
Net sales   19,660,889    5,549,366    10,659,259        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   (52,656)   (505,946)   11,854        (546,748)
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   2,755,145    123,001    748,744    1,249,037    4,875,927 
Income tax   1,747,568    118,926    211,350        2,077,844 
Net (loss) income   1,007,577    4,075    537,394    1,249,037    2,798,083 

 

42

 

 

Other Data  Mexico   United
States of
America
   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 of
America
   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 (income) expense, 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 (gain) loss, 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 income (loss)   (1,411,702)   (673,860)   290,621    155,083    (1,639,858)

 

43

 

 

Other Data  Mexico   United
States of
America
   Brazil   Operations
between
Segments
   Total 
Depreciation and amortization   577,048    260,760    270,821        1,108,629 
Total assets   34,973,516    8,419,771    6,002,701    (3,343,456)   46,052,532 
Total liabilities   9,291,486    4,219,817    3,274,908    (3,343,456)   13,442,755 
Additions of property, plant and equipment, net   785,818    278,467    207,135        1,271,420 

 

Our net sales by product during 2019, 2020 and 2021 were as follows:

 

SALES BY PRODUCT

(in thousands of pesos)

   2019   2020   2021 
Light structural   1,396,632    1,529,216    2,600,484 
Structural   3,304,178    3,677,441    5,342,228 
Bars   2,220,264    2,051,053    4,456,151 
Rebar   12,370,490    14,081,399    19,625,065 
Flat bar   1,833,576    1,851,960    3,376,554 
Hot rolled bars   8,226,613    7,548,939    11,413,275 
Cold drawn bars   3,102,544    2,139,938    3,213,061 
Other   1,716,904    2,989,368    5,593,538 
Total   34,171,201    35,869,314    55,620,356 

 

Our net sales by country or region during 2019, 2020 and 2021 are as follows:

 

SALES BY COUNTRY OR REGION

(in thousands of pesos)

   2019   2020   2021 
Mexico   17,873,633    18,122,828    28,060,405 
USA   7,544,078    6,555,642    9,050,696 
Brazil   8,500,592    10,608,151    17,548,823 
Canada   175,686    311,761    441,856 
Latin America   60,672    253,096    513,524 
Other (Europe and Asia)   16,540    17,836    5,052 
Total   34,171,201    35,869,314    55,620,356 

 

44

 

 

Consolidated Statements of Comprehensive Income

Comparison of Years Ended December 31, 2020 and 2021

 

Net Sales

 

Net sales increased 55%, to Ps. 55,620 million in 2021 compared to Ps. 35,869 million in 2020. This increase resulted primarily from a 51% increase in the average price per ton of steel products of 2021 compared to 2020. Total sales outside of Mexico increased 55%, to Ps. 27,560 million in 2021 compared to Ps. 17,746 million in 2020. Total sales in Mexico increased 51%, from Ps. 18,123 million in 2020 to Ps. 28,060 million in 2021.

 

Shipments of finished steel products increased 2.5%, to 2.504 million tons in 2021, compared to 2.441 million tons in 2020. Total sales volume outside of Mexico of finished steel products increased 2.2% to 1.132 million tons in 2021, compared to 1.108 million tons in 2020, while total Mexican sales increased 2.9%, from 1.333 million tons in 2020, compared to 1.372 million tons in 2021. The average price of steel products increased 51% in 2021 compared to 2020.

 

Cost of Sales

 

Our cost of sales increased 36.8%, from Ps. 29,212 million in 2020 to Ps. 39,968 million in 2021, the increase is mainly attributable to a 33.3% increase in the average cost per ton of steel products sold. Cost of sales as a percentage of net sales was 72% in 2021 and 81% in 2020. 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.$1.8 (Ps. 37) per hour in 2021 and U.S.$1.9 (Ps. 37) per hour in 2020, compared to U.S.$23.7 (Ps. 486) and U.S.$34 (Ps. 678) per hour for 2021 and 2020, respectively, at our U.S. operations. Although raw material costs are similar in the United States of America 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. 15,652 million in 2021 compared to a Ps. 6,658 million gross profit in 2020. This increase in gross profit is attributable mainly to an increase of 63,000 tons of finished steel products shipped, a 51% increase in the average price of steel products sold, and a 33.3% increase in the average cost per ton of steel products sold. As a percentage of net sales, our gross profit was 28% in 2021 and our gross profit was 18% in 2020.

 

Administrative Expenses

 

Our administrative expenses (including depreciation and amortization) increased 1.1%, to Ps. 2,043 million in 2021, compared to Ps. 2,019 million in 2020. The variation of Ps. 24 million corresponds to the decrease of Ps. 210 million in the Mexican segment (mainly legal expenses),a the increase of Ps. 217 million in the Brazil segment and an increase of Ps. 16 million in the US segment. In 2021 and 2020, our general and administrative expenses included Ps. 10.5 million and 11.2 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 4% in 2021 and 6% in 2020. Depreciation and amortization expense were Ps. 256 million in 2021 compared to Ps. 422 million in 2020.

 

Other (Income) Expense, Net

 

We recorded other expense, net, of Ps. 77 million in 2021, mainly from account debugging.

 

We recorded other income, 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.

 

45

 

  

Interest Income

 

We recorded interest income of Ps. 66 million in 2021 compared to Ps. 108 million in 2020. Mainly to interest charged to affiliated companies.

 

Interest Expense

 

We recorded interest expense of Ps. 87 million in 2021 compared to Ps. 54 million in 2020. Mainly from a higher use of financial services.

 

Foreign Exchange Loss (Gain)

 

We recorded a foreign exchange gain of Ps. 325 million in 2021 compared to a foreign exchange loss of Ps. 363 million in 2020; this foreign exchange loss reflected the 2.9% depreciation of the peso against the dollar in 2021.

 

Income Tax

 

In 2021 we recorded an income tax provision of Ps. 4,390 million, which included an income tax provision of Ps. 3,818 million and an income tax expense provision for deferred income taxes of Ps. 572 million. In 2020 we recorded an income tax provision of Ps. 2,078 million, which included an income tax provision of Ps. 1,831 million and an income tax expense provision for deferred income taxes of Ps. 247 million.

 

Our effective income tax rates for 2021 and 2020 were 31.7% and 27.9%, respectively. According to the Income Tax Law in Mexico, the tax rate for the year 2021 and years thereafter is 30%.

  

Net Income (Loss)

 

We recorded net profit of Ps. 9,446 million in 2021, compared to net profit of Ps. 2,798 million in 2020. The net profit for the year 2021 compared to the net profit in 2020 is mainly as a result of (i) a 51% increase in the average price of steel products sold, (ii) a 9% decrease in cost of sales, (iii) the increase in the foreign exchange gain in 2021 to Ps. 325 million compared to the foreign exchange loss of Ps. 363 million in 2020 and (iv) the increase in the provision of income taxes in 2021 to Ps. 4,390 million compared to Ps. 2,078 million in 2020.

 

46

 

 

Mexican Segment

Statements of Comprehensive Income

Comparison of Years Ended December 31, 2020 and 2021

 

Net Sales

 

Net sales increased 51%, to Ps. 29,678 million in 2021 compared to Ps. 19,661 million in 2020. This increase resulted principally from a 46.7% increase in the average price per ton of steel products in 2021 compared to 2020.

 

Shipments of finished steel products increased 2.9%, to 1.372 million tons in 2021, compared to 1.332 million tons in 2020.

  

Cost of Sales

 

Our cost of sales increased 38%, from Ps. 15,459 million in 2020 to Ps. 21,337 million in 2021, this increase is mainly attributable to an increase in the scrap cost. As a percentage of net sales, our cost of sales was 72% in 2021, compared to 79% in 2020.

 

Gross Profit

 

Our gross profit increased 98.5%, to Ps. 8,341 million in 2021 compared to Ps. 4,202 million in 2020. This increase is attributable mainly to an increase of 46.7% in the average price of steel products sold, decreased by a higher average cost of sales per ton of 34.1%. As a percentage of net sales, our gross profit was 28% in 2021, compared to 21% in 2020.

  

Administrative Expenses

 

Our administrative expenses (including depreciation and amortization) decreased 18.8%, to Ps. 908 million in 2021, compared to Ps. 1,118 million in 2020. The decrease was mainly originated by lower legal expenses.

 

Administrative expenses as a percentage of net sales were 3.1% in 2021 and 5.6% in 2020. Depreciation and amortization expense were Ps. 238 million in 2021 compared to Ps. 283 million in 2020.

 

Other Expense (Income), Net

 

We recorded other expenses, net, of Ps. 77.5 million in 2021, reflecting income related to account debugging.

 

We recorded other income, net, of Ps. 53 million in 2020, reflecting an income related to the sale of scrap,

 

47

 

 

Interest Income

 

We recorded interest income of Ps. 65.6 million in 2021 compared to Ps. 107 million in 2020. This interest income corresponds mainly to affiliates.

 

Interest Expense

 

We recorded interest expense of Ps. 28.9 million in 2021, corresponding mainly to related party transactions that are not eliminated in the consolidated statement of income, compared to Ps. 5 million of interest income in 2020.

 

Foreign Exchange Gain (Loss)

 

We recorded a foreign exchange gain of Ps. 325 million in 2021 compared to a foreign exchange loss of Ps. 484 million in 2020; this foreign exchange reflected the 2.9% depreciation of the Mexican peso against the dollar in 2021.

 

Income Tax

 

In 2021, we recorded an income tax provision of Ps. 2,473 million, which included an income tax provision of Ps. 2,569 million and an income tax provision for deferred income taxes of Ps. 96 million. 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.

 

According to the Income Tax Law in Mexico, the tax rate for 2021 and thereafter is 30%.

 

Net Income

 

We recorded net income of Ps. 5,245 million in 2021, compared to net income of Ps. 1,008 million in 2020. This variance is attributable mainly to; (i) an increase of 51% in the average price of steel products sold, (ii) less administrative expenses of Ps. 210 million, (iii) a foreign exchange gain of Ps. 325 million in 2021 compared to Ps. 484 million of foreign exchange loss in 2020 and (iv) a higher income tax provision in 2021 of Ps. 2,473 million compared to Ps. 1,748 million in 2020.

 

48

 

 

USA Segment

Statements of Comprehensive Income

Comparison of Years Ended December 31, 2020 and 2021

 

Net Sales

 

Net sales increased 48%, to Ps. 8,217 million in 2021 compared to Ps. 5,549 million in 2020. This increase resulted principally from an increase of 38,000 tons in shipments of finished steel products and a higher average price of steel products.

 

Shipments of finished steel products increased 16%, to 275,000 tons in 2021, compared to 237,000 tons in 2020.

 

The average price of steel products in pesos increased 27.7% in 2021 compared to 2020.

 

Cost of Sales

 

Our cost of sales increased 26.1%, from Ps. 5,677 million in 2020 to Ps. 7,159 million in 2021, the increase is mainly due to an increase of approximately 38,000 in tons of shipments of finished steel products and the 8.7% increase in the average cost per ton of steel products sold. Cost of sales as a percentage of net sales was 87% in 2021, compared to 102% in 2020.

 

Gross Profit (Loss)

 

Our gross profit was Ps. 1,057 million in 2021 compared to a Ps. 128 million gross loss in 2020. As a percentage of net sales, our gross profit was 12.9% in 2021, mainly attributable to an increase of approximately 38,000 tons of shipments of finished steel products and an increase of 27.7%, approximately, in the average price per ton of steel products sold, compared to a gross loss of (2%) in 2020.

 

Administrative Expenses

 

Our administrative expenses (including depreciation and amortization) were Ps. 257 million in 2021, compared to Ps. 241 million in 2020.

 

Administrative expenses as a percentage of net sales were 3% in 2021 and 4% in 2020. Depreciation and amortization expense were Ps. 27 million in 2021 compared to Ps. 25 million in 2020.

 

Other Income, Net

 

We recorded other income, net, of Ps. 454 million in 2021, related to other financial operations.

 

We recorded other income, net, of Ps. 506 million in 2020, related to scrap metal sold during the period.

 

Interest Income

 

We recorded an interest income of Ps. 0 million in 2021 compared to Ps. 0 million in 2020.

 

Interest Expense

 

We recorded an interest expense of Ps. 61 million in 2021 compared to Ps. 16 million in 2020.

 

Foreign Exchange Gain (Loss)

 

We recorded a foreign exchange loss of Ps. 0.4 million in 2020 compared to a foreign exchange gain of Ps. 2 million in 2020.

 

Income Tax

 

In 2021, we recorded an income tax provision of Ps. 477 million and an income tax profit provision. In 2020, we recorded an income tax provision of Ps. 119 million.

 

Net Profit

 

We recorded a net profit of Ps. 716 million in 2021, compared to a net profit of Ps. 4 million in 2020. Our net income in 2021 is attributable mainly to an increase in the average price of steel tons produced of 27.7% and the increase of 38,000 tons in shipments of finished steel products.

 

49

 

 

Brazil Segment

Statements of Comprehensive Income

Comparison of Years Ended December 31, 2020 and 2021

 

Net Sales

 

Net sales increased 66% to Ps. 17,726 million in 2021 compared to Ps. 10,659 million in 2020. This increase resulted principally from a higher average price of finished steel products.

 

Shipments of finished steel products decreased to 857,000 tons in 2021 compared to 870,500 tons in 2020 (including the shipment of the plants Cariacica and Itauna).

 

Cost of Sales

 

Our cost of sales increased to Ps. 11,471 million in 2021 compared to Ps. 8,075 million in 2020. The average cost per ton of steel products sold increased 44.3% compared to 2020. Cost of sales as a percentage of net sales was 65% in 2021, compared to 76% in 2020.

 

Gross Profit

 

Our gross profit was Ps. 6,254 million in 2021 compared to Ps. 2,584 million of gross profit in 2020. As a percentage of net sales, our gross profit was 35% in 2021, compared to 24% of gross profit in 2020.

 

Administrative Expenses

 

Our administrative expenses (including depreciation and amortization) were Ps. 878 million in 2021 compared to Ps. 661 million in 2020. Administrative expenses as a percentage of net sales were 5% and 6% in 2021 and 2020, respectively. Managerial expenses increased the administrative expenses.

 

Depreciation and amortization expenses were Ps. 2 million in 2021 compared to Ps. 126 million in 2020.

 

Other Expense, Net

 

We recorded other income, net of Ps.2 million in 2021.

 

We recorded other expense, net, of Ps. 12 million in 2020. 

 

Interest Expense

 

We recorded an interest expense of Ps. 96 million in 2021 compared to Ps. 66 million in 2020.

 

Foreign Exchange Gain (Loss)

 

We recorded a foreign exchange loss of Ps. 120 million in 2021 this foreign exchange loss reflected the depreciation of the Brazilian real against the dollar in 2021 compared to a foreign exchange loss of Ps. 1,096 million in 2020.

 

Income Tax

 

In 2021 we recorded an income tax provision of Ps. 1,440 million compared to Ps. 211 million of income tax provision in 2020.

 

Net Income (Loss)

 

We recorded a net income of Ps. 3,722 million in 2021 compared to a net income of Ps. 537 million in 2020. The net income for the year 2021 compared to the net income in 2020 is mainly as a result of an increase of the average price of finished steel products shipped.

 

50

 

 

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 of America 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.

 

51

 

 

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 expense 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.

 

52

 

 

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.

 

53

 

 

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.

 

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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. 

 

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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.

 

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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 of America 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.

 

57

 

 

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.

 

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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.

 

59

 

 

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.

 

60

 

 

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.

 

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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.

 

B. Liquidity and Capital Resources

 

On December 31, 2021, our total consolidated debt was Ps. 6,196 million (U.S.$302,000) of 10 3/4% 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.

  

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 ADRs and series B shares and raised cash proceeds of approximately Ps. 2,421 million (U.S.$214 million). As of December 31, 2019, we had cash and cash equivalents of Ps. 7,446 million and as of December 31, 2020 we had cash and cash equivalents of Ps. 7,728 million. As of December 31, 2021 we had cash and cash equivalents of Ps. 15,130 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, 2019, 2020 and 2021:

 

Principal Cash Flows

 

   Years ended December 31, 
   2019   2020   2021 
   (millions of pesos) 
Funds provided by operating activities   1,043    3,634    8,387 
Funds used in investing activities   (107)   (833)   (1,010)
Funds used in financing activities   (211)   (2,086)   (162)

 

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Our net funds provided by operations were Ps. 8,387 million in 2021 compared to Ps. 3,634 million of net funds provided by operations in 2020. The increase of Ps. 2,591 million in the net funds provided by operations between 2020 and 2019 originated mainly from operations.

 

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. 1,010 million in 2021 compared to Ps. 833 million in 2020. In 2021 the acquisition of property, plant and equipment was Ps.1,066 million, we had interest income of Ps. 66 million and other non-current assets used for Ps. 9 million. 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 for Ps. 11 million.

 

Our net funds used by financing activities in 2021 were Ps. 162 million, compared to Ps. 2,086 million used by financing activities in 2020. In 2021, there was an decrease of Ps. 74 million in the buy-back of our own shares and we paid interest for Ps. 87 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 for Ps. 54 million.

 

As of December 31, 2021, 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 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. 24.6 million (U.S.$1.2 million) and of Ps. 21.9 million (U.S.$1.1 million) from this agreement in 2021 and in 2020, respectively.

 

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 Primetal Technologies of Italy, the United States of America 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. As of January 2021, steel bars are already being produced. Currently, some adjustments are being made to start the production of steel rods and steel profiles. The budget used for this project is U.S.$24 million (Ps. 492 million).

 

On December 20, 2020, the purchase of the Itauna plant was made by Cia. Siderúrgica de Espirito Santo, S.A. to Compañia Itaunense Energia y Participacoes Real Estate and Real Estate Equipment, located on Rua Clara Chaves street in Villa Santa Maria, city of Itauna, committing to pay R$ 4.0 million reais (U.S. $ 0.7 million) per month, up to a value of R$ 105.0 million reais (U.S. $18.8 million), payments to be made until 2022.

 

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. This project 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 costs. The cost of this project has been U.S.$1.415 million, as of October 2021. The modernization of the Mexicali plan is ongoing.

 

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C. Research and Development, Patents and Licenses

 

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.

 

D. Trend Information

 

In the first quarter of 2022, net sales increased by 17% as compared to the fourth quarter of 2021. Sales in tons of finished steel increased by 13% in the first quarter of 2022 as compared to the fourth quarter of 2021. Prices of finished products sold in the first quarter of 2022 increased by approximately 3% as compared to the fourth quarter of 2021. 

 

E. Critical Accounting Estimates

 

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.

 

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Management has no near-term plans to restart the facility, except for the Lorain 9/10” Mill, which is in the process of being recommissioned due to market demand for cold heading quality steel (CHQ) and special bar quality steel (SBQ). The expectation is that it will be restarted when market conditions improve substantially, particularly in the oil and gas drilling industry. During 2021 and 2020, the Company invested in certain improvements in the Lorain facility so as to be better prepared to reactivate the plant, with USD$ 15.6 and USD$ 6.0 million recorded to construction-in-progress for the years ended December 31, 2021 and 2020, respectively. The Company has property, plant and equipment with a net book value of approximately U.S.$54.6 (Ps. 1,120 million), U.S.$41.5 (ps. 827 million) and U.S.$41.5 (Ps. 783 million) as of December 31, 2021, 2020 and 2019, respectively, pertaining to the Lorain, Ohio, facility, after recording an 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, 2021, 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)
 
12/31/2019  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. 
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 
2021  Sale of Coke   0    0    0              
12/31/2021  Coke inventory   150,509    136,541    U.S.$99,932,739.59   U.S.$731.88   U.S.$465.50    U.S.$63,559,835.50 

 

 

1)In 2021 ,the applicable exchange rate was 20.52 per 1 U.S. dollar. In 2020, the applicable exchange rate was 19.93 pesos per 1 U.S. dollar. In 2019, the applicable exchange rate was 18.87 pesos per I U.S. dollar.
(2)Market price of Furnace coke quoted by Platts “SBB STEEL MARKETS DAILY” - 66/65 CCSR - FOB N.China

 

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:

 

  our history of earnings;

 

  our history of capital expenditures;

 

  the remaining useful lives of our primary assets;

 

  current and expected market and operating conditions; and

 

  our weighted average cost of capital.

 

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, 2020 and 2021, 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, 2020 and 2021, there was no impairment charge related to the San Luis facilities.

 

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As of December 31, 2021, the main key assumptions used in the valuation models of the San Luis reporting unit are as follows:

 

  discount rate: 12.7%; and

 

  sales: we estimate an increase in sales volume of approximately 31.22% in 2021, mainly attributable to the constant increase in volume due to the industries’ growth. After 2023, no sales increases in volume terms are considered in the valuation model. For the years after 2022, we estimate only an increase in sales prices in line with estimated inflation.

 

If these estimates or their related assumptions for prices and demand change in the future, we may be required to record additional impairment charges for these assets.

 

With respect to valuation allowance on accounts receivable, on a periodic basis management analyzes the recoverability of accounts receivable in order to determine if, due to credit risk or other factors, some receivables may not be collected. If management determines that such a situation exists, the book value of the non-recoverable assets is adjusted and charged to the income statement through an increase in the doubtful accounts allowance. This determination requires substantial judgment by management. As a result, final losses from doubtful accounts could differ significantly from estimated allowances.

 

We apply judgment at each balance sheet date to determine whether the slow-moving inventory is impaired. Inventory is impaired when the carrying value is greater than the net realizable value.

 

The reserve for environmental liabilities represent the estimated environmental remediation costs that we believe are going to incur. These estimates are based on currently available data, existing technology, the current laws and regulations and take into account the likely effects of inflation and other economic and social factors. The time in which we could incur these costs cannot be determined reliably at this time due to the absence of deadlines for remediation under the laws and regulations which apply to remediation costs will be made.

 

New Accounting Pronouncements

 

IASB has issued amendments to IFRS, which were enacted but some of which are not yet effective:

  

Amendments are effective as of 2022:

 

In May 2020, the following amendments were issued:

 

Reference to the conceptual framework

 

IFRS 3.- Business Combinations, the amendments correspond only to refer to the conceptual framework.

 

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.

 

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.

 

Also in May 2020, annual improvements to IFRS Standards 2018-2020 were issued, effective January 1, 2022.

 

IFRS 1 First-time Adoption of International Financial Reporting Standards

 

Purpose of improvement:

 

Some options are established for the application of the Standards to Subsidiaries as a first-time adopter of IFRS

 

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IFRS 9 Financial Instruments.

 

Purpose of improvement:

 

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

 

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.

 

In February 2021, the following amendments were issued:

 

IAS 1.- Presentation of financial statements, the modification is that an entity must disclose its material information on accounting policies instead of its significant accounting policies.

 

IAS 8.- Accounting policies, changes in accounting estimates and errors, this standard is modified to clarify how entities must distinguish between changes in accounting policies and changes in accounting estimates.

 

In May 2021, the IASB issued an amendment to IAS 12.- Income Tax, which clarifies the accounting for deferred tax on transactions that, at the time of the transaction, give rise to equal taxable temporary differences and deductibles. In specific circumstances, entities are exempt from recognizing deferred taxes when they recognize assets or liabilities for the first time. The amendments clarify that the exemption does not apply to transactions for which entities recognize both an asset and a liability and that give rise to equal taxable and deductible temporary differences. This may be the case for transactions such as leases and decommissioning, restoration and similar obligations. Entities are required to recognize deferred taxes on such transactions.

 

This Standard modifies IFRS 1.- Adoption for the first time of the International Financial Reporting Standards, to establish that deferred taxes related to leases and dismantling, restoration and similar obligations are recognized by those who adopt for the first time on the date of transition to International Financial Reporting Standards, despite the exemption established in IAS 12.

 

At the date of issuance of our consolidated financial statements, these new standards have not had any effect on our financial information.

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

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 by-laws, 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 by-laws 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.

 

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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 2021 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:

 

  our general strategy;

 

  annual approval of the business plan and the investment budget;

 

  capital investments not considered in the approved annual budget for each fiscal year;

 

  proposals to increase our capital or that of our subsidiaries;

 

  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;

 

  calling shareholders’ meetings and acting on their resolutions;

 

  any transfer by us of shares in our subsidiaries;

 

  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;

 

  determining how to vote the shares that we hold in our subsidiaries; and

 

  the exercise of our general powers in order to comply with our corporate purpose.

 

Meetings of the board of directors will be validly convened and held if a majority of our members are present. Resolutions at the meetings will be valid if approved by a majority of the members of the board of directors, unless our by-laws require a higher number. The chairman has a tie-breaking vote. Notwithstanding the board’s authority, our shareholders pursuant to decisions validly taken at a shareholders’ meeting at all times may override the board.

 

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Duty of Care and Duty of Loyalty

 

The Mexican Securities Market Law imposes a duty of care and a duty of loyalty on directors. The duty of care requires our directors to act in good faith and in the best interests of the company. In carrying out this duty, our directors are required to obtain the necessary information from the executive officers, the external auditors or any other person to act in the best interests of the company. Our directors are liable for damages and losses caused to us and our subsidiaries as a result of violating their duty of care.

 

The duty of loyalty requires our directors to preserve the confidentiality of information received in connection with the performance of their duties and to abstain from discussing or voting on matters in which they have a conflict of interest. In addition, the duty of loyalty is violated if a shareholder or group of shareholders is knowingly favored or if, without the express approval of the board of directors, a director takes advantage of a corporate opportunity. The duty of loyalty is also violated, among other things, by (i) failing to disclose to the audit and corporate practices committee or the external auditors any irregularities that the director encounters in the performance of his or her duties or (ii) disclosing information that is false or misleading or omitting to record any transaction in our records that could affect our financial statements. Directors are liable for damages and losses caused to us and our subsidiaries for violations of this duty of loyalty. This liability also extends to damages and losses caused as a result of benefits obtained by the director or directors or third parties, as a result of actions of such directors.

 

Our directors may be subject to criminal penalties of up to 12 years’ imprisonment for certain illegal acts involving willful misconduct that result in losses to us. Such acts include the alteration of financial statements and records.

 

Liability actions for damages and losses resulting from the violation of the duty of care or the duty of loyalty may be exercised solely for our benefit and may be brought by us, or by shareholders representing 5% or more of our capital stock, and criminal actions only may be brought by the Mexican Ministry of Finance, after consulting with the CNBV. As a safe harbor for directors, the liabilities specified above (including criminal liability) will not be applicable if the director acting in good faith (i) complied with applicable law, (ii) made the decision based upon information provided by our executive officers or third-party experts, the capacity and credibility of which could not be subject to reasonable doubt, (iii) selected the most adequate alternative in good faith or if the negative effects of such decision could not have been foreseeable, and (iv) complied with shareholders’ resolutions provided the resolutions do not violate applicable law.

 

The members of the board are liable to our shareholders only for the loss of net worth suffered as a consequence of disloyal acts carried out in excess of their authority or in violation of our by-laws.

 

In accordance with the Mexican Securities Market Law, supervision of our management is entrusted to our board of directors, which shall act through an audit and corporate practices committee for such purposes, and to our external auditor. The audit and corporate practices committee (together with the board of directors) replaces the statutory auditor (comisario) that previously had been required by the Mexican Corporations Law. See Item 6.C. “— Committees” below.

 

The following table sets forth the names of the members of our board of directors and the year of their initial appointment:

 

Name    Director 
Since 
 
Rufino Vigil González   2001 
Raúl Arturo Pérez Trejo   2003 
Luis García Limón   2011 
Rodolfo García Gómez de Parada   2001 
Alfonso Barragán Galindo   2019 

 

Biographical Information of our Board of Directors

 

Rufino Vigil González. Mr. Vigil was born in 1948. He is currently the chairman of our board of directors and has been a member of the board of directors since 2001. Since 1973, Mr. Vigil has been chief executive officer of 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.

 

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.

 

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Luis García Limón. Mr. García was born in 1944. He was our chief executive officer and is still 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.

 

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.

 

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.

  

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  Finance Coordinator  2012 
Armando Rueda Granados  Chief Operating Officer  2021 

 

Rufino Vigil González. Mr. Vigil was born in 1948. He is currently the chairman of our board of directors and has been a member of the board of directors since 2001. Since 1973, Mr. Vigil has been chief executive officer of 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 for Simec.

 

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.

 

Armando Rueda Granados. Mr. Rueda was born in 1965. He is currently our chief operating officer. From 1998 to 2017, he has been working in several operational departments, like machining and laminations. From 2017 to 2021, he worked as operational controller.

 

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 is the chief executive officer of Industrias CH, which, together with its wholly-owned subsidiaries, currently hold approximately 1% 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. Mr. Vigil is the brother of our controlling shareholder and chairman of our board of directors, Rufino Vigil González. 

 

The business address of our directors and executive officers is our principal executive headquarters.

 

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B. Compensation

 

For the years ended December 31, 2021 and 2020, we paid no fees to our five directors, and the aggregate compensation our executive officers earned was approximately Ps. 78.3 million and Ps. 90.6 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.

 

C. Board Practices

 

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 by-laws 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.” In accordance with the bylaws of Grupo Simec, the Audit and Corporate Practices Committee is made up exclusively of independent directors and a minimum of 3 members. The Chairman of said Committee is appointed by the Shareholders’ Meeting, and the rest of its members may be appointed by the Board of Directors.

 

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 2021.

 

D. Employees

 

As of December 31, 2021, we had 5,331 employees (3,177 were employed at our Mexico facilities, of whom 1,524 were unionized, 815 were employed at Republic facilities, of whom 620 were unionized and 1,339 were employed at our Brazil plants, of whom 1,248 were unionized) compared to 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) in 2020.

 

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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.

 

  Guadalajara facilities: Sindicato de Trabajadores en la Industria Siderúrgica y Similares en el Estado de Jalisco. The contract expires on February 18, 2022.

 

  Mexicali facilities: Sindicato de Trabajadores de la Industria Procesadora y Comercialización de Metales de Baja California. The contract expires on January 15, 2022.

 

  Apizaco facilities: Sindicato Nacional de Trabajadores de Productos Metálicos, Similares y Conexos de la República Mexicana. The contract expires on January 15, 2022.

 

  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.

  

  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.

 

We have had good relations with the unions in our 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, 2021, 76% 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. 53 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 48% 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, 2022.

 

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. 34) per hour for each covered employee’s contributory hours, as defined under the plan.

 

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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, 2021 and 2020, is outlined in the table below.

 

       Pension
Protection Act
Zone Status(a)
      

Republic Steel Contributions

(U.S.$ in thousands) 

   Surcharge
Imposed(c)
     
Pension Fund  EIN/ Pension
Plan Number
   2021   2020   FIP/RP Status
Pending/
Implemented(b)
   2021