UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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 |
Date of event requiring this shell company report ____________
For the transition period from ____________ to ___________
Commission File Number: 333-7480
INDUSTRIAS BACHOCO, S.A.B. DE C.V.
Bachoco Industries
(Translation of Registrant’s name into English)
The United Mexican States
Avenida Tecnologico No. 401
Ciudad Industrial C.P. 38010
Celaya, Guanajuato, Mexico.
(Address of principal executive offices)
Daniel Salazar Ferrer
Avenida Tecnologico No. 401
Ciudad Industrial C.P. 38010
Celaya, Guanajuato, Mexico
Telephone: (+011-52-461-618-3555)
Facsimile: (+011-52-461-611-6502)
Email: inversionistas@bachoco.net
(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 | Name of each exchange on which registered | |
| American Depositary Shares, each representing twelve | New York Stock Exchange | |
| Series B Shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NoneSecurities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
NoneIndicate 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 Capital Stock: 600,000,000 Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ Nox
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 x No¨
Note
: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.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 x No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 x No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filerx | Non-accelerated filer¨ |
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 | Otherx |
| Standards as issued by the International | ||
Accounting Standards Board ¨ |
If “Other”“Other has been checked in response to the previous question, indicate by check mark which financial statements item the registrant has elected to follow:
Item 17¨ Item 17 ¨ Item 18 x
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 ¨ Nox
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 23 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court.
Yes ¨ No¨
| ii |
TABLE OF CONTENTS
| iii |
| iv |
| A. | Debt Securities | 67 | ||||
| B. | Warrants and Rights | 67 | ||||
| C. | Other Securities | 67 | ||||
| D. | American Depository Receipts | 67 | ||||
| PART II | 69 | |||||
| ITEM 13. | Default, Dividend Arrearages and Delinquencies | 69 | ||||
| ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 69 | ||||
| ITEM 15. | Controls and Procedures | 69 | ||||
| ITEM 16. | [Reserved] | 71 | ||||
| ITEM 16.A. | Audit Committee Financial Expert | 71 | ||||
| ITEM 16.B. | Code of Ethics | 72 | ||||
| ITEM 16.C. | Principal Accountant Fees and Services | 72 | ||||
| ITEM 16.D. | Exemptions from the Listing Standards for Audit Committees | 72 | ||||
| ITEM 16.E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 73 | ||||
| ITEM 16.F. | Changes in Registrant’s Certifying Accountant | 74 | ||||
| ITEM 16.G. | Corporate Governance | 75 | ||||
| PART III | 81 | |||||
| ITEM 17. | Financial Statements | 81 | ||||
| ITEM 18. | Financial Statements | 81 | ||||
| ITEM 19. | Exhibits | 81 | ||||
| 81 | ||||||
| v |
Industrias Bachoco, S.A.B. de C.V. is a holding company with no operations other than holding the stock of its subsidiaries. Our principal operating subsidiary is Bachoco, S.A. de C.V. (“BSACV”), which owns the principal operating assets of Industrias Bachoco, S.A.B. de C.V. and accounted for 87.5%81.37% of consolidated total assets on December 31, 2010.2011. References herein to “Bachoco,” “we,” “us,” “our,” “its” or the “Company” are, unless the context requires otherwise, to Industrias Bachoco, S.A.B. de C.V. and its consolidated subsidiaries as a whole.
We are incorporated under the laws of the United Mexican States (“Mexico”), but we have operations in both in Mexico and all of our operations are in Mexico.the U.S. Our principal executive offices are located in Mexico at Avenida Tecnologico No. 401, Ciudad Industrial C.P. 38010, Celaya, Guanajuato, Mexico, and our telephone number is +52-461-618-3555.
Presentation of Information
We publish our financial statements in Mexican pesos and present our financial statements in accordance with Mexican Financial Reporting Standards (“Mexican FRS”) in effect as of. Information from the balance sheet date andyears 2008 to 2011, does not include the recognition of the effects of inflation, on thewhile financial information throughis presented in constant pesos as of December 31, 2007, based on the Mexican National Consumer Price Index (NCPI) published by Banco de Mexico (the “Central Bank”).
Mexican FRS B-10 supersedes Bulletin B-10 Recognition of the effects of inflation on the financial information and its five amendment documents as well as the related circulars and Interpretation of Financial Reporting Standards. The principal considerations established by this FRS are:
Recognition of the effects of inflation – An entity operates in (a) an inflationary economic environment when cumulative inflation over the immediately preceding 3-year period is equal to or greater than 26.0%; and (b) a non-inflationary economic environment, when inflation over the aforementioned period is less than 26.0%. For more detail, see Note 2-c2-d) in our Audited Consolidated Financial Statements.
With respect to (a) above, similarly to the superseded Bulletin B-10, the comprehensive recognition of the effects of inflation is required. For case (b), the effects of inflation are not recognized; however, at the effective date of this FRS and when an entity ceases to operate in an inflationary economic environment, the restatement effects determined through the last period in which the entity operated in an inflationary economic environment (in our case 2007), must be kept and shall be reclassified on the same date and using the same procedure as that of the corresponding assets, liabilities and stockholders' equity. Should the entity once more operate in an inflationary economic environment, the cumulative effects of inflation not recognized in the periods where the environment was deemed to be non-inflationary should be recognized retrospectively.
Except as otherwise indicated, all data in the financial statements included below in Item 18 (which together with the attached notes constitute theour “Audited Consolidated Financial Statements”) and the selected financial information included throughout this Form 20-F (this “Annual Report”) have been presented in nominal pesos for the years ended December 31, 2008 tothrough 2010, andexcept for year 2007 that is expressed in constant pesos as offor the year ended December 31, 2007 for the years 2006 and 2007.
Mexican FRS differs in certain respects from generally accepted accounting principles in the United States (“U.S. GAAP”). For a discussion of certain significant differences between Mexican FRS and U.S. GAAP as they apply to us, together with a reconciliation of consolidated operating income, consolidated net income, consolidated stockholders’ equity to U.S. GAAP, and a consolidated statement of cash flows under U.S. GAAP, see Note 2123 to theour Audited Consolidated Financial Statements. The effect of price-level restatement under Mexican FRS has not been reversed in the reconciliation to U.S. GAAP. See Note 2123 to theour Audited Consolidated Financial Statements.
In January 2009, the Mexican Banking and Securities Commission (Comision Nacional Bancaria y de Valores, “CNBV”) published certain amendments to the Rules for Public Companies and other participants in the Mexican Securities Market (Disposiciones de Caracter General Aplicables a las Emisoras de Valores y a otros Participantes del Mercado de Valores – the “Rules”) that require public companies to report financial information in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), effective as of January 1,
On January 1, 2012, we adopted IFRS, meeting the CNBV requirements. The Company must release its first quarter, 2012 unaudited results under IFRS, no later than May 2, 2012. IFRS differs in certain significant respects from Mexican FRS. See Note 22 to our Consolidated Financial Statements for a description of the principal differences among IFRS and Mexican FRS as they apply to us.
References herein to “U.S. dollars,” “U.S.$” $” or “$” are to the lawful currency of the United States of America.America, except that "$" is also used for pesos in the Audited Consolidated Financial Statements. References herein to “pesos” or “Ps.” are to the lawful currency of Mexico. This Annual Report contains translations of certain peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, such U.S. dollar amounts have been translated from pesos at an exchange rate of Ps 12.37ofPs 13.97 to US $1.00, the exchange rate on December 31, 2010.
As used herein, the term “tonnes”“tons” refers to metric tons of 1,000 kilograms (equal to 2,204.6 pounds) and the term “billion” refers to one thousand million (1,000,000,000). One square meter is equivalent to 10.764 square feet.
Market Data
This Annual Report contains certain statistical information regarding the Mexican chicken, beef, egg, balanced feed (or “feed”), turkey and swine markets and our market share. We have obtained this information from a variety of sources, including the producers’ associations Union Nacional de Avicultores (the(the National Poultry Union or the “UNA”“UNA”), Consejo Nacional Agropecuario (the(the National Agricultural Council or “CNA”“CNA”); Consejo Mexicano de Porcicultura (the(the Mexican Pork Council or “CMP”“CMP”), as well as Banco de Mexico (the(the Central Bank), Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y Alimentos (“(“Ministry of Agriculture, Livestock, Rural Development, Fishing and Food” or “SAGARPA”) and publications of the U.S. Department of Agriculture (“USDA”). The producers’ associations rely principally on data provided by their members. Information for which no source is cited was prepared by us on the basis of our knowledge of the Mexican chicken, egg, feed, turkey and swine markets and the wide variety of information available regarding these markets. The methodology and terminology used by different sources are not always consistent, and data from different sources are not readily comparable.
Forward-Looking Statements
We may from time to time make written or oral forward-looking statements in our periodic reports to the Securities and Exchange Commission (or “SEC”) on Forms 20-F and 6-K, in our annual report to stockholders, in offering circulars and prospectuses, in press releases and other written materials and in oral statements made by one of our officers, directors or employees to analysts, institutional investors, representatives of the media and others.
Examples of such forward-looking statements include, but are not limited to: (i) projections of revenues, income (or loss), earnings (or loss) per Share,share, capital expenditures, dividends, capital structure or other financial items or ratios; (ii) statements of our plans, objectives or goals or those of our management, including those relating to new contracts; (iii) statements about future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve inherent risks and uncertainties, and a number of unexpected changes could cause actual results to deviate from our plans, objectives, expectations, estimates and intentions. We recognize that the accuracy of our predictions and our ability to follow through on our intentions depend on factors beyond our control. The potential risks are many and varied, but include unexpected changes in: economic, weather and political conditions; raw material prices; competitive conditions; and demand for chicken, eggs, turkey, balanced feed, beef and swine.
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. | Selected Financial Data |
The financial information set forth below is derived from Bachoco’sour Audited Consolidated Financial Statements, which are included in Item 18.
In preparing theour Audited Consolidated Financial Statements, we followed Mexican FRS, which differ in certain respects from U.S. GAAP. Note 2123 to theour Audited Consolidated Financial Statements provides a description of the main differences between Mexican FRS and U.S. GAAP as they apply to us;us, a reconciliation from Mexican FRS to U.S. GAAP of total stockholders’ equity, net income, and a condensed statement of cash flows under U.S. GAAP as of December 31, 20102011 and 20092010 and for the years ended December 31, 2011, 2010 2009 and 2008.
The table set below presents our key financial information. Except as otherwise indicated all datathe amounts are presented in the Audited Consolidated Financial Statements included below in Item 18 and the selected financial information included throughout this Form 20-F (this “Annual Report”) have been presented inmillions of nominal pesos for the years 2010, 2009 andended December 31, 2008 through 2011, and in constant pesos as offor the year ended December 31, 2007 for the years 2006 and 2007. The effects of this price-level restatement under Mexican FRS have not been reversed in the reconciliation of Mexican FRS to U.S. GAAP. See Note 21 to the Audited Consolidated Financial Statements.
As of and for the year ended December 31, | ||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | 2010(2) | |||||||||||||||||||
| Income Statement Data | in millions of constant pesos as of December 31, 2007 for years 2006 and 2007 and in millions of nominal pesos for years 2008 to 2010(1) | In millions of U.S. dollars(1) | ||||||||||||||||||||||
| Mexican FRS: | ||||||||||||||||||||||||
| Net revenues | Ps. | 15,551.0 | Ps. | 18,219.6 | Ps. | 20,125.3 | Ps. | 23,262.9 | Ps. | 24,715.5 | US. $ | 1,998.0 | ||||||||||||
| Cost of sales | 12,053.0 | 14,477.9 | 17,482.5 | 19,326.8 | 19,500.7 | 1,576.4 | ||||||||||||||||||
| Gross profit | 3,498.0 | 3,741.8 | 2,642.9 | 3,936.1 | 5,214.8 | 421.6 | ||||||||||||||||||
| Operating income | 1,425.4 | 1,496.3 | 230.1 | 1,413.8 | 2,463.0 | 199.1 | ||||||||||||||||||
| Comprehensive financing income (loss) | 61.4 | 19.1 | (1,369.2 | ) | (133.2 | ) | 122.1 | 9.9 | ||||||||||||||||
| Net controlling interest income (loss) | 906.2 | 1,270.9 | (879.0 | ) | 797.6 | 1,983.4 | 160.3 | |||||||||||||||||
| Net consolidated income (loss) per Share(3) | 1.5 | 2.1 | (1.5 | ) | 1.3 | 3.3 | 0.3 | |||||||||||||||||
| Net consolidated income (loss) per ADS(4) | 18.1 | 25.4 | (17.5 | ) | 16.0 | 39.7 | 3.2 | |||||||||||||||||
| Dividends per Share(5) | 0.61 | 0.59 | 0.59 | 0.42 | 0.42 | 0.03 | ||||||||||||||||||
| Weighted average Shares outstanding (thousands) | 599,571 | 600,000 | 600,000 | 600,000 | 600,000 | 600,000 | ||||||||||||||||||
| U.S. GAAP: | ||||||||||||||||||||||||
| Net revenues | Ps. | 15,551.0 | Ps. | 18,219.6 | Ps. | 20,125.3 | Ps. | 23,262.9 | Ps. | 24,715.5 | 1,998.0 | |||||||||||||
| Operating income | 1,395.7 | 1,481.0 | 185.6 | 1,391.0 | 2,400.3 | 194.0 | ||||||||||||||||||
| Net controlling interest income (loss) | 895.6 | 1,261.9 | (869.4 | ) | 787.0 | 1,975.0 | 159.7 | |||||||||||||||||
| Statement of Financial Position Data | ||||||||||||||||||||||||
| Mexican FRS: | ||||||||||||||||||||||||
Cash and cash equivalents(7) | Ps. | 3,583.9 | Ps. | 3,039.9 | Ps. | 1,998.2 | Ps. | 2,399.1 | Ps. | 3,967.9 | 320.77 | |||||||||||||
| Primary financial instruments | 0.0 | 0.0 | 0.0 | 151.8 | 209.3 | 16.92 | ||||||||||||||||||
| Total assets | 17,559.2 | 19,116.4 | 19,455.0 | 19,877.9 | 21,197.8 | 1,713.6 | ||||||||||||||||||
| Short-term debt(6) | 9.8 | 58.8 | 234.2 | 591.9 | 139.9 | 11.3 | ||||||||||||||||||
| Long-term debt | 35.5 | 50.8 | 391.7 | 372.0 | 507.1 | 41.0 | ||||||||||||||||||
| Total stockholders’ equity | 14,102.9 | 15,127.2 | 14,079.4 | 14,638.5 | 16,368.4 | 1,323.2 | ||||||||||||||||||
| Capital Stock | 2,294.9 | 2,294.9 | 2,294.9 | 2,294.9 | 2,294.9 | 185.5 | ||||||||||||||||||
| U.S. GAAP: | ||||||||||||||||||||||||
| Total controlling interest equity | 14,053.2 | 15,071.7 | 13,786.7 | 14,329.2 | 16,052.8 | 1,297.7 | ||||||||||||||||||
| Selected Operating Data | ||||||||||||||||||||||||
| Sales volume (thousands of tonnes): | ||||||||||||||||||||||||
| Chicken | 773.7 | 837.2 | 878.1 | 918.1 | 983.9 | |||||||||||||||||||
| Eggs | 143.4 | 147.8 | 143.6 | 143.4 | 141.9 | |||||||||||||||||||
| Swine and Others | 8.9 | 16.1 | 18.8 | 19.0 | 20.0 | |||||||||||||||||||
| Balanced Feed | 484.4 | 438.8 | 370.7 | 337.9 | 327.5 | |||||||||||||||||||
| Margins (Mexican FRS) | ||||||||||||||||||||||||
| Gross margin (%) | 22.5 | % | 20.5 | % | 13.1 | % | 16.9 | % | 21.1 | % | ||||||||||||||
| Operating margin (%) | 9.2 | % | 8.2 | % | 1.1 | % | 6.1 | % | 10.0 | % | ||||||||||||||
| Consolidated net margin (%) | 5.8 | % | 7.0 | % | (4.4 | )% | 3.5 | % | 8.0 | % | ||||||||||||||
| Total employees | 21,035 | 23,088 | 23,248 | 24,065 | 23,473 | |||||||||||||||||||
| In millions of U.S. dollars | ||||||||||||||||||||||||
| Income Statement Data | 2007 | 2008 | 2009 | 2010 | 2011 | 2011 (1) | ||||||||||||||||||
| Mexican FRS: | ||||||||||||||||||||||||
| Net revenues | Ps. | 18,219.6 | Ps. | 20,125.3 | Ps. | 23,262.9 | Ps. | 24,715.5 | Ps. | 27,735.0 | US. $ | 1,985.3 | ||||||||||||
| Cost of sales | 14,477.9 | 17,482.5 | 19,326.8 | 19,500.7 | 24,773.2 | 1,773.3 | ||||||||||||||||||
| Gross profit | 3,741.8 | 2,642.9 | 3,936.1 | 5,214.8 | 2,961.8 | 212.0 | ||||||||||||||||||
| Operating income | 1,496.3 | 230.1 | 1,413.8 | 2,463.0 | 9.9 | 0.7 | ||||||||||||||||||
| Comprehensive financing income (loss) | 19.1 | (1,369.2 | ) | (133.2 | ) | 122.1 | 177.6 | 12.7 | ||||||||||||||||
| Net controlling interest income (loss) | 1,270.9 | (879.0 | ) | 797.6 | 1,983.4 | 157.0 | 11.2 | |||||||||||||||||
| Net consolidated income (loss) per Share(2) | 2.1 | (1.5 | ) | 1.3 | 3.3 | 0.27 | 0.02 | |||||||||||||||||
| Net consolidated income (loss) per ADS(3) | 25.4 | (17.5 | ) | 16.0 | 39.7 | 3.18 | 0.23 | |||||||||||||||||
| Dividends per Share(4) | 0.59 | 0.59 | 0.42 | 0.42 | 0.50 | 0.04 | ||||||||||||||||||
| Weighted average Shares outstanding (thousands) | 600,000 | 600,000 | 600,000 | 600,000 | 600,000 | 600,000 | ||||||||||||||||||
| U.S. GAAP: | ||||||||||||||||||||||||
| Net revenues | Ps. | 18,219.6 | Ps. | 20,125.3 | Ps. | 23,262.9 | Ps. | 24,715.5 | Ps. | 27,735.0 | 1,985.3 | |||||||||||||
| Operating income | 1,481.0 | 185.6 | 1,391.0 | 2,400.3 | (8.5 | ) | (0.6 | ) | ||||||||||||||||
| Net controlling interest income (loss) | 1,261.9 | (869.4 | ) | 787.0 | 1,975.0 | 1,178.6 | 84.4 | |||||||||||||||||
| Statement of Financial Position Data | ||||||||||||||||||||||||
| Mexican FRS: | ||||||||||||||||||||||||
| Cash and cash equivalents(6) | Ps. | 3,039.9 | Ps. | 1,998.2 | Ps. | 2,399.1 | Ps. | 3,967.9 | Ps. | 2,625.7 | 188.0 | |||||||||||||
| Primary financial instruments | 0.0 | 0.0 | 151.8 | 209.3 | 410.7 | 29.4 | ||||||||||||||||||
| Total assets | 19,116.4 | 19,455.0 | 19,877.9 | 21,197.8 | 23,169.9 | 1,658.5 | ||||||||||||||||||
| Short-term debt(5) | 58.8 | 234.2 | 591.9 | 139.9 | 1,453.0 | 104.0 | ||||||||||||||||||
| Long-term debt | 50.8 | 391.7 | 372.0 | 507.1 | 384.4 | 27.5 | ||||||||||||||||||
| Total stockholders’ equity | 15,127.2 | 14,079.4 | 14,638.5 | 16,368.4 | 16,269.1 | 1,164.6 | ||||||||||||||||||
| Capital Stock | 2,294.9 | 2,294.9 | 2,294.9 | 2,294.9 | 2,294.9 | 164.3 | ||||||||||||||||||
| U.S. GAAP: | ||||||||||||||||||||||||
| Total controlling interest equity | 15,071.7 | 13,786.7 | 14,329.2 | 16,052.8 | 17,017.4 | 1,218.1 | ||||||||||||||||||
| Selected Operating Data | ||||||||||||||||||||||||
| Sales volume (thousands of tons): | ||||||||||||||||||||||||
| Chicken | 837.2 | 878.1 | 918.1 | 983.9 | 1,072.7 | |||||||||||||||||||
| Eggs | 147.8 | 143.6 | 143.4 | 141.9 | 133.2 | |||||||||||||||||||
| Balanced Feed | 438.8 | 370.7 | 337.9 | 327.5 | 378.8 | |||||||||||||||||||
| Swine and Others | 16.1 | 18.8 | 19.0 | 20.0 | 21.6 | |||||||||||||||||||
| Margins (Mexican FRS) | ||||||||||||||||||||||||
| Gross margin (%) | 20.5 | % | 13.1 | % | 16.9 | % | 21.1 | % | 10.7 | % | ||||||||||||||
| Operating margin (%) | 8.2 | % | 1.1 | % | 6.1 | % | 10.0 | % | 0.0 | % | ||||||||||||||
| Consolidated net margin (%) | 7.0 | % | (4.4 | )% | 3.5 | % | 8.0 | % | 0.6 | % | ||||||||||||||
| Total employees | 23,088 | 23,248 | 24,065 | 23,473 | 25,326 | |||||||||||||||||||
(1) Except per share and per ADS amounts and operating data.
(2) Net income per share has been computed based on the weighted average number of common Shares outstanding.
(3) Each ADS has been computed by multiplying net income per share byrepresents twelve to reflect the ratio of twelve Shares per ADS.
(4) Dividends per share have been computed by dividing the total amount of dividends paid by the weighted average Shares outstanding.
(5) Includes notes payable to banks and current portion of long-term debt.
(6) For the years 2006, 2007 and 2008 the cash and cash equivalents amount includes primary financial instruments.
The chart below includes Mexican gross domestic product (“GDP”) and Inflation Rate data from 2007 to 2011, as provided by the Central Bank, and the average interest rates on 28-day Mexican treasury bills (“CETES”), as provided by the Central Bank.
| Year | GDP | Inflation Rate | CETES | |||||||||||
| 2007 | 3.3 | % | 3.80 | % | 7.2 | % | ||||||||
| 2008 | 1.3 | % | 6.50 | % | 7.6 | % | ||||||||
| 2009 | (6.5 | % | ) | 3.57 | % | 5.4 | % | |||||||
| 2010 | 5.5 | % | 4.40 | % | 4.4 | % | ||||||||
| 2011 | 3.9 | % | 3.82 | % | 4.3 | % | ||||||||
On April 17, 2012, the 28-day Cetes rate was 4.33%.
Exchange Rates
In 2007, the Mexican economy waspeso remained reasonably stable overall, with an annual inflation rate of 3.8%, while thein its peso-dollar exchange rate at year-endrate. According to the U.S. Federal Reserve Bank, the peso depreciated by 1.1% with respect to December 31,the U.S. dollar by 1.1% at year-end. The average value of the Mexican peso was 0.2% lower than the average of 2006.
In 2008, the Mexican economy suffered a sharp slowdown and ended the year with an inflation rate of 6.5%. The exchange rate of the peso against the U.S. dollar was highly volatile. While during the first half of the year, the Mexican peso strengthened its position with respect to the U.S. dollar, the Mexican peso experienced a steep depreciation during the second half of the year and the peso-dollar exchange rate at year-end had depreciated by 21.0% with respect to December 31, 2007.
During 2009, the Mexican economy continued to be affected by the global economic crisis, ending the year with an inflation rate of 3.57%. However, although the Mexican peso-dollar exchange rate depreciated during the first half of 2009, the peso stabilized and strengthened its position in the second half of 2009, leading the Mexican peso-dollar exchange rate to appreciate 5.4% in 2009 with respect to the exchange rate in effect on December 31, 2008.
In 2010, the Mexican economy grew 5.5%, which surpassed expectations made at the beginning of the year. The Mexican peso strengthened its position during the year as compared to the dollar, appreciating approximately 5.3% since the end of 2009, while the inflation rate for 2010 was 4.40%.
During the first half of 2011, the exchange rate of the peso to the dollar was stable, showed an average rate of Ps.11.89 per one dollar. This stability changed drastically during the second half of the year, were we observed a higher average rate peso-dollar of Ps.12.97, with a final depreciation of 13.0% by the end of the year with respect to year-end of 2010.
The following table sets forth for the periods indicated the high, low, average and year-end exchange rates for the purchase and sale of US dollars (presented in each case as the average between such purchase and sale rates):
Exchange Rate(1) (in current pesos per U.S. dollar) | ||||||||||||||||
| Year | High | Low | Average(2) | Year End | ||||||||||||
| 2006 | 11.46 | 10.43 | 10.91 | 10.80 | ||||||||||||
| 2007 | 11.27 | 10.67 | 10.93 | 10.92 | ||||||||||||
| 2008 | 13.94 | 9.92 | 11.14 | 13.83 | ||||||||||||
| 2009 | 15.41 | 12.63 | 13.50 | 13.08 | ||||||||||||
| 2010 | 13.19 | 12.16 | 12.62 | 12.38 | ||||||||||||
Exchange Rate(1) (in current pesos per U.S. dollar) | ||||||||
| Period | High | Low | ||||||
| December 2010 | 12.47 | 12.33 | ||||||
| January 2011 | 12.25 | 12.04 | ||||||
| February 2011 | 12.18 | 11.97 | ||||||
| March 2011 | 12.11 | 11.92 | ||||||
| April 2011 | 11.86 | 11.52 | ||||||
| May 2011 | 11.77 | 11.51 | ||||||
| Exchange Rate(1) | ||||||||||||||||||
| In Mexican pesos per U.S. dollar | ||||||||||||||||||
| Yearly | High | Low | Average(2) | Year end | ||||||||||||||
| 2007 | 11.27 | 10.67 | 10.93 | 10.92 | ||||||||||||||
| 2008 | 13.94 | 9.92 | 11.14 | 13.83 | ||||||||||||||
| 2009 | 15.41 | 12.63 | 13.50 | 13.08 | ||||||||||||||
| 2010 | 13.19 | 12.16 | 12.62 | 12.38 | ||||||||||||||
| 2011 | 14.25 | 11.51 | 12.43 | 13.95 | (3) | |||||||||||||
| Monthly | ||||||||||||||||||
| October 2011 | 13.93 | 13.10 | 13.44 | 13.17 | ||||||||||||||
| November 2011 | 14.25 | 13.38 | 13.70 | 13.62 | ||||||||||||||
| December 2011 | 13.99 | 13.49 | 13.77 | 13.95 | ||||||||||||||
| January 2012 | 13.75 | 12.93 | 13.38 | 13.04 | ||||||||||||||
| February 2012 | 12.95 | 12.63 | 12.78 | 12.79 | ||||||||||||||
| March 2012 | 12.99 | 12.63 | 12.75 | 12.81 | ||||||||||||||
(1) The exchange rates are the noon buying rates in New York City for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”).
(2) Average of month-end rates for each period shown.
(3) The exchange rate for the year end for the Banco de Mexico was Ps.13.97 per one dollar.
On June 10,April 13, 2011, the exchange rate for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York was Ps.11.8668Ps.13.1460 per $1.00 US dollar.
| 5 |
| B. | Capitalization and Indebtedness |
Not applicable
| C. | Reasons for the Offer and Use of Proceeds |
Not Applicable
| D. | Risk Factors |
Risks RelatingRelated to Mexico, Other Emerging Market CountriesEconomic Conditions
Mexican economic and other conditions, as well as economic and market conditions in other countries, may negatively affect our business, results of operations and the U.S. Economy
If the Mexican economy experiences decreased output in a recession, or if inflation or interest rates significantly increase, consumers may not be able to purchase our products. These and other effects could have adverse consequences on our business, financial condition and results of operations.
| Period | GDP | Inflation Rate | CETES | |||||||||
| 2006 | 4.8 | % | 4.05 | % | 7.2 | % | ||||||
| 2007 | 3.3 | % | 3.80 | % | 7.2 | % | ||||||
| 2008 | 1.3 | % | 6.50 | % | 7.6 | % | ||||||
| 2009 | -6.5 | % | 3.57 | % | 5.4 | % | ||||||
| 2010 | 5.5 | % | 4.40 | % | 4.4 | % | ||||||
High interest rates in Mexico could adversely affect our costs. Our earnings may also be affected by changes in interest rates due to the impact those changes have on our variable-rate debt instruments and may benefit from the interest we earn on our cash balance.
Our market value (through the trading of our shares listed on the Mexican Stock Exchange (or “BMV”) and our American Depositary Shares (or “ADSs”), listed at the New York Stock Exchange (or “NYSE”), may be affected by economic and market conditions arising in any other countries. Even when economic conditions in such countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries may have an adverse effect on the Mexican securities. Consequently, the market value of our securities may be adversely affected by events taking place outside of Mexico.
Political events in México, including transition to a new presidential administration, could affect
In July 2012, we will have presidential elections. We cannot predict the impact of this event in future business conditions in México. Presidential elections may result in government gridlock and political uncertainty, which could have an adverse effect on Mexican economic policy and as a result, to affect our business, financial position and results of operations.
Depreciation or fluctuation of the peso relative to the U.S. dollar could adversely affect our financial condition andconditions, results of operations
The single largest component of our cost of sales is the balanced feed. The main components of the balanced feed mainlyare corn and soybean which is comprised partiallymeal. We buy an important percentage of ingredients we purchase fromgrains in the United States, where prices are denominatedU.S., priced in U.S. dollars.
In addition, the pricesprice of ingredientsgrain we purchase in Mexico may be influenced by U.S. commodity markets. Therefore, should the peso fall relative to the U.S. dollar, the cost of our operations, some accounts payable due and our debt payments would increase. Any future depreciation or devaluation of the peso may result in further net foreign exchange losses.
In addition, severe devaluation or depreciation of the peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert pesos into U.S. dollars for the purpose of making timely payments of interest and principal on our indebtedness and some accounts payable. While
Therefore, if the Mexican government does not currently restrict,peso falls relative to the U.S. dollar, the cost of our balanced feed, some accounts payable due and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies out of Mexico, the government could institute restrictive exchange rate policies in the future. Currencyour debt payments would increase.
Furthermore, currency fluctuations will probably continue to affect our revenues and expenses.
Finally, fluctuations in the exchange rate between the peso and the U.S. dollar will also affect the U.S. dollar equivalent of the peso price of our Sharesshares (the “Shares”“shares” or “Series“Serie B Shares”) in the Mexican Stock ExchangeBMV and the price of American Depository Shares (“ADSs”) on the New York Stock Exchange. NYSE.
Because we pay cash dividends in pesos, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of American Depository Receipts (“ADRs”) upon conversion of such cash dividends by the Depositary.
U.S. and Other Economies Worldwide
Events affecting the U.S. economy may adversely affect our business,
Economic conditions in Mexico are heavily influenced by the condition ofglobal economic conditions, mainly the U.S. economyeconomy. This is due to various factors, includingsuch as the commercial trade pursuant to the North American Free Trade Agreement (“NAFTA”), U.S. investment in Mexico and emigration from Mexico to the United States.. Events and conditions affecting the U.S. economy may adversely affect our business, results of operations, prospects and financial condition.
U.S. economy slowdown may also negatively affect the results of our U.S. operation, since the demand and prices of chicken product in U.S. market depends partially on the global economic growth.
Investor’s reactions to economic conditions present in other economies worldwide, even when economic conditions in those countries may differ significantly from economic conditions in Mexico, may have an adverse effect in our stock. Consequently, our market value may be adversely affected by current events in other countries.
Risks Relating to the Food Industry
Future cyclicality excess supply and downturns within the chicken industry may adversely affect our Organization
The chicken industry is characterized by long-term price declinesin Mexico and cyclical periods
Increase in the price of feed ingredients is subject to significantand its volatility
The largest single component of our cost of sales is the cost of ingredients used to prepare balanced feed, includingincluding: sorghum, soybean meal, corn, fish meal, meat meal and, for certain chicken products, marigold extract. extract, among others.
The price of most of our feed ingredientsthese raw materials is subject to significant volatility resulting from weather conditions, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates, transportation, storage costs, and other factors.
Given the long-term declining trends in real chicken prices, we may experience difficulty or delays in passing through any increase in grain costs to our customers. Accordingly, increases in the prices of the main ingredientsraw materials used in the preparation of feed may have a material adverse effect on our margins and results of operations. Since we purchase many feed ingredients in U.S. dollars, from time to time we may acquire financial instruments to protect us against exchange rate fluctuations that may affect future purchases
Furthermore, the cost of feed ingredients.
Raising animals and soybean. A drastic change in grain prices couldmeat processing involve animal health and disease control risks, which can have an adverse impact on the financial positionour results of the Company.operations.
Our operations in Mexico and in the U.S. depend on raising animals and meat processing, which are subject to risks such as diseases contamination, adverse weather conditions or natural disasters
Live chickens and swine are susceptible to infections by a variety of microbiological agents. In the past we have experienced limited outbreaks of various diseases that have resulted in higher mortality rates than our average mortality rates.
Chicken, meatturkey, beef and eggs are subject to contamination during processing andor distribution. We do not believe that contamination of individual shipments during distribution would have a material adverse effect on our operations. Contamination during processing, however, could affect a larger number of our poultry products and therefore could have a more significant impact on operations.
Additionally, our sales are entirely dependent on consumer preferences, and the loss of consumer confidence in the products sold by Mexican meat and egg producers as a result of disease, contamination or other reasons, even if not related to our own products, could have a material adverse effect on the results of our operations.
Hurricanes or other adverse weather conditions may result in additional losses of inventory and damage to our plants and equipment.
Natural disasters could significantly damage our facilities. Our facilities in Mexico are susceptible mainly to earthquakes and hurricanes. Our facilities near Mexico’s coast are most vulnerable to the risk of severe weather. Our U.S. facilities are located in Arkansas and Oklahoma, a region vulnerable to being hit by tornadoes. Extensive damage to these facilities could affect our ability to conduct our regular production, as a result, reduce our operation results.
Increased competition may adversely affect our performance.
Both in Mexico and in the U.S. we face significant competition from other chicken producers in all of our geographic markets and product lines
According to the UNA, we are Mexico’s largest chicken producer, but we face competition from other producers in all of the markets in which we sell our products. In 2010, we accounted for approximately 35.0% of total chicken production in Mexico. There are two other major vertically integrated chicken producers in Mexico, which together with Bachoco account for approximately 59.0% of Mexican chicken production, with the balance distributed among 179 small and medium sized integrated and non-integrated producers.
Our operations in the U.S. face significant competition from other chicken producers in all of our geographic markets and product lines. According to the WATTPoultry USA ranking of U.S. poultry companies for 2010(©Copyright 2012 WATT Publishing Co. all rights reserved), our U.S. operations produced 2.1% of the total ready to cook pounds produced in the U.S. The top two companies in the U.S. produced 38.5% and the top ten produced 74.5%. Each of the top two companies in the U.S. has substantial financial resources and strengths in particular product lines and regions. We also face competition from other companies in the markets in which we sell our products.
We expect to continue to face strong competition in every market, as our existing or new competitors are likely to broaden their product lines and extend their geographic coverage.markets. Accordingly, we cannot assure you that our performance will not be adversely affected by increased competition.
Elimination of tariff barriers may adversely affect our performance
Since 2003, chicken (excluding leg quarters for which the Mexican government imposed some temporary restrictions), eggs and swine import quotas were eliminated through the North America Free Trade Agreement or “NAFTA.”NAFTA. Poultry producers in the United States have developed extremely low-cost production methods and have been successful in exporting primarily frozen and value-added poultry to other countries, especially in periods of overcapacity in the United States. As tariff barriers decline under NAFTA, U.S. producers can be expected to increase exports to Mexico, which could have a material adverse effect on our performance.
On January 1, 2008, the restrictions for leg quarters were phased out. At present there are no restrictions on exporting these products to Mexico.
In February 2011, the Mexican SecretariatSecretaria of Economy initiated an antidumping investigation focusing exclusively on imports of leg and thigh meat for human consumption from the United States of America to Mexico. This investigation was requested by Bachoco and by two other Mexican poultry companies.
On January, 2012 the Mexican Ministry of Economy (or “Ministry of Economy”) issued a preliminary ruling on the anti-dumping process regarding chicken leg quarters imported to Mexico from the United States. On its press releases the Ministry of Economy stated the following:
| · | There are dumping conditions on chicken leg quarters imported from the United States, including margins ranging from 62.90% to 129.77%. |
| · | These practices damaged the Mexican poultry industry. |
| · | The Ministry of Economy has all the elements for requiring anti-dumping duties, but did not proceed as the interested parties expressed the will to reach an agreement. |
| · | The antidumping practices investigation process with regards to chicken leg-quarters price discrimination will continue. |
| · | The Ministry agreed to establish a 30 business day period for the interested parties to provide additional arguments or elements deemed relevant to the investigation. |
As of the date of this report, the Company doeswe do not have any further information regarding this matter.
Risks Relating to the ADS, and the Shares in the Mexican Market
The Robinson Bours family controlsowns 82.75% of our managementtotal shares outstanding and their interests may differ from other security holders
The Robinson Bours family has established two Mexican trusts, which they control (“Control Trusts”), that together held 496,500,000Shares outstanding as of December 31, 2011. With that percentage they hold the power to elect a majority of the members of our Board of Directors and have the power to determine the outcome of certain other actions requiring the approval of our stockholders, including whether or not dividends are to be paid and the amount of such dividends. The Robinson Bours family has established two Mexican trusts, which they control (“Control Trust”), that together held 496,500,000 Shares outstanding on December 31, 2007. In November of 2008, the Robinson Bours family created a third trust with 102,000,000 Shares, which were taken from one of the existing trusts. The purpose of this new trust was to serve as collateral for the Company’s loan indebtedness. In the second half of 2009, this third trust was eliminated and the Shares were returned to the original trust. The trusts together accounted for 496,500,000 Shares outstanding on December 31, 2009 and there has been no change in the position of each holder.
The prevailing market prices for the ADS’s and the Shares could decline if the Robinson Bours family sold substantial amounts of their Shares, whether directly, or indirectly, through the Mexican trusts through which they hold their Shares, or if the perception arose that such a sale could occur.
The market value of our securities may be affected by economic and market conditions prevailing in any other country, although economic conditions in such countries may differ significantly from economic conditions in Mexico, Investors’ reactions to developments in any of these other countries may have an adverse perception and consequently, the market value of our securities may be adversely affected by events elsewhere.
The protection afforded to minority stockholders in Mexico is different from that in the United States
Under Mexican law, the protection afforded to minority stockholders is different from those in the United States. In particular, the law concerning fiduciary duties of directors is not well developed, there is no procedure for class actions or stockholder derivative actions, and there are different procedural requirements for bringing stockholder lawsuits. As a result, in practice it may be more difficult for the minority stockholders of Bachoco to enforce their rights against us or our directors or our controlling stockholder than it would be for stockholders of a U.S. company.
Our bylaws restrict the ability of non-Mexican stockholders to invoke the protection of their governments with respect to their rights as stockholders
As required by Mexican law, our bylaws provide that non-Mexican stockholders shall be considered as Mexicans with respect to their ownership interests in Bachoco and shall be deemed to have agreed not to invoke the protection of their governments in certain circumstances. Under this provision, a non-Mexican stockholder is deemed to have agreed not to invoke the protection of its own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the stockholder’s rights as a stockholder, but is not deemed to have waived any other rights it may have, including any rights under the U.S. securities laws, with respect to its investment in Bachoco. If you invoke such governmental protection in violation of this agreement, your Shares could be forfeited to the Mexican government.
Our bylaws may only be enforced in Mexico
Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws may be brought only in Mexican courts. As a result, it may be difficult for non-Mexican stockholders to enforce their stockholder rights pursuant to the bylaws.
It may be difficult to enforce civil liabilities against us or our directors, officers and controlling persons
We are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, all of our assets and their assets are located in Mexico. As a result, it may be difficult for investors to affect service of process within the United States on such persons or to enforce judgments against them. This pertains also to any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
Non-Mexican stockholders may not be entitled to participate in future preemptive rights offerings
Under Mexican law and our bylaws, if we issue new Shares for cash as part of a capital increase, we must grant our stockholders the right to purchase a sufficient number of Shares to maintain their existing ownership percentage in the Company (“preemptive rights”). We can allow holders of ADSs in the United States to exercise preemptive rights in any future capital increase only in one of the following two circumstances: (i) we file a registration statement with the Securities and Exchange Commission with respect to that future issuance of Shares; or (ii) the offering qualifies for an exemption from the registration requirements of the Securities Act.
We make no promises that we will file a registration statement with the Securities and Exchange Commission to allow holders of ADSs in the United States to participate in a preemptive rights offering. As a result, the equity interests of such holders in the Company may be diluted proportionately. In addition, under current Mexican law, it is not practicable for the depositary to sell preemptive rights and distribute the proceeds from such sales to ADS holders.
Corporate disclosure and accounting in Mexico may differ from other countries
There may be less, or different, publicly available information about issuers of securities in Mexico than is regularly published by or about issuers of securities in other countries with highly developed capital markets. In addition, due to country-by-country differences in accounting and other reporting principles and standards, our corporate disclosures may differ in content from disclosures made under other principles and standards, such as U.S. GAAP.
ITEM 4. Information of the Company
| A. | History and Development of the Company |
Our legal name is Industrias Bachoco, S.A.B. de C.V., and we frequently refer to ourselves commercially as Bachoco. We are a holding company, and our principal operating subsidiary is Bachoco,. S.A. de C.V. We were incorporated in Mexico on April 17, 1980. 1980 under the laws of the United Mexican States (“Mexico”.)
Our headquarters are located at Avenida Tecnologico No. 401, Ciudad Industrial 38010, Celaya, Guanajuato, Mexico, telephone +52-461-618-3500+52(461) 6183500 and +52-461-618-3555.+52(461) 6183555. Our main product lines are: chicken, table egg, balanced feedfeed.
We have production facilities and swine. Currently, allsales in México and, more recently, in the U.S. Until November 2011, our business and sales were domestic, with a very small portion of our production and almost allexports to Asia. Now with the integration of ourthe new business of O.K. Industries, Inc. (or “O.K. Industries”), we are now also present in the U.S. market, with sales are in Mexico. of chicken products under the O.K. brand.
Our current investor relations agent since July 1, 2011 in the United States is Grayling, which is located at 405 Lexington Avenue, Seventh Floor in New York, New York. Our contract with Grayling expires on June 30, 2011 and we will not be renewing their services for another term. Starting July 1 our investor relation agent in the United States will be I-advizeI-adize Corporate Communications, located inat 82 Wall Street, Suite 805 in New York, New York. As
Important events in the development of the date of this annual report, we are currentlyCompany’s business
We were founded in negotiations with other potential investor relations agents in the United States.
Year Ended December 31, | ||||||||||||||||||||
| (In thousands of tons) | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||
| Chicken | 773.7 | 837.2 | 878.1 | 918.1 | 983.9 | |||||||||||||||
| Eggs | 143.4 | 147.8 | 143.6 | 143.4 | 141.9 | |||||||||||||||
Swine and others(1) | 8.9 | 16.1 | 18.8 | 19.0 | 20.0 | |||||||||||||||
| Balanced feed | 484.4 | 438.8 | 370.7 | 337.9 | 327.5 | |||||||||||||||
In 1963, we started operations in the cities of Navojoa, Los Mochis and acquiring additional facilities from other poultry producers. Culiacan, producing just table eggs. In 1971, we commenced the production of chicken in the operation facility in the city of Culiacan.
In 1974, we established operationsa new complex in Celaya, a city located in the agricultural region of Bajio,central Mexico. Our products were widely accepted in that region, which led us to begin serving theopen offices and distribution centers in Mexico City metropolitan region. Beginning in 1988, ourCity.
Our management recognized the potential for growth in Mexican chicken consumption, as well as the advantages of a large, vertically integrated operation. Ascompany; as a result, we began to seek opportunities for geographic expansion and to increase production capacity and market.
In 1993, we moved out headquarters from the Obregon to Celaya city, and opened a new complex in the city of Techamalco, in the Southeast of Mexico.
In 1994, we continued expanding our coverage, this time with a new complex in Lagos de Moreno city, in the Western Mexico. By 1994, we had four productive complexes strategically located throughout Mexico and an important presence in the Mexican poultry market share. We extended our market coverage (particularly in 1993 and 1994) by purchasing fixed assets and inventory from major regional producers that faced financial difficulties. Following each acquisition, we made substantial investments to apply our production and distribution methods and reap the benefits of vertical integration and economies of scale, improving the performance of the acquired facilities.
In September 1997, we made an initial public offering of Units representing 17.25% of the outstanding Old Shares. Following such offering, the Control Trust held Units and B Units representing 68.0% of the outstanding Series B Shares.
Furthermore, in December, 1999, we acquired Campi. With this acquisition we entered the chicken market in the South of Mexico, starting a new business line selling balanced feed to third parties. In 2001, we established our sixth productive complex in Gomez Palacio city, located in the Series B Shares outstanding. As a result, the Robinson Bours Stockholders continue to have the power to control the Company.
In December 2006, we acquired most of the assets and inventories of Del Mezquital to start a new complex in the State of Sonora,Hermosillo city, located in northernNorthern Mexico, close to the border with the United States.
In 2009, we made diverse business agreements with a companies located at the Northeast of Mexico, that includes the buying of all their inventories and a long term rent agreement of their facilities to strengthen our presence in that market. See Item 5: “Operating and Financial Review and Prospects - Acquisitions and Dispositions” in this Annual Report for more details on these transactions.
In 2011, the Company carried out two acquisitions: In August 20, 2011, we acquired Trosi de Carnes, S.A. (“Trosi”) business; this facility is located in Monterrey, Nuevo Leon in Northern Mexico. Trosi produces and sells processed beef and chicken. With this acquisition we expect to increase our sales of beef value added products.
On November 1, 2011, the Company entered the U.S. market and increased its export business with the acquisition of the American poultry company, O.K. Industries, Inc. this company accounts with operations across the River Valley area in Arkansas and Oklahoma. It supplies grocery retailers, food service distributors and commodity customers throughout the U.S. as well as foreign markets.
In December 2011, the Company carried out a transaction to buy certain property assets of
Capital Expenditures
Over the past decade, we have substantially increased our chicken production, establishing ourselves in every major product category and distribution channel for chicken and expanding to cover a geographic market in Mexico that is more widespread than any other chicken producer. We have also increased the efficiency of our production process and built a reputation for the freshness of our chicken products and quality of our customer service.
In 2009, we made the following capital expenditures (in nominal pesos):
In 2010, we made capital expenditures of Ps. 517.3 million, with which we increased capacity for live chicken in Merida and Tecamachalco facilities; increased egg production capacity in the Mexicali facility; conducted productivity projects in the Tecamachalco and Merida processing plants, as well as adjusted production process to export requirements for the export of chicken claws to Asia; and updated our transportation fleet.
In 2011, we made capital expenditures of Ps. 707.5 million, to implement new technologies in the processing plants located in Coatzacoalcos, Culiacan and Celaya. In Celaya we built a water treatment plant and, we also updated our transportation fleet.
| B. | Business Overview |
Description of the Company
We are a vertically integrated Company dedicated to the production and commercialization of chicken, table eggs, balanced feed, swine and value added products of turkey and beef in Mexico. Recently in November 2011, we entered the U.S. chicken market. We have had no material changes with product development or production in the recent years.
| In million of Mexican pesos, for year ended December 31, | ||||||||||||
| Sales Breakdown | 2009 | 2010 | 2011 | |||||||||
| Chicken | Ps. | 18,211.1 | Ps. | 20,127.7 | Ps. | 22,611.2 | ||||||
| In Mexico | 18,211.1 | 20,127.7 | 21,232.4 | |||||||||
| In the U.S.(1) | - | - | 1,378.8 | |||||||||
| Table eggs | 2,356.8 | 2,101.8 | 2,085.9 | |||||||||
| Balanced feed | 1,465.6 | 1,380.8 | 1,853.2 | |||||||||
| Swine and other business lines | 1,229.4 | 1,105.2 | 1,184.7 | |||||||||
| Net revenues | Ps. | 23,262.9 | Ps. | 24,715.5 | Ps. | 27,735.0 | ||||||
(1 ) Includes only sales subsequent to the acquisition of O.K. Industries.
Chicken Business Line
We basically compete in two different markets: the Mexican and the U.S. chicken markets.
The Characteristics of Mexican Chicken Market
Mexico is fresh.the fifth largest producer of poultry worldwide. Fresh chicken is the leading meat consumed in Mexico. According to the UNA, for 2011 the annual per capital consumption of chicken was an estimated of 25.6 kilograms. Chicken is a central ingredient in many traditional Mexican dishes and it isdishes. Differently than in the leading meat consumed in Mexico according to data from the UNA. Traditionally,U.S. chicken industry, value-added chicken products, such as heat-and-serve products, frozen dinners, chicken nuggets and other similar foods, have found limited acceptance among Mexican consumers due to historical consumer preferences for fresh chicken.
Based on market demand, fresh chicken rather than frozen will continue to be a characteristic found mainly in our public-market and supermarket-broilerpreference within the Mexican market. Furthermore, we believe that consumer demand for value-added fresh chicken products, thatsuch as rotisserie chicken, supermarket broilers and chicken parts, will increase over time. Accordingly, we attain by including marigold extract in our chicken feed. We have also noticed an increased demand for smaller, whole,continue to focus primarily on producing fresh chicken, from various fast-food outlets, principallyincluding value-added fresh chicken roasting shops (rosticerias), which have developed rapidly in Mexico.
According to data obtained from the UNA, total Mexicanwe are Mexico’s largest chicken consumption per capita decreased from 26.8 kilograms in 2008 to 26.0 kilograms in 2010. Chicken is the leading meat consumed in Mexico, and it accounted for approximately 33.7%producer; In 2011 we produced 35.0% of the total livestockchicken produced in Mexico. We face significant competition from other producers in all of the markets in which we sell our chicken products. When combined with our two largest vertically integrated competitors in Mexico, in 2010. The following table sets forthwe account for approximately 59.0% of total Mexican productionpoultry production; the remaining 41.0% is distributed among approximately 179 small and medium-sized integrated and non-integrated producers.
The three major poultry producers in Mexico, including Bachoco, have substantial cost advantages and financial resources over smaller, non-integrated producers arising from economies of scale and control of feed preparation. We believe, however, that we have substantial competitive strengths over our competitors, including a broader range of chicken porkproducts and beefbroader geographic coverage.
Furthermore, there are considerable barriers to entry into large-scale chicken production and distribution in Mexico, including, among others, the consumer preference for fresh chicken, the weaknesses of the transportation infrastructure and varying regional consumer preferences among the various product categories. The channels for distribution of chicken products, in particular, are highly specialized and varied, and they call for in-depth experience in market practices.
Poultry producers in the United States have developed low-cost production techniques and have been successful in exporting primarily frozen and value-added poultry to other countries, especially in periods of overcapacity in the United States. As tariff barriers have declined under NAFTA since 2008, we have experienced increased competition from U.S. poultry producers. According to 2010:
2008 | 2009 | 2010 | ||||||||||
| Chicken | 2,853 | 2,781 | 2,822 | |||||||||
| Beef | 1,673 | 1,700 | 1,751 | |||||||||
| Swine | 1,149 | 1,162 | 1,165 | |||||||||
The Mexican chicken industry like chicken industries in other countries,worldwide is characterized by a long-term decline in real prices in real terms in conjunction with cyclical periods of higher profitability leading to overproduction followed by periods of lower prices and lower profitability.
Chicken products in 2007, which was primarily a result of increases in the prices of raw materials, partially offset by (i) excess domestic supply, particularly during the second half of the year, and (ii) decrease in the purchasing power of the average consumer.
| - | Live chickenis delivered alive to small independent slaughtering operations or to wholesalers that contract with independent slaughtering operations for processing. The freshly slaughtered chicken is then sold to chicken shops and other specialized retailers for sale to consumers and in some areas is sold directly to consumers by the slaughterhouse. |
| - | Public market chickenis a whole broiler presented either uneviscerated or eviscerated, generally sold within 48 hours after slaughter in public markets throughout Mexico, but primarily concentrated in the Mexico City metropolitan region. |
| - | Rotisserie chickenis a whole broiler presented eviscerated and ready to cook. Rotisserie chicken is sold by wholesalers and directly by producers to small shops, stands called rosticerias and supermarkets, which cook the chicken and sell it whole and freshly cooked to the end-consumer, providing an economical form of fast-food. |
| - | Supermarket chickenis a fresh whole broiler presented with the edible viscera packed separately. In most cases, it is sold directly by producers to supermarkets and, in some regions, to other independent food shops. Mexican consumers’ preference for freshness requires regular deliveries of chicken to supermarkets and other food shops. |
| - | Chicken partsrefers to cut-up fresh chicken parts sold wrapped in trays or in bulk principally to supermarket chains, the fast-food industry and other institutional food-service providers. Producers generally sell directly to the supermarket chains and deliver the chicken directly to the outlet. Sales to the institutional market often require customized cutting and presentation. |
| - | Value-added Productsrefers mainly to cut up fresh chicken parts with value-added treatment like marinating, breading and individual quantity frozen, sold mainly wrapped in trays principally to supermarkets and other institutional chains. Producers generally sell directly to the supermarket chains and deliver the chicken directly to the store. Sales to the institutional market often require customized cutting and presentation. |
Chicken volume sold by category in the Mexican industry and by Company in 2009:
| Category | Industry s/volume (1) | Bachoco s/volume | Bachoco s/sales | |||||||||
| Live | 29 | % | 31 | % | 24 | % | ||||||
| Public market | 20 | % | 16 | % | 15 | % | ||||||
| Rotisserie | 26 | % | 30 | % | 30 | % | ||||||
| Supermarket | 14 | % | 6 | % | 6 | % | ||||||
| Chicken parts | 8 | % | 11 | % | 16 | % | ||||||
| Value-added products | 3 | % | 6 | % | 9 | % | ||||||
(1) According with the UNA in Mexico
Chicken volume sold by category in the Mexican industry and by Company in 2010:
| Category | Industry s/volume (1) | Bachoco s/volume | Bachoco s/sales | |||||||||
| Live | 31 | % | 34 | % | 28 | % | ||||||
| Public market | 20 | % | 14 | % | 14 | % | ||||||
| Rotisserie | 24 | % | 28 | % | 28 | % | ||||||
| Supermarket | 15 | % | 6 | % | 6 | % | ||||||
| Chicken parts | 7 | % | 12 | % | 15 | % | ||||||
| Value-added products | 3 | % | 6 | % | 9 | % | ||||||
(1) According with the UNA in Mexico
Chicken volume sold by category in the Mexican industry and by Company in 2011:
| Category | Industry s/volume (1) | Bachoco s/volume | Bachoco s/sales | |||||||||
| Live | 33 | % | 36 | % | 29 | % | ||||||
| Public market | 20 | % | 14 | % | 14 | % | ||||||
| Rotisserie | 26 | % | 27 | % | 27 | % | ||||||
| Supermarket | 12 | % | 5 | % | 5 | % | ||||||
| Chicken parts | 6 | % | 12 | % | 16 | % | ||||||
| Value-added products | 3 | % | 6 | % | 9 | % | ||||||
(1)According with the UNA in Mexico
The U.S. Chicken Market Description
Chicken is the most popular meat produced in the United States. In 2011, the total meat production in the U.S. was 42.1 million tons. U.S. production of chicken products mainly to supermarkets and other retailers. The following table sets forth, for the periods indicated, the sales volume in tonnes and as a percentagemeat was 16.9 million tons or 40.2% of the total volumeU.S. meat production. The U.S. broiler industry exported 3.1 million tons of chicken sold for eachor 18.4% of our principal linesthe total U.S. production.
On a retail weight basis U.S. per capita consumption of chicken products:
| Bachoco’s chicken volume sold | ||||||||||||||||||||||||
| 2008 | 2009 | 2010 | ||||||||||||||||||||||
| Tonnes | % | Tonnes | % | Tonnes | % | |||||||||||||||||||
| Public market and rotisserie | 402.1 | 45.8 | 418.2 | 45.5 | 413.0 | 42.0 | ||||||||||||||||||
Supermarket, chicken parts and others(1) | 239.0 | 27.2 | 217.1 | 23.7 | 235.3 | 23.9 | ||||||||||||||||||
| Live | 237.0 | 27.0 | 282.8 | 30.8 | 335.6 | 34.1 | ||||||||||||||||||
| Total | 878.1 | 100.0 | % | 918.1 | 100.0 | % | 983.9 | 100.0 | % | |||||||||||||||
Over the last thirty years the industry has experienced a constant trend toward greater integration and consolidation between companies. In 1980, the five largest companies in the industry processed 30.5% of all birds produced. In 2010, the five largest companies processed 59.6% of all birds processed. The pace of consolidation has slowed in recent years due to economic difficulties associated with higher ingredient costs. However since 2009, there has been significant investment by overseas poultry companies in U.S. broiler production and these companies now own approximately the 36% of U.S. production capacity.
Bachoco’s Chicken Marketing and Distribution
As previously stated, we operate in all of the six chicken categories; our product mix varies from region to region, in Mexico, reflecting different consumption and distribution patterns. Based on market demand, we believe that fresh, rather than frozen, chicken will continue to dominate the Mexican market. Furthermore, we believe that consumer demand for value-added fresh chicken products, such as rotisserie chicken, supermarket broilers and chicken parts, will increase over time. Accordingly, we continue to focus principally on producing fresh chicken, including value-added fresh chicken products.
We have developed an extensive distribution system that we believe is the largest and most modern of any chicken or egg producer in Mexico.system. We use various distribution channels in every major product category to service different market segments. We use our own fleet to transport the majority of rotisserie chickens, supermarket broilers and other chicken products to our customers. We try to cooperate with existing distribution channels and do not compete with wholesale distributors, except in areas where we supply our own distribution capacity where needed for market penetration.
| - |
Live |
| - | Public market |
| - | Rotisserie |
| - | Supermarket |
| - | Chicken |
| - | Value-added |
We use our own fleet to transport the majority of rotisserie chickens, supermarket broilers and other chicken products to our customers in Mexico. We try to cooperate with existing distribution channels and do not compete with wholesale distributors, except in areas where we supply our own distribution capacity where needed for market penetration.
We distribute products from our processing plants located in: Celaya, Culiacan, Tecamachalco, Lagos de Moreno, Coatzacoalcos, Merida, Gomez Palacio, Monterrey and Hermosillo to our cold-storage facilities and warehouses, which serve as a midpoint in distribution to wholesalers and local customers. From our cold-storage facilities, we service wholesalers (who in turn deliver to their customers), retailers and transport certain products directly to supermarkets and food-service operations. Our distribution infrastructure includes 63 cold-storage warehouses and facilities and a large fleet of vehicles. The decentralized sales force permits us to remain attuned to developments in the regions we serve and to develop close relationships with customers.
Table Eggs
The Mexican Table Eggs Market and Competition
According to the UNA, Mexico has one of the largest per capita consumption of table eggs in the world with 22.822.4 kilograms per capita consumed in 2010, compared with 22.2 kilograms per capita consumed in 2009. This high2011. We believe this level of consumption is due in part to the fact that eggs are among the cheapest sources of protein in Mexico.
The Mexican table egg industry is more fragmented than the chicken industry but has experienced some degree of consolidation in recent years, including acquisitions made by us.industry. According to the UNA, in 2010 the nine largest producers of table eggs in Mexico now account for approximately 44.0% of the market.
We estimate that we are the second largest producer of table eggs in Mexico, with approximately 10.0%in 2011, we produced 5.2% of the market.total eggs produced in Mexico. We sell both brown and white eggs. We estimate that we are the largest producer of brown eggs in Mexico. Our marketing efforts for egg products focus on increasing our brand recognition.
Table eggs in Mexico are classified in three main categories: bulk, packaged and processed.
| - | Bulk. Distributed in large 360 egg cases through wholesalers to retailers. The retailers, which are typically small grocery shops, sell the eggs by weight to consumers. |
| - | Packaged.Branded packages of mainly 12, 18 or 24 eggs. Packaged eggs are less vulnerable to price fluctuations and are mainly sold through supermarkets. |
| - | Processed.Liquid or powdery eggs used mainly by the bakery industry. Bachoco does not participate in this market. |
The tables below sets forth the volume of the table eggs sold within the Mexican industry and volume and sales, recorded by us for each year indicated,
In 2009, the volume sold by table eggs category in the Mexican industry and in the Company was:
| Category | Industry s/volume (1) | Bachoco s/volume | Bachoco s/sales | |||||||||||
| Bulk | 80 | % | 45 | % | 36 | % | ||||||||
| Package | 15 | % | 55 | % | 64 | % | ||||||||
| Processed | 5 | % | 0 | % | 0 | % | ||||||||
(1)Source: UNA
In 2010, the volume sold by table eggs category in the Mexican industry and in the Company was:
| Category | Industry s/volume (1) | Bachoco s/volume | Bachoco s/sales | |||||||||||
| Bulk | 80 | % | 47 | % | 41 | % | ||||||||
| Package | 14 | % | 53 | % | 59 | % | ||||||||
| Processed | 6 | % | 0 | % | 0 | % | ||||||||
(1)Source: UNA
In 2011, the volume sold by table eggs category in the Mexican industry and in the Company was:
| Category | Industry s/volume (1) | Bachoco s/volume | Bachoco s/sales | |||||||||||
| Bulk | 80 | % | 45 | % | 34 | % | ||||||||
| Package | 14 | % | 55 | % | 66 | % | ||||||||
| Processed | 6 | % | 0 | % | 0 | % | ||||||||
(1)Source: UNA
Bachoco’s Marketing and Distribution of Table Eggs
The branded carton of brown eggs is a premium product in the Mexican market. We believe that brown eggs are less vulnerable to price fluctuations than white or unbranded eggs,market, because consumers perceive them to be of higher quality. Brown eggs command a small premium over white eggs.
In some regions, however, we have reallocated part of our production from brown eggs to white eggs due to local market preferences. Our marketing strategy in the eggs business is to gradually move from bulk to packaged white eggs. Packaged eggs are less vulnerable to price fluctuation and create brand loyalty.
We have designed our egg distribution system to transport eggs from our laying farms at Celaya, Los Mochis, Obregon, Mexicali, Tecamachalco, Merida, Saltillo and La Laguna regions to customers in all sales regions. We sell packaged eggs directly to all of the principal supermarket chains in Mexico, with daily deliveries directly to their outlets.
Balanced Feed
The Mexican Balanced Feed Market and Competition
According to the The Consejo Nacional de Fabricantes de Alimento Balanceado y de la Nutricion Animal, A.C. (“CONAFAB” (or ”CONAFAB”) Mexico is among the ten biggest producers of balanced feed worldwide. In 2010, total production of balanced feed in Mexico was 28.1 million tonnes.tones, representing a cumulative increase of 5.8% from 2007 to 2010. CONAFAB estimates that Mexican production of balanced feed for 2011 will be 29.4 million tonnes,tons, and Mexico will account with 420 feed mill plants and a production capacity of 35 million tonnes.
Local production is composed of commercial and integrated manufacturers. Commercial manufacturers produce for the market, while integrated manufacturers mostly produce for themselves and occasionally for other producers. In 2010, integrated producers accounted for approximately 63.0% of total production. Imports of feed come almost entirely from the United States.
We estimate our market share in the balanced feed product line is approximately 3.1%.
Bachoco’s Marketing and Distribution of Balance Feed
We have benefited from economies of scale and synergies derived from producing feed both for our own internal consumption and for sale to third parties, we sell mainly to small livestock producers and through a network of small distributors located mainly in central and southern Mexico. Currently, we have 4 feed plants dedicated to producing balanced feed to third parties.
We estimate that in 2010, our balanced feed business currently comprisescomprised approximately 3.1% of the market share of the commercial (non-integrated) balanced feed business in Mexico, a small reduction from the 3.4% market share in 2009. The decrease in our balanced feed sales volume is due to a reduction in our production levels as we improve our sales mix.
Other Business Lines
This item comprises sales of swine and turkey and beef value-added products. The Company sells live swine to small packers.
We purchase breeder swine live from the United States and breed them at facilities in the state of Sonora. We then raise swine to maturity at our farms in Celaya and three other locations in Mexico. Mature swine is sold on the hoof to Mexican swine meat packers for the production of pork products.
TheMexican swine industry is highly fragmented and our swine prices increased by 19.6% asmarket share within this market is not significant.
The Mexican market of turkey and beef value-added products is a result ofsmall but one with a better balance in the commercial market. During 2009, swine business remained generally stable as prices increased 10.7% for the whole year. Swine prices for 2010 were strong and increased 16.0% over 2009. Traditionally, Mexicans consume fewer swine products than chicken and egg products.
In 2007, as a result of the “Del Mezquital” and “Grupo Libra” agreements, we introducedentered into two new product lines: turkey and value-added beef and pork products. We do not raise either turkey or cattle; we only process these products. See Item 5: “Operating and Financial Review and Prospects - Acquisitions & Dispositions” in this Annual Report for more details on the “Del Mezquital” and “Grupo Libra” agreements. In 2008, we integrated
Each of these business lines with the rest of our Company.
Seasonality of Our Company
Our sales are moderately seasonal in Mexico, with the highest levels of these products increased 4.4% oversales, in general, in the previous year.
Main Raw Materials
We purchase our breeding stock for broilers and layers from high-quality suppliers. All of our breeder swine currently come from one supplier, but we have changed suppliers from time to time and have numerous alternative sources of supply.
The largest single component of our cost of sales is the cost of ingredients used in the preparation ofto prepare balanced feed, including, principally,including: sorghum, soybean meal, corn, fish meal, meat meal and, soybean meal. for certain chicken products, marigold extract, among some others.
The price of these ingredients is subject to significant volatility resulting from weather, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates and other factors. To reduce the potential adverse effect of grain price fluctuations, we vary the composition of our feed to take advantage of current market prices for the various types of ingredients used.
Under NAFTA, corn tariffs were eliminated on January 1, 2008. This new condition has been positive for the Company, allowing us more flexibility in our cost of production as the cost of our ingredients more closely tracks prices in the international commodity markets.
To mitigate the effects of increases in grain prices, we are always watchful to take advantage ofseeking lower-cost feed ingredients from Mexican sources when available. The use of local feed ingredients allows us to save on transportation costs and import duties. However, because southern Mexico domestic crops and feed ingredients are limited in some cases our complexes use imported grain.
In 2010,2011, we obtainedbought approximately 54%44.6% of our total grain in the domestic market and the rest from the domestic market.U.S. We believe that the quality of local feed ingredients, particularly sorghum, is superior to that of imported feed ingredients. In addition, the use of local feed ingredients allows us to save on transportation costs and import duties. However, in southern Mexico domestic crops and feed ingredients are limited. As such, our complexes use mainly imported grain. The Company engages in hedging of its feed costs in order to assure more stable cost of grains.
Mexican Regulation
Mexican Import Regulation and Price Controls
As required by NAFTA, the Mexican government eliminated all permanent quotas and tariffs on poultry, table eggs and swine in January 2003. With certain specific exceptions described below, there are now no quotas or tariffs on imports of poultry, eggs and swine from the United States. We expect the elimination of these trade protections to stabilize the level of imports over time and to permit improved private control over imports, which may result in increased competition from importers.
Effective January 1, 2008, there is a free chicken market between Mexico and the U.S. This allows U.S. producers to export any amount of chicken leg quarters free of tariffs to Mexico.
In addition to NAFTA, Mexico has entered into free trade agreements with several other countries including Chile, Bolivia, Colombia, Venezuela and Japan and the European Union. Although such agreements may result in lower tariffs over our own products, we believe that imports from such countries will not increase substantially in the future due to high transportation and distribution costs.
Antitrust Regulations
TheLey Federal de Competencia Economica (“Mexican Economic Competition Law”), which took effect on June 22, 1993, regulates monopolies and monopolistic practices. Under this law, all companies (including Bachoco) are required to notify theComision Federal de Competencia (“Federal Competition Commission”) of all proposed transactions exceeding specified threshold amounts as set forth in the Mexican Economic Competition Law. The Federal Competition Commission can impose conditions on, and prevent or unwind, any such transactions by Mexican companies. We have complied with all requirements under this law.
In December 2009, Mexico’s Federal Commission of Economic Competition published a notice announcing an investigation of the Mexican poultry sector regarding possible monopolistic business practices. No specific companies have been cited as conducting business in this manner. We, along with other companies, were required to provide information to the commission. During
In 2010 and 2011 the Federal Commission of Economic Competition continued with the investigation and requested information from several poultry companies. We anticipateAs of the investigation will continue for approximately one more year.
Environmental and Sanitary Regulation
Our operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The principal laws areLey General de Equilibrio Ecologico y Proteccion Ambiental(General Law of Ecological Balance and Environmental Protection—the “Environmental Law”)Protection) andLey de Aguas Nacionales(“National Waters Law”)Law). TheSecretaria del Medio Ambiente y Recursos Naturales (Ministry of Environment and Natural Resources or “Semarnat”) administers the Environmental Law, andComision Nacional del Agua(“National Water Commission”) administers the National Waters Law.
The Environmental Law regulates water pollution, air pollution, noise control and hazardous substances.Semarnat can bring administrative and criminal proceedings against companies that violate environmental laws, and after certain administrative procedures, it also has the power to close non-complying facilities. Every company in Mexico is required to provideSemarnatwith periodic reports regarding compliance with the Environmental Law and the regulations thereunder.
The level of environmental regulation in Mexico has increased in recent years,every year, and enforcement of the law is improving. We expect this trend to continue and to intensify with international agreements between Mexico and the United States.
In particular, Mexican environmental laws set forth standards for water discharge that are applicable to poultry processing operations. Our processing plants have water treatment facilities that comply with Mexican environmental standards. We are implementing other investment projects in anticipation of stricter environmental requirements in the future. We do not expect that compliance with those Mexican federal environmental laws or Mexican state environmental laws will have a material effect on our financial condition or performance.
In 2008; the Company voluntarily entered in an audit program through the Office of Environmental Protection (“Propaeg”) of the Government of Guanajuato. As a result, in October 2011, the Company invested over Ps. 52.0 million in the building of water-treatment plant for its poultry processing plant located in Celaya, Guanajuato. On February 29, 2012, the Company received the Certificate “Clean Company” delivered by Propaeg.
This Certificate confirms that the Company meets all environmental standards on its production processes and that is friendly to the environment. Thus, this certification is a clear example of the Company’s environmental commitment with the community and the in general with the country.
The production, distribution and sale of chicken, eggs and swine are subject to Mexican federal and state sanitary regulations. The principal legislation isLey General de Salud (“General Health Law”) andLey Federal de Sanidad Animal(“Federal Animal Health Law”). The Federal Animal Health Law was enacted in 1993, and, since then, we have been working closely with Mexican authorities to develop regulatory standards and inspection methods for chicken processing. Currently, Mexican authorities do not monitor production or inspect products to the same degree as sanitary authorities in other countries, such as the USDA in the United States. However, we believe that we are in compliance with all applicable sanitary regulations.
U.S. Regulations
In our U.S. operations we are subject to regulations from federal agencies such as the USDA, the U.S. Food and Drug Administration (or “FDA”), the U.S. Environmental Protection Agency (or “EPA”), the U.S. Department of Homeland Security (or “DHS”), and the U.S. Department of Labor (or “DOL”),as well as state regulatory agencies in the states where we conduct business. Our U.S. subsidiary is in compliance with all current regulations and constantly monitors for any changes in those regulations.
| C. | Organizational Structure |
Industrias Bachoco, S.A.B de C.V. is a holding company with no operations other than holding the stock of ourits subsidiaries, allmost of which are incorporated in Mexico, and engaging in transactions with our subsidiaries.Mexico. Our principal operating subsidiary is BSACV, which owns our principal operating assets, and which accounted for 87.5%81.37% of consolidated total assets as of December 31, 2010,2011, and 93.0%85.5% of our consolidated revenues for the year ended December 31, 2010.2011. All of our subsidiaries are directly owned by us in the percentage listed below.
Percentage Equity Interest | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
| Acuicola Bachoco, S.A. de C.V. | 100 | - | - | |||||||||
| Aviser, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Bachoco, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Bachoco Comercial, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Campi Alimentos, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Huevo y Derivados, S.A. de C.V. | 97 | 97 | - | |||||||||
| Operadora de Servicios de Personal, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Pecuarius Laboratorios, S.A. de C.V. | 64 | 64 | 64 | |||||||||
| Secba, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Sepetec, S. A. de C.V. | 100 | 100 | 100 | |||||||||
| Servicios de Personal Administrativo, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Induba Pavos, S.A. de C.V. | 100 | 100 | 100 | |||||||||
| Percentage equity interest | ||||||||
| Country | 2009 | 2010 | 2011 | |||||
| Aviser, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Bachoco, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Bachoco Comercial, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Campi Alimentos, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Huevo y Derivados, S.A. de C.V. | Mexico | 97 | - | - | ||||
| Operadora de Servicios de Personal, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Pecuarius Laboratorios, S.A. de C.V. | Mexico | 64 | 64 | 64 | ||||
| Secba, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Sepetec, S. A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Servicios de Personal Administrativo, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| Induba Pavos, S.A. de C.V. | Mexico | 100 | 100 | 100 | ||||
| O.K. Industries Inc. and Subsidiaries | U.S. | - | - | 100 | ||||
In 2009, AcuicolaAcuícola Bachoco, S.A. de C.V. merged with Campi Alimentos, S.A. de C.V.
O.K. Industries was acquired in November 2011. It includes 4 subsidiaries which it controls; in 3 of Huevos y Derivados, S.A. de C.V. held on March 31, 2010, its stockholders approved its Balance Sheet asthem O.K. Industries holds the 100% of December 31, 2009their shares and agreed to proceed within the liquidationlast one it holds the 85% of the company starting on January 1st , 2010.
For more information, please read Note 2-a) of the Consolidated Financial Statements.
| D. | Property, Plant and Equipment |
The following table indicates production facilities and the number of each type of facility both in Mexico and the U.S., as of March 31, 2012:
| Bachoco production facilities | In Mexico | In the U.S. | ||||||
| Chicken breeding farms | 171 | 93 | ||||||
| Broiler grow-out farms | 518 | 336 | ||||||
| Broiler processing plants | 9 | 2 | ||||||
| Hatchery | 21 | 3 | ||||||
| Egg production farms | 91 | - | ||||||
| Swine breeding farms | 1 | - | ||||||
| Swine grow-out farms | 10 | - | ||||||
| Feed mills | 18 | 2 | ||||||
| Further process plants | 4 | 2 | ||||||
Mexico Facilities
In Mexico, our facilities are grouped in nine complexes that mainly include farms, feed mills, incubation and processing plants, and distribution centers. These complexes are located in the cities of Culiacan, Monterrey, Hermosillo, Gomez Palacios, Lagos de Moreno, Celaya, Tecamachalco, Coatzacoalcos, and Merida. Our nine processing plants process around 10 million chickens per week. The Celaya complex is the largest of our complexes in México, and it is also where our headquarters are located.
We also account with more than 800 production facilities (most of which are farms), and storage facilities63 distribution centers that are located throughout the regions we serve in orderMexico, to ensure freshness and minimize transportation time and costs. The most extensive facilities
Additionally, there are grouped in nine complexes that include farms and processing plants. The largest of our complexes is in Celaya, where we have broiler grow-out farms, a broiler processing plant and egg production farms. The complex at Culiacan includes broiler grow-out farms and a broiler processing plant, as do the complexes located in Puebla, Lagos de Moreno, Coatzacoalcos, Merida, Hermosillo and Monterrey. There are smallersmall egg production farms at Los Mochis, Ciudad Obregon, Puebla and Mexicali. In Gomez PalacioMexicali, and Saltillo,swine production is based in the cities of Los Mochis, Ciudad Obregon and Celaya.
Four of the eighteen feed mills plants are dedicated to produce balance feed to sales to third parties and the remaining fourteen are dedicated mainly to internal consumption.
We own other facilities, including two poultry manure-processing plants. We also own a laboratory that produces vaccines for the poultry industry, which we havemainly use for internal purposes.
We own most of our facilities, and lease a complex which consistslimited number of broiler grow-out farms and sales centers, all of which we do not consider material. We also employ a network of contract growers.
Our fleet of trucks transport day-old chickens from egg productionincubation plants to farms, representing nearly halfpart of our total egg production capacity.
Expansion, Construction or Issues Related with Our Facilities
On April 13, 2008, our processing plant in Monterrey caught fire. While the fire destroyed the entire further processing area, our broiler production processing did not suffer any damage and continued operating under nearly normal conditions until 2009. In 2009, the Company closed this facility and moved the broiler production processing to a new facility in the same city of Monterrey.
In April 2010, the table eggs operation located in Mexicali, B.C. was affected by an earthquake that hit northwestern Mexico on April 4. The earthquake partially affected almost all of the farms located in this region, including our farm. Our affected farm represents approximately 9.0% of our total egg production. Other facilities, such as feed mill and distribution centers, were essentially undamaged. This farm recommenced operations at the end of 2010, with normal production capacity expected to resume by the end of 2011.
U.S. Facilities
We operate 18have facilities across the River Valley area in Arkansas and Oklahoma. We process around 3 million chickens per week in those facilities. Our offices are in Fort Smith, Arkansas. Our slaughter and deboning plants and feed mills forare located in Fort Smith and Heavener, Oklahoma. We have further processing plants in Fort Smith and Muldrow, Oklahoma; our own chickens, feed saleshatcheries in Fort Smith, Heavener and Stigler, Oklahoma; our broiler research farms, in Greenwood and Hartford, Arkansas; and our cooler storage and distribution center, in Muldrow city.
We currently have no plans to third partiescarry out any construction or material expansion in our Mexico or US facilities.
ITEM 4.A. Unresolved Staff Comments
None
ITEM 5. Operating and Financial Review and Prospects
Company’s Overview
In 2011, the national economy grew 3.9%, and was generally marked by uncertainty caused by high volatility in the world economy. The Mexican peso remained especially volatile towards the end of the year, ending with a depreciation of 13.0 % with respect to the U.S. dollar when compared with the end year of 2010, while the inflation rate in Mexico was 3.8%.
According to theUnión Nacional de Avicultores en Mexico (National Association of Poultry Farmers in Mexico), during 2011, the volume of chicken produced in Mexico grew 3.4% and consumption per capita was 25.6 kg. Additionally, table egg production grew 2.5% and swine operations. The total production capacityconsumption per capita was 22.4 kg. of our feed plants is approximately 397,500 tonseggs per month. We estimate that we are the largest producer of animal feed in Mexico.
In general, the poultry industry whichand, consequently, Bachoco, continued experiencing high production costs during the entire 2011 fiscal year, caused mainly by the high costs of raw materials.
Net sales of the Company for the 2011 fiscal year increased 12.2% as compared to the prior year, resulting in the highest sales billed in the history of the Company.
The chicken products line, the Company’s main source of income, was marked by an oversupply during most of 2011, with an important recovery towards the end of the year. Nevertheless, it was insufficient to reverse the negative results recorded during most of the year.
Export sales from Mexico as percentage of our total sales are only slightly representative. However, we recorded a 70.0% increase in our export sales over the prior fiscal year. This increase is mainly use for internal purposes. Our headquarters aredue the marketing to new foreign customers.
In 2011, we experienced a significant growth mainly through the following: On August 20, 2011, the Company reached an agreement with Grupo OSIG to acquire Trosi de Carnes, S.A. de C.V. under a business combination agreement. This facility is located in Celaya Guanajuato, Mexico,Monterrey. It produces and sells processed beef. The Company paid Ps. 57.7 million for this acquisition.
On November 1, 2011 we have 60acquire OK. Foods, Inc. a fully-integrated U.S. company. Headquartered in Fort Smith, Arkansas, O.K. Industries operates facilities across the River Valley area in Arkansas and Oklahoma, processing 2.5 million chickens per week. With this acquisition, Bachoco might increase its sales around 30.0%. The Company paid US$93.4 million for O.K. Industries. Under USGAAP and IFRS principles, we determine that this acquisition has generated a profit of US$76.4 million equivalent to Ps. 1,038.0.
In addition, the Company carried out a purchase of three distribution centers throughoutlocated all in the regionsstate of Baja California Sur, with which it expanded its domestic coverage. The Company paid Ps. 55.5 million for this acquisition.
We are an important source of employment. At the closing of the 2011 fiscal year, we serve.
| A. | Operating Results |
The following table sets forth selected components of our results of operations as a limited numberpercentage of farms and sales centers, all of which we do not consider material. We also employ a network of contract growers.
| For year ended December 31, | ||||||||||||
| In percentages | 2009 | 2010 | 2011 | |||||||||
| Net revenues | 100.0 | 100.0 | 100.0 | |||||||||
| Cost of sales | (83.1 | ) | (78.9 | ) | (89.3 | ) | ||||||
| Gross profit | 16.9 | 21.1 | 10.7 | |||||||||
| Selling, general and administrative expenses | (10.8 | ) | (11.1 | ) | (10.6 | ) | ||||||
| Operating income | 6.1 | 10.0 | 0.0 | |||||||||
| Comprehensive financing income (loss) | (0.6 | ) | 0.5 | 0.6 | ||||||||
| Taxes (benefit) | (1.7 | ) | 2.0 | (0.1 | ) | |||||||
| Net income (loss) | 3.5 | 8.0 | 0.6 | |||||||||
The following table sets forth, for each of the periods indicated, our net revenues by main product lines as a percentage of total net revenues in each period:
| For year ended December 31, | ||||||||||||
| In percentages over sales | 2009 | 2010 | 2011 | |||||||||
| Chicken | 78.3 | 81.3 | 81.6 | |||||||||
| Eggs | 10.1 | 8.5 | 7.5 | |||||||||
| Feed | 6.3 | 5.6 | 6.7 | |||||||||
| Swine and others | 5.3 | 4.6 | 4.2 | |||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | |||||||||
The following discussion should be read in conjunction with our Audited Consolidated Financial Statements. TheOur Audited Consolidated Financial Statements have been prepared in accordance with Mexican FRS, which differs in certain respects from U.S. GAAP. Note 2123 to theour Audited Consolidated Financial Statements provides a description of the principal differences between Mexican FRS and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of consolidated stockholders’ equity, net income, a consolidated statement of stockholders’ equity and a consolidated statement of cash flows under U.S. GAAP as of December 31, 20092010 and 20102011 and for the years ended December 31, 2008, 2009, 2010 and 2010.2011.
| 26 |
| For year ended December 31, | ||||||||||||
| Net Revenues | 2009 | 2010 | 2011 | |||||||||
| Chicken | Ps. | 18,211.1 | Ps. | 20,127.7 | Ps. | 22,611.2 | ||||||
| In Mexico | 18, 211.1 | 20,127.7 | 21,232.4 | |||||||||
| In the U.S.(1) | - | - | 1,378.8 | |||||||||
| Eggs | 2,356.8 | 2,101.8 | 2,085.9 | |||||||||
| Balanced feed | 1,465.6 | 1,380.8 | 1,853.2 | |||||||||
| Swine and other business lines | 1,229.4 | 1,105.2 | 1,184.7 | |||||||||
| Total Revenues | Ps. | 23,262.9 | Ps. | 24,715.5 | Ps. | 27,735.0 | ||||||
As(1 ) Includes only sales of January 1, 2008, we have adoptedNovember and December, 2011, date on which O.K. was acquired.
2011 vs. 2010
The Company’s net sales for fiscal year 2011 totaled Ps. 27,735.0 million pesos, 12.2% more than the new standard related to “Inflationary Effects”sales registered in accordance with Mexican FRS (Mexican FRS B-10). Due to the relatively low inflation that the country has consistently achieved during the past several years, a new financial reporting standard came into effect on January 1, 2008, which terminates the recognition of inflationary effects in our financial information. Consequently, financial information corresponding to periods prior to December 31, 2007 is expressed in thousands of Mexican Pesos with purchasing power as of December 31, 2007, while the financial information for periods after December 31, 2007 is stated in thousands of nominal Mexican Pesos, except as otherwise indicated. The effects of this price-level restatement in accordance with Mexican FRS have not been reversed in the reconciliation from Mexican FRS to U.S. GAAP. See the Audited Consolidated Financial Statements for more detail.
Chicken products sales increased by 3.5%, mainly due to stable supply and cost of raw materials for most of the year, as well as slight increases in the purchasing power of Mexican consumers.
Table eggs sales decreased 0.8% during the 2011 fiscal year, although the price increased 5.7%; however, the sold volume decreased 6.1%. Decrease in the Northeast, as mentioned abovevolume is mainly due less eggs production in Item 4: “Information on the Company – History and Development of the Company – Background and Ownership Structure.”
Balanced feed sales, conducted under the CAMPI trademark, had an increase of the key segments in which we operate.
Other business lines of the Company include: live swine sales, sales of value added turkey and beef products and other by-products. In this respect, it is important to point out the significant growth in sales of value added beef products in the costlast quarter of feed ingredients. See “Trends in Prices of Feed Ingredients” below.
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
| (percentage of net revenues) | ||||||||||||
| Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales | (86.9 | ) | (83.1 | ) | (78.9 | ) | ||||||
| Gross profit | 13.1 | 16.9 | 21.1 | |||||||||
| Selling, general and administrative expenses | (12.0 | ) | (10.8 | ) | (11.1 | ) | ||||||
| Operating income | 1.1 | 6.1 | 10.0 | |||||||||
| Comprehensive financing income (loss) | (6.8 | ) | (0.6 | ) | 0.5 | |||||||
| Taxes | 1.4 | (1.7 | ) | 2.0 | ||||||||
| Net income (loss) | (4.4 | ) | 3.5 | 8.0 | ||||||||
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (percentage of net revenues) | ||||||||||||
| Chicken | 76.9 | % | 78.3 | % | 81.3 | % | ||||||
| Feed | 7.3 | % | 6.3 | % | 5.6 | % | ||||||
| Eggs | 10.5 | % | 10.1 | % | 8.5 | % | ||||||
| Swine and Others | 5.3 | % | 5.3 | % | 4.6 | % | ||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
2010 vs. 2009
In 2010, we recorded net sales of Ps. 24,715.5 million, a 6.2% increase with respect to the Ps. 23,262.9 million sales reported in 2009. A detail of sales by segment follows.
Sales in our chicken segment totaled Ps. 20,127.7 million during 2010, an increase of 10.7%10.5% as compared to 2009. This result is due to an increase of 3.3% in chicken prices and a 7.2% increase in volume sold, which is a record for the Company. Chicken sales accounted for 81.3% of overall sales.
Throughout 2010, the egg business line in our Company faced oversupply conditions, which increased pressure on egg prices. Sales of these products totaled Ps. 2,101.8 million pesos in 2010, 10.8% lower than the Ps. 2,356.8 million recorded in 2009. This reduction in sales is mainly due to a fall of 9.9% in egg prices and 1.0% decrease in volume sold. Egg sales accounted for 8.5% of overall sales.
The Company sells balanced feed for livestock and pet industry. This segment was affected in 2010 by the contraction in demand during most of the year, with a slight recovery by the fourth quarter. Sales of these products were Ps. 1,380.8 million, 5.8% below the recorded sales of Ps. 1,465.6 million in 2009. In 2010, this business line accounted for 5.6% of total sales.
During 2010, results in our swine business were very favorable primarily because of a healthy balance between supply and demand. Sales totaled Ps. 297.1 million, 26.8% higher than sales in 2009, which were Ps. 234.3 million. This is due to an increase of 16.0% in prices and 9.3% in sales volume. Sales of this product represent almost 1% of total sales of the Company.
The Company's other business segments are: by-products, and value-added products of turkey and beef, which together represent approximately 3.5% of total sales. During 2010, sales of other lines decreased 13.0% due mainly to a decline in the sales of by-products.
| For year ended December 31, | ||||||||||||
| Cost of Sales | 2009 | 2010 | 2011 | |||||||||
| Total cost of sales | Ps. | 19,326.8 | 19,500.7 | 24,773.2 | ||||||||
| Gross Profit | Ps. | 3,936.1 | 5,214.8 | 2,961.8 | ||||||||
| Gross margin | % | 16.9 | 21.1 | 10.7 | ||||||||
2011 vs. 2010
Total cost of sales increased 27.0% for year 2011, when compared to the year 2010. The production cost of chicken per unit was the most affected, it increased around 19.0% in 2011 vs. 2010.
Balanced feed cost is the single largest component of our cost of sales. In 2011, balanced feed cost was negatively affected by increases in corn and soybean meal, resulting from lower supply inventories, worldwide and in particular to a volatile exchange rate of peso–dollar. In 2011, 55.4% of the corn that we purchased was bought in the U.S., priced in dollars.
The gross profit
2010 vs. 2009
In 2010, cost of sales was Ps. 19,500.7 million compared to Ps. 19,326.8 million in 2009, this represents arepresenting 2.9% decrease of 2.9% in the cost of sales per unit, andunit. This was mainly due to increased efficiencies in our production indicators and an adequate administration of our grain hedging.
As a result of the reduction in our cost of sales per unit and increases in the volume of chicken and swine sold, the Company registered a gross profit for 2010 of Ps. 5,214.8 million with a margin of 21.2%, up from a margin of 16.9% in 2009.
| For year ended December 31, | ||||||||||||
| Operating Income ad EBITDA | 2009 | 2010 | 2011 | |||||||||
| Selling and administrative expenses | Ps. | 2,522.3 | 2,751.8 | 2,951.9 | ||||||||
| Operating income | Ps. | 1,413.8 | 2,463.0 | 9.9 | ||||||||
| Operating margin | % | 6.1 | 10.0 | 0.0 | ||||||||
| EBITDA result | Ps. | 2,076.4 | 3,155.6 | 735.9 | ||||||||
| EBITDA margin | % | 8.9 | 12.8 | 2.7 | ||||||||
2011 vs. 2010
Bachoco recorded an operating income of Ps. 9.9 million at the closing of 2011, a significant decrease compared with the operating income of Ps. 2,463.0 million recorded in 2010. The optimization of production indexes, general expense control and expenses
The result of the EBITDA in 2011 was Ps. 735.9 million, which represented 76.7% decrease compared to the Ps. 3,155.6 million of EBITDA reported in 2010.
2010 vs. 2009
Total operating expenses in 2010 were Ps. 2,751.8 million, in 2010, compared with Ps. 2,522.3 million in 2009, which primarily reflectsreflected the increase in our distribution and administrative expenses, leading to operatingexpenses. As a result the Company achieved income of Ps. 2,463.0 million, or a margin of 10.0%. This figure is higher than the operating income reached in 2009 of Ps. 1,413.8 million, or a margin of 6.1%.
The EBITDA for year 2010 our other expenses, net amounted towas Ps. 95.33,155.6 million, asa margin of 12.8% compared to other expenses, netand EBITDA result of Ps. 65.22,076.4 million and 8.9% margin reported in 2009.
| For year ended December 31, | ||||||||||||
| Comprehensive Financial Results | 2009 | 2010 | 2011 | |||||||||
| Comprehensive financial result: | Ps. | (133.2) | Ps. | 122.1 | Ps. | 177.6 | ||||||
| Net interest income and valuation effects of financial instruments | (95.3 | ) | 111.0 | 123.1 | ||||||||
| Foreign Exchange gain (loss) | (38.0 | ) | 11.1 | 54.5 | ||||||||
2011 vs. 2010
In 2011, we had comprehensive financial income of Ps. 177.6 million, compared with income of Ps. 122.1 million in 2009.2010. The increase wasgain is mainly attributable to a loss associated with salesgain in valuation effects of waste animals, raw materialsfinancial instruments and by products. See Note 17net interest of Ps. 123.1 million recorded in 2011. We also recorded an exchange gain of Ps. 54.5 million, compared to our Audited Consolidated Financial Statements for more detail.
2010 vs. 2009
In 2010, we recorded comprehensive financial income of Ps. 122.1 million, compared with a loss of Ps. 133.2 million in 2009. The result is mainly attributable to a gain in valuation effects of financial instruments and net interest of Ps. 111.0 million in 2010, while in 20092009; we registered a valuation effect of financial instruments and net interest loss of Ps. 95.3 million. In 2010 we recorded an exchange gain of Ps. 11.1 million, compared to an exchange loss of Ps. 37.9 million in 2009.
| For year ended December 31, | ||||||||||||
| Income Taxes | 2009 | 2010 | 2011 | |||||||||
| Total income tax (benefit) expense | Ps. | 406.4 | Ps. | 503.4 | Ps. | (40.5 | ) | |||||
| Income tax | 103.5 | 495.8 | 69.6 | |||||||||
| Flat rate business tax | 0.4 | 0.0 | 0.0 | |||||||||
| Deferred Income tax | 302.5 | 7.6 | (110.1 | ) | ||||||||
2011 vs. 2010
Total taxes in 2011 were a benefit of Ps. 40.5 million, compared to a charge of Ps. 503.4 million reported in 2010. This benefit in 2011 is mainly due to income tax of Ps. 69.6 million, offset with deferred income tax of Ps. 110.1 million.
The main components of the Income tax are computed “expected” tax expense for Ps.24.9 million and effect of companies outside simplified regime for Ps.33.1. The main components of deferred income tax are an increase in deferred tax assets for Ps.287.9 million, partially compensated by an increase in deferred tax liabilities for Ps. 6.0 million and an increase in deferred tax assets-foreign subsidiary for Ps.174.1 million.
For more detail see Note 19 of our Consolidated Financial Statements.
2010 vs. 2009
Total taxes recognized by the Company in 2010 amounted to Ps. 503.4 million, compared to Ps. 406.4 million reported in 2009. This represents an income tax of Ps. 495.8 million and deferred income tax of Ps. 7.6 million in 2010, comparable to income tax of Ps. 103.9 million and deferred income tax of Ps. 302.5 million in 2009. The decrease in deferred income taxtaxes in 2010 compared to 2009 is mainly due to an extraordinarythat in 2009 we recognized a single charge of Ps. 188.8 million of deferred taxes, recognized in 2009 as a result of a tax reform by which, as ofauthorized beginning in 2010, the tax rate wasis increased from 19.0%19% to 21.0%21% in the simplified regime and from 28.0%regime.
| For year ended December 31, | ||||||||||||
| Net Controlling Income | 2009 | 2010 | 2011 | |||||||||
| Net controlling income | Ps. | 797.6 | Ps. | 1,983.4 | Ps. | 157.0 | ||||||
| Net margin | % | 3.4 | % | 8.0 | % | 0.5 | ||||||
2011 vs. 2010
Net controlling income for year 2011 totaled Ps. 157.0 million, or Ps. 0.26 per share (US$0.22 per ADS), a sharp decrease as compared to 30.0%income in the general regime (the Company's principal subsidiary, Bachoco, being subject2010, which amounted Ps. 1,983.5 million or Ps. 3.31 per share (US$ 2.84 per ADS). Net consolidated margin in 2011 was a profit of 0.6% compared to the simplified regime). The Company did not recognize a similar chargeprofit of 8.0% reached in 2010.
2010 vs. 2009
Net controlling interest income for year 2010 was Ps. 1,983.4 million, or Ps. 3.31 per share (US. $3.21$2.84 per ADS), compared to a net controlling interest income of Ps. 797.6 million, or Ps. 1.33 per share in 2009 (US. $1.29$1.14 per ADS). In terms of margin, the Company reached a net controlling margin of 8.0%, significantly higher than the 3.5% net margin reported in the previous year.
The following information is a low debt level and 2010 was no exception: short- and long-term debt totaled Ps. 646.9 million, lower than the Ps. 963.8 million reported at the end of 2009.
Income Tax, Asset Tax and Flat Rate Business Tax, Year 2010
Industrias Bachoco and all of its subsidiaries file separate income tax returns. Bachoco, the Company’s main subsidiary, is subject to the simplified regime. This simplified regime is applicable to agriculture, cattle-raising and fishing, among others.
O.K. Industries, subsidiary is located in the U.S. and it has a different fiscal period that the rest of the subsidiaries located in Mexico. O.K. Industries’ fiscal year ends in April each year, while the rest of the Companies end in December.
For more information please see Note 2-v) and Note 19-a) and d) of the Consolidated Financial Statements.
Income Tax
In 2009, a tax reform was authorized by which, as of 2010, the tax rate was increased from 19.0% to 21.0% in the simplified regime and from 28.0% to 30.0% in the general regime. The Company recognized the result of this change in 2009, in a charge to results of Ps. 188.8 million, which is reflected in deferred taxes under the line item “Adjustment to deferred tax assets and liabilities for enacted changes in tax law and rates.” See Note 16-a19-a) of the Consolidated Financial Statements for more information.
Flat Rate Business Tax (IETU)
On October 1, 2007, new laws were published and a number of tax laws were revised relating to the Flat Rate Business Tax (IETU). These laws came into effect on January 1, 2008. The IETU rate was set at 16.5% for 2008, 17.0% for 2009 and 17.5% for 2010 and thereafter, based on cash flows, and limits certain deductions. The IETU is required to be paid only when it is greater than the income tax to be paid in any given year. To determine the IETU base in a given year, gross income tax (before subtracting deductions) is subtracted from the net income tax (after subtracting deductions), with the difference being the IETU base. If a negative IETU base is determined because deductions exceed income tax, there will be no IETU payable. Instead, the amount of the negative IETU payable base multiplied by the IETU rate results in an IETU credit, which may be applied against the income tax due for the same year or, if applicable, against any IETU payable in the next ten years. See Note 16-b19-b) of the Consolidated Financial Statements for more information.
Asset Tax (AT)
In 2007, a new law was enacted that resulted in the derogation of the asset tax law beginning on January 1, 2008. In 2007, the asset tax rate was payable at 1.25% and liabilities were no longer deductible from the asset tax base. At December 31, 2010,2011, the Company had Ps. 4.95.0 million in asset tax credits. See Note 16-c19-c) to theour Audited Consolidated Financial Statements for more detail.
| Base Year | Asset tax restated at December 31, 2010 | Year of expiration | ||||||
| 2005 | 1.6 | 2015 | ||||||
| 2006 | 3.3 | 2016 | ||||||
| Million of Ps. | 4.9 | |||||||
| Base Year | Asset tax restated at December 31, 2011 in million | Year of expiration | ||||||
| 2005 | Ps. | 1.6 | 2015 | |||||
| 2006 | Ps. | 3.4 | 2016 | |||||
Deferred income tax in O.K. Industries
Deferred income taxes of OK Industries is included in the consolidated deferred income tax of Bachoco, and relate primarily to the use of the farm price method of accounting for inventories for tax purposes and certain self-insurance and other accruals and reserves, as well as temporary differences between financial statement and tax return recognition of certain inventory costs, sales and other amounts resulting from the previous use of the cash basis of accounting for income tax purposes by the subsidiary’s agricultural production operations, as well as differences in basis and depreciation methods used on certain assets.
Reconciliation to U.S. GAAP
The Company’s Audited Consolidated Financial Statements are prepared in accordance with Mexican Financial Reporting Standards (“MexFRS”), which differ in certain respects from U.S. GAAP.
The principal differences between MexFRS and U.S. GAAP, as they relate to us, with an explanation, where appropriate, of the method used to determine the adjustments that affect income and stockholders’ equity, and any additional applicable disclosures as applicable are described in the Note 2123 of our Audited Consolidated Financial Statements. Our consolidated net income under U.S. GAAP was a net lossincome of Ps. 869.4798.4 million in 2008,2009, a net income of Ps. 787.01,978.0 million in 20092010 and a net income of Ps. 1,975.01,180.7 million in 2010,2011, compared to a net loss of Ps. 886.0 million, a net income of Ps. 809.0 million, and a net income of Ps. 1,986.3 million and, a net income of Ps.159.1 million, respectively, under Mexican FRS.
Bachoco has applied Statement of Financial Accounting Standards (included in FASB ASC Subtopic 740-10- Income taxes – Overall) (FIN 48.) Accounting for Income Taxes for all periods presented. The deferred tax adjustment included in the net income (loss) and stockholders’ equity reconciliations includes the effect of deferred taxes on all U.S. GAAP adjustments reflected in the reconciliation from Mexican FRS to U.S. GAAP. Under U.S. GAAP, the Company recognizes a deferred tax liability associated with profits originated during the simplified regime that have not paid income tax previously, but would be subject to taxation upon future distributions under the Mexican tax law. Due to the accounting change in Mexican FRS in 2008, this concept generates a reconciling difference to U.S. GAAP. The deferred tax liability under this concept amountedwas a charge of Ps. 275.0309.1 and a benefit of Ps. 309.1270.0 million as of December 31, 20092010 and 2010,2011, respectively.
For U.S. GAAP purposes, goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC Topic 350, Intangibles – Goodwill and Other. Up to December 31, 2004, we recognized an accumulated effect (increase in equity) of Ps. 58.7 million for the non amortization of goodwill, under U.S. GAAP. The Company performs its annual impairment review of goodwill at December 31, and when a triggering event occurs between annual impairment tests. In 2008, 2009, 2010 and 2010,2011, no triggering events occurred and the annual impairment test did not reflect any impairment concern.
The fair value of financial instruments is the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. When possible, we use quoted market prices to determine fair value. Where quoted market prices are not available, the fair value is internally derived based upon appropriate valuation methodologies with respect to the amount and timing of future cash flows and estimated discount rates for both counterparty and entity’s own risk. However, considerable judgment is required in interpreting market data to develop estimates of fair value, so the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions or estimation methodologies could be material to the estimated fair values.
Fair value information presented in Note 2123 to our Audited Consolidated Financial Statements is based on information available at December 31, 2010 and 2009.2011. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates; therefore, the current estimates of fair value at dates after December 31, 20102011 and 2009,2010, could differ from these amounts.
Use of Estimates in Certain Accounting Policies
In preparing our Audited Consolidated Financial Statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and the estimates involve judgments based on the information available to us. The discussion below identifies matters for which the financial presentation would be materially affected (a) if we relied on different estimates that we could reasonably use, or (b) if in the future we change our estimates in response to changes that are reasonably likely to occur.
The discussion below addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates would not be material to our financial results.
Estimated Useful Lives of Property, Plant and Equipment
We estimate the useful lives of our property, plant and equipment in order to determine the amount of depreciation expense to be recorded in each period. The current estimates of useful lives are based on estimates made by an independent appraiser in 1996. Those estimates have been adjusted when applicable, based on historical experience with similar assets that we own.
Accumulated depreciation expense for property, plant and equipment in 20102011 amounted to Ps. 8.28.7 billion. As applied to our 20102011 financial results, the depreciation and amortization was Ps. 692.6726.1 million, or 2.8%2.6% of our net revenues. For further explanation, see Notes 2-h2-c) and 79 to theour Audited Consolidated Financial Statements.
Allowance for Productivity Declines
The allowance for decline in productivity of our breeder chickens and swine is estimated based on expected future life under straight line method. See Note 2g2-h) in our Audited Consolidated Financial Statements for more detail.
Inventory Valuation
At December 31, 20092010 and 2010,2011, our inventories are stated at the lower of historical cost determined by the average cost method or market (replacement cost), provided that replacement cost is not less than net realizable value.
Agriculture
Our Audited Consolidated Financial Statements recognize the requirements of Mexican FRS E-1, “Agriculture,” which establishes the rules for recognizing, measuring, presenting and disclosing biological assets and agricultural products.
Mexican FRS E-1 requires biological assets and agricultural products (the latter at the time of harvesting) to be valued at their fair value, net of the estimated costs at the point of sale. Bulletin E-1 also establishes that whenever the fair value cannot be determined in a reliable, verifiable and objective manner, the assets are to be valued at their production cost, net of impairment loss.
Agricultural products are live chickens, processed chickens, commercial eggs and pigs available for sale. The Company’s biological assets are comprised of poultry in their different stages, incubatable eggs and breeder pigs.
Broiler chicks less than six and a half weeks old, incubatable eggs, breeder pigs and laying hens are valued at production cost since it is not possible to determine their fair value in a reliable, verifiable and objective manner.
Broilers more than six and a half weeks old through their date of sale are valued at fair value net of estimated point-of-sale costs, considering the price per kilogram of processed chicken at the valuation date.
Processed chicken and commercial eggs are valued at fair value net of estimated point-of-sale costs, considering the price per kilogram of processed chicken and commercial eggs at the time such items are considered as agricultural products. From such date through the date of sale, the fair value is considered to be the cost of processed chicken or commercial eggs, not in excess of net realizable value.
We are exposed to financial risks due to changes in the price of chicken. We estimate that the price of chicken will not fall sharply or significantly in the near future; consequently, we have not entered into any derivative agreement or any other type of agreement to offset the risk of a drop in the price of chicken.
For more details, see “Inventories and biological assets” in Note 67 of theour Audited Consolidated Financial Statements.
Allowance for Doubtful Accounts
The Company’s policy is to record an allowance for doubtful accounts for balances which are not likely to be recovered. In establishing the required allowance, management considers historical losses, current market conditions, and our customers’ financial condition, the amount of receivables in dispute originated by price differences and the aging of our current receivable and current payment patterns.
Pension Plan
We have a retirement plan in which all non-union workers participate. Pension benefits are based on the salary of workers in their final three years of service, the number of years worked and their age at retirement. See Note 2-m and Note 14 to our Audited Consolidated Financial Statements.
This plan includes:
| Defined contribution plan: This fund consists of employee and Company contributions. The employee contribution percentage ranges from 1.0% to 5.0%. The Company contribution ranges from 1.0% to 2.0% in the case of employees with less than 10 years’ seniority, and the same contribution percentage as the employee (up to 5.0%) when the employee has more than 10 years’ seniority. |
| Defined benefit plan: This fund consists solely of Company contributions and covers the Company's labor obligations with each employee. |
Seniority premiums and severance payments are paid to workers as required by Mexican labor law.
We recognize the liability for pension benefits, seniority premiums and termination benefits (severance payments), based on independent actuarial computations using the projected unit-credit method and financial assumptions net of inflation.
The Company’s employees in the US, also accounts with a contribution plan, where the Company contributes with the 50.0% of the employee’s contribution up to 2.0% of their remuneration.
See Note 2-q) and Note 17 to our Audited Consolidated Financial Statements, for more detail regarding pension plan for Bachoco’s employees either in Mexico and the U.S.
Valuation Allowance for Deferred Tax Assets
In assessing our ability to realize deferred tax assets, management considers whether it is more likely than not that part or all of the deferred tax assets will not be realized taking into account, that the final of our deferred tax assets is dependent upon the generation of future taxable income during the periods in which such assets become deductible. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The valuation allowance for deferred tax assets as of January 1, 20091st, of 2010 and 2010 amounted to2011 was Ps. 28.036.1 million and Ps. 36.153.3 million, respectively. See note 16-eFor more information see Note 19-e) to our Audited Consolidated Financial Statements.
| B. | Liquidity and Capital Resources |
We are a holding company with no significant operations of our own. We principally engage in transactions with our subsidiaries. Our main subsidiary is Bachoco, which in 2011 accounted with the 81.37% of the total revenues of the Company.
| For the year ended December 31, | ||||||||||||
| Cash and cash equivalents | 2009 | 2010 | 2011 | |||||||||
| Total Cash and equivalents: | Ps. | 2,551.0 | Ps. | 4,177.2 | Ps. | 3,036.4 | ||||||
| Cash and cash equivalents | Ps. | 2,399.1 | Ps. | 3,967.9 | Ps. | 2,625.7 | ||||||
| Primary financial instruments | 151.9 | 209.3 | 410.7 | |||||||||
| Acid test ratio(1) | 1.5 | 2.8 | 1.4 | |||||||||
(1) Current assets less inventories /current liabilities
Our cash comes basically from the sales of our products in the Mexican and U.S. markets. Our second source of liquidity comes from credit lines we use from time to time.
2011 vs. 2010
In 2011, cash and equivalents amounted Ps. 3,036.4 million 27.3% less than Ps. 4,177.2 million in 2010. The decrease is mainly due to the payment for part of the acquisition we completed in 2011, working capital increase and the weak operating results.
2010 vs. 2009
In 2010, our financial position remained sound. In 2010, cash and cash equivalents and primary financial instruments increased to Ps. 4,177.2 million, which compares positively to the Ps. 2,551.0 million reported in 2009. The increase was primarily due to our positive operating results.
| For the years ended December 31, | ||||||||||||
| Debt | 2009 | 2010 | 2011 | |||||||||
| Accounts payable | Ps. | 3,613.2 | Ps. | 1,572.3 | Ps. | 2,326.8 | ||||||
| Short-term debt | 234.3 | 0.0 | 1,277.8 | |||||||||
| Long-term debt(1) | 729.5 | 647.0 | 559.6 | |||||||||
| Debt ratio | 0.26 | 0.23 | 0.30 | |||||||||
(1) Includes current installments of long-term debt-
(2) Total liabilities / total assets
For details of maturity of our debt, and interest rate, see Note 12 of our Consolidated Financial Statements.
2011 vs. 2010
In general, total debt increased as a result of the recent acquisitions in Mexico and the U.S. Short-term debt totaled Ps. 1, 277.8, as the Company used US$ 75.0 million from one of its line of credits to partially fund the acquisition of O.K. Industries.
2010 vs. 2009
In 2010, our short- and long-term debt totaled Ps. 646.9 million, lower than the Ps. 963.8 million reported as fo December 31, 2009. This 32.9% of decrease primarily reflects the payment of our short term debt and some notes payable to banks.
| For the years ended December 31, | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Working capital: | Ps. | 3,325.3 | Ps. | 3,333.6 | Ps. | 4,824.0 | ||||||
| Current assets less cash and equivalents | Ps. | 5,352.2 | Ps. | 5,360.5 | Ps. | 7,824.0 | ||||||
| Current liabilities less debt | 2,026.9 | 2,026.9 | 3,000.0 | |||||||||
2011 vs. 2010
Our working capital (currentincreased in 2011 as compared to 2010, mainly due an increase in accounts receivable, inventories of raw materials and final and in process inventories. We partially offset the increase with an increase in accounts payable.
We consider that our current level of working capital is sufficient for the normal course of our operations. Our working capital needs are susceptible to change, depending mainly on the cost of our main raw materials which affect or inventory cost, and on the level of accounts payable.
The ratio of current assets lessto current liabilities)liabilities decreased from 4.4 in 2010 to 2.3 in 2011.
2010 vs. 2009
Our working capital increased year over year from Ps. 5.2 billion on December 31, 2009 to Ps. 7.4 billion on December 31, 2010. Such increase was mainly due to an increase in the cash and investments and a decrease in derivative financial instruments as current liabilities accounts. The ratio of current assets to current liabilities on December 31, 2010 was 4.4.
| For the years ended December 31, | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Capital Expenditures(1) | Ps. | 944.1 | Ps. | 517.3 | Ps. 707.5 | |||||||
(1)Due to the effect from accounting changes, amounts may differ from previously reported for past years.
2011
Our capital expenditures in 2011 were paid with internal resources. In 2011, the capital investments in the Company totaled Ps. 707.5 million, with which we implemented new technology in the processing plants located in Coatzacoalcos, Culiacan and cash equivalentsCelaya. In Crelaya plant the Company built a water treatment plant and, primary financial instruments were Ps. 4.2 billion on December 31, 2010, representing an increase of Ps. 1.6 billion or 63.8% from the previousand lastly as every year. The increase was primarily due to our positive operating results.
2010 representing a slight decrease of Ps. 37.8 million or 1.0% from the previous year, due mainly to a decrease in our inventories in raw materials.
In 2010, capital investments amounted to Ps. 560.6517.3 million, most of which were financed with resources generated from our own operations. These capital investments were used mainly to finance, productivity projects, production growing capabilities and infrastructure improvements to keep facilities in good operating conditions.
2010
In 2009, we made capital expenditures of Ps. 944.1 million, with which we entered into two main projects: (i) increased chicken production capacity in Chiapas, Sonora and Yucatán, and updated our transportation fleet (ii) improved production capacity in the Monterrey Complex.
| For the years ended December 31, | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Operating Leases | Ps. | 177.3 | Ps. | 197.5 | Ps. | 188.2 | ||||||
We entered into operating leases for certain offices, production sites, computer equipment, and vehicles. These agreements have terms ranging between one and five years and some of them contain renewal options. See Item 4: “Capital Expenditures”Note 14 to our Audited Consolidated Financial Statements for more detail.
We are a holding company with no significant operations of our own. We principally engage in transactions with our subsidiaries. We will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries, principally BSACV. The amount of dividends payable by our subsidiaries and us is also subject to general limitations under Mexican corporate law.
We manage our Consolidated Statementsexchange rate exposure primarily through management of Cash Flowour financial structure, specifically by maintaining most of our debt through long-term debt instruments. As part of our normal operations, we purchase financial derivative instruments in order to ensure greater certainty in our Audited Consolidated Financial Statementspurchases of U.S. dollars. We plan over a six month period into the future and, depending on the expected uncertainty for more details.
The main risk that the Company faces with the use of hedgingthese derivative instruments please see Note 10-ais the volatility in the exchange rate of the peso against the U.S. dollar.
We have followed different strategies with respect to derivatives which involved call and 10-b of our Audited Consolidated Financial Statements.
Our risk committee approves any change in policies and Ps. 197.5, respectively. Seereviews the application of current policies.
For more details see Note 1112 to our Audited Consolidated Financial Statements for more detail.
| C. | Research and Development, Patents and Licenses, etc. |
None
| D. | Trend Information |
Our demand and prices continues depending mainly on supply and demand in both markets, Mexico and U.S. and no new effect has been identify, additionally to those effects present in the past.
Cost of trendsour main raw materials is subject to level of inventories available, as it occurred in our product lines, see Item 5: “General – Trendspast periods and no disruption new technology is foresee in Product Prices for Bachoco” above.
| E. | Off-Balance Sheet Arrangements |
We do not have any off-balance sheet arrangements of the type that we are required to disclose under this Item.
| F. | Tabular Disclosure of Contractual Obligations |
Our major categories of indebtedness included the following:
| · | As of December 31, |
| · | Long-term debt to banks, as of December 31, 2010 |
| · | The weighted average interest rates on long-term debt for |
The following table summarizes long-term debt as of December 31, 2010.2011. The table does not include current installments of long-term debt, accounts payable or pension liabilities.
Payments Due by Period (millions of constant pesos as of December 31, 2010) | |||||||||||||||||||
Contractual Obligations | Total | 2012 | 2013 | 2014 | 2015 | ||||||||||||||
| Long-term debt | Ps. | 507.1 | 153.0 | 148.3 | 129.1 | 76.6 | |||||||||||||
| Operating leases | Ps. | 617.3 | 181.3 | 159.4 | 140.5 | 136.2 | |||||||||||||
| Payments Due by Period | ||||||||||||||||||||
| in millions of constant pesos as of December 31, 2011 | ||||||||||||||||||||
| Contractual Obligations | Total | Less than a year | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||
| Long-term debt | Ps. | 384.4 | 154.6 | 97.8 | 89.5 | 42.5 | ||||||||||||||
| Operating leases | Ps. | 641.1 | 188.2 | 165.5 | 145.9 | 141.4 | ||||||||||||||
The Company has certain leases related to operating assets, including farms and administrative offices.
| G. | Safe Harbor |
Not applicable.
ITEM 6. Directors, Senior Management and Employees
| A. | Directors and Senior Management |
Directors
The Board of Directors is responsible for the management of our business. The Board of Directors consists of an odd number of directors, never fewer than five, and corresponding alternate directors, each of whom is elected for a term of one year.
Alternate directors are authorized to serve on the Board of Directors in place of directors who are unable to attend meetings or otherwise participate in the activities of the Board of Directors.
At our annual stockholders’ meeting held on April 27, 2011. The changes to the composition of the Board of Directors are as follows:
At our annual stockholders’ meeting held on April 25, 2012, we ratified the membership of June 2011, our Board of Directors, which is composed of the following members:
| Year of Birth | Member since | |||||||
| Chairman of the Board and Proprietary Shareholder Director: | ||||||||
| Francisco Javier R. Bours Castelo | 1953 | 1982 | ||||||
| Proprietary Shareholder Directors: | ||||||||
| Jose Gerardo Robinson Bours Castelo | 1958 | 2008 | ||||||
| Jesus Enrique Robinson Bours Muñoz | 1951 | 1994 | ||||||
| Jesus Rodolfo Robinson Bours Muñoz | 1957 | 2002 | ||||||
| Arturo Bours Griffith | 1955 | 1994 | ||||||
| Octavio Robinson Bours | 1952 | 1997 | ||||||
| Ricardo Aguirre Borboa | 1954 | 1994 | ||||||
| Juan Salvador Robinson Bours Martinez | 1965 | 1994 | ||||||
| Alternate Directors: | ||||||||
| Jose Eduardo Robinson Bours Castelo | 1956 | 1994 | ||||||
| Jose Francisco Bours Griffith | 1950 | 1994 | ||||||
| Guillermo Pineda Cruz | 1948 | 1994 | ||||||
| Gustavo Luders Becerril | 1953 | 2011 | ||||||
| Independent Directors: | ||||||||
| Avelino Fernandez Salido | 1938 | 2003 | ||||||
| Humberto Schwarzbeck Noriega | 1954 | 2003 | ||||||
| Related Proprietary Director: | ||||||||
| Cristobal Gustavo Mondragon Fragoso | 1945 | 2011 | ||||||
| Secretary of the Board: | ||||||||
| Eduardo Rojas Crespo | 1969 | 2008 |
Honorary Members of the Board
Enrique Robinson Bours Almada, Mario Javier Robinson Bours Almada, and Juan Bautista Salvador Robinson Bours are co-founders of the Company and Honorary members of the board.
The following table identifies the relationships among the Bours family members:
Brothers and Co- Founders | Sons | Nephews | Son in Law | ||||||||
| Enrique Robinson Bours Almada | · | Jesus Enrique Robinson Bours Muñoz | · | Arturo Bours Griffith | Guillermo Pineda Cruz | ||||||
| · | Jesus Rodolfo Robinson Bours Muñoz | ||||||||||
| · | Francisco Javier R. Bours Castelo | ||||||||||
| Mario Javier Robinson Bours Almada | · | Jose Gerardo Robinson Bours Castelo | · | Jose Francisco Bours Griffith | |||||||
| · | Jose Eduardo Robinson Bours Castelo | ||||||||||
| · | Ricardo Aguirre Borboa | ||||||||||
| Juan Bautista Salvador Robinson Bours Almada | Juan Salvador Robinson Bours Martinez | · | Gustavo Luders Becerril | ||||||||
Ourbylaws provide for the creation of an executive committee of the Board of Directors, which may exercise certain of the Board’s powers in full, subject to certain limitations.
Francisco Javier R. Bours Castelo,
Chairman of the Board of Directors since 2002. Before his election as Chairman, he was Vice-Chairman for several years. Mr. Bours holds a degree in Civil Engineering from the Instituto Tecnologico y de Estudios Superiores Monterrey (ITESM). He currently serves as Chairman of the Boards of Directors of the following companies: Megacable Holdings, S.A.B. de C.V.,Jose Gerardo Robinson Bours Castelo,
Proprietary Shareholder DirectorJesus Enrique Robinson Bours Muñoz
, Proprietary Shareholder Director since 1994. He has previously worked in Bachoco as Production Director and Divisional Manager. Mr. Robinson Bours holds a degree in Engineering from the University of Arizona. He is also a member of the Board of Directors of San Luis Corporacion S.A. de C.V., and Megacable Holdings, S.A.B. de C.V.Jesus Rodolfo Robinson Bours Muñoz
, Proprietary Shareholder Director since 2002. Mr. Robinson Bours previously served in the Company as Production Manager in the Northwest and Bajio divisions, Commercial Manager in Northwest Division and Purchasing Manager at the Bajio Division. Mr. Robinson Bours holds a degree in Agricultural Engineering from the University of Arizona. He has business experience in agriculture and raising livestock with Agricola Monte Cristo S.A. de C.V., Agricola Rio Yaqui S.P.R. de R.L., Agricola Nacapul S.P.R. de R.L.Arturo Bours Griffith
, Proprietary Shareholder Director since 1994. Mr. Bours Griffith completed professional studies at the University of Arizona. He is also Chairman of the board of Qualyplast, S.A. de C.V., and a member of the board of Megacable Holdings, S.A.B. de C.V., Centro de Servicios Empresariales del Noreste, S.A. de C.V., and Taxis Aereos del Noroeste, S.A. de C.V.Octavio Robinson Bours
, Proprietary Shareholder Director since 1997. Mr. Robinson Bours holds a degree in Agricultural Engineering from the ITESM. He has experience in producing swine, and is also a member of the board of Choya, S.A. de C.V., andRicardo Aguirre Borboa
, Proprietary Shareholder DirectorJuan Salvador Robinson Bours Martinez
, Proprietary Shareholder Director since 1994. He has served Bachoco as Purchasing Manager. Mr. Robinson Bours holds a degree in Industrial Engineering from the ITESM. His other appointments include Chairman of the board and CEO of Llantas y Accesorios, S.A. de C.V. and member of the Board of Megacable Holdings, S.A.B. de C.V.Jose Eduardo Robinson Bours Castelo
,Jose Francisco Bours Griffith
, Alternate Director of Mr. Octavio Robinson Bours and Mr. Arturo BoursGuillermo Pineda Cruz
, Alternate Director of Jesus Enrique Robinson Bours and Mr. Arturo BoursGustavo Luders Becerril
, Alternate Director of Juan Salvador Robinson Bours Martinez and Mr. Ricardo Aguirre Borboa, was named Alternate Director during the annual general meeting held in April 2011. Mr. Luders holds an Accounting degree from the ITESM. He is aAvelino Fernandez Salido
, Independent Director, is member of the board since 2003. He is also a member of the board ofHumberto Schwarzbeck Noriega
, Independent Director, is member of the board since 2003. He holds a degree in economics from the ITESM. He is currently CEO of Yeso Industrial de Navojoa S.A. de C.V.Cristobal Gustavo Mondragon Fragoso
Eduardo Rojas Crespo was named Secretary of the Board of Directors in 2008. He holds a Law Degree from the UNAM. He also holds a post-graduate diploma in Environmental Law and Due Diligence, and a Specialty as well as a Master's Degree, both in Corporate Law; these three from the Anahuac University. Mr. Rojas has worked for Bachoco since 2004 as our Chief Legal Officer. Before joining us,Bachoco, Mr. MondragonRojas worked for 10 years as an accountant for three years. Later he joined La Hacienda, S.A. de C.V., where he held the positionsChief Legal Officer of Auditor, Accountant, Head of Processing Systems, Audit Manager, Administration Manager and Comptroller. Mr. Mondragon holds an Accounting degree from the UNAM.Grupo Fimex.
Honorary members
Mr. Enrique Robinson Bours Almada
, Chairman of the Board and co-founder of the Company, he retired in April 2002. Mr. Bours led the Company for 50 years. The Board named as Mr. Javier Robinson Bours Castelo, Mr. Enrique Robinson Bours’s nephew, as his successor.Mr. Mario Javier Robinson Bours Almada
, member of the Board of Directors, retired in April 2008, and was named as a Life Honorary Propriety Shareholder Director. On the same date, the Board named Mr. Jose Gerardo Robinson Bours Castelo as a Proprietary Shareholder Director in the place of Mr. Mario Javier Robinson Bours Almada.Juan Bautista S. Robinson Bours Almada
, Mr. Bours was co-founder of Industrias Bachoco, S.A.B. de C.V. and a Proprietary Shareholder Director for 57 years. Mr. Bours got retired in April 2011 and named as a Life Honorary Propriety Shareholders Director. On the same date the Board named Mr. Juan Salvador Robinson Bours Martinez as a Propriety Shareholders Director in the place of Mr. Juan Bautista S. Robinson Bours Almada.Executive Officers
| Name | Position | Year of Birth | ||
| Rodolfo Ramos Arvizu | Chief Executive Officer | 1957 | ||
| Paul Fox | Chief Executive Officer, U.S. Operations | 1966 | ||
| Daniel Salazar Ferrer | Chief Financial Officer | 1964 | ||
| David Gastelum Cazares | Director of Sales | 1951 | ||
| Jose Luis Lopez Lepe | Director of Personnel | 1947 | ||
| Ernesto Salmon Castelo | Director of Operations | 1962 | ||
| Andres Morales Astiazaran | Director of | 1968 | ||
| Marco Antonio Esparza Serrano | Comptroller Director | 1955 | ||
| Alejandro Elias Calles Gutierrez | Director of Purchasing | 1956 |
*Director of Marketing and Modern Segment Sales
Rodolfo Ramos Arvizu
,Chief Executive Officer.Mr. Ramos joined us in 1980 and, he was named as Chief Executive Officer in November 2010. Previously, Mr. Ramos served Bachoco as its Technical Director since 1992 and also held positions in the Egg Quality Control Training Program and in Poultry Management as well as serving as Supervisor of the Commercial Egg Production Training Program, Manager of Raw Material Purchasing and as a Director of Production. Ramos holds a degree in Agricultural Engineering from the ITESM.Paul Fox,CEO, U.S. Operations.Paul joined us in 2012 shortly after we acquired our U.S. operations. Paul started his career with Tyson Foods serving in domestic and international leadership positions during 17 years prior to serving as a private equity CEO and Managing Director with Marfrig. Mr. Fox received a BS in Animal Science from Missouri State University and MS in Leadership and Ethics from John Brown University.
Daniel Salazar Ferrer
, Chief FinancialDavid Gastelum Cazares
, Director ofJose Luis Lopez Lepe
,Director of Personnel sinceErnesto Salmon Castelo
,Director of Operations, joined us in 1991 and assumed his current position in 2000. Previously, Mr. Salmon worked for Gamesa, S.A. de C.V. and for us as Sales Manager in Sonora, Northwestern Distribution Manager, Manager of the Processing Plant in Celaya, Southeastern Division Manager and Bajio Division Manager. Mr. Salmon holds a degree in Chemical Engineering fromInstitutoTecnologico de Sonora and a master’s degree in Business| 42 |
Andres Morales Astiazaran
,Director of Marketing andMarco Antonio Esparza Serrano,Comptroller Director since March 2009. Before joining Bachoco, Mr. Esparza worked for more than 25 years in the pharmaceutical industry for three multinational companies, two American companies and one German company.companies. During that time, Mr. Esparza managed and directed every area within Finance and Administration as Accounting Manager, Tax Manager Comptroller, Financial Planning Director and Finance Director. Mr. Esparza holds a degree in public accounting and several post-graduate diplomas in Business Administration, Economics and Direction of Enterprises from universities such as Instituto Politecnico Nacional, University of California at Berkeley, theITESM, University of Almeria Spain and the IPADE.
Alejandro Elias Calles Gutierrez
,was named purchasing Director inAudit Committee
The mandate of the Audit Committee and Corporate Practices is to establish and monitor procedures and controls in order to ensure that the financial information we distribute is useful, appropriate and reliable and accurately reflects our financial position. In particular, pursuant to our bylaws and Mexican law, among others, the Audit Committee and Corporate Practices must do the following:
| Submit an annual report to the Board of Directors; |
| Inform the Board of Directors of the current condition of the internal controls and internal auditing system of the Company or of the entities it controls, including any irregularities detected; |
| Require the relevant directors and other employees of the Company, or of the entities it controls, to provide reports relative to the preparation of the financial information or any other kind of reports or information it deems appropriate to perform its duties; |
| Receive observations formulated by shareholders, Board members, relevant officers, employees and, in general, any third party with regard to the matters under the Audit Committee duties, as well as carry out the actions that, in its judgment, may be appropriate in connection with such observations; |
| Inform the Board of Directors of any material irregularities detected as a result of the performance of its duties and, as applicable, inform the Board of Directors of the corrective actions taken, or otherwise propose the actions that should be taken; |
| Call Shareholders Meetings and cause the items it deems pertinent to be inserted into the agendas of such Shareholders’ Meetings; and |
| Assist the Board of Directors in selecting candidates for audit and reviewing the scope and terms of the auditor’s engagement, as well as evaluate the performance of the entity that provides the external auditing services and analyze the report, opinions, statements and other information prepared and signed by the external auditor. |
At our annual stockholders’ meeting held on April 2007, when Mr. Avellino Fernandez assumed that position. In April27, 2011, we had subsequent changes, with Mr. Fernandez leaving the Audit Committee and Corporate Practices and, currently serving only as a member of the Board. Mr. Felizardo Gastelum Felix is an independent director and was namedelected to the Board of Directors, as President of the Audit Committee and Corporate Practices Committee and Financial Expert. Mr. Felizardo Gastelum Felix performed these roles in an exemplary manner until his death on April 18, 2012.
At our annual stockholders’ meeting held on April 25, 2012, we ratified the membership of the Company, and will provide his expertise as a financial expert.
| Name | Position | |
| Humberto Schwarzbeck Noriega | Member | |
| Ricardo Aguirre Borboa | Member | |
| Avelino Fernandez Salido | Member |
Mr. Avelino Fernandez was the President of the Audit Committee from April 2007 until April 2011, when Mr. Felizardo Gastelum Felix (President), Humberto Schwarzbeck Noriega, Ricardo Aguirre Borboa. succeeded him to the Presidency. Mr. Felizardo Gastelum Felix performed these roles in an exemplary manner until his death on April 18, 2012. Currently, we do not have a President of the Audit and Corporate Practices Committee.
Mr. Ricardo Aguirre Borboa represents the controlling shareholders and has no voting rights in the audit committee.
| B. | Compensation |
The table below sets forth the year ended December 31, 2010, we paid approximately Ps. 44.5 million in aggregate compensation paid to our directors and executive officers, for services they rendered in their respective capacities.
| In million of Mexican Pesos | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Compensation, net | Ps. | 35.2 | Ps. | 44.5 | Ps. | 44.4 | ||||||
| C. | Board Practices |
We do not have any special agreements or contracts with any member of our board. All of our board members are subject to the specific expiration dates of their current terms of office.
| D. | Employees |
| Workforce | 2009 | 2010 | 2011 | |||||||||
| Total Employees: | 24,065 | 23,473 | 25,326 | |||||||||
| in Mexico | 24,065 | 23,473 | 22,473 | |||||||||
| In the U.S. | - | - | 2,853 | |||||||||
In 2010, approximately 52.3%2011, around 60.0% of our employees were members of labor unions.unions in our operations in Mexico. As of March 20112012 and the date of this annual report, labor relations with our employees in Mexico are governed by 5352 separate collective labor agreements, each relating to a different group of employees and negotiated on behalf of each such group by a different labor union.
As is typical in Mexico, wages are renegotiated every year while other terms and conditions of employment are renegotiated every two years. We seek to attract dependable and responsible employees to train at each of our plants and facilities. We offer our employees attractive salary and benefit packages, including a pension and savings plan.
In our U.S. operations none of our employees are members of labor unions. As of the date of this Annual Report labor relations with our U.S. employees are not governed by any collective labor bargaining agreements
As is typical in the U.S., wages and other terms and conditions of employment are renegotiated periodically. We seek to attract dependable and responsible employees to train at each of our plants and facilities. We offer our employees attractive salary and benefit packages, including a health insurance and a retirement savings plan.
In general, we believe that we have good relations with our employees. We have not experienced significant work stoppages as a result of labor problems.
| E. | Share Ownership |
To the best of our knowledge, no individual director or manager holds Shares of the Company. At this time, we have not developed a share options plan for our employees.
ITEM 7. Major Stockholders and Related Party Transactions
Before September 2006, our Common Stock consisted of 450,000,000 Series B Shares and 150,000,000 Series L Shares. Holders of Series B Shares were entitled to one vote at any general meeting of our stockholders for each Series B Share held. Holders of Series L Shares were entitled to one vote for each Series L Share held, but only with respect to certain matters. We had UBL Units consisting of one Series B Share and one Series L Share and B Units consisting in two Series B Shares.
During the extraordinary meeting held on April 26, 2006 Shareholders approved the Company’s plan to convert the Series L Shares into Series B Shares, with full voting rights, as well as the dissolution of UBL and UBB Units into their components Shares.
This process was completed in September 2006, and included two steps: separating the UBL and UBB Units trading on the Mexican Exchange into their component Shares and converting the Series L Shares into Series B Shares, thereby creating a single share class, the Series B Shares. These Shares are trading on the Mexican stock market. The ADS which trade on the NYSE still consist of twelve underlying Shares, but they are all Series B Shares, with full voting rights.
Currently, the Company’s Common Stock consistedconsists of 600,000,000 Series B Shares with full voting rights.
| A. | Major Shareholders |
The Control Trust and the Family Trust own the same number of Shares (496,500,000 Shares or 82.75% of outstanding Shares).
The following table sets forth the estimated percentagesCompany’s main shareholders as of December 31, 2011.
| Shares | Position | Country | ||||||||||
| Control Trust | 312,000,000 | 52.00 | % | Mexico | ||||||||
| Family Trust | 184,500,000 | 30.75 | % | Mexico | ||||||||
| Royce & Associates LLC | 19,653,228 | 3.3 | % | U.S. | ||||||||
| Fidelity Management & Research Co. | 12,000,000 | 2.0 | % | U.S. | ||||||||
| River Road Asset Management LLC | 9,826,488 | 1.6 | % | U.S. | ||||||||
| Tradewinds Global Investor LLC | 6,023,016 | 1.0 | % | U.S. | ||||||||
All shares B Class with full voting rights.
As of March 31, 2012 there have been no changes in the composition of the Shares held in Mexico and other Countries asmain shareholders of April 30, 2011.
As of April 30,December 31, 2011, from the 100.0% of the total Shares of the Company, we accounted forthere were approximately 4240 shareholders in the NYSE and(there are no changes as of March 31, 2012). On the same date, there were 5,221,136 ADSs outstanding on the NYSE (There were 6,071,748 ADSs as of December 31, 2011), representing 10.4% of the total Shares of the Company or the 60.5% of the free float. Based on these figures, we can assume that the 39.5% remaining is trading at the Mexican Stock Exchange. According with most recent information providing by Stock houses at the date of our 2011 Bachoco’s Stockholders Annual meeting, we accounted with 247 inShareholders at the BMV.
| B. | Related Party Transactions |
It is our policy not to engage in any transaction with or for the benefit of any stockholder or member of the Board of Directors, or any entity controlled by such a person or in which such a person has a substantial economic interest, unless (i) the transaction is related to our business and (ii) the price and other terms are at least as favorable to us as those that could be obtained on an arm’s-length basis from a third party.
We have engaged in a variety of transactions with entities owned by members of the Robinson Bours family, all of which we believe were consistent with this policy and not material to our business and results of operations. All of these transactions are described below. See Note 5 to the Audited Consolidated Financial Statements.
We expect to engage in similar transactions in the future.
We regularly purchase vehicles and related equipment from distributors owned by various members of the Robinson Bours family. The total amount spent on such purchases was Ps. 157 million, Ps. 139 million and Ps. 136.1 for the years ended December 31, 2008, 2009 and 2010, respectively. The distribution of vehicles and related equipment is a highly competitive aspect of business in the areas in which we operate. We are not dependent on affiliated distributors and are able to ensure that the pricing and service we obtain from affiliated distributors are competitive with those available from other suppliers.
The Robinson Bours Stockholders also own Taxis Aereos del Noroeste, S.A. de C.V., an air transport company that provides transportation for members of the Board of Directors to and from meetings at our headquarters in Celaya. We paid Ps. 2 million, Ps. 10 million and Ps. 9 million for the years ended December 31, 2008, 2009 and 2010, respectively, for such transportation.
We purchased feed and packaging materials from enterprises owned by Robinson Bours Stockholders, the family of Enrique Robinson Bours and the family of Juan Bautista Robinson Bours. The cost of such purchases was Ps. 428 million, Ps. 415 million and Ps. 340 million for the years ended December 31, 2008, 2009 and 2010, respectively.
We also have accounts payable to related parties totaled Ps. 68 million and Ps. 61 million as of December 31, 2009 and 2010, respectively.parties. These transactions took place among companies owned by the same set of stockholders. See Note 5 to the Audited Consolidated Financial Statements.
Neither we nor our subsidiaries have loaned any money to any of our directors or officers, controlling shareholders or entities controlled by these parties.
| In million of Mexican Pesos | ||||||||||||
| Third Parties Transactions | 2009 | 2010 | 2011 | |||||||||
| Purchases of feed and packaging materials | Ps. | 415 | 340 | 477 | ||||||||
| Purchases of vehicles and related equipment | Ps. | 139 | 136 | 145 | ||||||||
| Air Transportation Services | Ps. | 10 | 9 | 10 | ||||||||
| Accounts payable to third parties | Ps. | 68 | 61 | 83 | ||||||||
See Note 6 to our Audited Consolidated Financial Statements for more detail.
| C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8. Financial Information
| A. | Consolidated Statements and Other Financial Information |
Our Audited Consolidated Financial Statements are included in Item 18.18 of this Annual Report. The financial statements were audited by an independent registered public accounting firmsfirm and are accompanied by their audit reports.
In 2008, we announced that the Company’s Board of Directors, as per the Audit Committee’s recommendation, approved the selection of KPMG Cardenas Dosal, S.C. as the Company’s independent auditor, effective asauditor. The Board of August 27, 2008.
Our Audited Consolidated Financial Statements have been prepared in accordance with Mexican FRS, which differ in certain respects from U.S. GAAP. Note 2123 to theour Audited Consolidated Financial Statements provides a description of the principal differences between Mexican FRS and U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of Consolidated stockholders’ equity, consolidated net income, a consolidated statement of stockholders’ equity and a consolidated cash flow statements under U.S. GAAP as of December 31, 20092010 and 2010,2011, and for the years ended December 31, 2008, 2009, 2010 and 2010.
Legal Proceedings
We are a party to certain legal proceedings in the ordinary course of our business. We believe that none of these proceedings, individually or in the aggregate, is likely to have a material adverse effect on the Company’s Audited Consolidated Financial positions and consolidated results of operations.
Dividends Policy
Pursuant to Mexican law and our bylaws, the declaration, amount and payment of annual dividends are determined by a majority vote of the shareholders, generally but not necessarily on the recommendation of the Board of Directors.
At the Company's annual shareholder's meeting held on April 27, 2011,25, 2012, the Board of Directors approved a cash dividend payment of Ps. 0.50 per share or Ps. 6.00 per ADS to be paid during 2011.
| For years ended December 31, | ||||||||||||
| Dividends | 2009 | 2010 | 2011 | |||||||||
| Total dividends paid (in millions) | Ps. | 250.0 | 250.1 | 299.9 | ||||||||
| Dividend paid per Share (in pesos) | Ps. | 0.42 | 0.42 | 0.50 | ||||||||
| Dividends paid per ADS (in pesos) | Ps. | 5.0 | 5.0 | 6.0 | ||||||||
Although there can be no assurance as to the amount or timing of future dividends, we expect to pay an annual dividend pro rata to holders of outstanding Shares in an amount of approximately 20.0% of the prior year’s net income. The declaration and payment of dividends will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors and the shareholders, including debt instruments which may limit our ability to pay dividends.
Because we are a holding company with no significant operations of our own, we will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries, principally BSACV. Accordingly, there can be no assurance that we will pay dividends or of the amount of any such dividends. BSACV, our principal operating subsidiary, could, in the future, enter into loan agreements containing covenants whose terms limit its ability to pay dividends under certain circumstances.
Mexican law requires that 5.0% of our net income each year (after profit sharing and other deductions required by Mexican law) be allocated to a legal reserve fund until such fund reaches an amount equal to at least 20.0% of our capital stock. Mexican corporations may pay dividends only out of earnings (including retained earnings after all losses have been absorbed or paid up) and only after such allocation to the legal reserve fund. The level of earnings available for the payment of dividends is determined under Mexican FRS.
| B. | Significant Changes |
In January, 2009, the Mexican Banking and Securities Commission (Comision Nacional Bancaria y de Valores, “CNBV”) published certain amendments to the Rules for Public Companies and other participants in the Mexican Securities Market (Disposiciones de Caracter General Aplicables a las Emisoras de Valores y a otros Participantes del Mercado de Valores – the “Rules”) that require public companies to report financial information in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), effective as of January 1st 2012.
On January 1, 2012, we adopted IFRS, meeting the CNBV requirements. The Company must release its first quarter, 2012 unaudited results under IFRS, no later than May 2, 2012. IFRS differs in certain significant changes since the date ofrespects from Mexican FRS. See Note 22 to our Audited Consolidated Financial Statements for a description of the year ended December 31, 2010.
We believe that the adoption of IFRS will provide more certainty to our international investors, and will cut some of the costs we incur in adjusting our financial information to foreign financial reporting requirements.
ITEM 9.The Offer and Listing
| A. | Offer and Listing Details |
We trade with fully registered shares, comprising one single class of shares with full rights. On September 19, 1997, Bachoco commenced trading on the Mexican Stock Exchange, and on the New York Stock Exchange throughNYSE, each of our ADSs (each comprised of six Units).represents twelve shares. The Bank of New York Mellon is our Depositary Bank.
The following tables set forth for each year from 2006 to 2010, for each quarter from 2009 and 2010 and for each complete month from December 2010 to May 2011, the high, low and close prices of the Shares on the Mexican Stock asBMV and NYSE, reported by the Mexican Stock Exchange and the high, low and close pricethis companies, for each of the ADSsperiods indicated.
| Mexican Stock Exchange | The New York Stock Exchange | |||||||||||||||||||||||
| Ticker Symbol: Bachoco | Ticker Symbol: IBA | |||||||||||||||||||||||
| In nominal pesos per Share | In U.S. Dollar per ADS | |||||||||||||||||||||||
| Year | High | Low | Close | High | Low | Close | ||||||||||||||||||
| 2007 | 30.96 | 20.00 | 28.60 | 35.11 | 24.10 | 31.81 | ||||||||||||||||||
| 2008 | 30.15 | 14.21 | 15.99 | 33.34 | 12.75 | 14.50 | ||||||||||||||||||
| 2009 | 26.00 | 11.85 | 25.00 | 23.16 | 9.03 | 23.00 | ||||||||||||||||||
| 2010 | 26.99 | 18.40 | 25.55 | 26.10 | 17.01 | 24.19 | ||||||||||||||||||
| 2011 | 27.86 | 20.30 | 22.30 | 28.75 | 17.40 | 19.07 | ||||||||||||||||||
| Quarter | ||||||||||||||||||||||||
| 1Q-2010 | 25.45 | 21.00 | 22.79 | 23.99 | 19.70 | 22.15 | ||||||||||||||||||
| 2Q-2010 | 24.50 | 18.50 | 18.50 | 22.74 | 17.01 | 17.01 | ||||||||||||||||||
| 3Q-2010 | 21.50 | 18.40 | 20.53 | 19.67 | 17.16 | 18.95 | ||||||||||||||||||
| 4Q-2010 | 26.99 | 20.50 | 25.55 | 26.10 | 19.07 | 24.19 | ||||||||||||||||||
| 1Q-2011 | 27.84 | 25.00 | 27.53 | 28.00 | 24.20 | 27.97 | ||||||||||||||||||
| 2Q-2011 | 27.86 | 23.66 | 23.66 | 28.75 | 24.10 | 24.10 | ||||||||||||||||||
| 3Q-2011 | 25.87 | 20.95 | 25.60 | 24.62 | 20.00 | 22.47 | ||||||||||||||||||
| 4Q-2011 | 25.50 | 20.30 | 22.30 | 22.79 | 17.40 | 19.07 | ||||||||||||||||||
| Month | ||||||||||||||||||||||||
| Oct 2011 | 25.50 | 24.20 | 24.65 | 22.79 | 21.45 | 22.57 | ||||||||||||||||||
| Nov 2011 | 24.58 | 22.55 | 23.30 | 21.97 | 19.55 | 20.07 | ||||||||||||||||||
| Dec 2011 | 23.08 | 20.30 | 22.30 | 20.73 | 17.42 | 19.07 | ||||||||||||||||||
| Jan 2012 | 22.10 | 21.64 | 21.87 | 20.58 | 18.86 | 20.08 | ||||||||||||||||||
| Feb 2012 | 23.30 | 21.74 | 21.74 | 21.85 | 20.24 | 20.24 | ||||||||||||||||||
| Mar 2012 | 22.60 | 20.70 | 22.50 | 21.10 | 19.08 | 21.06 | ||||||||||||||||||
Market Maker
On January 24, 2011, the Company announced the hiring of Accival as its market maker in order to promote and increase liquidity of its shares listed on the NYSE as reported byBMV.
The market maker was traded for two periods of six months and ended its operation on December 24, 2011. Although there was a significant increase in trading volume, the New York Stock Exchange.
Mexican Stock Exchange (Nominal pesos per Share) | The New York Stock Exchange (U.S.$ per ADS) | |||||||||||||||||||||||
| Year | High | Low | Close | High | Low | Close | ||||||||||||||||||
| 2006 | 23.70 | 15.70 | 23.66 | 29.00 | 16.33 | 29.00 | ||||||||||||||||||
| 2007 | 30.96 | 20.00 | 28.60 | 35.11 | 24.10 | 31.81 | ||||||||||||||||||
| 2008 | 30.15 | 14.21 | 15.99 | 33.34 | 12.75 | 14.50 | ||||||||||||||||||
| 2009 | 26.00 | 11.85 | 25.00 | 23.16 | 9.03 | 23.00 | ||||||||||||||||||
| 2010 | 26.99 | 18.40 | 25.55 | 26.10 | 17.01 | 24.19 | ||||||||||||||||||
Mexican Stock Exchange (Nominal pesos per Share) | The New York Stock Exchange (U.S.$ per ADS) | |||||||||||||||||||||||
| Period | High | Low | Close | High | Low | Close | ||||||||||||||||||
| First Quarter 2009 | 18.00 | 11.85 | 13.80 | 15.30 | 9.03 | 11.35 | ||||||||||||||||||
| Second Quarter 2009 | 25.00 | 13.00 | 23.84 | 22.57 | 11.60 | 21.30 | ||||||||||||||||||
| Third Quarter 2009 | 24.92 | 21.99 | 22.90 | 22.40 | 20.00 | 21.00 | ||||||||||||||||||
| Fourth Quarter 2009 | 26.00 | 21.00 | 25.00 | 23.16 | 18.90 | 23.00 | ||||||||||||||||||
| First Quarter 2010 | 25.45 | 21.00 | 22.79 | 23.99 | 19.70 | 22.15 | ||||||||||||||||||
| Second Quarter 2010 | 24.50 | 18.50 | 18.50 | 22.74 | 17.01 | 17.01 | ||||||||||||||||||
| Third Quarter 2010 | 21.50 | 18.40 | 20.53 | 19.67 | 17.16 | 18.95 | ||||||||||||||||||
| Fourth Quarter 2010 | 26.99 | 20.50 | 25.55 | 26.10 | 19.07 | 24.19 | ||||||||||||||||||
Mexican Stock Exchange (Nominal pesos per Share) | The New York Stock Exchange (U.S.$ per ADS) | |||||||||||||||||||||||
| Period | High | Low | Close | High | Low | Close | ||||||||||||||||||
| December 2010 | 26.70 | 24.50 | 25.55 | 26.10 | 23.61 | 24.19 | ||||||||||||||||||
| January 20011 | 26.25 | 25.01 | 25.58 | 26.20 | 24.20 | 25.15 | ||||||||||||||||||
| February 2011 | 27.70 | 25.00 | 26.48 | 27.44 | 24.82 | 26.13 | ||||||||||||||||||
| March 2011 | 27.84 | 26.69 | 27.53 | 28.00 | 26.45 | 27.97 | ||||||||||||||||||
| April 2011 | 27.86 | 27.30 | 27.30 | 28.75 | 27.98 | 28.51 | ||||||||||||||||||
| May 2011 | 27.25 | 25.00 | 27.25 | 28.26 | 25.84 | 25.84 | ||||||||||||||||||
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
On September 19, 1997, Bachoco commenced trading on the BMV, and on the NYSE. As of March 31, 2012 there were 5,221,136 ADSs outstanding at the NYSE, It represents 10.4% of the total Shares of the Company or the 60.5% of the free float. Based on these figures, we can assume that the 39.5% remaining is trading at the Mexican Stock Exchange,
| Exchange |
| BMV | Mexico | Bachoco | Shares | |||
| NYSE | U.S. | IBA | ADS |
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
ITEM 10.Additional Information
| A. | Share Capital |
Not applicable.
| B. | Memorandum and Articles of Association |
Information regarding the memorandum and articles of association wasare included in the Initial Registrationour F-1 Form F-1, submitted in September 1997. In April 2002, we made changes to our bylaws, which were reported in our annual report for year 2002. In December 2003, January 2007 and, in 2011 we made further changes, the most important of which are summarized below. Anan English translation of our bylaws was submitted with ouris attached in this annual report, for year 2006 and is incorporated by reference herein and is also available on our web pagewww.bachoco.com.mx.
The discussion set forth below contains information concerning our capital stock and a brief summary of the material provisions of the bylaws and applicable Mexican law. This summary does not purport to be complete and is qualified in its entirety by reference to the bylaws and the applicable provisions of Mexican law.
General
The Company was incorporated on April 17, 1980 as a variable capital corporation (sociedad anonima de capital variable) under the laws of Mexico. To fully comply with Mexican laws, the Company modified its name to Industrias Bachoco, S.A.B. de C.V. (sociedad anonima bursatil de capital variable) in April 2007.
In 1995, our stockholders authorized the issuance of up to 15,525,000 additional Series B Shares and 15,525,000 additional Series L Shares, all constituting fixed capital, to be issued in connection with the global offering of Shares that took place on September 19, 1997 (the “Global Offering”).
On April 21, 1997, we restructured our capital by (i) declaring a four-to-one stock split of the 106,678,125 Series B Shares and 35,559,375 Series L Shares outstanding, (ii) converting 7,762,500 Series L Shares (on a post-split basis) into Series B Shares and (iii) combining all of the 434,475,000 Series B Shares and 134,475,000 Series L Shares outstanding (in each case, on a post-split basis) into 134,475,000 Units and 150,000,000 B Units. Holders of Units were entitled to exercise all the rights of holders of the Series B Shares and Series L Shares underlying their Units. Each B Unit consisted of two Series B Shares. B Units entitle the holders thereof to exercise all the rights of holders of the Series B Shares underlying such B Units. Immediately prior to the Global Offering, our outstanding capital stock consisted of 434,475,000 Series B Shares and 134,475,000 Series L Shares, all of which were duly authorized, validly issued and are fully paid and non-assessable.
During the annual shareholders meeting held on April 26, 2006, shareholders approved to proceed with the anticipated conversion of the Series L Shares into Series B Shares, which have full voting rights. This conversion was effective in September 2006 and included two steps: separating the UBL and UBB Units currently trading on the Mexican Stock Exchange into their component Shares, and converting the Series L Shares into Series B Shares (on a one-to-one basis), thereby created a single share class, the Series B Shares, which represents all of our Common Stock.
The Robinson Bours Stockholders have advised us that they intend to ensure that the Control Trust will hold at least 51.0% of the Series B Shares at any time outstanding. See “—Foreign Investment Legislation” in this Item.
On April 27, 2011 during the extraordinary Stockholders meeting the Article Two - XII of our bylaws were modified as follows:
| Prior language | Current language | |
Produce, transform, adapt, import, export, purchase and sell, under any title, machinery, parts, materials, raw materials, industrial products, goods and merchandise of any kind | “Produce, transform, adapt or manufacturing of processed food in package and/or canned and/or in flask, as well as import, export, purchase and sell, under any title, machinery, parts, materials, raw materials, industrial products, goods and merchandise of any kind” |
An English translation of our complete bylaws is attached in this annual report.
Registration and Transfer
Shares are evidenced by certificates in registered form, which may have dividend coupons attached. We maintain a registry and, in accordance with Mexican law, we recognize as stockholders only those holders listed in the stock registry. Stockholders may hold their Shares in the form of physical certificates (which, together with notations made in our stock registry, evidence ownership of the Shares) or through book entries with institutions that have accounts with Indeval.
Indeval is the holder of record in respect of Shares held through it. Accounts may be maintained at Indeval by brokerage houses, banks and other entities approved by the CNBV. Ownership of Shares maintained at Indeval is evidenced through Indeval’s records and through lists kept by Indeval participants.
In accordance with Article 130 of theLey General de Sociedades Mercantiles(“Mexican Corporations Law”), the Board of Directors must authorize any transfer of stock, or any securities based on such stock, when the number of Shares sought to be transferred in one act or a succession of acts, without limit of time or from one group of interrelated stockholders or stockholders who act in concert, constitutes 10.0% or more of the voting stock issued by the Company. If the Board of Directors refuses to authorize such a transfer, the Board must designate one or more purchasers of the stock, who must pay the interested party the prevailing price on the Mexican Stock Exchange. The Board must issue its resolution within three months of the date on which it receives the relevant request for authorization and in any case, must consider: (i) the criteria that are in the best interests of the Company, the Company’s operations and the long-term vision of the activities of the Company and its Subsidiaries; (ii) that no shareholder of the Company is excluded, other than the person that intends to acquire control of the financial benefits that may result from the application of the terms of this clause; (iii) that the taking of the Control of the Company is not restricted in an absolute manner; (iv) that the provisions of the Securities Market Law, with respect to acquisition public offerings, are not contravened; and (v) that the exercise of the patrimonial rights of the acquirer are not rendered without effect.
If any person participates in a transaction that would have resulted in the acquisition of 10.0% or more voting stock of the Company without having obtained the board’s prior approval, they must pay the Company a fine equal to the market value of the Shares.
Any person who participates in an act that violates the terms of Article 130 discussed in the preceding paragraph will be obligated to pay the Company a fine in an amount equal to the value of the Shares owned directly or indirectly by the stockholder, or the value of the Shares involved in the prohibited transaction, if such person does not own Shares issued by the Company. In the case of a prohibited transaction that would have resulted in the acquisition of 10.0% or more of the voting stock of the Company, the fine will be equal to the market value of those Shares, provided that board authorization was not obtained in advance.
According to our bylaws, a majority of the members of the Board of Directors must authorize in writing, by a resolution made at a Board of Directors’ meeting, any change in the control of the Company. Our Board of Directors has the right to decide if a person or a group of persons is acting for the purpose of acquiring control of the Company.
“Control” or “Controlled” means (i) to directly or indirectly impose decisions at the general meetings of shareholders, stockholders or equivalent bodies or to appoint or remove the majority of the directors, managers or equivalent officers; (ii) to hold title to the rights that directly or indirectly allow the exercise of votes with respect to more than fifty percent of the capital stock; or (iii) to directly or indirectly direct the management, the strategy or the principal policies of the Company, whether through the ownership of securities, by contract or otherwise.
Voting Rights and Stockholders’ Meetings
Each Shareshare entitles the holder thereof to one vote at any general meeting of the stockholders. Holders are currently entitled to elect all members of the Board of Directors.
Our bylaws provide that the Board of Directors shall consist of at least five members and no more than twenty one. Our board was reformed during our ordinary shareholders meeting held on April 23, 2007, and now consists of eight Proprietary Shareholder Directors and two independent Directors. The stockholders also appointed four alternate Shareholder Directors to the Board of Directors.
General stockholders’ meetings may be ordinary or extraordinary meetings. Extraordinary general meetings are meetings called to consider the matters specified in Article 182 of the Mexican Corporations Law and the bylaws,including changes in the fixed portion of the capital stock and other amendments to the bylaws, liquidation, merger, transformation from one type of corporate form to another, change in nationality and changes of corporate purposes.
General meetings called to consider all other matters, including election of the directors, are ordinary meetings. An ordinary general meeting of the Company must be held at least annually during the four months following the end of the preceding fiscal year to consider certain matters specified in Article 181 and 182 of the Mexican Corporations Law, including, principally, the election of directors, the approval of the report of the Board of Directors regarding their company’s performance, the Company’s financial statements for the preceding fiscal year and the allocation of the profits and losses of the preceding year, and to approve the transactions that the Company or the entities that the Company controls intend to carry out, in terms of article 47 of the Securities Market Law, in one fiscal year, when such transactions represent 20.0% (twenty percent) or more of the consolidated assets of the Company, based on the figures corresponding to the closing of the immediately preceding quarter, independently of the manner in which such transactions are carried out, whether simultaneously or successively, but which due to their characteristics, may be considered as a single transaction. Holders of Shares may vote at such Meetings.
Under our bylaws, the quorum on first call for a general ordinary meeting is at least 50.0%50%. If a quorum is not available on first call, a second meeting may be called at which action may be taken by a majority of those present, regardless of the number of Shares represented at the meeting. On a second call, Ordinary General Shareholders’ Meetings will be considered validly held regardless of the number of common or ordinary Shares represented therein and the resolutions of such Meetings will be valid when passed by majority vote of the Common Stock therein.
The quorum on first call for a general extraordinary meeting or a special meeting is 75.0%75% of the outstanding Shares with voting rights on the matters to be addressed in that meeting. If a quorum is not available on first call, a second meeting may be called, provided that at least 50.0%50% of the outstanding Shares with voting rights on the matters to be addressed in that meeting are represented.
Our bylaws requirebylawsrequire the approval of holders of at least 95.0%95% of the outstanding Shares and the approval of the CNBV for the amendment of the controlling stockholders’ obligation under the bylaws tobylawsto repurchase Shares and certain other provisions in the event of delisting. See “—Other Provisions—Repurchase in the Event of Delisting.” For more detail, see our bylaws on our webpage atwww.bachoco.com.mx. Holders of ADSs are entitled to instruct the Depositary as to the exercise of the voting rights.
According to our bylaws, stockholders with a right to vote may ask to postpone a vote on any matters on which they believe they do not have enough information as defined by Article 199 of the Mexican Corporation Law. Stockholders with a right to vote, including a limited right to vote, and who hold at least 20.0%20% of the capital stock, may legally object to the decisions of a general stockholders’ meeting, with respect to matters in which they have rights, without the percentage established under article 201 of the General Law of Business Entities being applicable in such case.
Moreover, holders of Sharesshares having voting rights, including limited or restricted voting rights or holders of Shares without voting rights that jointly or individually represent 5.0% (five percent)5% or more of the capital stock, may directly exercise the action of liability against the members and secretary of the Board of Directors, as well as against the relevant directors or executive officers. The exercise of such action will not be subject to the compliance with the requirements set forth under articles 161 and 163 of the General Law of Business Entities.
The Board of Directors, or its President or Secretary or the judicial authority, as applicable, must issue notices of calls of Shareholders’ Meetings. In addition, shareholders that jointly or separately represent at least 10.0% (ten percent)10% of the capital of the Company may request the President of the Board of Directors or the President of the Audit Committee to call a General Shareholder’s Meeting, without the percentage indicated under article 184 of the General Law of Business Entities being applicable for such purpose. If the notice of meeting is not issued within fifteen days after the date of the corresponding request, a Civil or District Judge of the Company’s domicile will issue such notice at the request of the interested parties that represent the requesting 10.0% (ten percent)10% of the capital, who must present their stock certificates for such purpose.
At least 15 days prior to the meeting, notice of the meeting must be published in theDiario Oficial de la Federacion (“Official Gazette”) or in a newspaper of general circulation in Mexico City. Stockholders’ meetings may be held without such publication provided that 100.0%100% of the outstanding Shares with voting rights on the matters to be addressed by such meeting are represented.
From the moment that a call for a stockholders’ meeting is made public, all the information related to the meeting must be available to the stockholders. In order to attend a stockholders’ meeting, a stockholder must request and obtain an admission card by furnishing, at least 24 hours before the time set for holding the stockholders’ meeting, appropriate evidence of ownership of Shares in us and depositing such Shares with our corporate secretary or with an institution authorized to accept such deposit. If so entitled to attend the meeting, a stockholder may be represented by proxy signed before two witnesses. Additionally, the stockholder may be represented at the stockholders’ meetings by a person named by proxy, on a printed form that we issue, which, under Mexican law, must identify our Company and indicate clearly the matters to be addressed in the meeting, with enough space for the instructions that the stockholder specifies. We are obliged to make information on the upcoming meeting available to the intermediaries in the stock market, for the time specified in Article 173 of the Mexican Law, in order to give the intermediaries time to send it to the stockholders they represent. The Secretary of the Board of Directors must verify that this requirement is met and report on this matter at the stockholders’ meeting. See “—Registration and Transfer.”
Members of the Board
Under the Mexican Corporations Law, a Board of Directors must conform to the following requirements:
| The Board of Directors will be integrated by a minimum of |
| At least |
| For each principal member, a substitute will be appointed, in the understanding that the substitutes of independent Board members must also be independent. |
Besides satisfying all of the requirements mentioned above, failure to meet these standards for any reason will not constitute grounds for judicial action challenging any act, contract, or agreement undertaken by the board, an intermediate committee or other delegated authority. Furthermore, such standards will not be mandatory for the validity or existence of such acts.
The Board of Directors must meet at least every three months at our address or any other place in Mexico and on the dates that the board determines. Meetings previously scheduled in accordance with a schedule pre-approved by the board do not need to be called. Meetings must be called by at least 25.0%25% of the members of the Board of Directors, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, the Secretary or the Alternate Secretary of the Board or the President of the Audit Committee. Members of the board must be notified via e-mail or in writing at least five calendar days in advance of a meeting.
Dividends and Distributions
At the annual ordinary general stockholders’ meeting, the Board of Directors submits our financial statements for the previous fiscal year, together with a report thereon by the board, to the holders of Shares for their consideration. The holders of Shares, once they have approved the financial statements, determine the allocation of our net profits, if any, for the preceding year. As of December 31, 2010,2012, our legal reserve fund was equal to at least 20.0%20% of our paid-in capital stock. Amounts in excess of those allocated to the legal reserve fund may be allocated to other reserve funds as the stockholders determine, including a reserve for the repurchase of our Shares. The remaining balance of net profits, if any, is available for distribution as dividends. No dividends may be paid, however, unless losses for prior fiscal years have been paid or absorbed.
Holders of Sharesshares and, accordingly, holders of ADSs will have equal rights, on a per Share basis, to dividends and other distributions, including any distributions we make upon liquidation. Partially paid Shares participate in any distribution to the extent that such Shares have been paid at the time of the distribution or, if not paid, only with respect to the proportion paid.
Changes in Capital Stock
An increase of capital stock may generally be affected through the issuance of new Sharesshares for payment in cash or in kind, by capitalization of indebtedness or by capitalization of certain items of stockholders’ equity. An increase of capital stock generally may not be realized until all previously issued and subscribed Shares of capital stock have been fully paid. Generally, a reduction of capital stock may be effected to absorb losses, to redeem Shares, or to release stockholders from payments not made. A reduction of capital stock to redeem Shares is effected by reimbursing holders of Shares pro rata or by lot. Stockholders may also approve the redemption of fully paid Shares with retained earnings. Such redemption would be affected by a repurchase of Shares on the Mexican Stock Exchange (in the case of Shares listed thereon).
Except under limited circumstances, the bylaws requirebylawsrequire that any capital increase affected pursuant to a capital contribution be represented Shares.
The fixed portion of our capital stock may only be increased or decreased by resolution of a general extraordinary meeting and an amendment to the bylaws, whereas the variable portion of our capital stock may be increased or decreased by resolution of a general ordinary meeting. See “Other Provisions—Fixed and Variable Capital.”
No resolution by the stockholders is required for decreases in capital stock resulting from exercise of our right to withdraw variable Shares or from our repurchase of our own Shares or for increases in capital stock resulting from our sale of Shares we previously purchased. See “Other Provisions—Purchase by the Company of its Shares” and “Other Provisions—Appraisal Rights.”
Preemptive Rights
Except in certain limited circumstances, in the event of a capital increase through the issuance of new Shares for payment in cash or in kind, a holder of existing Shares of a given Series at the time of the capital increase has a preferential right to subscribe for a sufficient number of new Shares of the same Series to maintain the holder’s existing proportionate holdings of Shares of that Series or, in the event of a capital increase through the issuance of limited-voting or non-voting stock only, to subscribe for a sufficient number of the Shares to be issued to maintain the holder’s existing proportionate holdings of our capital stock. Preemptive rights must be exercised within 15 days following the publication of notice of the capital increase in theDiario Oficial de la Federacion(Official Gazette)or following the date of the stockholders’ meeting at which the capital increase was approved if all stockholders were represented at such meeting; otherwise, such rights will lapse. Under Mexican law, preemptive rights cannot be waived in advance by a stockholder, except under limited circumstances, and cannot be represented by an instrument that is negotiable separately from the corresponding share. The Robinson Bours Stockholders, including the Selling Stockholders, have waived all preemptive rights with respect to the Shares and the ADSs being offered in the Global Offering. Holders of ADSs that are U.S. citizens or are located in the United States may be restricted in their ability to participate in the exercise of preemptive rights.
Foreign Investment Legislation
Ownership by foreigners of Shares of Mexican companies is regulated by theLey de Inversion Extranjera (“Foreign Investment Law”) and by theReglamento de la Ley para Promover la Inversion Mexicana y Regular la Inversion Extranjera(“Foreign Investment Regulations”). The Ministry of Commerce and Industrial Development and the Foreign Investment Commission are responsible for the administration of the Foreign Investment Law.
The Foreign Investment Law reserves certain economic activities exclusively for the Mexican state and certain other activities exclusively for Mexican individuals or Mexican corporations, and limits the participation of foreign investors to certain percentages in regard to enterprises engaged in activities specified therein. Foreign investors may own up to 100.0% of the capital stock of Mexican companies or entities, except for companies (i) engaged in reserved activities as referred to above or (ii) with assets exceeding an amount to be established annually by the Foreign Investment Commission, in which case an approval from the Foreign Investment Commission will be necessary in order for foreign investment to exceed 49.0% of the capital stock. Mexican and non-Mexican nationals will be entitled to hold and to exercise the rights of holders. The Robinson Bours Stockholders have advised us that they intend to maintain a control position. Pursuant to our bylaws, foreigners may only own Shares up to 49.0%.
Other Provisions
Fixed and variable capital.
As asociedad anonima de capital variable, we are permitted to issue Shares constituting fixed capital and Shares constituting variable capital. The issuance of variable capital Shares, unlike the issuance of fixed capital Shares, does not require an amendment of the bylaws, although it does require approval at a general ordinary stockholders’ meeting.In no case may the capital of the Company be decreased to less than the minimum required by law and any decrease in the shareholders’ equity must be registered in the Equity Variations Book that the Company will keep for such purpose.
| 56 |
Repurchase in the event of delisting.
In the event of cancellation of the registration of the Company’s Shares in such Registry, whether at the request of the Company or by a resolution of the National Securities and Banking Commission under applicable law, the Company agrees to make a public offering for the acquisition of the total number of the Shares registered prior to the cancellation. The Company must contribute to a trust for at least six months, the necessary resources to purchase at the same price of the public offering, the Shares of the investors that did not attend or did not accept such offer, in case that after the public offering for purchase has been made and prior to the cancellation of the registration of the Shares that represent the capital stock of the Company or of other securities issued based on such Shares in the National Securities Registry, the Company had been unable to acquire 100.0% of the paid in capital stock.Forfeiture of Shares.
As required by Mexican law, ourExclusive Jurisdiction.
OurDuration.
The duration of our existence under our bylaws is indefinite.Repurchase of our own Shares.
We may repurchase our Shares on the Mexican Stock Exchange at any time at the then prevailing market price. Any repurchases will be charged to the Stockholders Equity as long as these Shares belong to the same Company or to the Capital Stock in the event that we convert these Shares to treasury stock, and in this last case no resolution of the stockholders’ meeting is required. At each annual ordinary Stockholder’s Meeting, the maximum amount of resources that may be used to repurchase Shares will be expressly defined. The Board of Directors will name the persons responsible for the operation of the repurchase process. The Shares that belong to the Treasury Stock or us can be resold among the public stockholders; in the latter case, no resolution of a stockholders’ meeting is necessary for an increase in capital. The economic and voting rights corresponding to such repurchased Shares may not be exercised during the period in which such Shares are owned by us, and such Shares are not deemed to be outstanding for purposes of calculating any quorum or vote at any stockholders’ meeting during such period.| 57 |
Non-Subscribed Shares.
With prior authorization of the CNBV, we may issue non-subscribed Shares provided that such Shares will be held by a depositary institution and that there is compliance with the conditions of Article 53 of theLey del Mercado de Valores(“Mexican Securities Law”). In any extraordinary stockholders’ meeting at which this issuance of non-subscribed Shares is approved, the preference rights established by Article 132 of the Mexican Corporations Law must be respected. With a quorum at the meeting, the approval of the issuance will take effect, even with respect to stockholders that were not present at the meeting, such that we will be free to issue these Shares with no prior publication. When a minority of stockholders representing at least 25.0% of the voting capital stock vote against the issuance of these Shares, such issuance cannot be made. Any stockholder that votes against this issuance at the stockholders’ meeting will have the right to request that we sell its Shares before issuing the new non-subscribed Shares. In such event, we will have the obligation to sell first the Shares belonging to such stockholders, at the same price that the non-subscribed Shares are to be offered to the public.Stockholder Conflicts of Interest.
Under Mexican law, any stockholder that has a conflict of interest with respect to any transaction must abstain from voting thereon at the relevant stockholders’ meeting. A stockholder that votes on a business transaction in which its interest conflicts with that of ours may be liable for damages if the transaction would not have been approved without such stockholder’s vote.Board Member Conflicts of Interest.
Under Mexican law, any member of the Board of Directors who has a conflict of interest with us in any transaction must disclose such fact to the other members of the Board of Directors and abstain from voting. Any member of the Board of Directors who violates such provision may be liable for damages caused to us. Additionally, members of the Board of Directors and statutory auditors may not represent other stockholders at any stockholders’ meeting.Appraisal Rights.
Whenever the stockholders approve a change of corporate purpose, a change in our nationality or transformation from one type of corporation form to another, any stockholder entitled to vote on such change or transformation who has voted against it has the right to withdraw from us and receive the amount calculated as specified under Mexican law attributable to its Shares, provided such stockholder exercises its right to withdraw within 15 days following the adjournment of the meeting at which the change or transformation was approved. Under Mexican law, the amount that a withdrawing stockholder is entitled to receive is equal to its proportionate interest in our capital stock according to the most recent balance sheet that has been approved by an ordinary general meeting of stockholders.Actions against Directors.
Under Mexican law, holders of Shares having voting rights, including limited or restricted voting rights or holders of Shares without voting rights that jointly or individually represent 5.0% (five percent) or more of the capital stock, may directly exercise the action of liability against the members and secretary of the Board of Directors, as well as against the relevant directors or executive officers. The exercise of such action, among others, will be subject to the compliance with the requirements set forth under the Mexican Law.Audit Committee
Under our bylaws, the Board of Directors is required to create an Audit Committee and Corporate Practices under the terms and conditions outlined below:
Plan contributions and benefits paid were as follows:
| Plan Contributions | Benefits paid | |||||||||||||||||||||||
| 2009 | 2010 | 2011 | 2009 | 2010 | 2011 | |||||||||||||||||||
| Retirement | $ | 17,436 | 14,039 | 15,099 | 2,382 | 2,934 | 3,049 | |||||||||||||||||
| F-58 |
| Plan Contributions | Benefits paid | |||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2008* | 2009 | 2010 | |||||||||||||||||||
| Termination | $ | - | - | - | $ | 21,489 | - | - | ||||||||||||||||
| Retirement | 17,450 | 17,436 | 14,039 | 2,865 | 2,382 | 2,934 | ||||||||||||||||||
| Total | $ | 17,450 | 17,436 | 14,039 | $ | 24,354 | 2,382 | 2,934 | ||||||||||||||||
The cost, obligations and other elements of the pension, seniority premium and severance compensation plans for reasons other than restructuring, mentioned in note 2m,2q, have been determined based on computations prepared by independent actuaries at December 31, 2008, 2009, 2010 and 2010.2011. The components of the net periodic cost for the years ended December 31, 2008, 2009, 2010 and 2010,2011, were as follows:
| Benefits | ||||||||||||||||||||||||
| Termination | Retirement | |||||||||||||||||||||||
| 2009 | 2010 | 2011 | 2009 | 2010 | 2011 | |||||||||||||||||||
| Net periodic cost: | ||||||||||||||||||||||||
| Service cost | $ | 13,898 | 14,720 | 17,346 | $ | 16,187 | 18,962 | 20,380 | ||||||||||||||||
| Interest cost | 6,220 | 6,605 | 6,976 | 20,043 | 22,453 | 21,720 | ||||||||||||||||||
| Return on plan assets | - | - | - | (19,307 | ) | (22,508 | ) | (25,816 | ) | |||||||||||||||
| Net actuarial loss (gain) | 7,171 | 24,597 | (677 | ) | (1,982 | ) | (1,816 | ) | (1,775 | ) | ||||||||||||||
| Prior service cost: | ||||||||||||||||||||||||
| Amortization of prior service cost and plan modifications | - | - | - | 1,885 | 1,885 | 1,885 | ||||||||||||||||||
| Amortization of transition liability | 4,828 | 4,828 | 4,667 | 5,448 | 5,448 | 5,448 | ||||||||||||||||||
| Net periodic cost | $ | 32,117 | 50,750 | 28,312 | $ | 22,274 | 24,424 | 21,842 | ||||||||||||||||
| Benefits | ||||||||||||||||||||||||
| Termination | Retirement | |||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2008 | 2009 | 2010 | |||||||||||||||||||
| Net periodic cost: | ||||||||||||||||||||||||
| Service cost | $ | 13,122 | 13,898 | 14,720 | $ | 18,539 | 16,187 | 18,962 | ||||||||||||||||
| Interest cost | 5,324 | 6,220 | 6,605 | 19,880 | 20,043 | 22,453 | ||||||||||||||||||
| Return on plan assets | - | - | - | (18,683 | ) | (19,307 | ) | (22,508 | ) | |||||||||||||||
| Net actuarial loss (gain) | 7,012 | 7,171 | 24,597 | (380 | ) | (1,982 | ) | (1,816 | ) | |||||||||||||||
| Prior service cost: | ||||||||||||||||||||||||
| Amortization of prior service cost and plan modifications | - | - | - | 1,885 | 1,885 | 1,885 | ||||||||||||||||||
| Amortization of transition liability | 4,828 | 4,828 | 4,828 | 5,448 | 5,448 | 5,448 | ||||||||||||||||||
| Net periodic cost | $ | 30,286 | 32,117 | 50,750 | $ | 26,689 | 22,274 | 24,424 | ||||||||||||||||
| F-59 |
The present value of benefit obligations of the plans atas of December 31, 2009, 2010 and 2010,2011, is as follows:
| Benefits | ||||||||||||||||||||||||
| Termination | Retirement | |||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2008 | 2009 | 2010 | |||||||||||||||||||
| Acumulated Benefit Obligation (ABO) | $ | 52,131 | 64,328 | 91,255 | $ | 138,077 | 151,796 | 152,737 | ||||||||||||||||
| Projected Benefit Obligation (PBO) | 70,915 | 76,988 | 95,216 | 210,319 | 240,968 | 275,550 | ||||||||||||||||||
| Plan asset at fair value | - | - | - | (188,815 | ) | (223,778 | ) | (256,382 | ) | |||||||||||||||
| Projected benefit obligation over plan assets | 70,915 | 76,988 | 95,216 | 21,504 | 17,190 | 19,168 | ||||||||||||||||||
| Unrecognized ítems: | ||||||||||||||||||||||||
| Transition liability | (18,370 | ) | (13,542 | ) | (8,714 | ) | (21,793 | ) | (16,345 | ) | (10,896 | ) | ||||||||||||
| Plan modifications | - | - | - | (25,437 | ) | (23,552 | ) | (21,667 | ) | |||||||||||||||
| Actuarial gains | - | - | - | 53,871 | 53,890 | 53,350 | ||||||||||||||||||
| Projected liability, net | $ | 52,545 | 63,446 | 86,502 | $ | 28,145 | 31,183 | 39,955 | ||||||||||||||||
| Benefits | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| Discount rate (net of inflation) | 9.75 | % | 9.50 | % | 8.00 | % | ||||||
| Rate of compensation increase* | 4.50 | % | 4.50 | % | 4.50 | % | ||||||
| Expected return on plan assets | 9.75 | % | 9.75 | % | 9.00 | % | ||||||
| Amortization period of unrecognized items (applicable to retirement benefit) | 19.66 years | 19.33 years | 19.06 years | |||||||||
| Benefits | ||||||||||||||||||||||||||||
| Termination | Retirement | |||||||||||||||||||||||||||
| 2009 | 2010 | 2011 | 2009 | 2010 | 2011 | |||||||||||||||||||||||
| Acumulated Benefit Obligation (ABO) | $ | 64,328 | 91,255 | 84,702 | $ | 151,796 | 152,737 | 168,920 | ||||||||||||||||||||
| Projected Benefit Obligation (PBO) | 76,988 | 95,216 | 101,140 | 240,968 | 275,550 | 239,431 | ||||||||||||||||||||||
| Plan asset at fair value | - | - | - | (223,778 | ) | (256,382 | ) | (250,855 | ) | |||||||||||||||||||
| Projected benefit obligation over plan assets | 76,988 | 95,216 | 101,140 | 17,190 | 19,168 | (11,424 | ) | |||||||||||||||||||||
| Unrecognized ítems: | ||||||||||||||||||||||||||||
| Transition liability | (13,542 | ) | (8,714 | ) | (4,047 | ) | (16,345 | ) | (10,896 | ) | (5,448 | ) | ||||||||||||||||
| Plan modifications | - | - | - | (23,552 | ) | (21,667 | ) | (19,782 | ) | |||||||||||||||||||
| Actuarial gains | - | - | - | 53,890 | 53,350 | 81,649 | ||||||||||||||||||||||
| Projected liability, net | $ | 63,446 | 86,502 | 97,093 | $ | 31,183 | 39,955 | 44,995 | ||||||||||||||||||||
| Benefits | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Discount rate (net of inflation) | 9.50 | % | 8.00 | % | 8.50 | % | ||||||
| Rate of compensation increase* | 4.50 | % | 4.50 | % | 4.50 | % | ||||||
| Expected return on plan assets | 9.75 | % | 9.00 | % | 9.50 | % | ||||||
| Amortization period of unrecognized items (applicable to retirement benefit) | 19.33 years | 19.06 years | 11.89 years | |||||||||
*Salary increases, includingpast practice, trends in the market and compensation scheme (average salary increase earned if performance is satisfactory).
| F-60 |
Below is the determination of benefit obligations of the plan at December 31, 2008, 2009, 2010, and 2010:
| Retirement benefits 2009 | ||||||||||||
| Seniority premium | Pension plan |
Total | ||||||||||
| Defined benefit obligations: | ||||||||||||
| Obligations of defined benefits at the beginning of year | $ | 32,980 | 177,339 | 210,319 | ||||||||
| Current labor cost | 3,034 | 13,153 | 16,187 | |||||||||
| Interest cost | 3,130 | 16,913 | 20,043 | |||||||||
| Actuarial gain and losses | 1,439 | (2,836 | ) | (1,397 | ) | |||||||
| Benefits paid | (1,801 | ) | (2,383 | ) | (4,184 | ) | ||||||
| Defined benefit obligations at end of year | $ | 38,782 | 202,186 | 240,968 | ||||||||
| Retirement benefits 2010 | ||||||||||||
| Seniority premium | Pension plan |
Total | ||||||||||
| Defined benefit obligations: | ||||||||||||
| Obligations of defined benefits at the beginning of year | $ | 38,782 | 202,186 | 240,968 | ||||||||
| Current labor cost | 3,675 | 15,287 | 18,962 | |||||||||
| Interest cost | 3,574 | 18,879 | 22,453 | |||||||||
| Actuarial gain and losses | 1,523 | (3,809 | ) | (2,286 | ) | |||||||
| Benefits paid | (1,613 | ) | (2,934 | ) | (4,547 | ) | ||||||
| Defined benefit obligations at end of year | $ | 45,941 | 229,609 | 275,550 | ||||||||
| Retirement benefits 2008 | ||||||||||||
Seniority premium | Pension plan | Total | ||||||||||
| Defined benefit obligations: | ||||||||||||
| Obligations of defined benefits at the beginning of year | $ | 32,095 | 199,333 | 231,428 | ||||||||
| Current labor cost | 2,658 | 15,880 | 18,538 | |||||||||
| Interest cost | 2,743 | 17,137 | 19,880 | |||||||||
| Actuarial gain and losses | (3,187 | ) | (51,298 | ) | (54,485 | ) | ||||||
| Benefits paid | (1,329 | ) | (3,713 | ) | (5,042 | ) | ||||||
| Defined benefit obligations at end of year | $ | 32,980 | 177,339 | 210,319 | ||||||||
| Retirement benefits 2009 | ||||||||||||
Seniority premium | Pension plan | Total | ||||||||||
| Defined benefit obligations: | ||||||||||||
| Obligations of defined benefits at the beginning of year | $ | 32,980 | 177,339 | 210,319 | ||||||||
| Current labor cost | 3,034 | 13,153 | 16,187 | |||||||||
| Interest cost | 3,130 | 16,913 | 20,043 | |||||||||
| Actuarial gain and losses | 1,439 | (2,836 | ) | (1,397 | ) | |||||||
| Benefits paid | (1,801 | ) | (2,383 | ) | (4,184 | ) | ||||||
| Defined benefit obligations at end of year | $ | 38,782 | 202,186 | 240,968 | ||||||||
| F-61 |
| Retirement benefits 2010 | ||||||||||||
Seniority premium | Pension plan | Total | ||||||||||
| Defined benefits obligations: | ||||||||||||
| Obligation of defined benefit at the beginning of year | $ | 38,782 | 202,186 | 240,968 | ||||||||
| Current labor cost | 3,675 | 15,287 | 18,962 | |||||||||
| Interest cost | 3,574 | 18,879 | 22,453 | |||||||||
| Actuarial gain and losses | 1,523 | (3,809 | ) | (2,286 | ) | |||||||
| Benefits paid | (1,613 | ) | (2,934 | ) | (4,547 | ) | ||||||
| Defined benefit obligations at end of year | $ | 45,941 | 229,609 | 275,550 | ||||||||
| Retirement benefits 2011 | ||||||||||||
| Seniority | Pension | |||||||||||
| premium | plan | Total | ||||||||||
| Defined benefits obligations: | ||||||||||||
| Obligation of defined benefit at the beginning of year | $ | 45,942 | 229,609 | 275,551 | ||||||||
| Current labor cost | 4,192 | 16,188 | 20,380 | |||||||||
| Interest cost | 3,585 | 18,134 | 21,719 | |||||||||
| Actuarial gain and losses | (15,750 | ) | (57,718 | ) | (73,468 | ) | ||||||
| Benefits paid | (1,702 | ) | (3,049 | ) | (4,751 | ) | ||||||
| Defined benefit obligations at end of year | $ | 36,267 | 203,164 | 239,431 | ||||||||
Below is the determination of plan assets at 31 December 2008, 2009, 2010 and 2010:
| Retirement benefits 2009 | ||||||||||||
| Seniority | Pension | |||||||||||
| premium | plan | Total | ||||||||||
| Plan assets: | ||||||||||||
| Plan asset at the beginning of year | $ | - | 188,815 | 188,815 | ||||||||
| Yield expected | - | 19,307 | 19,307 | |||||||||
| Actuarial gain and losses | - | 602 | 602 | |||||||||
| Company contributions | - | 17,436 | 17,436 | |||||||||
| Benefits paid | - | (2,382 | ) | (2,382 | ) | |||||||
| Plan assets at end of year | $ | - | 223,778 | 223,778 | ||||||||
| Retirement benefits 2008 | ||||||||||||
Seniority premium | Pension plan | Total | ||||||||||
| Plan assets: | ||||||||||||
| Plan asset at the beginning of year | $ | - | 182,017 | 182,017 | ||||||||
| Yield expected | - | (8,475 | ) | (8,475 | ) | |||||||
| Company contributions | - | 17,450 | 17,450 | |||||||||
| Benefits paid | - | (2,177 | ) | (2,177 | ) | |||||||
| Plan assets at end of year | $ | - | 188,815 | 188,815 | ||||||||
| F-62 |
| Retirement benefits 2010 | ||||||||||||
| Seniority | Pension | |||||||||||
| premium | plan | Total | ||||||||||
| Plan assets: | ||||||||||||
| Plan asset at the beginning of year | $ | - | 223,778 | 223,778 | ||||||||
| Yield expected | 22,507 | 22,507 | ||||||||||
| Actuarial gain and losses | - | (1,008 | ) | (1,008 | ) | |||||||
| Company Contributions | - | 14,039 | 14,039 | |||||||||
| Benefits Paid | - | (2,934 | ) | (2,934 | ) | |||||||
| Plan assets at end of year | $ | - | 256,382 | 256,382 | ||||||||
| Retirement benefits 2011 | ||||||||||||
| Seniority | Pension | |||||||||||
| premium | plan | Total | ||||||||||
| Plan assets: | ||||||||||||
| Plan asset at the beginning of year | $ | - | 256,382 | 256,382 | ||||||||
| Yield expected | - | 25,816 | 25,816 | |||||||||
| Actuarial gains and losses | - | (43,392 | ) | (43,392 | ) | |||||||
| Company contributions | - | 15,100 | 15,100 | |||||||||
| Benefits paid | - | (3,051 | ) | (3,051 | ) | |||||||
| Plan assets at end of year | $ | - | 250,855 | 250,855 | ||||||||
| F-63 |
| Retirement benefits 2009 | ||||||||||||
Seniority premium | Pension plan | Total | ||||||||||
| Plan assets: | ||||||||||||
| Plan asset at the beginning of year | $ | - | 188,815 | 188,815 | ||||||||
| Yield expected | - | 19,307 | 19,307 | |||||||||
| Actuarial gain and losses | - | 602 | 602 | |||||||||
| Company Contributions | - | 17,436 | 17,436 | |||||||||
| Benefits Paid | - | (2,382 | ) | (2,382 | ) | |||||||
| Plan assets at end of year | $ | - | 223,778 | 223,778 | ||||||||
| Retirement benefits 2010 | ||||||||||||
| Seniority | Pension | |||||||||||
| premium | plan | Total | ||||||||||
| Plan assets: | ||||||||||||
| Plan asset at the beginning of year | $ | - | 223,778 | 223,778 | ||||||||
| Yield expected | 22,507 | 22,507 | ||||||||||
| Actuarial gains and losses | - | (1,008 | ) | (1,008 | ) | |||||||
| Company contributions | - | 14,039 | 14,039 | |||||||||
| Benefits paid | - | (2,934 | ) | (2,934 | ) | |||||||
| Plan assets at end of year | $ | - | 256,382 | 256,382 | ||||||||
Following is a detailed description of the current amounts and the amounts for the previous four annual periods derived from the defined benefit obligations, the reasonable value of the plan’s assets and the adjustments on the plan assets and liabilities, based on experience:
| Seniortiy premium* | ||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
| Defined benefit obligations | $ | 49,097 | 56,601 | 59,086 | 66,711 | 83,871 | ||||||||||||||
| Plan assets | - | - | - | - | - | |||||||||||||||
| Plan status | $ | 49,097 | 56,601 | 59,086 | 66,711 | 83,871 | ||||||||||||||
| Pension plan | ||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
| Defined benefit obligations | $ | 189,355 | 199,333 | 177,339 | 202,186 | 229,609 | ||||||||||||||
| Plan assets | (160,421 | ) | (182,017 | ) | (188,815 | ) | (223,778 | ) | (256,382 | ) | ||||||||||
| Plan status | $ | 28,934 | 17,316 | (11,476 | ) | (21,592 | ) | (26,773 | ) | |||||||||||
| Seniortiy premium* | ||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||
| Defined benefit obligations | $ | 56,601 | 59,086 | 66,711 | 83,871 | 76,382 | ||||||||||||||
| Plan assets | - | - | - | - | - | |||||||||||||||
| Plan status | $ | 56,601 | 59,086 | 66,711 | 83,871 | 76,382 | ||||||||||||||
* The results of seniority premium include retirement and termination, due to the fact that this division did not exist in prior years in accordance with the Bulletin D-3.
| Pension plan | ||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||
| Defined benefit obligations | $ | 199,333 | 177,339 | 202,186 | 229,609 | 203,164 | ||||||||||||||
| Plan assets | (182,017 | ) | (188,815 | ) | (223,778 | ) | (256,382 | ) | (250,855 | ) | ||||||||||
| Plan status | $ | 17,316 | (11,476 | ) | (21,592 | ) | (26,773 | ) | (47,691 | ) | ||||||||||
The distribution of assets listed by category at the end of 2008, 2009, 2010 and 2010,2011, are as follows:
| 2008 | 2009 | 2010 | ||||||||||
| Fixed rate investment | 77 | % | 75 | % | 75 | % | ||||||
| Variable rate investment | 23 | % | 25 | % | 25 | % | ||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
| 2009 | 2010 | 2011 | ||||||||||
| Fixed rate investment | 75 | % | 75 | % | 70 | % | ||||||
| Variable rate investment | 25 | % | 25 | % | 30 | % | ||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
The distribution of the assets reflects the strategy that was used to optimize the return rate on the plan and the fund's results, within the framework of an appropriate risk level.
| b) | Benefit plans in foreign operation |
OK Industries, Inc. (foreign subsidiary) maintains a 401(k) retirement plan (defined benefit plan) covering all employees meeting certain eligibility requirements. The Company contributes to the plan at the rate of 50% of employees contributions up to a maximum of 2% of the individual employees compensation. Expense for contributions accrued to this plan was 33.7 USD ($471) for the two-month period ending December 31, 2011.
OK Industries, Inc. (foreign subsidiary) maintains a deferred compensation arrangement with certain key employees. Amounts payable under this plan vest 10 years from the date of the agreement. The benefit value of each unit is equal to the increase in initial subsidiary book value from the date of the agreement to the conclusion of the vesting period. Under the agreement, 275,000 units were outstanding on December 31, 2011, all of which were fully vested. Amounts expected to be paid within the next year of 657.7 USD ($9,189) are included in other current liabilities. The remaining liability is 411.8 USD ($5,753) under this plan. There was no compensation expense for the two-month period ending December 31, 2011.
(18) Stockholders’ Equity-
| a) | As of December 31, |
| b) | In |
| c) | The Mexican Corporation Law requires that at least 5% of each year’s net income be appropriated to increase the legal reserve until such reserve is equal to 20% of capital stock issued and outstanding. The balance of the legal reserve at December 31, |
| F-65 |
| d) | The Company approved a stock repurchase plan in 1998, in conformity with the Mexican Securities Trading Act, providing a stock repurchase reserve for that purpose of $180,000 ($303,861 expressed in constant Mexican pesos at December 31, 2007) through the appropriation of retained earnings in 1998. |
| e) | The Company is required to pay taxes on dividends distributed to stockholders only to the extent that the payment made exceeds the balance of the “net tax profit account” (CUFIN), which is used to control earnings on which income tax has already been paid. Income tax paid on dividends refers to a tax payable by corporate entities and not by individuals. |
| f) | The Company obtains the majority of its revenues and net profit from Bachoco, S.A. de C.V. (“BSACV”). For the years |
Dividends on which BSACV has paid income tax will be credited to the Company’s “CUFIN” account and, accordingly, no further income tax will be paid when such amounts are distributed as dividends to the Company’s stockholders.
| g) | From 1999 through 2001, under Mexican income tax law, corporate taxpayers were extended with the option of deferring payment of a portion of their annual corporate income tax, so that the tax rate will represent 30%. The earnings on which taxpayers opted to defer payment of a portion of corporate income tax had to be controlled in the so-called “net reinvested tax profit account” (CUFINRE). |
Since the Company opted for this tax deferral, earnings will be considered to be distributed first from the CUFINRE and any excess will be paid from the “net tax profit account” balance (“CUFIN”) so as to pay the 5% deferred tax. The option to defer a portion of the annual corporate income tax was eliminated effective January 1, 2002.
| F-66 |
| h) | Stockholders contribution restated as provided for by the tax law (CUCA), aggregating |
| (19) | Income Tax (IT), Asset Tax (AT), and Flat Rate Business Tax (IETU) and Employee Statutory Profit Sharing (ESPS)- |
Under the current tax legislation in Mexico, companies must pay the greater of their IT or IETU. IFIf IETU is payable, the payment will be considered final i.e.(i.e. not subject to recovery in subsequent years.
| a) | Income tax (IT)- |
The Company and each of its subsidiaries file separate income tax returns.returns (including its foreign subsidiary, that files income tax returns in the U.S. based on its existing tax year end of April). Bachoco, S.A. de C.V. BSACV, the Company’s principal operating subsidiary, is subject to corporate income tax under the provisions of the simplified regime, which is applicable to companies engaged exclusively in agriculture, cattle-raising, fishing, forestry and other activities. The income tax law establishes that such regime is exclusive for companies that obtain no more than 10% of their total revenues from the production of processed products; BSACV has complied with this criteria.
In 2009, a tax reform was authorized by which, beginning in 2010, the tax rate is increased from 19% to 21% in the simplified regime. The result of this change is recognized in 2009, as a charge of $188,754, which is reflected in deferred taxes under the item “Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates”.
The simplified regime establishes that the taxable base for income tax is determined on revenues collected net of deductions paid (cash basis). The tax rate for this regime was 19% from 2007 tofor 2009 and 21% for 2010 and thereafter.
The IT rate of the general regime for fiscal years 2010 to 2012 is 30%, for 2013 the rate shall be 29% and for 2014 and thereafter is 28%.
The income tax rate of the foreign subsidiary is 38.79%.
| F-67 |
| b) | Flat Rate Business Tax (IETU)- |
The IETU rate is 17.5% for 2010 and thereafter (16.5% for 2008 and 17%(17% for 2009) based on cash flows and limits certain deductions.
IETU credits are derived mainly from the unamortized negative IETU base, and salaries taxes for IT purposes and social security contributions, as well as credits derived from the deduction of certain investments, such as inventories and fixed assets.
The IETU is required to be paid only when it is greater than the IT. To determine the IETU payable, income tax paid in a given period shall first be subtracted from the current IT of the same period and the difference shall be the IETU payable.
If negative IETU base is determined because deductions exceed income, there will be no IETU payable. The amount of negative base multiplied by the IETU rate results in a IETU credit, which may be applied against IT for the same year or, if applicable, against IETU payable in the next ten years. According to the tax law, the IETU credit can not be applied against IT for 2010.
| c) | Asset tax (AT)- |
In 2007, a new law was enacted that resulted in the derogation of the AT Law beginning on January 1, 2008. In 2007, the asset tax rate was payable at 1.25% and liabilities were no longer deductible from the asset tax base.
At December 31, 2010,2011, the Company had $4,859$5,044 in Asset Tax credits and such recoverable AT will expire, as follows:
| Asset tax | ||||||||
| restated at | ||||||||
| December 31, | Year of | |||||||
| Base year | 2011 | expiration | ||||||
| 2005 | $ | 1,615 | 2015 | |||||
| 2006 | 3,429 | 2016 | ||||||
| $ | 5,044 | |||||||
| Asset tax | ||||||||
| restated at | ||||||||
| December 31, | Year of | |||||||
| Base year | 2010 | expiration | ||||||
| 2005 | $ | 1,556 | 2015 | |||||
| 2006 | 3,303 | 2016 | ||||||
| $ | 4,859 | |||||||
| F-68 |
| d) | Income tax charged to operations- |
For the years ended December 31, 2008, 2009, 2010 and 2010,2011, income tax (credited) charged to results of operations was as follows:
| 2008 | 2009 | 2010 | ||||||||||
| Current income tax | $ | 78,559 | $ | 103,482 | $ | 495,828 | ||||||
| Flat rate business tax | 108 | 371 | 18 | |||||||||
| Deferred income tax | (352,686 | ) | 302,505 | 7,569 | ||||||||
| Total (benefit) income tax expense | $ | (274,019 | ) | $ | 406,358 | $ | 503,415 | |||||
| 2009 | 2010 | 2011 | ||||||||||
| Mexican operation: | ||||||||||||
| Current income tax | $ | 103,482 | $ | 495,828 | $ | 69,578 | ||||||
| Flat rate business tax | 371 | 18 | 8 | |||||||||
| Deferred income tax | 302,505 | 7,569 | (109,221 | ) | ||||||||
| 406,358 | 503,415 | (39,635 | ) | |||||||||
| Foreign operation: | ||||||||||||
| Current income tax | $ | - | $ | - | $ | - | ||||||
| Deferred income tax | - | - | (895 | ) | ||||||||
| - | - | (895 | ) | |||||||||
| Total (benefit) income tax expense | $ | 406,358 | $ | 503,415 | $ | (40,530 | ) |
Income tax and employee statutory profit sharing expense attributable to income before income taxes differed from the amounts computed by applying the Mexican statutory IT rates of 19% for 2009 and 21% for 20092010 and 2010,2011, respectively and 10% employee statutory profit sharing to income, as a result of the items shown in the next page:
| 2009 | 2010 | 2011 | ||||||||||||||||||||||
| IT | ESPS | IT | ESPS | IT | ESPS | |||||||||||||||||||
| Computed “expected” tax expense | $ | 230,927 | 121,540 | $ | 522,846 | 248,974 | $ | 24,908 | 11,860 | |||||||||||||||
| Add ESPS expense | - | 3,300 | - | 3,369 | - | 2,160 | ||||||||||||||||||
| Increase (decrease) in income taxes resulting from: | ||||||||||||||||||||||||
| Effects of inflation, net | (50,596 | ) | - | (66,504 | ) | - | (71,189 | ) | - | |||||||||||||||
| Non-deductible expenses | 4,538 | 183 | 8,032 | 1,872 | 3,411 | 1,032 | ||||||||||||||||||
| Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates | 188,754 | - | - | - | - | - | ||||||||||||||||||
| Subsidiaries not subject to labor obligations | - | (92,661 | ) | - | (226,341 | ) | - | 7,197 | ||||||||||||||||
| Effect of companies outside simplified regime | 38,163 | - | 31,661 | - | 33,073 | - | ||||||||||||||||||
| Change in the valuation allowance for deferred tax assets | 8,130 | - | 17,164 | - | (32,312 | ) | - | |||||||||||||||||
| Other, net | (13,558 | ) | 639 | (9,784 | ) | 5,822 | 1,579 | (651 | ) | |||||||||||||||
| IT and ESPS expense (benefit) | $ | 406,358 | 33,001 | $ | 503,415 | 33,696 | $ | (40,530 | ) | 21,598 | ||||||||||||||
| 2008 | 2009 | 2010 | ||||||||||||||||||||||
| IT | ESPS | IT | ESPS | IT | ESPS | |||||||||||||||||||
| Computed “expected” tax (benefit) expense | $ | (220,411 | ) | (116,006 | ) | 230,927 | 121,540 | $ | 522,846 | 248,974 | ||||||||||||||
| Add ESPS expense | - | 3,298 | - | 3,300 | - | 3,369 | ||||||||||||||||||
| Increase (decrease) in income taxes resulting from: | ||||||||||||||||||||||||
| Effects of inflation, net | (69,435 | ) | - | (50,596 | ) | - | (66,504 | ) | - | |||||||||||||||
| Non-deductible expenses | 3,646 | 251 | 4,538 | 183 | 8,032 | 1,872 | ||||||||||||||||||
| Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates | - | - | 188,754 | - | - | - | ||||||||||||||||||
| Subsidiaries not subject to labor obligations | - | 147,174 | - | (92,661 | ) | - | (226,341 | ) | ||||||||||||||||
| Effect of companies outside simplified regime | (31,413 | ) | - | 38,163 | - | 31,661 | - | |||||||||||||||||
| Change in the valuation allowance for deferred tax assets | 23,402 | - | 8,130 | - | 17,164 | - | ||||||||||||||||||
| Other, net | 20,192 | (1,736 | ) | (13,558 | ) | 639 | (9,784 | ) | 5,822 | |||||||||||||||
| IT and ESPS (benefit) expense | $ | (274,019 | ) | 32,981 | 406,358 | 33,001 | $ | 503,415 | 33,696 | |||||||||||||||
| e) | Deferred income tax- |
Based on the financial projections of taxable income, the Company estimated that it will pay income tax (IT); therefore, deferred tax effects as of December 31, 20092010 and 20102011 have been recorded reflecting the IT basis.
| F-70 |
The components of the Company’s deferred income tax assets and liabilities are as follows:
| 2010 | 2011 | |||||||
| Deferred tax assets: | ||||||||
| Accounts payable | $ | 493,645 | $ | 649,678 | ||||
| Labor obligations | 33,407 | 58,661 | ||||||
| ESPS payable | 11,311 | 9,002 | ||||||
| Effects on derivative financial instruments | 1,635 | - | ||||||
| Recoverable AT | 4,859 | 5,044 | ||||||
| Tax loss carryforwards | 17,698 | 96,773 | ||||||
| Others | 1,006 | - | ||||||
| Total gross deferred tax assets | 563,561 | 819,158 | ||||||
| Less valuation allowance | 53,309 | 20,997 | ||||||
| Net deferred tax assets | 510,252 | 798,161 | ||||||
| Deferred tax liabilities: | ||||||||
| Inventories | 842,767 | 1,056,327 | ||||||
| Accounts receivable | 190,082 | 204,213 | ||||||
| Property, plant and equipment, net | 1,490,183 | 1,262,899 | ||||||
| Other deductions | 16,370 | 20,210 | ||||||
| Effects on derivative financial instruments | - | 1,704 | ||||||
| Total gross deferred tax liabilities | 2,539,402 | 2,545,353 | ||||||
| Net deferred tax liability | $ | 2,029,150 | $ | 1,747,192 | ||||
| Deferred tax assets-foreign subsidiary | $ | - | $ | 174,141 | ||||
| Deferred tax liability-Mexican subsidiaries | $ | 2,029,150 | $ | 1,921,333 | ||||
| 2009 | 2010 | |||||||
| Deferred tax assets: | ||||||||
| Accounts payable | $ | 438,174 | $ | 493,645 | ||||
| Labor obligations | 24,350 | 33,407 | ||||||
| ESPS payable | 11,349 | 11,311 | ||||||
| Effects on derivative financial instruments | - | 1,635 | ||||||
| Recoverable AT | 4,654 | 4,859 | ||||||
| Tax loss carryforwards | 89,698 | 17,698 | ||||||
| Others | - | 1,006 | ||||||
| Total gross deferred tax assets | 568,225 | 563,561 | ||||||
| Less valuation allowance | 36,145 | 53,309 | ||||||
| Net deferred tax assets | 532,080 | 510,252 | ||||||
| Deferred tax liabilities: | ||||||||
| Inventories | 838,854 | 842,767 | ||||||
| Accounts receivable | 170,667 | 190,082 | ||||||
| Property, plant and equipment, net | 1,525,593 | 1,490,183 | ||||||
| Other deductions | 16,261 | 16,370 | ||||||
| Effects on derivative financial instruments | 2,286 | - | ||||||
| Total gross deferred tax liabilities | 2,553,661 | 2,539,402 | ||||||
| Net deferred tax liability | $ | 2,021,581 | $ | 2,029,150 | ||||
| F-71 |
The valuation allowance for deferred tax assets as of January 1, 20092010 and 20102011 amounted to $28,015$36,145 and $36,145,$53,309, respectively. The net change in the total valuation allowance for the years ended December 31, 2008, 2009, 2010 and 2010,2011, was an increase of $23,402, $8,130, $17,164 and $17,164,a decrease of $32,312, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
| f) | Tax loss carryforwards- |
As of December 31, 2010,2011, the Company has tax loss carryforwards restated in accordance with the current Mexican Tax Law, which can be used to offset future taxable income in the next ten years, as follows:
| Tax loss carryforwards as adjusted by inflation through December 31, 2011 | ||||||
| Year of | Restated | |||||
| Base year | expiration | Amount | ||||
| 2007 | 2017 | $ | 3,251 | |||
| 2008 | 2018 | 48,164 | ||||
| 2009 | 2019 | 12,933 | ||||
| 2010 | 2020 | 530 | ||||
| 2011 | 2021 | 380,961 | ||||
| $ | 445,839 | |||||
Tax loss carryforwards as adjusted by inflation through December 31, 2010 | ||||||
| Year of | Restated | |||||
| Base year | expiration | Amount | ||||
| 2007 | 2017 | $ | 3,149 | |||
| 2008 | 2018 | 45,496 | ||||
| 2009 | 2019 | 12,523 | ||||
| 2010 | 2020 | 510 | ||||
| $ | 61,678 | |||||
| F-72 |
| g) | Equity tax value- |
As of December 31, 20092010 and 2010,2011, the tax value of the Company’s equity, which will not be subject to taxation, comprised the following:
| 2009 | 2010 | |||||||
| Restated contribution capital (CUCA) | $ | 2,070,958 | $ | 2,162,080 | ||||
| Net tax profit account (CUFIN) and net reinvested tax profit account (CUFINRE) | 2,622,015 | 4,203,221 | ||||||
| Total | $ | 4,692,973 | $ | 6,365,301 | ||||
| 2010 | 2011 | |||||||
| Restated contribution capital (CUCA) | $ | 2,162,080 | $ | 2,244,455 | ||||
| Net tax profit account (CUFIN) and net reinvested tax profit account (CUFINRE) | 4,203,221 | 4,194,245 | ||||||
| Total | $ | 6,365,301 | $ | 6,438,700 | ||||
| h) | Employee statutory profit sharing |
Industrias Bachoco, S.A.B de C.V. and BSACV have no employees, but each of the subsidiaries of the Company in Mexico that has employees is required under Mexican law to pay employees, in addition to their compensation and benefits, statutory profit sharing in an aggregate amount equal to 10% of such subsidiary’s taxable income subject to certain adjustments.
| F-73 |
| (20) | Other income (expense), net- |
As of December 31, 2008, 2009, 2010 and 2010,2011, other income and expense net, were as follows:
| 2009 | 2010 | 2011 | ||||||||||
| Other income: | ||||||||||||
| Sales of waste animals, raw material, by-products and others | $ | 139,555 | $ | 194,779 | $ | 202,780 | ||||||
| Tax incentives | 5,496 | - | - | |||||||||
| Total other income | 145,051 | 194,779 | 202,780 | |||||||||
| Other expense: | ||||||||||||
| Cost of waste animals, raw material, by- products and other | (162,957 | ) | (173,436 | ) | (193,707 | ) | ||||||
| Employee statutory profit sharing | (33,001 | ) | (33,696 | ) | (21,598 | ) | ||||||
| Others | (14,282 | ) | (82,962 | ) | (56,396 | ) | ||||||
| Total other expense | (210,240 | ) | (290,094 | ) | (271,701 | ) | ||||||
| Total other expense, net | $ | (65,189 | ) | $ | (95,315 | ) | $ | (68,921 | ) | |||
| 2008 | 2009 | 2010 | ||||||||||
| Other income: | ||||||||||||
| Sales of waste animals, raw material, by-products and others | $ | 187,911 | $ | 139,555 | $ | 202,523 | ||||||
| Tax incentives | 44,899 | 5,496 | - | |||||||||
| Others | 8,106 | - | - | |||||||||
| Total other income | 240,916 | 145,051 | 202,523 | |||||||||
| Other expense: | ||||||||||||
| Cost of waste animals, raw material, byproducts and other | (200,960 | ) | (162,957 | ) | (223,537 | ) | ||||||
| Employee statutory profit sharing | (32,981 | ) | (33,001 | ) | (33,696 | ) | ||||||
| Others | (27,933 | ) | (14,282 | ) | (40,605 | ) | ||||||
| Total other expense | 261,874 | (210,240 | ) | (297,838 | ) | |||||||
| Total other expense, net | $ | (20,958 | ) | $ | (65,189 | ) | $ | (95,315 | ) | |||
| F-74 |
| (21) | Segment financial information- |
a)Product line segments
The segments to be reported are organized by geographic operation and product line. Inter-segment transactions have been eliminated. Our Poultry segment is comprised of our chicken and egg products due to their similarity in risks and benefits. The information included under “Others” corresponds to pigs, balanced animal feed and other non-significant sub-products. The segment information is as shown in the next page:
| As of and for the year ended at December 31, 2009 | ||||||||||||
| Poultry | Others | Total | ||||||||||
| Net revenues | $ | 20,567,944 | 2,694,906 | 23,262,850 | ||||||||
| Cost of sales | (16,900,540 | ) | (2,426,219 | ) | (19,326,759 | ) | ||||||
| Gross profit | 3,667,404 | 268,687 | 3,936,091 | |||||||||
| Interest income | 149,160 | 21,495 | 170,655 | |||||||||
| Valuation effects of financial instruments | (174,603 | ) | - | (174,603 | ) | |||||||
| Interest and financial expenses | (77,052 | ) | (14,274 | ) | (91,326 | ) | ||||||
| Income taxes | (370,734 | ) | (35,624 | ) | (406,358 | ) | ||||||
| Net controlling interest income | 702,344 | 95,256 | 797,600 | |||||||||
| Property, plant and equipment, net | 10,453,381 | 412,601 | 10,865,982 | |||||||||
| Goodwill, net | 212,833 | 88,015 | 300,848 | |||||||||
| Total assets | 18,706,330 | 1,171,549 | 19,877,879 | |||||||||
| Total liabilities | 4,817,238 | 422,178 | 5,239,416 | |||||||||
| Capital expenditures | 813,628 | 130,478 | 944,106 | |||||||||
| Expenses not requiring cash disbursement: | ||||||||||||
| Depreciation and amortization | 621,324 | 41,306 | 662,630 | |||||||||
| F-75 |
| As of and for the year ended at December 31, 2010 | ||||||||||||
| Poultry | Others | Total | ||||||||||
| Net revenues | $ | 22,229,505 | 2,485,951 | 24,715,456 | ||||||||
| Cost of sales | (17,377,938 | ) | (2,122,739 | ) | (19,500,677 | ) | ||||||
| Gross profit | 4,851,567 | 363,212 | 5,214,779 | |||||||||
| Interest income | 154,203 | 11,443 | 165,646 | |||||||||
| Valuation effects of financial instruments | 18,850 | - | 18,850 | |||||||||
| Interest and financial expenses | (65,007 | ) | (8,512 | ) | (73,519 | ) | ||||||
| Income taxes | (463,616 | ) | (39,799 | ) | (503,415 | ) | ||||||
| Net controlling interest (loss) income | 1,896,160 | 90,166 | 1,986,326 | |||||||||
| Property, plant and equipment, net | 10,240,120 | 303,911 | 10,544,031 | |||||||||
| Goodwill, net | 212,833 | 88,015 | 300,848 | |||||||||
| Total assets | 20,109,011 | 1,088,757 | 21,197,768 | |||||||||
| Total liabilities | 4,407,236 | 422,178 | 4,829,414 | |||||||||
| Capital expenditures | 504,675 | 12,621 | 517,296 | |||||||||
| Expenses not requiring cash disbursement: | - | - | - | |||||||||
| Depreciation and amortization | 664,054 | 28,586 | 692,640 | |||||||||
| As of and for the year ended at December 31, 2011 | ||||||||||||
| Poultry | Others | Total | ||||||||||
| Net revenues | $ | 24,697,212 | 3,037,778 | 27,734,990 | ||||||||
| Cost of sales | (22,075,071 | ) | (2,698,145 | ) | (24,773,216 | ) | ||||||
| Gross profit | 2,622,141 | 339,633 | 2,961,774 | |||||||||
| Interest income | 182,400 | 11,377 | 193,777 | |||||||||
| Valuation effects of financial instruments | (896 | ) | - | (896 | ) | |||||||
| Interest and financial expenses | (58,327 | ) | (11,417 | ) | (69,744 | ) | ||||||
| Income taxes | (13,135 | ) | (27,395 | ) | (40,530 | ) | ||||||
| Net controlling interest income | 65,502 | 91,539 | 157,041 | |||||||||
| Property, plant and equipment, net | 10,044,310 | 395,943 | 10,440,253 | |||||||||
| Goodwill, net | 212,833 | 88,015 | 300,848 | |||||||||
| Total assets | 21,832,440 | 1,337,434 | 23,169,874 | |||||||||
| Total liabilities | (6,370,017 | ) | (530,751 | ) | (6,900,768 | ) | ||||||
| Capital expenditures | 662,009 | 45,524 | 707,533 | |||||||||
| Expenses not requiring cash disbursement: | ||||||||||||
| Depreciation and amortization | 703,740 | 22,321 | 726,061 | |||||||||
| F-76 |
| As of and for the year ended at December 31, 2008 | ||||||||||||
| Poultry | Others | Total | ||||||||||
| Net revenues | $ | 17,594,994 | 2,530,327 | 20,125,321 | ||||||||
| Cost of sales | (15,171,145 | ) | (2,311,323 | ) | (17,482,468 | ) | ||||||
| Gross profit | 2,423,849 | 219,004 | 2,642,853 | |||||||||
| Interest income | 168,283 | 5,411 | 173,694 | |||||||||
| Valuation effects of financial instruments | (1,666,821 | ) | - | (1,666,821 | ) | |||||||
| Interest and financial expenses | (16,691 | ) | (19,511 | ) | (36,202 | ) | ||||||
| Income taxes | 292,563 | (18,544 | ) | 274,019 | ||||||||
| Net controlling interest income | (939,068 | ) | 60,020 | (879,048 | ) | |||||||
| Property, plant and equipment, net | 10,422,423 | 266,812 | 10,689,235 | |||||||||
| Goodwill, net | 212,833 | 88,015 | 300,848 | |||||||||
| Total assets | 18,386,409 | 1,068,562 | 19,454,971 | |||||||||
| Total liabilities | 5,039,205 | 336,347 | 5,375,552 | |||||||||
| Capital expenditures | 1,140,843 | 15,325 | 1,156,168 | |||||||||
| Expenses not requiring cash disbursement: | ||||||||||||
| Depreciation and amortization | 594,704 | 21,654 | 616,358 | |||||||||
| As of and for the year ended at December 31, 2009 | ||||||||||||
| Poultry | Others | Total | ||||||||||
| Net revenues | $ | 20,567,944 | 2,694,906 | 23,262,850 | ||||||||
| Cost of sales | (16,900,540 | ) | (2,426,219 | ) | (19,326,759 | ) | ||||||
| Gross profit | 3,667,404 | 268,687 | 3,936,091 | |||||||||
| Interest income | 149,160 | 21,495 | 170,655 | |||||||||
| Valuation effects of financial instruments | (174,603 | ) | - | (174,603 | ) | |||||||
| Interest and financial expenses | (77,052 | ) | (14,274 | ) | (91,326 | ) | ||||||
| Income taxes | (370,734 | ) | (35,624 | ) | (406,358 | ) | ||||||
| Net controlling interest (loss) income | 702,344 | 95,256 | 797,600 | |||||||||
| Property, plant and equipment, net | 10,497,525 | 412,601 | 10,910,126 | |||||||||
| Goodwill, net | 212,833 | 88,015 | 300,848 | |||||||||
| Total assets | 18,706,330 | 1,171,549 | 19,877,879 | |||||||||
| Total liabilities | 4,817,238 | 422,178 | 5,239,416 | |||||||||
| Capital expenditures | 857,772 | 130,478 | 988,250 | |||||||||
| Expenses not requiring cash disbursement: | ||||||||||||
| Depreciation and amortization | 621,324 | 41,306 | 662,630 | |||||||||
| As of and for the year ended at December 31, 2010 | ||||||||||||
| Poultry | Others | Total | ||||||||||
| Net revenues | $ | 22,229,505 | 2,485,951 | 24,715,456 | ||||||||
| Cost of sales | (17,377,938 | ) | (2,122,739 | ) | (19,500,677 | ) | ||||||
| Gross profit | 4,851,567 | 363,212 | 5,214,779 | |||||||||
| Interest income | 154,203 | 11,443 | 165,646 | |||||||||
| Valuation effects of financial instruments | 18,850 | - | 18,850 | |||||||||
| Interest and financial expenses | (65,007 | ) | (8,512 | ) | (73,519 | ) | ||||||
| Income taxes | (463,616 | ) | (39,799 | ) | (503,415 | ) | ||||||
| Net controlling interest (loss) income | 1,896,160 | 90,166 | 1,986,326 | |||||||||
| Property, plant and equipment, net | 10,283,410 | 303,911 | 10,587,321 | |||||||||
| Goodwill, net | 212,833 | 88,015 | 300,848 | |||||||||
| Total assets | 20,109,011 | 1,088,757 | 21,197,768 | |||||||||
| Total liabilities | 4,407,236 | 422,178 | 4,829,414 | |||||||||
| Capital expenditures | 547,965 | 12,621 | 560,586 | |||||||||
| Expenses not requiring cash disbursement: | - | - | - | |||||||||
| Depreciation and amortization | 664,054 | 28,586 | 692,640 | |||||||||
Revenues from our poultry segment are analyzed as follows:
As of and for year ended at December 31, 2008 | ||||||||||||
| Chicken | Eggs | Total | ||||||||||
| Net revenues | $ | 15,486,614 | 2,108,380 | 17,594,994 | ||||||||
As of and for year ended at December 31, 2009 | ||||||||||||
| Chicken | Eggs | Total | ||||||||||
| Net revenues | $ | 18,211,109 | 2,356,835 | 20,567,944 | ||||||||
As of and for year ended at December 31, 2010 | ||||||||||||
| Chicken | Eggs | Total | ||||||||||
| Net revenues | $ | 20,127,721 | 2,101,784 | 22,229,505 | ||||||||
| As of and for year ended at December 31, 2009 | ||||||||||||
| Chicken | Eggs | Total | ||||||||||
| Net revenues | $ | 18,211,109 | 2,356,835 | 20,567,944 | ||||||||
| As of and for year ended at December 31, 2010 | ||||||||||||
| Chicken | Eggs | Total | ||||||||||
| Net revenues | $ | 20,127,721 | 2,101,784 | 22,229,505 | ||||||||
| As of and for year ended at December 31, 2011 | ||||||||||||
| Chicken | Eggs | Total | ||||||||||
| Net revenues | $ | 22,611,264 | 2,085,948 | 24,697,212 | ||||||||
b)Geographic operating segments
As of 2011, with the acquired operation in the United States, it incorporated a new segment at the management approach named “foreign” to identify (segment) the national and foreign operations. When submitting information by geographical area, the revenues are classified based on the geographical location of the customers. The assets of the segments are classified regarding the geographical location of assets.
| As of and for the year ended at December 31, 2011 | ||||||||||||
| National Poultry | Foreign Poultry (two- months operation) | Total Poultry | ||||||||||
| Net revenues | $ | 23,318,433 | 1,378,779 | 24,697,212 | ||||||||
| Cost of sales | (20,772,407 | ) | (1,302,664 | ) | (22,075,071 | ) | ||||||
| Gross profit | 2,546,026 | 76,115 | 2,622,141 | |||||||||
| Interest income | 182,400 | - | 182,400 | |||||||||
| Valuation effects of financial instruments | (896 | ) | - | (896 | ) | |||||||
| Interest and financial expenses | (58,164 | ) | (163 | ) | (58,327 | ) | ||||||
| Income taxes | (12,240 | ) | (895 | ) | (13,135 | ) | ||||||
| Net controlling interest income | 68,160 | (2,658 | ) | 65,502 | ||||||||
| Property, plant and equipment, net | 10,428,265 | 12,045 | 10,440,310 | |||||||||
| Goodwill, net | 212,833 | - | 212,833 | |||||||||
| Total assets | 19,983,780 | 1,848,660 | 21,832,440 | |||||||||
| Total liabilities | (5,830,667 | ) | (539,350 | ) | (6,370,017 | ) | ||||||
| Capital expenditures | 662,009 | - | 662,009 | |||||||||
| Expenses not requiring cash disbursement: | ||||||||||||
| Depreciation and amortization | 703,606 | 134 | 703,740 | |||||||||
| As of and for year ended at December 31, 2011 | ||||||||||||
| National Chicken | Foreign Chicken (two-months operation) | Total | ||||||||||
| Net revenues | $ | 21,232,485 | 1,378,779 | 22,611,264 | ||||||||
| Subsequent events- |
|
In this regardIndustrias Bachoco, S.A.B. de C.V. (the “Company”) was notified, the consolidated financial statements to be issued by the CNBV aboutCompany for the applicability of the aforementioned requirements, and began working on its project for conversion from Mexican Financial Reporting Standards (Mex NIF) to IFRS.
| Property, Plant and Equipment - The Company has taken the “Deemed Cost” option at the transition date by applying the fair value option for certain property, plant and equipment at December, 2011, according to IFRS 1 “First time adoption of International Financial Reporting Standards”. |
| b) | Employee Benefits -Severanceaccrual has been written-off since such liability does not meet the requirement required by the accounting standard IAS 19 “Employee Benefits”. |
| c) | Stockholders’ equity –The adjustment that will be recognized at the transition date will be accounted for against retained earnings. |
| d) | Inflation effects -According to IAS 29 “Financial Reporting in Hyperinflationary Economies”, accumulated inflation effects recognized in periods that do not qualify as hyperinflationary in accordance with IFRS will be eliminated from the equity accounts against retained earnings, such as capital stock, additional paid-in-capital, and reserve for repurchase of shares. |
| F-79 |
| e) | Deferred Income Tax -Deferred income taxes were accounted for the adjustments that were initially recognized in the financial statements caption at the transition date to IFRS. |
Best estimated information regardingthe significant changes in captions of the Company’s financial statements impacted by the IFRS adoption at January 1, 2011 (transition date) are listed below. The Company is in the process to determine the significant changes in main captions of the financial statement at December 31, 2011 as they are currently obtaining all complementary information to determine the final effects at such date, however, the Company estimates that such effects will not change significantly:
| January 1, 2011 | note | MEX FRS | Adjustment at transition date | IFRS | ||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | $ | 9,537,718 | $ | - | $ | 9,537,718 | ||||||||||
| Property, plant and equipment, net | a | 10,544,031 | (403,563 | ) | 10,140,468 | |||||||||||
| Other non current assets | 1,116,019 | - | 1,116,019 | |||||||||||||
| Total assets | $ | 21,197,768 | $ | (403,563 | ) | $ | 20,794,205 | |||||||||
| LIABILITIES | ||||||||||||||||
| Current liabilities | $ | 2,166,754 | $ | - | $ | 2,166,754 | ||||||||||
| Long term debt | 507,053 | - | 507,053 | |||||||||||||
| Labor obligations | b | 126,457 | (69,359 | ) | 57,098 | |||||||||||
| Deferred income tax | e | 2,029,150 | (71,732 | ) | 1,957,418 | |||||||||||
| Total liabilities | $ | 4,829,414 | $ | (141,091 | ) | $ | 4,688,323 | |||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Capital Stock | d | $ | 2,294,927 | $ | (902,051 | ) | $ | 1,392,876 | ||||||||
| Additional paid- in capital | d | 744,753 | (286,244 | ) | 458,509 | |||||||||||
| Retained earnings | c,d | 13,122,387 | 987,031 | 14,109,418 | ||||||||||||
| Other equity captions | d | 206,287 | (61,208 | ) | 145,079 | |||||||||||
| Total stockholders’ equity | $ | 16,368,354 | $ | (262,472 | ) | $ | 16,105,882 | |||||||||
On January 25, 2012, the Company paid the debt of $200,000 mentioned in note 12a.
At the stockholders meeting held on April 25, 2012 the stockholders approved, among others:
| b- | Dividend decree of $0.50 per share in nominal pesos. |
| (23) | Differences between Mexican Financial Reporting Standards and United States Generally Accepted Accounting Principles |
The Company’s consolidated financial statements are prepared in accordance with Mexican Financial Reporting Standards (“MexFRS”), which differ in certain respects from accounting principles generally accepted in the United States (“U.S. GAAP”).
The principal differences between MexFRS and U.S. GAAP, as they relate to us, are described below with an explanation, where appropriate, of the method used to determine the adjustments that affect net income and stockholders’ equity, or additional disclosures as applicable.
Business Combination
OK Industries acquisition
Bachoco applies the purchase method as the sole recognition alternative for a business combination by allocating the purchase price to all assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.
As it is mentioned in note 1 “Significant transaction”, to the consolidated financial statements, on November 1, 2011 the Company acquired 100% percent of the voting stock of OK Industries, Inc., the aggregate purchase price that was paid in cash, amounted to 93,400 thousand USD.
As of December 31, 2011 Bachoco was in the process of allocating the fair values to the assets acquired and liabities asumed. The consolidated financial statements of Bachoco include the balance sheet of OK Industries, Inc., as of December 31, 2011, based on the best estimate of its net asset’s fair value as of the acquisition date, and its results of operations for the two-month period ended December 31, 2011. The fair values of these net assets acquired were determined using the cost and market approaches.The following summarizes the difference between the purchase price and the fair value of the identifiable net assets acquired at the purchase date:
| Allocated to: | US GAAP US dollars | USGAAP pesos | ||||||
| Cash and cash equivalents | $ | 21 | $ | 288 | ||||
| Accounts receivable | 25,051 | 340,443 | ||||||
| Inventories | 69,869 | 949,518 | ||||||
| Refundable income taxes | 894 | 12,155 | ||||||
| Other current assets | 2,234 | 30,358 | ||||||
| Property, plant and equipment | 124,649 | 1,693,980 | ||||||
| Investment in life insurance contracts | 2,539 | 34,505 | ||||||
| Investment in unconsolidated entity | 2,722 | 36,993 | ||||||
| Other long-term receivable | 6,024 | 81,866 | ||||||
| Total assets acquired | 234,003 | 3,180,106 | ||||||
| Accounts payable | (14,985 | ) | (203,631 | ) | ||||
| Other current liabilities | (13,303 | ) | (180,773 | ) | ||||
| Deferred compensation liability | (412 | ) | (5,597 | ) | ||||
| Deferred income taxes | (38,206 | ) | (519,189 | ) | ||||
| Total liabilities assumed | (66,906 | ) | (909,190 | ) | ||||
| Noncontrolling interest in consolidated entity | (516 | ) | (7,025 | ) | ||||
| Net assets acquired | 166,581 | 2,263,891 | ||||||
| Less cost to acquire | 93,400 | 1,269,306 | ||||||
| Gain on bargain purchase | $ | 73,181 | $ | 994,585 | ||||
| F-82 |
Under MexFRS B-7 “Business acquisitions”, if the fair value of net assets acquired exceeds the aggregate purchase price amount (bargain purchase), then the fair value of the net assets value shall be adjusted up to the purchase price amount as it is considered the fair value of the transaction between two independent parties in a free market.
Adjustment to the fair value of the net assets acquired should be applied by reducing the fair value of certain assets until exhausting its value in the following order: a) firstly, intangible assets, b) then, long-term monetary assets as property, plant and equipment, and c) finally, any other long-term assets as permanent investments. Once the fair value of such asset is exhausted the remaining amount, if any, should be recognized as a gain on bargain purchase in the income statement on the acquisition date.
In accordance with the provision of MexFRS B-7, the Company reduced the fair value of the property, plant and equipment and the related deferred income taxes up to the amount of the gain on bargain purchase ($994,585 (73,181 thousand USD)).
For U.S. GAAP purposes, ASC Topic 805, Business Combinations, mentions that occasionally, an acquirer will make a bargain purchase, which is a business combination in which the fair value of the net assets acquired exceeds the aggregate purchase price amount. If that excess remains after the acquirer, reassess whether it has correctly identified and determined the fair value of all assets acquired, and liabilities assumed, any non-controlling interest in the acquired entity, any previously held equity interest in the acquired entity, and the consideration transferred, then the acquirer shall recognize the resulting gain in earnings on the acquisition date. The gain shall be attributed to the acquirer. Therefore, for U.S. GAAP purposes, the Company recognized in earnings the amount of $994,585 (73,181 thousand USD) as a gain on bargain purchase.
For U.S. GAAP purposes, the Company recognized in the 2011 income statements, a depreciation expense of $18,546 and a deferred tax benefit of $7,000 related to the depreciation of the fair values assigned to property, plant and equipment that come from OK Industries, Inc. acquisition.
Moreover, an additional amount of $27,535 related to translation effect of foreign subsidiary (OK Industries, Inc.) was recognized for U.S. GAAP purposes in other comprehensive income, to reach a total amount of $63,171 related to such translation effect of foreign subsidiary ($35,636 recognized under Mex FRS)
| F-83 |
In addition, Accounting Standards Update (ASU) 2010-29 “Business Combination (Topic 805) Disclosures of Supplementary Pro Forma Information for Business Combinations,” requests to public entities that presents comparative financial statements to disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. This unaudited disclosure is shown as follow:
| Combined Figures | ||||||||
| Thousands USD | Thousands USD | |||||||
| Jan 1, through December 31, 2010 (Unaudited) | Jan 1, through December 31, 2011 (Unaudited) | |||||||
| Results of operations: | ||||||||
| Net Sales | $ | 2,382,735 | $ | 2,605,050 | ||||
| Operating income | 128,941 | 214,707 | ||||||
| Net income | 58,916 | 157,939 | ||||||
No proforma adjustments were deemed necessary by the Company.
| F-84 |
Effects of inflation
MexFRS B-10 “Effects of inflation" (applicable for years beginning on or after January 1, 2008), supersedes Bulletin B-10 of MexFRS "Recognition of the effects of inflation on the financial information", and its fifth amendment documents as well as the related circulars and Mexican Interpretation of Financial Reporting Standards. The main consideration established by this MexFRS is the recognition of the effects of inflation when an entity operates in an inflationary economic environment (defined as when cumulative inflation over the immediately preceding 3-yearthree year period is equal to or greater than 26%) applicable as from January 1, 2008. Therefore, the last restatement factor applied to financial statements for the year ended December 2007 was 1.0376, which corresponds to the annual rate of inflation from December 31, 2006 to December 31, 2007, based on the Mexican National Consumer Price Index (NCPI) published by Banco de Mexico.
The reconciliation to U.S. GAAP does not include the reversal of the adjustments to the financial statements for the effects related to the inflation required under MexFRS because the application of MexFRS B-10 represents a comprehensive measure of the effects of price level changes in the Mexican economy and, as such, it is considered a more meaningful presentation than historical cost base over financial reporting for both Mexican and U.S. accounting purposes as permitted by the “Securities and Exchange Commission” (SEC).
Cash flow information
MexFRS B-2 “Statement of cash flow” was revised and changes are effective beginning January 1, 2010. The changes in the presentation were recognized retrospectively and are related to “available on demand-investment” that should be highly liquid (original maturities of three months or less).
At December 31, 2008, 2009, 2010 and 2010,2011, restricted cash amounting to $223,921, $8,270, $8,899, and $8,899,$1,641 respectively, are being reclassified for U.S. GAAP purposes from the line-item “cash and cash equivalents” to “restricted cash”, within investing activities, since such restricted cash does not meet the definition of cash equivalents according to FASB ASC Topic 230Statement of cash flows (SFAS 95Statement of cash flows).
| F-85 |
Consolidated statements of cash flows derived from information prepared in accordance with U.S. GAAP would be as presented in the following page:as follows:
| Cash Flow Information | Years ended December 31, | |||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income under U.S. GAAP | $ | 798,440 | $ | 1,977,951 | $ | 1,180,685 | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation | 667,354 | 697,364 | 749,334 | |||||||||
| Bargain purchase | - | - | (994,585 | ) | ||||||||
| Deferred income tax | 291,459 | 50,949 | (155,502 | ) | ||||||||
| Unrealized loss (gain) on derivative financial instruments | (785,398 | ) | (1,625 | ) | 2,689 | |||||||
| Foreign exchange loss on loans | - | - | 34,500 | |||||||||
| Loss on sale of property, plant and equipment | 88,186 | 148,571 | 46,671 | |||||||||
| Labor obligations, net period cost | 46,682 | 42,865 | 43,427 | |||||||||
| 1,106,723 | 2,916,075 | 907,219 | ||||||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | $ | (44,359 | ) | $ | (60,654 | ) | $ | (199,177 | ) | |||
| Inventories and biological assets | 274,541 | (945 | ) | (877,238 | ) | |||||||
| Prepaid expenses and other accounts receivable | (934 | ) | 16,265 | (67,166 | ) | |||||||
| Accounts payable | 2,058 | (81,696 | ) | 565,424 | ||||||||
| Related parties payable | 17,277 | (6,740 | ) | 17,670 | ||||||||
| Other taxes payable and other accruals | 109,168 | (44,048 | ) | (242,673 | ) | |||||||
| Labor obligations, net | (40,452 | ) | (18,749 | ) | (35,201 | ) | ||||||
| Cash flows provided by (used in) operating activities to next page | $ | 1,424,022 | $ | 2,719,508 | $ | 68,858 | ||||||
| Years ended December 31, | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Cash flows provided by (used in) operating activities from previous page | $ | 1,424,022 | $ | 2,719,508 | $ | 68,858 | ||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Acquisition of property, plant and Equipment | $ | (988,250 | ) | $ | (560,586 | ) | $ | (849,334 | ) | |||
| Proceeds from sale of property, plant and Equipment | 16,541 | 42,179 | 83,946 | |||||||||
| Restricted cash | 215,651 | (629 | ) | 7,258 | ||||||||
| Investment securities | 316,162 | (57,507 | ) | (201,373 | ) | |||||||
| Business acquisition | - | - | (1,326,741 | ) | ||||||||
| Other assets | (650 | ) | (1,497 | ) | (4,589 | ) | ||||||
| Cash flows used in investing activities | $ | (440,546 | ) | $ | (578,040 | ) | $ | (2,290,833 | ) | |||
| FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from issuance of notes payable to Banks | $ | 1,044,611 | $ | 778,955 | $ | 1,930,541 | ||||||
| Repayment of long-term debt and notes payable | (706,668 | ) | (1,095,870 | ) | (774,598 | ) | ||||||
| Cash dividends paid | (250,045 | ) | (250,082 | ) | (299,926 | ) | ||||||
| Dividends paid to non-controlling interest | (1,035 | ) | (1,186 | ) | (912 | ) | ||||||
| Additional paid-in capital | 1,079 | (5,167 | ) | (209 | ) | |||||||
| Cash flows provided by (used in) financing activities | 87,942 | (573,350 | ) | 854,896 | ||||||||
| Translation effect of foreign subsidiary | - | - | 32,124 | |||||||||
| Net increase (decrease) in cash and equivalents | 1,071,418 | 1,568,118 | (1,334,955 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 1,319,439 | 2,390,857 | 3,958,975 | |||||||||
| Cash and cash equivalents at end of year | $ | 2,390,857 | $ | 3,958,975 | $ | 2,624,020 | ||||||
Supplemental disclosure of cash flows information:
| Years ended December 31, | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Interest paid during the year | $ | (90,192 | ) | $ | (73,519 | ) | $ | (60,809 | ) | |||
| Payment of valuation effects of financial instruments | 177,740 | - | - | |||||||||
| Income taxes paid during the year | $ | (107,158 | ) | $ | (495,846 | ) | $ | (121,982 | ) | |||
| F-87 |
| Cash Flow Information | Years ended December 31, | |||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net (loss) income under U.S. GAAP | $ | (876,358 | ) | $ | 798,440 | $ | 1,977,951 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation | 620,041 | 667,354 | 697,364 | |||||||||
| Deferred income tax | (341,925 | ) | 291,459 | 50,949 | ||||||||
| Impairment on investment securities | 13,116 | - | - | |||||||||
| Unrealized loss (gain) on derivative financial Instruments | 887,174 | (785,398 | ) | (1,625 | ) | |||||||
| Loss on sale of plant and equipment | 49,485 | 88,186 | 148,571 | |||||||||
| Labor obligations, net period cost | 48,345 | 46,682 | 42,865 | |||||||||
| 399,878 | 1,106,723 | 2,916,075 | ||||||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | $ | (165,763 | ) | $ | (44,359 | ) | $ | (60,654 | ) | |||
| Inventories and biological assets | ( 768,084 | ) | 274,541 | (945 | ) | |||||||
| Prepaid expenses and other accounts receivable | (24,703 | ) | (934 | ) | 16,265 | |||||||
| Accounts payable | 513,919 | 2,058 | (81,696 | ) | ||||||||
| Related parties payable | 23,517 | 17,277 | (6,740 | ) | ||||||||
| Other taxes payable and other accruals | 93,694 | 109,168 | (44,048 | ) | ||||||||
| Labor obligations, net | (41,805 | ) | (40,452 | ) | (18,749 | ) | ||||||
| Derivative financial instruments | (122,126 | ) | - | - | ||||||||
| Cash flows (used in) provided by operating activities to next page | $ | (90,973 | ) | $ | 1,424,022 | $ | 2,719,508 | |||||
| Years ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| Cash flows (used in) provided by operating activities from previous page | $ | (90,973 | ) | $ | 1,424,022 | $ | 2,719,508 | |||||
| INVESTING ACTIVITIES: | ||||||||||||
| Acquisition of property, plant and Equipment | $ | (1,156,168 | ) | $ | (988,250 | ) | $ | (560,586 | ) | |||
| Proceeds from sale of property, plant and Equipment | 57,329 | 16,541 | 42,179 | |||||||||
| Restricted cash | (223,921 | ) | 215,651 | (629 | ) | |||||||
| Investment securities | (61,998 | ) | 316,162 | (57,507 | ) | |||||||
| Other assets | (1,112 | ) | (650 | ) | (1,497 | ) | ||||||
| Cash flows used in investing activities | $ | (1,385,870 | ) | $ | (440,546 | ) | $ | (578,040 | ) | |||
| FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from issuance of notes payable to Banks | $ | 535,100 | $ | 1,044,611 | $ | 778,955 | ||||||
| Repayment of long-term debt and notes payable | (18,809 | ) | (706,668 | ) | (1,095,870 | ) | ||||||
| Cash dividends paid | (353,880 | ) | (250,045 | ) | (250,082 | ) | ||||||
| Dividends paid to non-controlling interest | - | (1,035 | ) | (1,186 | ) | |||||||
| Additional paid-in capital | - | 1,079 | (5,167 | ) | ||||||||
| Cash flows provided by (used in) financing activities | 162,411 | 87,942 | (573,350 | ) | ||||||||
| Net (decrease) increase in cash and Investments | (1,314,432 | ) | 1,071,418 | 1,568,118 | ||||||||
| Cash and cash equivalents at beginning of year | 2,633,871 | 1,319,439 | 2,390,857 | |||||||||
| Cash and cash equivalents at end of year | $ | 1,319,439 | $ | 2,390,857 | $ | 3,958,975 | ||||||
| Supplemental disclosure of cash flows information: | ||||||||||||
| Years ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| Interest paid during the year | $ | (33,339 | ) | $ | (90,192 | ) | $ | (73,519 | ) | |||
| Payment of valuation effects of financial instruments | (747,795 | ) | 177,740 | - | ||||||||
| Income taxes paid during the year | $ | (147,426 | ) | $ | (107,158 | ) | $ | (495,846 | ) | |||
Agriculture:
The Company follows the requirements of the MexFRS bulletin E-1,Agriculture, which establishes the rules for recognizing, valuing, presenting and disclosing biological assets and agricultural products.
This bulletin establishes that biological assets and the agricultural products (the latter at the time of their harvesting) are to be valued at their fair value, net of estimated costs at point of sale. Also, the bulletin establishes that whenever the fair value cannot be determined in a reliable, verifiable and objective manner, the assets are to be valued at their production cost, net of accumulated impairment, if any.
In accordance with U.S. GAAP, under FASB ASC 905 Topic “Agriculture”, sub-topic 330 Inventory biological assets and agricultural products are to be valued at cost. Accordingly, the reconciliation between MexFRS and U.S. GAAP (loss) income for 2008, 2009, 2010 and 20102011 includes a reversal of the unrealized gain (loss) on valuation of biological assets and agricultural products at fair value, which shows a decrease of $(16,358) andan increases of $7,214 and increases of $32,016 and a decrease of ($2,558), respectively.
Capitalized interest:
Under MexFRS D-6 starting January 1, 2007, capitalized interest is comprehensively measured in order to include: (i) the interest expense, plus (ii) any foreign exchange fluctuations, and less (iii) the related monetary position result, which was applicable until December 31, 2007, because of the adoption of the new MexFRS B-10 that came into effect on January 1, 2008. Although the Company adopted the policy of capitalizing the comprehensive result of financing on assets under construction, as a result of MexFRS D-6, during 2008, 2009, 2010 and 2010,2011, there were no construction projects identified with interest expense related to debt, as described in Note 2h.
Under U.S. GAAP, interest expense incurred during the qualifying construction period must be considered as an additional cost of qualifying constructed assets to be capitalized in property, plant and equipment and depreciated over the lives of the related assets. The amount of the capitalized interest for U.S. GAAP purposes was determined by applying the weighted average interest rate of financing. During 2008, 2009, 2010 and 2010,2011, there were no qualifying construction projects.
Deferred income tax and deferred employee statutory profit sharing:
Under MexFRS, the Company determines deferred income taxes in a manner similar to U.S. GAAP, using the asset and liability method, by applying the enacted statutory income tax rate. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards.carry forwards. The effect on deferred taxes of a change in tax rates is recognized in results of operations in the period that includes the enactment date. For MexFRS presentation purposes, deferred tax assets and liabilities are long-term items, while under U.S. GAAP, deferred tax assets and liabilities should be classified as short-term or long-term items depending on the nature of the caption that gives rise to such deferred tax assets and liabilities.
Under U.S. GAAP, as of December 31, 20092010 and 2010,2011, the long term deferred tax liability is $1,814,053$1,825,344 and $1,825,344$2,132,907 respectively. Short term deferred tax liability is $486,738$526,395 and $526,395$608,009 as of December 31, 20092010 and 2010,2011, respectively.
The deferred tax adjustment included in the net (loss) income and stockholders’ equity reconciliations includes the effect of deferred taxes on all U.S. GAAP adjustments reflected in the reconciliation from MexFRS to U.S. GAAP. Under U.S. GAAP, the Company recognizes a deferred tax liability associated with profits originated during the simplified regime that have not paid income tax previously, but would be subject to taxation upon future distributions under the Mexican tax law. Due to the accounting change under MexFRS in 2008,2009, this concept generates a reconciling difference to U.S. GAAP. The deferred tax liability under this concept amounted $274,953$309,106 and $309,106$270,029 as of December 31, 20092010 and 2010,2011, respectively.
The Company is required to pay Employee Statutory Profit Sharing (ESPS) in accordance with Mexican labor law. In accordance with MexFRS D-3 “Employee Benefits”, deferred ESPS is determined under the asset and liability method at the statutory rate of 10%. This methodology is similar to the approach under FASB ASC Topic 740 “Income Taxes” (SFAS 109Accounting for Income Taxes).
The Company’s reconciliations between MexFRS and U.S. GAAP do not include deferred ESPS since there is no amount to be booked.
Under MexFRS, current ESPS is recorded within other expenses, net. Under U.S. GAAP, ESPS is classified as selling, general and administrative expenses.
Severance indemnities
MexFRS D-3 “Labor Obligations” requires among other things, that employee benefits should be classified in four main categories; direct short-term and long term, termination and post-employment benefits. MexFRS D-3 establishes a maximum five-year period for amortizing unrecognized/unamortized items while actuarial gains or losses may be recognized as earned or incurred. Unlike termination benefits, post-employment benefit actuarial gains or losses may be immediately recognized in results of operations or amortized over the expected service life of the employees.
Under U.S. GAAP, FASB ASC Topic 712 “Compensation-Non retirement PostemploymentPost employment Benefits”required that a liability for certain termination benefits provided under an ongoing benefit arrangement such as statutorily mandated severance indemnities should be recognized in results of operations when the employers’ obligations relates to rendered services, the likelihood of future settlement is probable and the liability can be reasonably estimated. Therefore, as of December 31, 2008, 2009, 2010 and 2010,2011, the amounts of past service cost amortized under MexFRS was $4,828, $4,828 and $4,828,$4,667, respectively. Such amounts have been reversed for U.S. GAAP since these amounts had been already recognized in the results of operations under U.S. GAAP. These amounts were included in the U.S. GAAP reconciliation of net income and equity.
FASB ASC Topic 715 “Compensation-Retirement Benefits”
Under MexFRS D-3, companies must amortize transition obligations/benefits, over a maximum period of 5 years. This requirement has resulted in an increase in net periodic pension cost under MexFRS which is being reversed for US GAAP purposes.
FASB ASC Topic 715 “Compensation-Retirement Benefits”, requires companies to recognize the funded or unfunded status of defined benefit pension and other postretirement plans as a net asset or liability and to recognize changes in that funded or unfunded status in the year in which the changes occur through accumulated other comprehensive income to the extent those changes are included in the net periodic cost. The funded status reported on the balance sheet as of December 31, 2008, 2009, 2010 and 20102011 under FASB ASC Topic 715 “Compensation-Retirement Benefits” was measured as the difference between the fair value of plan assets and the projected benefit obligation on a plan-by-plan basis.
The components of the plan funded status that is reflected in the consolidated balance sheets as of December 31, 20092010 and 20102011 are as follows:
| 2009 | ||||||||||||||||
Pension plan | Seniority premium | Severance | Total | |||||||||||||
| Projected benefit obligation | $ | 202,186 | 66,711 | $ | 49,059 | $ | 317,956 | |||||||||
| Market value of plan assets | (223,778 | ) | - | - | (223,778 | ) | ||||||||||
| (Funded) unfunded defined benefit plan (asset) liability | $ | (21,592 | ) | 66,711 | $ | 49,059 | $ | 94,178 | ||||||||
| 2010 | ||||||||||||||||
| Pension plan | Seniority premium | Severance | Total | |||||||||||||
| Projected benefit obligation | $ | 229,609 | 83,871 | $ | 57,286 | $ | 370,766 | |||||||||
| Market value of plan assets | (256,382 | ) | - | - | (256,382 | ) | ||||||||||
| (Funded) unfunded defined benefit plan (asset) liability | $ | (26,773 | ) | 83,871 | $ | 57,286 | $ | 114,384 | ||||||||
| 2011 | ||||||||||||||||
| Pension plan | Seniority premium | Severance | Total | |||||||||||||
| Projected benefit obligation | $ | 203,164 | 76,382 | $ | 61,025 | $ | 340,571 | |||||||||
| Market value of plan assets | (250,855 | ) | - | - | (250,855 | ) | ||||||||||
| (Funded) unfunded defined benefit plan (asset) liability | $ | (47,691 | ) | 76,382 | $ | 61,025 | $ | 89,716 | ||||||||
The asset allocations of the Company’s pension benefits as of December 31, 20092010 and 20102011 measurement dates were as follows:
| Pension benefits (Level 2) | ||||||||
| 2009 | 2010 | |||||||
| Asset category: | ||||||||
| Debt securities | $ | 223,778 | $ | 256,382 | ||||
| Total | $ | 223,778 | $ | 256,382 | ||||
| Pension benefits (Level 2) | ||||||||
| Asset category: | 2010 | 2011 | ||||||
| Debt securities | $ | 256,382 | $ | 250,855 | ||||
| Total | $ | 256,382 | $ | 250,855 | ||||
Goodwill:
Beginning January 1, 2005, due to the adoption of MexFRS B-7, goodwill is no longer amortized, but rather is subject to annual impairment test, and also in interim periods when impairment indicators are noted.
For U.S. GAAP purposes, goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC Topic 350, “Intangibles – Goodwill and Other”. Up to December 31, 2004, the Company recognized an accumulated effect (increase in equity) of $58,716 due to the reversal of amortization of goodwill recognized under MexFRS, restoring the goodwill amount in order to comply with U.S. GAAP. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
The Company performs its annual impairment review of goodwill at December 31, and when a triggering event occurs between annual impairment tests. In 2008, 2009, 2010 and 2010,2011, no triggering events occurred and the annual impairment test did not reflect any impairment concern.
Reporting comprehensive income:
For U.S. GAAP reconciliation purposes, the Company has adopted the FASB ASC Topic 220 “Comprehensive Income”, which establishes rules for reporting and disclosure of comprehensive income and its components. Comprehensive income consists of current year net (loss) income plus (less) the change in stockholders’ equity resulting from transactions and other events and circumstances from non-owner sources. For the 2008, 2009, 2010 and 20102011 fiscal years the components of comprehensive income are the net (loss) income, the changes in fair value of the effective portion of derivative financial instruments, and the effect of labor obligation under FASB ASC Topic 715 “Compensation-Retirement Benefits”.net of taxes. In addition, for the 2011 fiscal year there is a translation effect of foreign subsidiary as part of the comprehensive income. Comprehensive income effects and amounts under US GAAP are disclosed in the consolidated statements of stockholder´s equity in accordance with US GAAP.
Impairment of long-lived assets:
Under US GAAP, an impairment test on long-lived assets requires a two-step process to determine the amount of any impairment loss to be recognized when events and circumstances indicated that the carrying amount may not be recoverable. The first step of this test requires the determination of whether the carrying amount of the long-lived asset is recoverable through the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). The second step requires the determination of the amount of impairment loss to be recognized by comparing the carrying amount of the asset (asset group) to its fair value. Mexican FRS does not require a two-step impairment evaluation process for long-lived assets but rather, a direct comparison is made between the recoverable amount (higher of value in use and fair value less cost to sale) and carrying value. Since there were no impairment indicators or triggering events, no impairment losses on long-lived assets have been recorded in 2008, 2009, 2010 and 2010.2011.
| F-93 |
Valuation and Qualifying accounts:
Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Write-off’s for 2008, 2009, 2010 and 20102011 were as follows:
Balance at beginning of period | Charged to cost and expenses | Deductions | Balance at end of period | ||||||||||||||
| Allowance for | |||||||||||||||||
| doubtful accounts | 2010 | $ | 29,801 | $ | 18,743 | $ | (15,554) | $ | 32,990 | ||||||||
| 2009 | $ | 28,320 | $ | 12,647 | $ | (11,166) | $ | 29,801 | |||||||||
| 2008 | $ | 36,154 | $ | 7,637 | $ | (15,471) | $ | 28,320 | |||||||||
| Balance at beginning of period | Business Acquisition (OK Industries) | Charged to cost and expenses | Deductions | Balance at end of period | ||||||||||||||||||||
| Allowance for doubtful accounts | 2011 | $ | 32,990 | $ | 699 | $ | 15,298 | $ | (10,450 | ) | $ | 38,537 | ||||||||||||
| 2010 | $ | 29,801 | $ | - | $ | 18,743 | $ | (15,554 | ) | $ | 32,990 | |||||||||||||
| 2009 | $ | 28,320 | $ | - | $ | 12,647 | $ | (11,166 | ) | $ | 29,801 | |||||||||||||
The Company does not have any off-balance-sheet credit exposure related to its customers.
Investment Securities
All rights and obligations arising from primary investment securities are recognized on the balance sheet and the company classifies its investment securities depending on the purpose for which the securities were acquired: (i) held-to-maturity, (ii) trading, or (iii) available for sale. Investments in these instruments are reflected on the line-item “current primary investment securities” within cash and investments, denominated in Mexican peso and US dollar.
Trading securities, except held-to-maturity, are recorded at fair value, where peso-denominated debt securities are taken from the bank statements which are based on the information of the local price vendors, while US-denominated debt securities are based on diversified sources. Held-to-maturity securities are recorded at amortized cost. Changes in the carrying amounts of trading securities, including the related costs and yields are included under comprehensive financial results. Gains or losses arising from changes in the fair value of available-for-sale securities (less the corresponding yield) non functional currency denominated and foreign exchange gain or loss, in the case of equity securities, as well as the related monetary position gain or loss, as applicable, are reported as a comprehensive income (loss) item within stockholders’ equity.
Furthermore, where evidence exists that a financial asset held-to-maturity shall not be recovered in full, the expected loss (impairment) is recognized in the statement of operations.
Several securities were no longer traded actively in the financial markets, hence the Company, in accordance with FASB ASC Topic 320 “Investment-Debt and Equity Securities”, transferred Commercial Paper classified as trading securities to the Held-To-Maturity category starting October 1, 2008.
| F-94 |
Derivative Financial Instruments and Risk Hedging Activities
The Company accounts for derivatives and hedging activities in accordance with FASB ASC Topic 815, “Derivatives and Hedging”, which requires entities to recognize all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated into qualified fair value hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or if a qualified cash flow hedging relationship is designated, the effective portion changes on the fair value of the derivatives are recognized in accumulated other comprehensive income. Amounts are reclassified from accumulated other comprehensive income into earnings when the hedged item is recognized in earnings affecting the same revenue or expense item where the hedged item impacts.
The Company enters into transactions denominated in foreign currencies, buying and selling options. These derivatives are not designated as hedging instruments for financial reporting purposes, thus the changes in their fair values are recorded in earnings each period.
Relative to grain usage, the Company enters into derivative contracts designated to hedge firm commitments not recognized as assets or liabilities in the balance sheet (fair value hedges). However, derivatives not designated under a hedging relationship or those do not qualify under strict hedge accounting criteria, are accounted for as trading instruments with changes in fair value recorded in earnings each period. As of November 1st, 2011, the Company acquired OK Industries Inc., and with this acquisition the Company acquired open positions on grain options listed in CBOT (Chicago Board of Trade). The changes in the fair value of these instruments have been also recorded in earnings each period since that date.
| F-95 |
For all qualifying hedging relationships, the Company formally documents the hedging relationship, including its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness.
For derivative instruments that are designated and qualify for a hedging relationship under the fair value hedge accounting model, the Company recognizes the changes in fair value of the derivative directly in earnings each period, as well as the changes in fair value attributable to the hedged risk of the hedged item, that is grain firm commitments (off-balance sheet executory contracts) which latter become recognized assets (grain inventory).
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting changes in fair value or if the derivative expires or is sold, terminated, or exercised, or if the derivative is no longer designated as a hedging instrument because the management determines that designation of the derivative as a hedging instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and the derivative instrument remains outstanding, the Company continues to carry the derivative instrument at its fair value on the balance sheet and recognizes any subsequent changes in its fair value within current earnings.
On January 1, 2009, the Company adopted the provisions of SFAS 161,Disclosures about Derivative Instruments and Hedging Activities (included in Topic 815-10:Derivatives and Hedging – Overall), which amends the disclosure requirements for derivative instruments and hedging activities.
The Company has implemented fair value hedge relationships with firm commitments as hedged item, using bought options on grain futures. Hedge accounting for these relationships does require the recognition of either an asset (gain) or a liability (loss) attributable to the hedged risk (intrinsic changes only) on the balance sheet against current earnings where the changes in the fair value hedge derivatives effects are also recognized and do compensate.
| F-96 |
When the same bought options on corn grain futures are redesigned as to hedge a portion of corn/sorghum inventories, once these became recognized assets, the changes in these inventory’s portion fair values adjust the carrying value of such grain inventories against current earnings, where the changes in fair value of the designated derivatives offset in current earnings these decreases in the inventories’ fair value. The cash flow statement is affected when the derivatives’ cash flow from early exercises or those that end up with intrinsic value are collected from ASERCA.
During 2010,2011, the Company took long positions in 8,6306,767 put option contracts on corn futures listed in the CBOT (each conveys 5,000 bushels), which gave the right to the Company for selling 1,096,096859,477 metric tons at certain strike price 5,7475,493 of these put option contracts reached their maturity during 20102011 and provided to the Company a realized gain at correspondent expirations of $2.4$1.9 millions of dollars which was recognized in current earnings into cost of goods sold.
Derivative
Financial Instruments and Risk Hedging Activities:As of December 31, 20102011 and 2009,2010, the Company used commodity derivatives to manage its exposure to commodity prices, and foreign exchange rate derivatives. The Company does not enter into derivative instruments for any purpose other than hedging its exposure to these commodity prices and foreign currency exchange rate fluctuations, however, derivatives that did not qualify for hedge accounting were accounted as trading instruments. By the end of 2008 and amended in 2010, the Company did establish a Corporate Policy associated to the use of foreign exchange derivatives, where instruments entered in the amount of up to 30 Million USD are approved by the Risk Committee, while entering into an amount higher than this amount does require Board’s approval.
By using derivative financial instruments to hedge exposures to changes in commodity prices and exchange rate fluctuations, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. Positive fair value derivatives are carried as financial assets on the balance sheet, while negative fair values are presented as current liabilities on the balance sheet.
| F-97 |
The Company maintains a commodity-price-risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. The manufacturing of the Company’s products requires a significant volume of grain. Price fluctuations in grain cause market values of grain inventory to differ from its cost and cause the actual purchase price of the grain to differ from the anticipated price.
As of December 31, 20102011 and 2009,2010, the Company has periodically entered into grain futures and options on futures (F&O) contracts traded at the CBOT (Chicago Board of Trade) through New Edge, and Jefferies Bache a F&O brokerbrokers on behalf of the Company, to economically hedge a portion of its anticipated purchases of grains, against the risk associated with fluctuations in market prices. These F&O contracts were not designated as hedges; thus, changes in fair value were recognized directly in earnings each period.
Also, the Company has entered into options on futures of corn, as to hedge the downward changes in the prices of grains, corn and sorghum, when the pricing of these are fixed through firm commitments, based on a Mexican Government sponsored program named “Agricultura por Contrato” managed by ASERCA (Apoyos y Servicios a la Comercialización Agropecuaria), a governmental entity ascribed to Mexico’s Secretary of Farming and Agriculture (SAGARPA, Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación). This program basically represents a subsidy to the Company, through which, a commodities-related price hedging program scheme is offered to both farmers and agro-business entities such as the Company. The ASERCA program hashad two participating modalities: during 2011 for which the Company applied (i) 0%10% of the payment of the option’s premium and 100% of the benefit with a 60% discount on the amount of the initial premium, or (ii) 50% of the payment of the option’s premium, and 100% of the benefit in the payment of the premium of the bought options.
Also, in this program ASERCA plays the role of the intermediary between the Company and the CBOT, but stands as the counterparty. These are put options on futures listed at the CBOT and are designated as fair value hedging relationships. The changes in the fair value of these options and the fair value of the hedged item (firm commitments) are recognized in earnings. Changes in the fair value of the hedged item attributable to the hedged risk, that were recognized within the consolidated balance sheet as either an asset or liability from the grain firm commitment’s valuation or as an adjustment to the carrying value of the inventory when the edged item is the grain inventory during the hedging relationship, where the firm commitment’s fair value effects are subsequently reclassified as hedge adjustments to cost of goods sold when the related inventory layer affect earnings as cost of goods sold.
As of December 31, 20092010 and 2010,2011, the Company had entered into foreign currency exchange rate derivatives, traded with the following financial institutions as of December 31, 2009:2010: UBS Group and Morgan StanleySantander (México) and as of December 31, 2010:2011: UBS Group Morgan Stanley and Santander (México),Morgan Stanley, S. A. These structured derivatives were not designated in a hedging relationship, hence changes in the fair value for these instruments were recognized in earnings each period. Likewise, the Company entered into over-the-counter (OTC) grain derivatives with Cargill Incorporated and exchange traded derivatives through, New Edge and Jefferies Bache which were not designated as hedges and consequently, the changes in their fair values were also recognized in earnings each period.
As of December 31, 20092010 and 2010,2011, the Company had not established any current hedging relationship under the cash flow hedge model; hence there is no derivatives effect in other comprehensive income as of these dates.
Fair Value Measurements and the Fair Value Option of Financial Instruments:
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
When feasible, the Company uses quoted market prices to determine fair values. Where quoted market prices are not available, the fair value is internally derived based upon valuation methodologies with respect to the amount and timing of future cash flows and estimated discount rates adjusted for both counterparty and entity’s own risk. However, considerable judgment is required in interpreting market data to develop estimates of fair value, so the estimates including both counterparty and entity’s own risk adjustment are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange, but those are proxy estimates. The effect of using different market assumptions or estimation methodologies could be material to the estimated fair values. Fair value information presented herein is based on information available as of December 31, 2010 and 2009.2011. Fair values vary from period to period based on changes in a wide range of risk factors, including interest rates, credit quality, and market perceptions of value and as existing assets and liabilities run off and new transactions are entered into.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash, trade accounts receivable, other account receivables, other assets (nonderivatives), trade accounts payable, due to affiliated company, and accrued expenses (nonderivatives)
: The carrying amounts, at face value or cost plus accrued interest, reported in the consolidated balance sheets equal or approximate fair values, due to the short maturity of these instruments.Investment securities
: The Company classifies its investment securities depending on the purpose for which the securities were acquired, its holding period objective and the Company’s ability to hold them until maturity as either: (i) trading, (ii) held-to-maturity or (iii) available for sale. Trading securities and available for sale securities are recognized at fair value, determined by using quoted market prices multiplied by the quantity held when quoted market prices are available. Held-to-maturity securities are reported at amortized cost.Futures and Options on Futures of Grains
: Exchange listed futures and options on futures are valued using the closing (settlement) price observed at the CBOT on the last business day of the year.| F-100 |
Currency exchange rate options
: The fair value of these over-the-counter options is determined using option pricing models that value the potential for the option to become “in the money” through changes in currency exchange rate prices during the remaining term of the derivative. Inputs to that option pricing model reflect observable market data, including implied volatility determined by reference to exchange traded options on futures.Note payables to banks, long and short term debt
: The fair value of the Company’s long-term debt is measured using quoted offered-side prices when quoted market prices are available. If quoted market prices are not available, the fair value is determined by discounting the future cash flows of each instrument at rates that reflect, among other things, market interest rates and the Company’s credit standing. For long-term debt measurements, where there are not rates currently observable in publicly traded debt markets of similar terms to companies with comparable credit, the Company uses market interest rates and adjusts that rate for all necessary risks, including its own credit risk. In determining an appropriate spread to reflect its credit standing, the Company considers credit default swap spreads, bond yields of other long-term debt offered by the Company, and interest rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers as well as other banks that regularly compete to provide financing to the Company.In accordance to FASB ASC Topic 825 “Financial Instruments” (SFAS 107Disclosures about Fair Value of Financial Instruments), the following table presents both the carrying and estimated fair value of assets and liabilities considered financial instruments under this Statement. Others items like short and long term debt not carried and recognized originally at fair value are also presented in the table at their fair value. The disclosure excludes leases, pension and benefit obligations, as well as insurance policy reserve. Also as required, the disclosures excludes the effect of taxes, any premium or discount that could result from offering for sale at one time the entire holdings of a particular instrument, excess fair value associated with deposit with no fixed maturity and other expenses that would be incurred in a market transaction.
| F-101 |
According to the FASB ASC Topic 825, certain items are excluded from this table, such as receivables and payables that arises from the ordinary course of business.
| 2009 | 2010 | |||||||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||
| Cash | $ | 178,749 | $ | 178,749 | $ | 513,076 | $ | 513,076 | ||||||||
| Investment Securities | 2,315,534 | 2,315,534 | 3,655,247 | 3,655,247 | ||||||||||||
| Short term debt | (591,865 | ) | (662,392 | ) | (139,867 | ) | (163,405 | ) | ||||||||
| Long term debt | (371,970 | ) | (345,128 | ) | (507,053 | ) | (466,930 | ) | ||||||||
| 2010 | 2011 | |||||||||||||||
| Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||
| Cash | $ | 513,076 | $ | 513,076 | $ | 472,318 | $ | 472,318 | ||||||||
| Investment Securities | 3,655,247 | 3,655,247 | 2,565,661 | 2,565,661 | ||||||||||||
| Short term debt | (139,867 | ) | (163,405 | ) | (1,452,993 | ) | (1,477,537 | ) | ||||||||
| Long term debt | (507,053 | ) | (466,930 | ) | (384,370 | ) | (363,146 | ) | ||||||||
Fair Value Hierarchy:
FASB ASC Topic 820 “Fair Value Measurements and Disclosures” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
The Company adopted FASB ASC Topic 820 on January 1, 2008 for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, the Company adopted the provisions of FASB ASC Topic 820 for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| · | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. |
| · | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include investment securities that are not actively traded and derivative contracts. |
| · | Level 3 inputs for the asset or liability are unobservable and significant to the overall fair value measurement. |
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The hierarchy requires the use of observable market data when available. In the case of investment securities, the instruments are classified in Level 2. The CBOT derivatives (counterparties New Edge and ASERCA)Jefferies Bache) are classified in Level 1. Currency options and OTC grain derivatives (Cargill)(Cargill and ASERCA) are classified in Level 2.
The following fair value hierarchy table presents assets and liabilities that are measured at fair value on a recurring basis at December 31, 20092010 and 20102011 (including only items that are required to be measured at fair value, items for which the fair value option has be elected, are not presented due that the Company did not elect the Fair Value Option):
| At December 31, 2010 | Total asset/ liabilities at Fair Value | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Trading Securities | $ | 3,655,247 | - | 3,655,247 | - | |||||||||||
| Derivative instruments | 3,841 | 3,573 | 268 | - | ||||||||||||
| Total | $ | 3,659,088 | 3,573 | 3,655,515 | - | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivative instruments | $ | (568 | ) | (282 | ) | (286 | ) | - | ||||||||
| At December 31, 2011 | Total asset/ liabilities at Fair Value | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Trading Securities | $ | 2,565,661 | - | 2,565,661 | - | |||||||||||
| Derivative instruments | 10,975 | 760 | 10,216 | - | ||||||||||||
| Total | $ | 2,576,636 | 760 | 2,575,877 | - | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivative instruments | (768 | ) | (768 | ) | - | - | ||||||||||
| Total | $ | (768 | ) | (768 | ) | - | - | |||||||||
| F-104 |
| At December 31, 2009 | Total asset/ liabilities at Fair Value | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Trading securities | $ | 2,315,662 | - | 2,315,662 | - | |||||||||||
| Derivative instruments | 11,272 | 8,381 | 2,891 | - | ||||||||||||
| Total | $ | 2,326,934 | 8,381 | 2,318,553 | - | |||||||||||
| At December 31, 2010 | Total asset/ liabilities at Fair Value | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Trading Securities | $ | 3,655,247 | - | 3,655,247 | - | |||||||||||
| Derivative instruments | 3,841 | 3,573 | 268 | - | ||||||||||||
| Total | $ | 3,659,088 | 3,573 | 3,655,515 | - | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivative instruments | (568 | ) | (282 | ) | (286 | ) | - | |||||||||
| Total | $ | (568 | ) | (282 | ) | (286 | ) | - | ||||||||
Fair Value Option
FASB ASC Topic 825-10 provides entities with an option to measure many financial instruments and certain other items at fair value. Under ASC Topic 825-10, unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting period. This fair value option must be applied on an instrument-by-instrument basis with changes in fair value reported in earnings. After initial adoption, the election can be made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made. The adoption of FASB ASC Topic 825-10 did not have an impact to the Company’s financial position and results of operations, as the Company did not elect the fair value option for eligible items.
Income taxes
a) Tax rate reconciliation:
Until December 31, 2010, all income before income tax and related income tax expense (benefit) expense are from Mexican sources.
Pre-tax income from domestic and foreign operations is comprised as follow:
| 2009 | 2010 | 2011 | ||||||||||
| Pre-tax income from domestic operations | $ | 1,193,751 | 2,524,746 | 122,283 | ||||||||
| Pre-tax income from foreign operations | - | - | 972,486 | |||||||||
| Total | $ | 1,193,751 | 2,524,746 | 1,094,769 | ||||||||
Income tax (IT) expense (benefit) expense attributable to (loss) income before income taxestax differed from the amounts computed by applying the Mexican statutory rate of 19% for 2008 and 2009 and 21% for 2010 and 2011, respectively, to (loss) income before income tax, as a result of the items shown below:
| 2009 | 2010 | 2011 | ||||||||||
| Computed “expected” tax (benefit) expense | $ | 226,813 | 530,197 | 229,902 | ||||||||
| Increase (decrease) in income taxes resulting from: | ||||||||||||
| Effects of inflation, net | (50,596 | ) | (66,504 | ) | (71,189 | ) | ||||||
| Non-deductible expenses | 4,538 | 8,032 | 3,411 | |||||||||
| Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates | 192,614 | - | - | |||||||||
| Effect of companies outside simplified regime | 38,163 | 31,661 | 210,009 | |||||||||
| Change in the valuation , allowance of deferred tax assets | 8,130 | 17,164 | (32,312 | ) | ||||||||
| (Reversal) addition of deferred tax liability related to simplified regime | (9,273 | ) | 34,153 | (39,077 | ) | |||||||
| Gain resulting from Bargain Purchase | - | - | (385,799 | ) | ||||||||
| Other, net | (15,078 | ) | (7,908 | ) | (861 | ) | ||||||
| IT expense (benefit) | $ | 395,311 | 546,795 | (85,916 | ) | |||||||
Income tax expense (benefit) for the years ended December 31, 2008, 2009, and 2010,
| 2008 | 2009 | 2010 | ||||||||||
| Computed “expected” tax (benefit) expense | $ | (216,527 | ) | 226,813 | 530,197 | |||||||
| Increase (decrease) in income taxes resulting from: | ||||||||||||
| Effects of inflation, net | (69,435 | ) | (50,596 | ) | (66,504 | ) | ||||||
| Non-deductible expenses | 3,646 | 4,538 | 8,032 | |||||||||
| Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates | - | 192,614 | - | |||||||||
| Effect of companies outside simplified regime | (31,413 | ) | 38,163 | 31,661 | ||||||||
| Change in the valuation allowance of deferred tax assets | 23,402 | 8,130 | 17,164 | |||||||||
| (Reversal) addition of deferred tax liability related to simplified regime | (4,354 | ) | (9,273 | ) | 34,153 | |||||||
| Other, net | 31,424 | (15,078 | ) | (7,908 | ) | |||||||
| IT (benefit) expense | $ | (263,257 | ) | 395,311 | 546,795 | |||||||
| 2009 | 2010 | 2011 | ||||||||||
| Current tax | $ | 103,853 | $ | 495,846 | $ | 69,586 | ||||||
| Deferred tax | 291,458 | 50,949 | (155,502 | ) | ||||||||
| $ | 395,311 | $ | 546,795 | $ | (85,916 | ) | ||||||
Deferred tax benefit for the Consolidated Financial Statements
| F-106 |
b) Deferred income tax-
Based on the financial projections of taxable income, the Company estimated that it will pay income tax (IT) in future years; therefore, deferred income tax effects as of December 31, 20092010 and 20102011 have been accounted for reflecting the IT basis.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 20092010 and 2010,2011, are presented below:
| 2009 | 2010 | |||||||
| Deferred tax assets: | ||||||||
| Accounts payable | $ | 438,174 | 493,645 | |||||
| Labor obligations | 24,224 | 29,785 | ||||||
| ESPS payable | 11,349 | 11,311 | ||||||
| Effects on derivative financial instruments | - | 1,635 | ||||||
| Others | - | 1,006 | ||||||
| Recoverable AT | 4,654 | 4,859 | ||||||
| Tax loss carryforwards | 89,698 | 17,698 | ||||||
| Total gross deferred tax assets | 568,099 | 559,939 | ||||||
| Less valuation allowance | 36,145 | 53,309 | ||||||
| Net deferred tax assets | 531,954 | 506,630 | ||||||
| Deferred tax liabilities: | ||||||||
| Inventories | 816,903 | 827,540 | ||||||
| Accounts receivable | 170,667 | 190,082 | ||||||
| Property, plant and equipment, net | 1,551,675 | 1,515,271 | ||||||
| Other deductions | 16,261 | 16,370 | ||||||
| Effects on derivative financial instruments | 2,286 | - | ||||||
| Additional deferred income tax liability related to simplified regime | 274,953 | 309,106 | ||||||
| Total deferred tax liabilities | 2,832,745 | 2,858,369 | ||||||
| Net deferred tax liability | $ | 2,300,791 | 2,351,739 | |||||
| 2010 | 2011 | |||||||
| Deferred tax assets: | ||||||||
| Accounts payable | $ | 493,645 | 649,678 | |||||
| Labor obligations | 29,785 | 42,949 | ||||||
| ESPS payable | 11,311 | 9,002 | ||||||
| Effects on derivative financial instruments | 1,635 | - | ||||||
| Others | 1,006 | - | ||||||
| Recoverable AT | 4,859 | 5,044 | ||||||
| Tax loss carryforwards | 17,698 | 141,421 | ||||||
| Total gross deferred tax assets | 559,939 | 848,094 | ||||||
| Less valuation allowance | 53,309 | 20,997 | ||||||
| Net deferred tax assets | 506,630 | 827,097 | ||||||
| Deferred tax liabilities: | ||||||||
| Inventories | 827,540 | 1,040,562 | ||||||
| Accounts receivable | 190,082 | 204,213 | ||||||
| Property, plant and equipment, net | 1,515,271 | 2,031,296 | ||||||
| Other deductions | 16,370 | 20,211 | ||||||
| Effects on derivative financial instruments | - | 1,702 | ||||||
| Additional deferred income tax liability related to simplified regime | 309,106 | 270,029 | ||||||
| Total deferred tax liabilities | 2,858,369 | 3,568,013 | ||||||
| Net deferred tax liability | $ | 2,351,739 | 2,740,916 | |||||
The valuation allowance for deferred tax assets as of January 1, 20092010 and 20102011 amounted to $28,015$36,145 and $36,145,$53,309 respectively. The net change in the total valuation allowance for the years ended December 31, 20092010 and 2010,2011, was an increase of $8,130$17,164 and $17,164a decrease of $(32,312), respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance at December 31, 2010 was primarily2011 is related to cover asset tax, loss carryforwards and part of labor obligations that, in the judgment of management, are not more likely that not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Taxable income of the Company on a consolidated basis for the year ended December 31, 20102011 was $2,521,770.$1,094,770. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2010.2011. The amount of the deferred tax asset considered realizable, however, could be reduced in the near future if estimates of future taxable income during the carryforward period are reduced.
The Company has not accounted for deferred income taxes on the temporary differences resulting from investments in subsidiaries since it meets the criteria provided by ASC 740 “Income taxes” (Accounting Principles Board Opinion 23 (APB 23)). The Company considers these investments to be indefinitely held. A deferred tax liability will be recognized once the Consolidated Financial Statements
Accounting for uncertainty in income taxes:
FASB Interpretation No. 48“Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No.109”(included in FASB ASC Topic 740 Income taxes – Overall)(FIN 48) requires that an entity recognizes in the consolidated financial statements the effect of income tax positions, only if those positions are more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The adoption of FIN 48 on January 1, 2007 did not have any effect on the Company’s consolidated financial statements. The Company’s accounting policy is to accrue interest and penalties related to unrecognized tax benefits, if and when required, as a component of other income (expense), in the consolidated statements of operations.
For the years ended December 31, 2008, 2009, 2010 and 2010,2011, the Company did not have any unrecognized tax benefits and thus no interest and penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months. The income tax returns of the Company and its Mexican subsidiaries remain subject to examination by the Mexican tax authorities for the tax years beginning in 2006.
| F-109 |
Business and credit concentrations:
The Company’s products are sold to a large number of customers without significant concentration with any of them; likewise, there is no significant supplier concentration.
Summary of adjustments to reconcile MexFRS and U.S. GAAP:
The following is a summary of net (loss) income adjusted to take into account certain material differences between MexFRS and U.S. GAAP:
| Years ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| Net (loss) income as reported under MexFRS | $ | (886,037 | ) | $ | 809,045 | $ | 1,986,326 | |||||
| Adjustments to reconcile net (loss) income to U.S. GAAP: | ||||||||||||
| Biological assets and agricultural products valuation at fair value | (16,358 | ) | 7,214 | 32,016 | ||||||||
| Depreciation of capitalized interest | (3,683 | ) | (4,724 | ) | (4,724 | ) | ||||||
| Severance cost | 4,828 | 4,828 | 4,828 | |||||||||
| Pensions and labor liabilities | 3,802 | 2,882 | 2,885 | |||||||||
| Deferred income tax on US GAAP adjustments | (15,116 | ) | 1,774 | (9,227 | ) | |||||||
| Fair value credit valuation adjustment effect | 31,852 | (31,852 | ) | |||||||||
| Additional deferred income tax liability related to simplified regime | 4,354 | 9,273 | (34,153 | ) | ||||||||
| Less: non-controlling interest income (loss) | 6,989 | (11,445 | ) | (2,976 | ) | |||||||
| Net controlling interest (loss) income under U.S. GAAP | $ | (869,369 | ) | $ | 786,995 | $ | 1,974,975 | |||||
| Other comprehensive income, net of tax | (61,836 | ) | 4,469 | 3,910 | ||||||||
| Comprehensive (loss) income | (931,205 | ) | 791,464 | 1,978,885 | ||||||||
| Weighted average number of shares outstanding (thousands) | 600,000 | 600,000 | 600,000 | |||||||||
| Net (loss) income per basic and diluted share | $ | (1.45 | ) | $ | 1.31 | $ | 3.29 | |||||
| Years ended December 31, | ||||||||||||
| 2009 | 2010 | 2011 | ||||||||||
| Net income as reported under MexFRS | $ | 809,045 | $ | 1,986,326 | $ | 159,138 | ||||||
| Adjustments to reconcile net income to U.S. GAAP: | ||||||||||||
| Biological assets and agricultural products valuation at fair value | 7,214 | 32,016 | (2,558 | ) | ||||||||
| Depreciation of capitalized interest | (4,724 | ) | (4,724 | ) | (4,724 | ) | ||||||
| Severance cost | 4,828 | 4,828 | 4,667 | |||||||||
| Pensions plan and Seniority Premium | 2,882 | 2,885 | 2,738 | |||||||||
| Bargain purchase | - | - | 994,585 | |||||||||
| Deferred income tax on US GAAP adjustments | 1,774 | (9,227 | ) | 6,308 | ||||||||
| Fair value credit valuation adjustment effect | (31,852 | ) | - | - | ||||||||
| Additional deferred income tax liability related to simplified regime | 9,273 | (34,153 | ) | 39,077 | ||||||||
| Depreciation of fair values of property, plant and equipment of OK Industries, Inc. | - | - | (18,546 | ) | ||||||||
| Less: non-controlling interest income | (11,445 | ) | (2,976 | ) | (2,097 | ) | ||||||
| Net controlling interest income under U.S. GAAP | $ | 786,995 | $ | 1,974,975 | $ | 1,178,588 | ||||||
| Other comprehensive income, net of tax | 4,469 | 3,910 | 86,198 | |||||||||
| Comprehensive income | 791,464 | 1,978,885 | 1,264,786 | |||||||||
| Weighted average number of shares outstanding (thousands) | 600,000 | 600,000 | 600,000 | |||||||||
| Net income per basic and diluted share | $ | 1.31 | $ | 3.29 | $ | 2.11 | ||||||
Classification differences:
There are certain other classification differences between MexFRS and U.S. GAAP, which are as follows:
| - | Effective beginning January 1, 2011, with retrospective application; under Mex FRS, advances for purchase of inventories (current assets) or property, plant and equipment and intangible assets (non-current assets), among others, must be reported under prepayments provided the benefits and risks inherent in the assets to be acquired or the services to be received have not yet been transferred to the entity. Furthermore, prepaid expenses must be reported based on the nature of the item to be acquired, either under current assets or non-current assets. Under US GAAP, advances for purchase of inventory, or property plant and equipment are still recorded as inventory or property plant and equipment, respectively. |
| - | Employee statutory profit sharing expenses are classified as other expenses under MexFRS and as selling, general and administrative expenses under U.S. GAAP. |
| - | Tax incentives for 2009 |
The reconciliation of the controlling interest between MexFRS and U.S. GAAP is as follows:
| Years ended December 31 | ||||||||
| 2009 | 2010 | |||||||
| Controlling interest equity as reported under MexFRS | $ | 14,588,254 | $ | 16,316,355 | ||||
| Adjustments to reconcile controlling interest equity to U.S. GAAP: | ||||||||
| Biological assets and agricultural products valuation at fair value | (104,528 | ) | (72,512 | ) | ||||
| Accumulated differences between the financing cost capitalized for MexFRS and U.S. GAAP purposes | 94,481 | 94,481 | ||||||
| Accumulated depreciation on capitalized interest | (29,002 | ) | (33,726 | ) | ||||
| Severance cost | (13,542 | ) | (8,714 | ) | ||||
| Pensions and labor liabilities | 13,992 | 20,787 | ||||||
| Reversal of accumulated amortization of goodwill | 58,716 | 58,716 | ||||||
| Deferred income taxes on U.S. GAAP adjustments | (4,256 | ) | (13,483 | ) | ||||
| Additional deferred income tax liability related to simplified regime | (274,953 | ) | (309,106 | ) | ||||
| Controlling interest equity as reported under U.S. GAAP | $ | 14,329,162 | $ | 16,052,798 | ||||
| Years ended December 31 | ||||||||
| 2010 | 2011 | |||||||
| Controlling interest' equity as reported under MexFRS | $ | 16,316,355 | $ | 16,208,897 | ||||
| Adjustments to reconcile controlling interest’ equity to U.S. GAAP: | ||||||||
| Biological assets and agricultural products valuation at fair value | (72,512 | ) | (75,070 | ) | ||||
| Accumulated differences between the financing cost capitalized for MexFRS and U.S. GAAP purposes | 94,481 | 94,481 | ||||||
| Accumulated depreciation on capitalized interest | (33,726 | ) | (38,450 | ) | ||||
| Severance cost | (8,714 | ) | (4,048 | ) | ||||
| Pension plan and Seniority Premium | 20,787 | 56,421 | ||||||
| Reversal of accumulated amortization of goodwill | 58,716 | 58,716 | ||||||
| Deferred income taxes on U.S. GAAP adjustments | (13,483 | ) | (17,044 | ) | ||||
| Additional deferred income tax liability related to simplified regime | (309,106 | ) | (270,029 | ) | ||||
| Translation effect of foreign subsidiary | - | 27,536 | ||||||
| Depreciation of fair value of property, plant and equipment of OK Industries, Inc. | - | (18,546 | ) | |||||
| Bargain purchase | - | 994,585 | ||||||
| Controlling interest’ equity as reported under U.S. GAAP | $ | 16,052,798 | $ | 17,017,449 | ||||
The effects of the above adjustments do not have any impact on non-controlling interest.
The consolidated statements of stockholders’ equity in accordance with U.S. GAAP is as follows:
| Capital stock | Additional Paid in- capital | Reserve for repurchase of shares | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total controlling interest equity | Non- controlling interest | Total stockholders´ equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2008 | $ | 2,294,927 | $ | 743,674 | $ | 159,455 | $ | 10,585,770 | $ | 2,838 | $ | - | $ | 13,786,664 | $ | 39,799 | $ | 13,826,463 | ||||||||||||||||||
| Cash dividends paid | - | - | - | (250,045 | ) | - | - | (250,045 | ) | - | (250,045 | ) | ||||||||||||||||||||||||
| Cash dividends paid to non-controlling interest | - | - | - | - | - | - | - | (1,035 | ) | (1,035 | ) | |||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income for the year | - | - | - | 786,995 | - | 786,995 | 786,995 | 11,445 | 798,440 | |||||||||||||||||||||||||||
| Components of other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Labor obligations under FASB ASC Topic 715 effect | - | - | - | - | - | 4,469 | - | - | - | |||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | - | - | - | - | 4,469 | 4,469 | 4,469 | - | 4,469 | |||||||||||||||||||||||||||
| Repurchase of shares | - | 1,079 | - | - | - | - | 1,079 | - | 1,079 | |||||||||||||||||||||||||||
| Comprehensive income | - | - | - | - | - | 791,464 | - | - | - | |||||||||||||||||||||||||||
| Balance at December 31, 2009 | $ | 2,294,927 | $ | 744,753 | $ | 159,455 | $ | 11,122,720 | $ | 7,307 | $ | - | $ | 14,329,162 | $ | 50,209 | $ | 14,379,371 | ||||||||||||||||||
| Capital stock | Additional Paid in- capital | Reserve for repurchase of shares | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total controlling interest equity | Non- controlling interest | Total stockholders´ equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2009 | $ | 2,294,927 | $ | 744,753 | $ | 159,455 | $ | 11,122,720 | $ | 7,307 | $ | - | $ | 14,329,162 | $ | 50,209 | $ | 14,379,371 | ||||||||||||||||||
| Cash dividends paid | - | - | - | (250,082 | ) | - | (250,082 | ) | - | (250,082 | ) | |||||||||||||||||||||||||
| Cash dividends paid to non-controlling interest | - | - | - | - | - | - | - | (1,186 | ) | (1,186 | ) | |||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income for the year | - | - | - | 1,974,975 | - | 1,974,975 | 1,974,975 | 2,976 | 1,977,951 | |||||||||||||||||||||||||||
| Components of other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Labor obligations under FASB ASC Topic 715 effect | - | - | - | - | - | 3,910 | - | - | - | |||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | - | - | - | - | 3,910 | 3,910 | 3,910 | - | 3,910 | |||||||||||||||||||||||||||
| Repurchase of shares | - | - | (5,167 | ) | - | - | - | (5,167 | ) | - | (5,167 | ) | ||||||||||||||||||||||||
| Comprehensive income | - | - | - | - | - | 1,978,885 | - | - | - | |||||||||||||||||||||||||||
| Balance at December 31, 2010 | 2,294,927 | $ | 744,753 | $ | 154,288 | $ | 12,847,613 | $ | 11,217 | $ | - | $ | 16,052,798 | $ | 51,999 | $ | 16,104,797 | |||||||||||||||||||
| Capital stock | Additional Paid in- capital | Reserve for repurchase of shares | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total controlling interest equity | Non- controlling interest | Total stockholders´ equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2010 | 2,294,927 | $ | 744,753 | $ | 154,288 | $ | 12,847,613 | $ | 11,217 | $ | - | $ | 16,052,798 | $ | 51,999 | $ | 16,104,797 | |||||||||||||||||||
| Cash Dividends paid | - | - | - | (299,926 | ) | - | - | (299,926 | ) | - | (299,926 | ) | ||||||||||||||||||||||||
| Cash dividends paid to non-controlling interest | - | - | - | - | - | - | (912 | ) | (912 | ) | ||||||||||||||||||||||||||
| Comprehensive income: | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net income for the year | - | - | - | 1,178,588 | - | 1,178,588 | 1,178,588 | 2,097 | 1,180,685 | |||||||||||||||||||||||||||
| Components of other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Translation effect of foreign subsidiary | - | - | - | - | - | 63,171 | 63,171 | - | 63,171 | |||||||||||||||||||||||||||
| Labor obligations under FASB ASC Topic 715 effect, net of tax effect of $9,869 | - | - | - | - | - | 23,027 | 23,027 | - | 23,027 | |||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | - | - | - | - | 86,198 | 86,198 | - | |||||||||||||||||||||||||||||
| Repurchase of shares | - | - | (209 | ) | - | - | - | (209 | ) | - | (209 | ) | ||||||||||||||||||||||||
| Comprehensive income | - | - | - | - | - | 1,264,786 | - | - | ||||||||||||||||||||||||||||
| Non-controlling interest acquired | - | - | - | - | - | - | - | 7,025 | 7,025 | |||||||||||||||||||||||||||
| Balance at December 31, 2011 | 2,294,927 | $ | 744,753 | $ | 154,079 | $ | 13,726,275 | $ | 97,415 | $ | - | $ | 17,017,449 | $ | 60,209 | $ | 17,077,658 | |||||||||||||||||||
(Continued)
| F-114 |
Capital stock | Additional Paid in- capital | Reserve for repurchase of shares | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total controlling interest equity | Non- controlling interest | Total stockholders´ equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2007 | $ | 2,294,927 | $ | 743,674 | $ | 159,455 | $ | 15,544,273 | $ | (3,670,580 | ) | $ | - | $ | 15,071,749 | $ | 46,788 | $ | 15,118,537 | |||||||||||||||||
| Cash dividends paid | - | - | - | (353,880 | ) | - | - | (353,880 | ) | - | (353,880 | ) | ||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
| Net loss for the year | - | - | - | (869,369 | ) | - | (869,369 | ) | (869,369 | ) | (6,989 | ) | (876,358 | ) | ||||||||||||||||||||||
| Components of other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Deficit from holding of non monetary assets | - | - | - | (3,735,254 | ) | 3,735,254 | - | - | - | - | ||||||||||||||||||||||||||
| Derivative financial instruments (net of deferred income tax effect of $23,204) | - | - | - | - | - | (98,922 | ) | (98,922 | ) | - | (98,922 | ) | ||||||||||||||||||||||||
| Other comprehensive income FASB ASC Topic 715 effect | - | - | - | - | - | 37,086 | 37,086 | - | 37,086 | |||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | - | - | - | - | (61,836 | ) | (61,836 | ) | - | - | - | |||||||||||||||||||||||||
| Comprehensive loss | - | - | - | - | - | (931,205 | ) | - | - | - | ||||||||||||||||||||||||||
| Balance at December 31, 2008 | $ | 2,294,927 | $ | 743,674 | $ | 159,455 | $ | 10,585,770 | $ | 2,838 | $ | - | $ | 13,786,664 | $ | 39,799 | $ | 13,826,463 | ||||||||||||||||||
| Cash dividends paid | - | - | - | (250,045 | ) | - | - | (250,045 | ) | - | (250,045 | ) | ||||||||||||||||||||||||
| Cash dividends paid to non-controlling interest | - | - | - | - | - | - | - | (1,035 | ) | (1,035 | ) | |||||||||||||||||||||||||
Capital stock | Additional Paid in- capital | Reserve for repurchase of shares | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total controlling interest equity | Non- controlling interest | Total stockholders´ equity | ||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income for the year | - | - | - | 786,995 | - | 786,995 | 786,995 | 11,445 | 798,440 | |||||||||||||||||||||||||||
| Components of other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income FASB ASC Topic 715 effect | - | - | - | - | - | 4,469 | - | - | - | |||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | - | - | - | - | 4,469 | 4,469 | 4,469 | - | 4,469 | |||||||||||||||||||||||||||
| Repurchase of shares | - | 1,079 | - | - | - | - | 1,079 | - | 1,079 | |||||||||||||||||||||||||||
| Comprehensive income | - | - | - | - | - | 791,464 | - | - | - | |||||||||||||||||||||||||||
| Balance at December 31, 2009 | $ | 2,294,927 | $ | 744,753 | $ | 159,455 | $ | 11,122,720 | $ | 7,307 | $ | - | $ | 14,329,162 | $ | 50,209 | $ | 14,379,371 | ||||||||||||||||||
| Cash dividends paid | - | - | - | (250,082 | ) | - | (250,082 | ) | - | (250,082 | ) | |||||||||||||||||||||||||
| Cash dividends paid to non-controlling interest | - | - | - | - | - | - | - | (1,186 | ) | (1,186 | ) | |||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income for the year | - | - | - | 1,974,975 | - | 1,974,975 | 1,974,975 | 2,976 | 1,977,951 | |||||||||||||||||||||||||||
| Components of other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income FASB ASC Topic 715 effect | - | - | - | - | - | 3,910 | - | - | - | |||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | - | - | - | - | 3,910 | 3,910 | 3,910 | - | 3,910 | |||||||||||||||||||||||||||
| Repurchase of shares | - | - | (5,167 | ) | - | - | - | (5,167 | ) | - | (5,167 | ) | ||||||||||||||||||||||||
| Comprehensive income | - | - | - | - | - | 1,978,885 | - | - | - | |||||||||||||||||||||||||||
| Balance at December 31, 2010 | $ | 2,294,927 | $ | 744,753 | $ | 154,288 | $ | 12,847,613 | $ | 11,217 | $ | - | $ | 16,052,798 | $ | 51,999 | $ | 16,104,797 | ||||||||||||||||||