UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
¨
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
OR
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the fiscal year ended December 31, 2007
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period from ____________ to ___________
¨
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Commission
File Number: 333-7480
INDUSTRIAS
BACHOCO, S.A.B. DE C.V.
(Exact
name of Registrant as specified in its charter)
Bachoco
Industries
(Translation
of Registrant’s name into English)
The
United Mexican States
(Jurisdiction
of incorporation
or
organization)
|
Avenida
Tecnológico No. 401
Ciudad
Industrial C.P. 38010
Celaya,
Guanajuato, México
(Address
of principal executive offices)
Daniel
Salazar Ferrer
Avenida
Tecnológico No. 401
Ciudad
Industrial C.P. 38010
Celaya,
Guanajuato, México
Telephone:
(+011-52-461-618-3555)
Facsimile:
(+011-52-461-611-6502)
(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 Series B Shares.
|
|
New
York Stock Exchange
|
Securities
registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
Indicate
the number of outstanding Shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:
Series
B
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 ¨ No
x
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
¨
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 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
filer x
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 Standards as issued by the
International Accounting Standards Board ¨
|
|
Other x |
If
“Other
has been checked in resonse to the previous question, indicate by check mark
which financial statement item the reigstrant has elected to
follow:
Indicate
by check mark which financial statement item the registrant has elected to
follow:
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 ¨ No
x
(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
¨
TABLE
OF CONTENTS
|
|
|
Page
|
PART
I
|
|
|
|
|
|
|
|
ITEM
1.
|
Identity
of Directors, Senior Management and Advisers
|
1
|
|
ITEM
2.
|
Offer
Statistics and Expected Timetable
|
1
|
|
ITEM
3.
|
Key
Information
|
1
|
|
ITEM
4.
|
Information
on the Company
|
10
|
|
ITEM
5.
|
Operating
and Financial Review and Prospects
|
25
|
|
ITEM
6.
|
Directors,
Senior Management and Employees
|
39
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|
ITEM
7.
|
Major
Stockholders and Related Party Transactions
|
46
|
|
ITEM
8.
|
Financial
Information
|
48
|
|
ITEM
9.
|
The
Offer and Listing
|
50
|
|
ITEM
10.
|
Additional
Information
|
53
|
|
ITEM
11.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
69
|
|
ITEM
12.
|
Description
of Securities Other Than Equity Securities
|
70
|
|
|
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PART
II
|
|
|
|
|
|
|
ITEM
13.
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Default,
Dividend Arrearages and Delinquencies
|
70
|
|
ITEM
14.
|
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
70
|
|
ITEM
15.
|
Controls
and Procedures
|
71
|
|
ITEM
16.
|
[Reserved]
|
73
|
|
ITEM
16A.
|
Audit
Committee Financial Expert
|
73
|
|
ITEM
16B.
|
Code
of Ethics
|
73
|
|
ITEM
16C.
|
Principal
Accountant Fees and Services
|
73
|
|
ITEM 16D.
|
Exemptions
from the Listing Standards for Audit Committees
|
74
|
|
ITEM
16E.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
74
|
|
|
|
|
PART
III
|
|
|
|
|
|
|
ITEM
17.
|
Financial
Statements
|
74
|
|
ITEM
18.
|
Financial
Statements
|
74
|
|
ITEM
19.
|
Exhibits
|
74
|
|
Index
of Exhibits
|
75
|
Industrias
Bachoco, S.A.B. de C.V. is a holding company with no operations other than
holding the stock of its subsidiaries. On April 2, 2007, we changed our name
from Industrias Bachoco S.A. de C.V. to Industrias Bachoco, S.A.B. de C.V.,
by
operation of law and amended article one of our by laws. 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 87.7%
of consolidated total assets on December 31, 2007. 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 (México), and all of
our operations are in México. Our principal executive offices are located at
Avenida Tecnológico No. 401, Ciudad Industrial C.P. 38010, Celaya, Guanajuato,
México, and our telephone number is (011) (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”). Until December 31, 2007, Mexican FRS required restatement of all
financial statements to constant pesos as of the date of the most recent balance
sheet presented.
Except
as
otherwise indicated, all data in both the financial statements included below
in
Item 18 (which together with the attached notes constitute the
“Consolidated Financial Statements”) and the selected financial information
included throughout this Form 20-F (this “Annual Report”) have been
restated in constant pesos as of December 31, 2007.
As
of
January 1, 2008, we have adopted the changes to “Inflationary Effects” in
accordance with the new released 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 accounting principle went into effect on January
1,
2008, which eliminates the recognition of inflationary effects in our financial
information. Consequently, financial information corresponding to periods prior
to December 31, 2007 is expressed in millions of Mexican Pesos with purchasing
power as of December 31, 2007, while the financial information for periods
after
December 31, 2007, will be presented in current or nominal Mexican
Pesos.
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 relate to us, together
with a reconciliation of operating income, net income and total stockholders’
equity to U.S. GAAP, and a condensed statement of cash flows under U.S. GAAP,
see Note 19 to the 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 19 to the Consolidated Financial Statements.
References
herein to “U.S. dollars,” “U.S.$” or “$” are to the lawful currency of the
United States of America. References herein to “pesos” or “Ps.” are to the
lawful currency of México. 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.10.92 to U.S.$1.00, the exchange
rate on December 31, 2007.
As
used
herein, the term “tonnes” 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 Unión
Nacional de Avicultores (“UNA”),
Consejo
Nacional Agropecuario (“CNA”);
Consejo
Mexicano de Porcicultura (“CMP”),
as well as Banco
de México (“Mexican
Central Bank”), Secretaría
de Agricultura, Ganadería, 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 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, 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;
|
|
·
|
competitive
conditions; and
|
|
·
|
demand
for chicken, eggs, turkey, balanced feed and
swine.
|
PART
I
ITEM
1.
|
Identity
of Directors, Senior Management and
Advisers
|
Not
applicable.
ITEM
2.
|
Offer
Statistics and Expected
Timetable
|
Not
applicable.
Selected
Financial Data
The
information set forth below is derived from Bachoco’s Consolidated Financial
Statements, which are included in Item 18. In this disclosure, we explain
the figures and year-to-year changes in our Consolidated Financial Statements.
In
preparing the Consolidated Financial Statements, we followed Mexican FRS, which
differ in certain respects from U.S. GAAP. Note 19 to the Consolidated Financial
Statements provides a description of the main differences between Mexican FRS
and U.S. GAAP as they relate to us; a reconciliation from Mexican FRS to U.S.
GAAP of total stockholders’ equity, net income and operating income, and a
condensed statement of cash flows under U.S. GAAP as of December 31, 2006 and
2007 and for the years ended December 31, 2005, 2006 and 2007. Our financial
statements were prepared pursuant to Bulletin B-10, as amended, and Bulletin
B-12, both issued by the Mexican Institute of Public Accountants.
Bulletin
B-10 is designed to account for the effects of inflation on financial
disclosures by requiring us to:
|
·
|
restate
non-monetary assets at current replacement cost or by using the Mexican
National Consumer Price Index (“NCPI”), except for the biological assets
(see Note 5 of the Financial
Statement);
|
|
·
|
restate
non-monetary liabilities using the
NCPI;
|
|
·
|
restate
the components of stockholders’ equity using the NCPI;
and
|
|
·
|
recognize
gains or losses in purchasing power that result from the monetary
liabilities or assets that we hold.
|
Bulletin
B-10 also requires restatement of all financial statements in constant pesos
as
of the date of the most recent balance sheet presented. Except as otherwise
indicated, we have restated all financial information taken from the financial
statements or derived from them, as explained below, in constant pesos as of
December 31, 2007. Bulletin B-12 requires that the statement of changes in
financial position reconcile the differences between the restated historical
balance sheet and the current balance sheet. The effects of price-level
restatement under Mexican FRS have not been reversed in the reconciliation
to
U.S. GAAP. See Note 19 to the Consolidated Financial Statements.
As
of
January 1, 2008, we have adopted the new standard related to “Inflationary
Effects” 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 accounting principle went into effect on January
1,
2008, which eliminates the recognition of inflationary effects in our financial
information. Consequently, financial information corresponding to periods prior
to December 31, 2007 is expressed in millions of Mexican Pesos with purchasing
power as of December 31, 2007, while the financial information for periods
after
December 31, 2007, will be stated in current or nominal Mexican
Pesos.
|
|
As
of and for the year ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2007(2)
|
|
Income
Statement Data
|
|
(millions
of constant pesos as of December 31, 2007)(1)
|
|
(millions
of
U.S.
dollars)
|
|
Mexican
FRS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
Ps. |
12,616.6
|
|
Ps. |
14,836.7
|
|
Ps. |
15,617.7
|
|
Ps. |
15,551.0
|
|
Ps. |
18,219.6
|
|
|
1,668.9
|
|
Cost
of sales
|
|
|
10,263.4
|
|
|
12,032.42
|
|
|
11,234.2
|
|
|
12,053.0
|
|
|
14,477.9
|
|
|
1,326.2
|
|
Gross
profit
|
|
|
2,353.2
|
|
|
2,804.3
|
|
|
4,383.5
|
|
|
3,498.0
|
|
|
3,741.8
|
|
|
342.7
|
|
Operating
income
|
|
|
507.2
|
|
|
952.4
|
|
|
2,378.1
|
|
|
1,426.4
|
|
|
1,496.3
|
|
|
137.1
|
|
Comprehensive
financing income (loss)
|
|
|
146.8
|
|
|
(79.8
|
)
|
|
(74.0
|
)
|
|
61.4
|
|
|
19.1
|
|
|
1.8
|
|
Majority
net income
|
|
|
633.1
|
|
|
788.3
|
|
|
1,908.4
|
|
|
906.2
|
|
|
1,270.9
|
|
|
116.4
|
|
Majority
net income per Share(3)
|
|
|
1.06
|
|
|
1.32
|
|
|
3.19
|
|
|
1.51
|
|
|
2.12
|
|
|
0.19
|
|
Majority
net income per ADS(4)
|
|
|
12.66
|
|
|
15.8
|
|
|
38.2
|
|
|
18.1
|
|
|
25.4
|
|
|
2.3
|
|
Dividends
per Share(5)
|
|
|
0.60
|
|
|
0.46
|
|
|
0.44
|
|
|
0.61
|
|
|
0.59
|
|
|
0.05
|
|
Weighted
average Shares outstanding (thousands)
|
|
|
598,738
|
|
|
599,260
|
|
|
599,694
|
|
|
599,571
|
|
|
600,000
|
|
|
600,000
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Majority
net income
|
|
Ps. |
590.4
|
|
Ps. |
825.9
|
|
Ps. |
1,893.3
|
|
Ps. |
895.5
|
|
Ps. |
1,261.8
|
|
|
116.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
FRS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
Ps. |
1,841.5
|
|
Ps. |
2,608.4
|
|
Ps. |
3,419.9
|
|
Ps. |
3,583.9
|
|
Ps. |
3,039.9
|
|
|
278.5
|
|
Total
assets
|
|
|
14,577.1
|
|
|
15,008.6
|
|
|
16,530.9
|
|
|
17,559.2
|
|
|
19,116.4
|
|
|
1,751.0
|
|
Short-term
debt(6)
|
|
|
68.2
|
|
|
111.2
|
|
|
100.0
|
|
|
9.8
|
|
|
58.8
|
|
|
5.4
|
|
Long-term
debt
|
|
|
109.0
|
|
|
80.9
|
|
|
56.0
|
|
|
35.5
|
|
|
50.8
|
|
|
4.6
|
|
Stockholders’
equity
|
|
|
11,805.2
|
|
|
12,132.7
|
|
|
13,502.7
|
|
|
14,102.9
|
|
|
15,127.2
|
|
|
1,385.7
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
11,772.7
|
|
|
12,144.7
|
|
|
13,499.0
|
|
|
14,053.2
|
|
|
15,017.7
|
|
|
1,381.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
volume (thousands of tonnes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicken
|
|
|
655.4
|
|
|
733.0
|
|
|
773.0
|
|
|
773.7
|
|
|
837.2
|
|
|
|
|
Eggs
|
|
|
132.1
|
|
|
138.1
|
|
|
140.6
|
|
|
143.4
|
|
|
147.8
|
|
|
|
|
Swine
and Others
|
|
|
8.5
|
|
|
9.1
|
|
|
9.6
|
|
|
8.9
|
|
|
16.1
|
|
|
|
|
Balanced
Feed
|
|
|
316.2
|
|
|
320.7
|
|
|
389.6
|
|
|
484.4
|
|
|
438.8
|
|
|
|
|
Gross
margin (%)
|
|
|
18.7
|
%
|
|
18.9
|
%
|
|
28.1
|
%
|
|
22.5
|
%
|
|
20.5
|
%
|
|
|
|
Operating
margin (%)
|
|
|
4.0
|
%
|
|
6.4
|
%
|
|
15.2
|
%
|
|
9.2
|
%
|
|
8.2
|
%
|
|
|
|
Net
margin (%)
|
|
|
5.0
|
%
|
|
5.3
|
%
|
|
12.2
|
%
|
|
5.8
|
%
|
|
7.0
|
%
|
|
|
|
Total
employees
|
|
|
18,495
|
|
|
18,896
|
|
|
20,432
|
|
|
21,035
|
|
|
23,088
|
|
|
|
|
(1) |
Except
per share and per ADS amounts and operating
data.
|
(2) |
Peso
amounts have been translated into U.S. dollars, solely for the convenience
of the reader, at the rate of Ps.10.92 per U.S.
dollar.
|
(3) |
Net
income per share has been computed based on the weighted average
number of
common Shares outstanding.
|
(4) |
Net
income per ADS has been computed by multiplying net income per share
by
twelve, to reflect the ratio of twelve Shares per
ADS.
|
(5) |
Dividends
per share have been computed by dividing the total amount of dividends
paid (in constant pesos as of December 31, 2007) by the weighted
average
Shares outstanding.
|
(6) |
Includes
notes payable to banks and current portion of long term
debt.
|
Exchange
Rates
The
Mexican peso showed high levels of volatility during the first four months
of
2003; it appreciated and remained stable during the middle of the year and
increased its volatility in the last four months of the year. Overall, the
peso
declined in 2003.
In
2004,
the Mexican peso showed volatility for the first four months of the year with
a
general trend to depreciate with respect to the U.S. dollar. In the following
months, the Mexican peso fluctuated around the same level, it finished the
year
stronger against the dollar when compared to the exchange rate at the end of
2003.
During
2005, the Mexican peso continued showing volatility mainly at the beginning
and
at the end of the year, with a general trend to appreciate with respect to
the
U.S. dollar. At the end of 2005, the Mexican peso finished stronger against
the
U.S. dollar.
During
2006, the Mexican economy showed signs of stability with an annual inflation
rate of 4.1%. After showing volatility during the first part of the year, the
Mexican peso showed a reasonably stable peso-dollar exchange rate with a final
depreciation of 1.6%, compared with the exchange rate at the end of
2005.
In
2007,
the Mexican economy was stable overall, with an annual inflation rate of 3.8%,
while the peso-dollar exchange rate at the year-end depreciated by 1.1% with
respect to December 31, 2006.
The
following table sets forth for the periods indicated the high, low, average
and
year-end exchange rates for the purchase and sale of U.S. 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 Ended December 31,
|
|
High
|
|
Low
|
|
Average(2)
|
|
Year
End
|
|
2003
|
|
|
11.41
|
|
|
10.11
|
|
|
10.79
|
|
|
11.24
|
|
2004
|
|
|
11.64
|
|
|
10.81
|
|
|
11.29
|
|
|
11.15
|
|
2005
|
|
|
11.41
|
|
|
10.41
|
|
|
10.89
|
|
|
10.63
|
|
2006
|
|
|
11.46
|
|
|
10.43
|
|
|
10.91
|
|
|
10.80
|
|
2007
|
|
|
11.27
|
|
|
10.67
|
|
|
10.93
|
|
|
10.92
|
|
|
(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.
|
|
|
Exchange
Rate(1)
(in
current pesos
per
U.S. dollar)
|
|
Period
|
|
High
|
|
Low
|
|
December
2007
|
|
|
10.92
|
|
|
10.80
|
|
January
2008
|
|
|
10.97
|
|
|
10.82
|
|
February
2008
|
|
|
10.82
|
|
|
10.67
|
|
March
2008
|
|
|
10.85
|
|
|
10.63
|
|
April
2008
|
|
|
10.60
|
|
|
10.44
|
|
May
2008
|
|
|
10.57
|
|
|
10.31
|
|
|
(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.
|
On
May
30, 2008, the exchange rate for cable transfers in pesos as certified for
customs purposes by the Federal Reserve Bank of New York was Ps.10.329 per
$1.00
U.S. dollar.
Risk
Factors
Risks
Relating to México, Other Emerging Market Countries and the U.S.
Economy
México
has experienced adverse economic conditions
|
·
|
In
2003, GDP increased by 1.3% and the inflation rate was 3.98%.
|
|
·
|
In
2004, México’s GDP increased by 4.4% and the inflation rate was 5.19%.
|
|
·
|
In
2005, México’s GDP improved and increased by 3.0%, and the inflation rate
was 3.33%.
|
|
·
|
In
2006, GDP increased by 4.8% while the inflation rate was
4.05%.
|
|
·
|
In
2007, GDP increased by 3.3% and the inflation rate was
3.8%.
|
Should
the Mexican economy fall into a recession or if inflation and interest rates
increase significantly, consumers may find it difficult to pay for the products
we offer. This and other effects of recession or increased inflation and
interest rates could have adverse consequences on our business, financial
condition and results of operations.
Depreciation
or fluctuation of the peso relative to the U.S. dollar could adversely affect
our financial condition and results of operations
The
single largest component of our cost of sales, our feed, is comprised partially
of ingredients we purchase from the United States, where prices are denominated
in U.S. dollars. In addition, the prices of ingredients we purchase in México
may be influenced by U.S. commodity markets. Therefore, should the peso fall
relative to the U.S. dollar, both the cost of our operations and our debt
payments would increase. Any future depreciation or devaluation of the peso
may
result in further net foreign exchange losses.
|
·
|
In
2003, the peso depreciated against the U.S. dollar by 7.3% at
year-end, and the average value of the peso against the U.S. dollar
during
2003 was 10.5% lower than in 2002.
|
|
·
|
In
2004, the Mexican peso appreciated with respect to the U.S. dollar
by 0.8%
at year end, whereas the average value of the Mexican peso against
the
U.S. dollar was 4.4% lower, since the peso appreciated at the end
of the
year.
|
|
·
|
In
2005, the Mexican peso appreciated with respect to the U.S. dollar
by 4.9%
at the end of the year and also the average value of the Mexican
peso was
3.6% higher.
|
|
·
|
In
2006, the Mexican peso was reasonably stable in its peso-dollar exchange
rate with a final depreciation of 1.6%, compared to the end of 2005.
The
average value of the Mexican peso was 0.10% lower than the average
of
2005.
|
|
·
|
In
2007, the Mexican peso remained reasonably stable in its peso-dollar
exchange rate. According with the U.S. Federal Reserve Bank, the
peso was
depreciated with respect to the U.S.
dollar by 1.1% at year-end. The average value of the Mexican peso
was
0.21% lower than the average of
2006.
|
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. While the Mexican government does
not currently restrict, 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 México, the government could
institute restrictive exchange rate policies in the future. Currency
fluctuations will probably continue to affect our revenues and
expenses.
Furthermore,
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 Shares (the “Shares”
or “Series B Shares”) in the Mexican Stock Exchange and the price of American
Depository Shares (“ADSs”) on the New York Stock Exchange. 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.
High
levels of inflation and high interest rates in México could adversely affect our
financial condition and results of operations
México
has experienced high levels of inflation and high domestic interest rates in
the
past. The annual rate of inflation, as measured by changes in the National
Consumer Price Index was 3.98% in 2003, 5.19% in 2004, 3.33% in 2005, 4.05%
in
2006 and 3.76% in 2007. Inflation for the first four months of 2008 was 1.72%
according to the Mexican Central Bank.
According
to Bank of México the average interest rates on 28-day Mexican treasury bills,
or Cetes,
was
6.23%, 6.82%, 9.20%, 7.19% and 7.19% during 2003, 2004, 2005, 2006 and 2007,
respectively. On June 6, 2008, the 28-day Cetes
rate was
7.44%. High interest rates in México 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 beneficed by the
interest we earn in our cash balance.
Political
events in México could affect Mexican economic policy and our
operations
In
July
2006, we had a presidential election where Felipe Calderón was elected as the
new President of México. President Calderón’s election initially met resistance
from members of the political opposition in the form of legal challenges and
protests. These protests could return as President Calderón seeks to enact his
legislative agenda. We cannot predict the impact that future protests may have
on the Mexican government or on business conditions in México. Although
President Calderón’s party, the Partido
Acción Nacional,
or PAN,
obtained a plurality of the seats in the Mexican Congress after the election,
no
party succeeded in securing a majority in either chamber of the Mexican
Congress. The absence of a clear majority by a single party and the lack of
alignment between the president-elect and the legislature are likely to continue
until the next Congressional election in 2009. This situation may result in
government gridlock and political uncertainty, which could have an adverse
effect on our business, financial position and results of operations. We cannot
provide any assurance that future political developments in México, over which
we have no control, will not have an adverse effect on our financial position
or
results of operations.
Developments
in other emerging market countries
may adversely affect our business or the market price of our
securities
The
market value of securities of Mexican companies is, to varying degrees, affected
by economic and market conditions in other emerging market countries. Although
economic conditions in such countries may differ significantly from economic
conditions in México, investors’ reactions to developments in any of these other
countries may have an adverse effect on the market value of securities of
Mexican issuers. We cannot assure you that the market value of our securities
will not be adversely affected by events elsewhere, especially in emerging
markets.
Developments
in the U.S. economy may adversely affect our business
Economic
conditions in México are heavily influenced by the condition of the U.S. economy
due to various factors, including commercial trade pursuant to the North
American Free Trade Agreement (“NAFTA”), U.S. investment in México and
emigration from México to the United States. Events and conditions affecting the
U.S. economy may adversely affect our business, results of operations, prospects
and financial condition.
Risks
Relating to our Organization
The
chicken industry is characterized by long-term price declines and cyclical
periods
The
Mexican chicken industry, like the chicken industry in other countries, has
been
characterized by a long-term decline in prices in real terms. The industry
has
undergone cyclical periods of higher prices and profitability, followed by
overproduction, leading to periods of lower prices and profitability. Real
prices for eggs and swine in México have also declined over the long term and
have varied cyclically. The market that we serve is subject to volatility with
respect to supply, which affects prices. We cannot assure you that future
cyclicality, excess supply and downturns in real prices will not adversely
affect our results.
The
price of feed ingredients is subject to significant volatility
The
largest single component of our cost of sales is the cost of ingredients used
to
prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and,
for certain chicken products, marigold extract. The price of most of our feed
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. Given the long-term
declining trends in real chicken prices, we may experience difficulty or delays
in passing any increase in grain costs to customers. Accordingly, increases
in
the prices of the main ingredients 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 of feed ingredients.
Additionally,
the prices of corn and soybean meal experienced high volatility in 2007 and
through the first half of 2008. Prices of corn reached historically high prices
worldwide, as a result of strong demand and consequently, lower inventories
worldwide. We can offer no assurance that corn and soybean meal prices will
not
continue to experience strong volatility in the future. Such a continued
increase in prices could adversely affect our profits.
Our
operations depend on raising animals and meat processing, which are subject
to
risks such as disease, contamination and adverse weather
conditions
Our
operations involve raising animals and are subject to a variety of risks,
including disease, contamination and adverse weather conditions. Chickens,
in
particular, are susceptible to infections by a variety of microbiological
agents. Since 1983, the avian influenza virus (“AIV”) has been widespread in the
United States and in México. During 2003, AIV was widespread in Asian countries
and the United States. México, to avoid having the disease spread from the
United States, imposed certain restrictions on the importation of chicken from
affected U.S. states. The AIV was still present in Asian countries and the
United States. In 2004 and 2005, AIV was still present in Asian countries and
the United States. During 2004 and 2005, México has been eliminating some
restrictions on the importation of chicken from certain U.S. states as the
sanitary conditions in those states improve. In October 2005, México lifted
importation restrictions on all U.S. states, except for 11 counties in the
state
of Texas. In 2007, Mexico lifted importation restrictions for those remaining
11
counties in the state of Texas.
In
the
past we have experienced limited outbreaks of various diseases that have
resulted in higher mortality rates.
During
2005, there was an ample diffusion on the media worldwide of the widespread
of a
particular strain of AIV (H5N1), mainly in Asia and some European countries,
which affected consumption of chicken in those countries. At the present time,
this strain has not been found in the United States or in Latin
America.
Meat
and
eggs are subject to contamination during processing and 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.
In
2006
we experienced a loss of chickens at our Norwest Complex due to the effects
of
Hurricane Lane. Future hurricanes or other adverse weather conditions could
result in additional losses of inventory and damage to our plants and equipment.
Our facilities near México’s coast are most vulnerable to the risk of severe
weather.
The
use of nutritional supplements and the possibility of contamination expose
us to
risk of loss of consumer confidence in the chicken industry
To
reduce
contamination, we use specialized feedstock and nutritional supplements that
have been approved by the Mexican government and meet international industry
standards. We can offer no assurance, however, that in the future we will not
be
materially adversely affected by claims or consumer concerns arising out of
the
use of these products in raising our animals.
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.
We
face significant competition from other chicken producers in all of our
geographic markets and product lines
According
to the UNA, we are México’s largest chicken producer, but we face significant
competition from other producers in all of the markets in which we sell our
products. In 2007, we accounted for approximately 31.2% of total chicken
production in México. There are two other major vertically integrated chicken
producers in México, which together with Bachoco account for more than 55.0% of
Mexican chicken production, with the balance distributed among approximately
two
hundred small- and medium-sized integrated and non-integrated
producers.
Each
of
the two other major companies has substantial financial resources and strengths
in particular product lines and regions. 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. Accordingly,
we cannot assure you that our performance will not be adversely affected by
increased competition.
We
face increased competition from U.S. producers
In
January 2003, import quotas and most tariffs on poultry, eggs and swine were
eliminated through 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 México, which could
have a material adverse effect on our performance.
In
July
2003, the Mexican government imposed temporary restrictions on chicken leg
quarters imported from the U.S. and both governments confirmed this safeguard
in
July 2003. The safeguard consists of a five-year limited poultry import measure.
The measure, which became effective in 2003, includes quotas and an initial
tariff of 98.8% on chicken leg quarters that will slowly decrease until it
reaches 0% in 2008. On January 1, 2008, the safeguard was phased
out.
We
are a holding company with no substantial operations and depend on our
subsidiaries for cash flow
We
are a
holding company with no substantial operations and, consequently, we are
dependent on dividends and other payments from subsidiaries for virtually all
of
our cash flow, including cash flow to pay taxes, service debt, make equity
investments, finance the growth of subsidiaries and pay dividends to
stockholders. Together with Mexican law, our ability to pay dividends may,
in
the future, be limited by financial covenants in debt instruments that we,
or
our subsidiaries, may acquire.
Risks
Relating to the ADS, and the Shares in the Mexican
Market
The
Robinson Bours family controls our management and their interests may differ
from other security holders
Certain
members of the Robinson Bours family 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 hold 496,500,000 Shares outstanding on December
31, 2007.
Future
sales of Shares by the controlling stockholders may affect prevailing market
prices for the ADSs and the Shares trading at the Mexican
Market.
The
prevailing market prices for the ADSs and Shares could decline if
either:
|
·
|
the
Robinson Bours family were to sell substantial amounts of their Shares,
whether
|
|
o
|
indirectly,
through the Mexican trusts through which they hold Shares;
or
|
|
·
|
the
perception arose that such a sale could
occur.
|
The
protection afforded to minority stockholders in México 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 our 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 México
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 México, 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 México. 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 México, 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:
|
·
|
we
file a registration statement with the Securities and Exchange Commission
with respect to that future issuance of Shares;
or
|
|
·
|
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 México may differ from other
countries
There
may
be less, or different, publicly available information about issuers of
securities in México 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
on the Company
|
General
Our
legal
name is Industrias Bachoco, S.A.B. de C.V., and we frequently refer to ourselves
commercially as Bachoco.
We were
incorporated in México on April 17, 1980. Our headquarters are located at
Avenida Tecnológico No. 401, Ciudad Industrial 38010, Celaya, Guanajuato,
México, telephone (52)(461) 618-3500 and (52)(461)618-3555. Our main product
lines are: chicken, table egg, balanced feed and swine. At the present almost
all of our production and almost all of our sales are made in México.
According
to the UNA, we are the largest poultry producer in México. In 2007, we produced
more than 9.0 million chickens per week and accounted for approximately 31.2%
of
total chicken production in México. As a vertically integrated producer, we
control virtually all aspects of the production and distribution process, which
enables us to exercise cost controls and to maintain high standards of quality,
service and efficiency. With over 700 production and distribution facilities
dispersed throughout México, our operations include the following:
|
·
|
preparing
balanced feed;
|
|
·
|
breeding,
hatching and growing chickens; and
|
|
·
|
processing,
packaging and distributing chicken
products.
|
Sales
of
chicken products accounted for 77.6% of our net revenues in 2007. Please also
see the table under Item 5. “General—Results of Operations for the Years Ended
December 31, 2006 and 2007.”
We
are
also a significant producer of commercial balanced feed. We sell our feed both
through distributors and directly to small producers. During 2007, we sold
approximately 438,000 tonnes of balanced feed to external customers, which
amounted to 8.0% of our total revenues for that year.
Currently,
Bachoco is the second largest producer of table eggs products. In 2007, we
sold
approximately 147,700 tons. Table egg sales accounted for 9.6% of our net
revenues in 2007.
As
part
of our other product lines we also sell swine on the hoof to meat packers for
pork product production, miscellaneous poultry-related products, and we have
recently entered into two new business lines: turkey and beef value-added
products. In 2007, sales of swine and these other lines accounted for 4.8%
of
our net revenues.
The
following table sets forth, for each of the periods presented, the volume of
chicken, balanced feed, table eggs and swine that we sold:
|
|
Bachoco
Sales Volume
(in
thousands of tonnes)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
Chicken
|
|
|
655.5
|
|
|
733.0
|
|
|
773.0
|
|
|
773.7
|
|
|
837.2
|
|
Eggs
|
|
|
132.1
|
|
|
138.1
|
|
|
140.6
|
|
|
143.4
|
|
|
147.8
|
|
Swine(1)
|
|
|
8.5
|
|
|
9.1
|
|
|
9.6
|
|
|
8.9
|
|
|
16.1
|
|
Balanced
Feed
|
|
|
316.2
|
|
|
320.7
|
|
|
389.6
|
|
|
484.4
|
|
|
438.8
|
|
(1)
Includes Swine, Turkey and Beef products.
In
the
Mexican poultry industry few producers operate in multiple regions. We believe
we have the broadest geographic market coverage in the Mexican poultry industry
and that we are one of the largest poultry suppliers in the México City
metropolitan region (which accounts for a significant portion of overall Mexican
chicken consumption). We currently compete in every major product category
and
channel of distribution for poultry products within the regions that we serve.
We expect to continue to do so in order to meet growing consumer demand and
needs.
Background
and Ownership Structure
Founded
in 1952 by the Robinson Bours family as a small commercial table egg operation
in the state of Sonora, we grew by expanding our existing facilities and
acquiring additional facilities from other poultry producers. In 1974, we
established operations in Celaya, located in the agricultural region of Bajio,
to begin serving the México City metropolitan region. Beginning in 1988, our
management recognized the potential for growth in Mexican chicken consumption,
as well as the advantages of a large, vertically integrated operation. As a
result, we began to seek opportunities for geographic expansion and to increase
production capacity and 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
April
1995, Robinson Bours stockholders created a trust (the “Control Trust”), the
principal purpose of which was to hold a controlling interest in our Series
B
Shares. Before September 2006, our common stock (“Common Stock”) consisted of
Series B Shares and Series L Shares of limited voting stock (“Series L Shares”)
(collectively, the “Old Shares”). The Old Shares were grouped into units. Each
unit (“Unit”) consisted of one Series B Share and one Series L Share. Each B
Unit (“B Unit”) consisted of two Series B Shares.
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.
In
September 2006, we separate the UBL and UBB units trading on the Mexican
Exchange into their component L and B Shares. The Series L Shares was converted
into Series B Shares, on a one -to -one basis, thereby creating a single Share
class, the Series B Shares, which represent our entire Common Stock This change
did not modify the face value of the Shares. These Shares are trading on the
Mexican stock market. The ADS still consist of twelve underlying Shares, but
they are all Series B Shares, with full rights.
As
of
December 31, 2007, the Robinson Bours Stockholders owned B Shares representing
82.75% of the Series B Shares outstanding. As a result, the Robinson Bours
Stockholders continue to have the power to control the Company.
Members
of the Robinson Bours family, together with certain of our executive officers,
hold a majority of the seats on our Board of Directors.
In
November 1998, we approved a stock repurchase plan (the “Repurchase Plan”),
which allows us to repurchase up to 3.0% of the total Shares outstanding and
trading on the Mexican
Stock Exchange (Bolsa
Mexicana de Valores),
in
accordance with Mexican securities laws. To execute the Repurchase Plan, we
created a reserve of Ps.321.6 million (expressed in nominal pesos), which
reduced retained earnings on our balance sheet. As of May 31, 2008, we had
repurchased no Shares.
During
2003, we implemented two important projects to expand the facilities at our
Northwest Complex and Yucatán Peninsula Complex to increase production capacity
in our chicken business. Both of these projects were completed by the end of
the
third quarter of 2004. These facilities are ideally suited for the expansion
projects due to their sanitary status and their geographical location. Both
complexes were expanded to increase capacity by approximately 50%, which will
increase opportunities for potential future exports as well as for meeting
consumer demand in those regions and in other regions in México. The new
facilities in both complexes have been equipped with the best technology
available.
In
July
2004, we reached an agreement for renting the farms of UPAVAT and UPATEC, a
small producer of table eggs in the state of Puebla, south of México City, with
a capacity of about 0.75 million of lying hens. This operation allows us to
start the production of table eggs in southern México.
On
June
29, 2005, we acquired certain assets of Grupo Sanjor, a private poultry company
located in the Yucatan Peninsula, with production of approximately 300 thousand
chickens per week and 100 thousand table egg laying hens, which allow us to
reinforce our leadership in this region of the country.
In
December 2006, we acquired most of the assets and working capital of “Del
Mezquital” to start a new complex in the State of Sonora, located in northern
México, close to the border with the United States.
In
February 2007, we reached a business agreement with “Grupo Libra” a Company in
the Northeast of México, that includes the buying of all their working capital
and long term rent agreement of their facilities to strengthen our presence
in
that market.
In
December 2007, we reached an agreement with “Grupo Agra,” a table eggs company
located in the states of Nuevo Leon and Coahuila in Northeast Mexico. The
agreement provides for leasing of their facilities, which include laying hens
farms (with a capacity of approximately 1.0 million hens), a processing table
eggs plant, distribution centers and the Agra brands. In addition, we acquired
all of their working capital.
Business
Strategy
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 México 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.
The
Mexican poultry industry has experienced considerable consolidation in recent
years, in which we have participated. We continue to evaluate possible
acquisitions of other poultry producers or production facilities from time
to
time and may pursue certain opportunities consistent with our business
strategy.
The
key
elements of our business strategy are as follows:
|
·
|
Increased
market penetration through expanded distribution. We
have an extensive distribution network, supported by our own
transportation fleet, superior knowledge of existing wholesale channels
and strategically located cold storage warehouses and facilities.
We have
substantially increased our distribution routes during the past years.
We
plan to continue to develop and improve our distribution network
and
systems in every product category and throughout our expanded geographic
coverage in México.
|
|
·
|
Increased
service and market responsiveness. We
seek to remain a leader in the Mexican poultry market by maintaining
high
standards of customer service and continuing to be responsive to
the
changing needs of varying market segments. As part of this strategy,
we
have structured our operations in such a way as to enable us to vary
the
size, weight, color and presentation of our chicken products, depending
upon the particular demands of the market segment. In addition, we
have
decentralized order and sales services from our headquarters to our
cold
storage warehouses and facilities, which serve as midpoints in the
distribution chain to wholesalers and local customers. This strategy
allows us to stay closer to our customer base and to better cultivate
growing customer segments, such as food-service operators, supermarkets
and food wholesale clubs.
|
|
·
|
Low-cost
production and operating efficiency. We
are among México’s lowest-cost producers and distributors of chicken, due
in part to economies of scale and vertically integrated operations.
We
pursue on-going programs to increase operating efficiencies and reduce
operating costs.
|
|
·
|
Continued
brand differentiation. We
have developed a brand image for premium fresh chicken and table
eggs in
México. Building on the success of our branded products to date, we
seek
to continue to promote our brand name through billboards, packaging,
special publicity campaigns and through development of brand loyalty
among
wholesale and retail distributors. At the end of 2007 and beginning
of
2008, we launched Bachoco’s new
image.
|
Capital
Expenditures
Over
the
last three years, we have financed our capital expenditures with resources
generated by our operations. We made the following capital expenditures during
the last three years (nominal pesos):
|
·
|
In
2005, we made capital expenditures of Ps.805.3 million net, with
which
we:
|
|
o
|
continued
to update our transportation fleet, farms, processing plants and
feed
mills;
|
|
o
|
increased
the capacity and updated our rendering plants, which expenditures
continue
to the present; and
|
|
o
|
made
the acquisition of certain assets of Grupo Sanjor.
|
|
·
|
In
2006, we made capital expenditures of Ps.863.2 million net, with
which
we:
|
|
o
|
continued
to update our transportation fleet, farms, processing plants and
feed
mills, which expenditures continue to the
present;
|
|
o
|
increased
capacity, mainly for the production of live chickens and;
|
|
o
|
building
of a new feed mill in the state of Aguascalientes.
|
|
·
|
In
2007, we made capital expenditures of Ps.991.7 million net, with
which
we:
|
|
o
|
began
the construction of the new complex in the state of
Sonora.
|
|
o
|
finished
the construction of our new feed mill in the state of
Aguascalientes;
|
|
o
|
increased
capacity in the production of live
chicken;
|
|
o
|
increased
capacity of the secondary process at some of our processing plants;
and
|
|
o
|
updated
our transportation fleet, processing plants and feed
mills.
|
Business
Overview
Chicken
Market
Mexican
consumers value distinct characteristics in their chicken. Virtually all chicken
sold by us and other major chicken producers in México is fresh. Fresh chicken
is a central ingredient in many traditional Mexican dishes and it is the leading
meat consumed in México according to data from the UNA. Traditionally,
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.
In
recent
years, the value-added chicken products are growing rapidly; we participate
significantly in the market and try to lead the supplying of these products.
According to the UNA, value-added chicken products currently account for
approximately 7.0% of the chicken sold in México.
Mexican
consumers traditionally prefer chicken with pronounced yellow skin pigmentation,
a characteristic found mainly in our public-market and supermarket-broiler
chicken products that we attain by including marigold extract in our chicken
feed. We have also noticed an increased demand for smaller, whole, fresh chicken
from various fast-food outlets, principally chicken roasting shops (rosticerías),
which
have developed rapidly in México.
According
to data obtained from the UNA, total Mexican chicken consumption per capita
increased by 12.4% from 2003 to 2007. Chicken is the leading meat consumed
in
México, and it accounted for approximately 34.1% of all meat produced in México
in 2007. The following table sets forth total Mexican production of chicken,
pork and beef for 2003 to 2007:
Mexican
Production of Chicken, Beef and Pork
(in
thousands of tonnes)*(1)
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Chicken
|
|
|
2,290
|
|
|
2,390
|
|
|
2,498
|
|
|
2,592
|
|
|
2,683
|
|
Beef
|
|
|
1,496
|
|
|
1,543
|
|
|
1,559
|
|
|
1,602
|
|
|
1,628
|
|
Swine
|
|
|
1,100
|
|
|
1,150
|
|
|
1,088
|
|
|
1,102
|
|
|
1,116
|
|
*(1)Source:
UNA
The
Mexican chicken industry, like chicken industries in other countries, 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.
In
2003,
chicken prices decreased by approximately 4.0% over 2002, mainly due to an
oversupply in domestic production that was present mainly in the second half
of
the year and a decrease in the purchasing power of the average consumer.
In
2004,
chicken prices increased by approximately 6.7%, mainly as a result of an
increase in the cost of the main feed ingredients worldwide, and a more
normalized supply in México during the second half of the year.
In
2005,
chicken prices decreased by approximately 1.7%, mainly as a result of a decrease
in the cost of the main feed ingredients worldwide, and a strong oversupply
during the last quarter of the year. We believe that Mexican chicken prices
may
decline further in real terms and that prices for chicken may also vary
cyclically.
In
2006
prices declined 3.6% when compared to the previous year mainly as a result
of an
oversupply in the Mexican poultry market at the beginning of 2006.
During
2007, chicken prices increased by 5.5% as compared with 2006, due to increases
in the price of the main feed ingredients and a strong demand for
chicken.
We
believe that changes in Mexican chicken consumption correlate closely with
changing chicken prices and their effect on consumer purchasing power. Chicken
per capita consumption increased 4.9% in 2003, 3.3% in 2004, 3.5% in 2005,
2.6%
in 2006 and 2.5% in 2007.
Chicken
Products
Six
main
product categories exist for fresh chicken in México: live, public market,
rotisserie, supermarket broiler, chicken parts and value-added
products.
“Live”
chicken
is 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. According to the UNA, live chicken
accounts for approximately 26% by volume of the chicken sold by producers in
México.
“Public
Market”
chicken
is a whole broiler presented either uneviscerated or eviscerated, generally
sold
within 48 hours after slaughter in public markets throughout México, but
primarily concentrated in the México City metropolitan region. According to the
UNA, public market chicken accounts for approximately 21% by volume of the
chicken sold by producers in México.
“Rotisserie”
chicken
is a whole broiler presented eviscerated and ready to cook. Rotisserie chicken
is sold by wholesalers and directly by producers to small shops, stands
(rosticerías
or
asaderos)
and
supermarkets, which cook the chicken and sell it whole and freshly cooked to
the
end-consumer, providing an economical form of fast-food. According to the UNA,
rotisserie chicken accounts for approximately 28% by volume of the chicken
sold
by producers in México.
“Supermarket
Broiler”
chicken
is 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. According to the UNA, supermarket broiler chicken accounts for
approximately 7% of the volume of the chicken sold by producers in
México.
“Chicken
Parts” refers
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. According to the UNA, chicken
parts account for approximately 11% by volume of the chicken sold by producers
in México.
“Value-added
Products”
refers
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. According to the UNA, chicken parts account for approximately
7%
by volume of the chicken sold by producers in México
We
sell
value-added 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 percentage of the total volume of chicken sold for each of
our
principal lines of chicken products:
|
|
Year
Ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Volume
|
|
% of
Total
|
|
Volume
|
|
% of
Total
|
|
Volume
|
|
% of
Total
|
|
Volume
|
|
% of
Total
|
|
Volume
|
|
% of
Total
|
|
|
|
(thousands
of tonnes, except percentages)
|
|
Public
Market and Rotisserie
|
|
|
288.1
|
|
|
44.0
|
|
|
319.1
|
|
|
43.5
|
|
|
349.6
|
|
|
45.2
|
|
|
344.3
|
|
|
44.5
|
|
|
371.0
|
|
|
44.3
|
|
Supermarket
Broiler, Chicken Parts and Other(1)
|
|
|
194.9
|
|
|
29.7
|
|
|
219.6
|
|
|
30.0
|
|
|
219.1
|
|
|
28.4
|
|
|
228.2
|
|
|
29.5
|
|
|
245.1
|
|
|
29.3
|
|
Live
|
|
|
172.5
|
|
|
26.3
|
|
|
194.4
|
|
|
26.5
|
|
|
204.3
|
|
|
26.4
|
|
|
201.2
|
|
|
26.0
|
|
|
221.2
|
|
|
26.4
|
|
Total
|
|
|
655.5
|
|
|
100.0
|
%
|
|
733.1
|
|
|
100.0
|
%
|
|
773.0
|
|
|
100.0
|
%
|
|
773.7
|
|
|
100.0
|
%
|
|
837.2
|
|
|
100.0
|
%
|
(1) “Other”
comprises sales of value-added poultry products, viscera and other
products.
Our
product mix varies from region to region in México, 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.
Chicken
Marketing, Sales and Distribution
We
have
developed an extensive distribution system that we believe is the largest and
most modern of any chicken or egg producer in México. 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.
We
distribute products from our nine processing plants (located in Celaya,
Culiacán, Puebla, Lagos de Moreno, Coatzacoalcos, Mérida, Gómez 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) and transport certain products directly to supermarkets and
food-service operations. Our distribution infrastructure includes 60
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.
We
have
expanded our distribution network, which now covers almost all of
México:
|
· |
During
2003, we implemented two important projects to expand the facilities
at
our Northwest Complex and Peninsula Complex to increase production
capacity in our chicken business. These facilities are ideally suited
for
the expansion projects due to their sanitary status and their geographical
location. Both complexes were expanded in the third quarter of 2004
by
approximately 50%, which increased opportunities for future exports
as
well as for meeting consumer demand in those regions and in other
regions
in México.
|
|
· |
During
2004, we finished our projects to expand the facilities at our Northwest
Complex and Peninsula Complex.
|
|
· |
In
2005, we acquired assets of Grupo Sanjor, a private producer of chicken
and table eggs located in the Yucatán Peninsula.
|
|
· |
At
the end of 2006, we acquired assets of “Del Mezquital,” a private broiler
producer located in the state of
Sonora.
|
|
· |
At
the beginning of 2007, we reached a business agreement with “Grupo Libra,”
a chicken producer located in northeast México. We also started to build a
new complex in Hermosillo City.
|
In
the
following paragraphs, we provide a description of our marketing, sales and
distribution strategies for each of our major chicken products.
|
· |
Live
Chicken –
We sell live chicken primarily to wholesalers, which contract out
the
processing to independent slaughterhouses and then resell the processed
product as public market chicken. To a lesser extent, we sell to
small,
independent slaughterhouses in the southeast, where live chicken
continues
to be the standard for consumption. Additionally, customers can purchase
live chicken directly from us on our farms. However, we believe that
the
market as a whole is moving slowly away from live
chicken.
|
|
· |
Public
Market Chicken –
We believe that we are the largest producer of public market chicken
in
México. We regularly sell to more than 50 of the approximately 200
whole
fresh chicken wholesalers operating in the México City region. Most of our
wholesale customers rely primarily on us for public market chicken,
although we have no exclusive supply agreements. Our principal focus
in
this market has been to provide superior distribution and service
to
selected wholesalers in order to maintain and further develop loyalty.
Public market chicken is ordinarily sold to consumers without any
packaging or other identification of the producer, but our distribution
system encourages wholesalers to sell to retailers in containers
from our
own “Bachoco” trailers, reinforcing our reputation for freshness and
efficiency of service and fostering brand loyalty among retailers.
We
believe we have developed excellent relationships with the wholesalers
we
serve.
|
|
· |
Rotisserie
Chicken–We
sell rotisserie chicken directly to rosticerías,
asaderos
and supermarkets. We attribute the growth in our sales of rotisserie
chicken in large part to the rapid growth of the market for freshly
cooked
chicken sold by rosticerías
and
asaderos
and in the rotisserie sections of supermarkets. We expect this market
to
continue to grow because of an ever-increasing consumer demand for
convenient, low-priced and high-quality fast food. Success in supplying
rotisserie chicken depends on consistency and good service, and only
larger producers with more modern processing facilities and distribution
capacity can compete in this market. We expect to expand sales of
rotisserie chicken by leveraging our increasingly developed transportation
and distribution network.
|
|
· |
Supermarket
Broiler Chicken –
We sell supermarket broilers, as well as chicken parts and eggs,
directly
to the principal supermarkets, convenience store chains and wholesale
clubs in México. In order to build consumer loyalty for our supermarket
broiler chicken, we emphasize our brand image as well as our superior
service, reinforced by frequent delivery to ensure freshness. Each
chain
negotiates purchases centrally, but we deliver directly to every
point of
sale, ordinarily at least once every 48 hours. We believe that we
lead the
market in frequency of deliveries to
supermarkets.
|
|
· |
Chicken
Parts –
We sell chicken parts principally to supermarkets, using the same
marketing strategy that we use for supermarket broiler chicken. We
are
also an important supplier of chicken parts to the growing franchise
fast-food and institutional food-service industries. We continue
to
develop custom-cutting processes to help meet demand from fast-food
and
institutional customers for a wider variety of chicken
parts.
|
|
· |
Value-Added
Products–Mexican
consumers have a greater preference for fresh chicken than their
U.S.
counterparts. Frozen, heat and serve and other further processed
poultry
products make up only a small proportion of total Mexican poultry
consumption today. Demand for these kinds of fresh products is growing
rapidly. The potential for substantial growth in this market is large
and
we believe that our distribution network, our large market share
for
supermarket chicken sales, our brand name and our experience in a
wide
range of existing Mexican distribution channels will be important
competitive strengths in this area.
|
Sales
of
our fresh value-added products increased approximately 10.3% over 2006 sales.
We
are moving to produce and introduce various value-added products in México,
which we have developed in accordance with Mexican customer preferences. We
will
continue to do so, as this market grows.
Table
Eggs
According
to the UNA, México has one of the largest per capita consumption of table eggs
in the world with 21.6 kilograms per capita a year a 2.3% decrease when compare
to the previous year. This high level of consumption is due in part to the
fact
that eggs are among the cheapest sources of protein in México.
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. According to the UNA, the ten largest producers of table eggs in
México now account for approximately 43% of the market.
Eggs
in
México have traditionally been 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. At present, approximately 21%
of
the eggs sold in México are sold in packaged form, 9% are sold in processed form
and approximately 70% are sold in bulk to wholesalers. The sales
trend in
recent
years has been moving towards packaged and processed egg sales. We expect that
the convenience, the development of brand loyalty and the growth of supermarket
chains will contribute to the continuance of this trend toward packaged eggs.
Bachoco
is the second largest producer of table eggs in México with approximately 9.0%
of the market. We sell both brown and white eggs. We are the largest producer
of
brown eggs in México. Our marketing efforts for egg products focus on increasing
our brand recognition.
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, 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.
In
2004,
we started to build new farms to increase production capacity of table eggs
in
our Northwest Complex, at Mexicali, near the U.S. border. We completed this
project in the second half semester of 2005.
In
2005,
as part of the acquisition of Grupo Sanjor, we acquired some table egg farms
located in the Yucatán Peninsula.
In
December 2007, we reached an agreement with “Grupo Agra”, located in the states
of Nuevo Leon and Coahuila in Northeast Mexico. The agreement provides for
leasing of their facilities, which include laying hens farms with a capacity
of
approximately 1.0 million hens, a processing table eggs plant, distribution
centers and the Agra brands. In addition, we acquired all of their working
capital.
In
2007,
we began to enter into foreign markets. We are testing our brand by selling
table eggs in the southern US states with products produced in the US. This
test
will allow us to see how our brand is received and identify opportunities and
strategies going forward.
We
have
designed our egg distribution system to transport eggs from our laying farms
at
Celaya, Los Mochis, Obregón, Mexicali, Tecamachalco, Mérida, Saltillo and La
Laguna regions to customers in all sales regions. We sell packaged eggs directly
to all of the principal supermarket chains in México, with daily deliveries
directly to their outlets.
Seasonality
Our
sales
are moderately seasonal, with the highest levels of sales, in general, in the
second and fourth quarter due to higher chicken consumption during the holiday
season and lower sales levels earlier in the year during Lent (particularly
in
the week prior to Easter).
Balanced
Feed
According
to Consejo
Nacional de Fabricantes de Alimento Balanceado y de la Nutrición Animal,
A.C)
(”CONAFAB”) , Mexican production of balanced feed increased from 22.1 million
tonnes in 2001 to 25.2 million tonnes in 2006. In 2006, México was ranked the
fourth largest producer of feed in the world and the second largest in Latin
America.
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. Integrated
producers account for approximately 64.0% of total production. Imports of feed
come almost entirely from the United States and represent approximately 1.2%
of
the total consumption in México.
We
entered the feed business as a result of our acquisition of Grupo Campi at
the
end of 1999. We sell to small livestock producers and through a network of
small
distributors located mainly in central and southern México. 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. Currently, we have
four
feed plants dedicated to produce balanced feed to third parties. We estimate
that our balanced feed business comprises approximately 4.8% of the market
share
of the commercial (non-integrated) balanced feed business in
México.
Swine
We
purchase breeder swine live from the United States and breed them at facilities
in Navojoa. We then raise swine to maturity at our farms in Celaya and three
other locations in México. Mature swine is sold on the hoof to Mexican swine
meat packers for the production of pork products. In 2003, swine prices began
to
recover, increasing by 7.0%, due mostly to the fact that there was very modest
growth in domestic production and imports. In 2004, our swine prices increased
by more than 20.0% as a result of an increase in the cost of feed ingredients
and a more normalized supply and imports, and, during 2005, our swine prices
decreased 9.0% due to larger supplies in the Mexican market which continued
in
2006 where prices went down about 11.9%. In 2007, swine prices decrease 5.5%
as
a result of over-supply conditions in the swine market. Traditionally, Mexicans
consume less swine products than chicken and eggs products.
Turkey
and Prepared Beef Products
At
the
beginning of 2007, as a result the “Del Mezquital” and “Grupo Libra” agreements
we introduced 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.
In
2007,
these products lines represented less than 1.0% of our total sales. However
we
see opportunities to grow these businesses by taking advantage of our
distribution network.
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 of feed including, principally, sorghum, soy meal, corn, fish
meal, meat meal, and for certain chicken products, marigold extract. 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, the government eliminated the tariff on sorghum effective January 1,
1994, and eliminated tariffs on all other grains that we use, except corn,
on
January 1, 2003. Corn tariffs were eliminated on January 1, 2008. We expect
these developments to allow us more flexibility in our cost of production as
the
cost of our ingredients more closely tracks prices in the international
commodity markets.
Since
the
end of 2006, throughout all of 2007 and through the first months of 2008, prices
of corn and soybean meal have experienced high volatility and have demonstrated
historically high prices world-wide.
We
take
advantage of lower-cost feed ingredients from Mexican sources, when available.
In 2007, we obtained approximately 36.4% of our total grain needs from the
domestic market. 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 México where Grupo Campi’s
complexes are located, domestic crops and feed ingredients are limited. As
such,
these complexes use mainly imported grain. We may, from time to time, engage
in
hedging of our feed costs in the future.
Competition
Chicken
According
to the UNA, we are México’s largest chicken producer. We face significant
competition from other producers in all of the markets in which we sell our
products. When combined with our two largest vertically integrated competitors,
we account for approximately 56% of total Mexican poultry production; the
balance is distributed among approximately two hundred small- and medium-sized
integrated and non-integrated producers. The major producers, including Bachoco,
have substantial cost advantages over smaller, non-integrated producers arising
from economies of scale and control of feed preparation. To varying degrees,
each of these companies has substantial financial resources and strengths in
particular product lines and regions. We believe, however, that we have
substantial competitive strengths over our competitors, including a broader
range of chicken products and broader geographic coverage.
Furthermore,
there are considerable barriers to entry into large-scale chicken production
and
distribution in México, including, among others, the consumer preference for
fresh chicken, the weaknesses of 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.
Nonetheless,
we expect that we will continue to face strong competition in every market
and
that existing or new competitors are likely to broaden their product lines
and
to extend their geographic coverage.
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, we have experienced increased
competition from U.S. poultry producers. According to the UNA, in 2007, imports
of poultry products decreased 13.7% in volume over imports in 2006. This
decrease was caused by a better level of prices in others foreign markets.
We
expect
that competition from U.S. exporters could increase. However, Mexican consumer
acceptance of frozen poultry products is still low, and we do not anticipate
significant growth in the near future.
Table
Eggs
We
are
one of the largest producers of table eggs in México, with approximately 6.5% of
total Mexican egg production at the end of 2007.
Balanced
Feed
Of
the
registered producers of feed in México, integrated firms produce approximately
64.4% of total production for their internal use, and the remaining 35.6% is
produced for sale to third parties. We estimate a market share of approximately
4.8% in our feed product line.
Swine
The
Mexican swine industry is highly fragmented, and no producer has more than
15.0%
of the market. On December 31, 2007, we had less than 1.0% of the Mexican market
share in swine. U.S. producers already compete in this market in México because
tariff barriers on swine are moderate.
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.
Import
limits and short-term tariffs:
The
Mexican government has put in place a number of short-term tariffs and import
limits on poultry, eggs and swine:
|
· |
In
January 2003, the Mexican government announced a temporary safeguard
to
stabilize the flow of poultry imports, which
included an initial tariff of 98.8% on imports of chicken leg quarters.
This safeguard will decrease annually until it reaches 0% in 2008.
All
other chicken products from the United States, including whole chicken,
chicken parts other than leg quarters and eggs, remain
tariff-free.
|
|
· |
According
to the safeguard, for 2007, the tariff in effect was 19.8% for imports
of
chicken leg quarters above the quota of 104 thousand
tonnes.
|
|
· |
On
January 1, 2008, the safeguard was phased out. This allows American
producers to export any amount of chicken leg quarters free of tariffs
to
México.
|
In
addition to NAFTA, México has entered into free trade agreements with several
other countries including Chile, Europe, Colombia and Venezuela. Although such
agreements may result in lower tariffs on 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
The
Ley
Federal de Competencia Económica
(“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 the Comisión
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.
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 are
Ley
General de Equilibrio Ecológico y Protección Ambiental (General
Law of Ecological Balance and Environmental Protection—the “Environmental Law”)
and Ley
de Aguas Nacionales (“National
Waters Law”). The Secretaría
del Medio Ambiente y Recursos Naturales
(Ministry of Environment and Natural Resources, or “Semarnat”) administers the
Environmental Law, and Comisión
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 México is required to provide Semarnat with
periodic reports regarding compliance with the Environmental Law and the
regulations thereunder.
The
level
of environmental regulation in México has increased in recent years, and
enforcement of the law is improving. We expect this trend to continue and to
intensify with international agreements between México 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.
The
production, distribution and sale of chicken, eggs and swine are subject to
Mexican federal and state sanitary regulations. The principal legislation is
Ley
General de Salud
(“General Health Law”) and Ley
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.
Organizational
Structure
We
are a
holding company with no operations other than holding the stock of our
subsidiaries, all of which are incorporated in México, and engaging in
transactions with our subsidiaries. Our principal operating subsidiary is BSACV,
which owns our principal operating assets, and which accounted for 87.7% of
consolidated total assets as of December 31, 2007, and 88.9% of our consolidated
revenues for the year ended December 31, 2007. All of our subsidiaries are
directly owned by us in the percentage listed below. None of these subsidiaries
have any subsidiaries of their own.
The
following table shows our main subsidiaries as of December 31, 2005, 2006 and
2007:
|
|
Percentage
Equity Interest
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Acuícola
Bachoco, S.A. de C.V.
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Aviser,
S.A. de C.V.
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Bachoco,
S.A. de C.V. (“BSACV”)
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Bachoco
Comercial, S.A. de C.V.
|
|
|
-
|
|
|
-
|
|
|
100
|
|
Campi
Alimentos, S.A. de C.V.
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Huevo
y Derivados, S.A. de C.V.
|
|
|
97
|
|
|
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
|
|
In
November 2004, the Company acquired all the Shares of Seceba, S.A. de C.V.
from
a related party for Ps.14.4 million. As of the date of acquisition, the figures
of Secba, S.A. de C.V. have been consolidated with the Company’s figures. The
excess of the purchase price paid over the book value of this investment
amounted to Ps.0.3 million, which was recorded in other income.
In
December 2006 and July 2007 we created Induba Pavos, S.A. de C.V. and Bachoco
Comercial, S.A. de C.V. respectively. They are both 100% owned subsidiaries
of
Industrias Bachoco.
Property,
Plants and Equipment
Our
production and storage facilities are located throughout the regions we serve
in
order to ensure freshness and minimize transportation time and costs. The most
extensive facilities 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 Culiacán includes broiler grow-out farms and a broiler processing
plant, as do the complexes located in Puebla, Lagos de Moreno, Coatzacoalcos,
Mérida, Hermosillo and Monterrey. There are smaller egg production farms at Los
Mochis, Ciudad Obregón and Mexicali. In Gómez Palacio, Durango, we have a
complex which consists of broiler grow-out farms, a broiler processing plant
and
egg production farms representing nearly half of our total egg production
capacity.
The
following table summarizes the types and number of each type of our production
facilities as March 2008:
Bachoco
Production Facilities
Type
|
|
Number
|
|
Chicken
breeding farms
|
|
|
152
|
|
Broiler
grow-out farms
|
|
|
481
|
|
Broiler
processing plants
|
|
|
9
|
|
Egg
incubation plants
|
|
|
22
|
|
Egg
production farms
|
|
|
109
|
|
Swine
breeding farms
|
|
|
1
|
|
Swine
grow-out farms
|
|
|
10
|
|
Feed
mills
|
|
|
17
|
|
Further
process plants
|
|
|
4
|
|
The
Company repaired its Peninsula Complex on schedule and by the end of 2003 the
complex had returned to the level of capacity maintained prior to sustaining
the
damage caused by Hurricane Isidore. In 2003, the Company implemented projects
to
expand the facilities at the Peninsula Complex as well as the Northwest Complex.
Both complexes were expanded to increase capacity by approximately 50% by the
third quarter of 2004. These projects were financed with internal resources
generated by our own operations.
In
2003,
the Company implemented projects to expand the facilities at the Peninsula
Complex as well as the Northwest Complex. Both complexes were expanded to
increase capacity by approximately 50% by the third quarter of 2004. These
projects were financed with internal resources generated by our own
operations.
On
September 16, 2006, Hurricane Lane, hit the southern part of the state of
Sinaloa affecting some of our chicken growing farms in that region. We were
able
to keep a proper supply to our customers in that region from our other
complexes.
We
operate 17 feed mills for our own chickens, feed sales to third parties and
egg
and swine operations. The total production capacity of our feed plants is
approximately 380,000 tonnes per month. We estimate that we are the largest
producer of animal feed in México.
Our
other
facilities include two poultry manure-processing plants. Our headquarters are
located in Celaya Guanajuato, México, and we have 60 sales centers throughout
the regions we serve. While we own most of our facilities, we lease a limited
number of farms and sales centers. We also employ a network of contract
growers.
Our
fleet
of trucks carries part of the feed from feed mills to farms, live chickens
from
farms to processing plants, day-old chickens from egg incubation plants to
farms, eggs from farms to distribution centers and, ultimately, products from
distribution centers to customers.
ITEM
5.
|
Operating
and Financial Review and
Prospects
|
The
following discussion should be read in conjunction with our Consolidated
Financial Statements. The Consolidated Financial Statements have been prepared
in accordance with Mexican FRS, which differs in certain respects from U.S.
GAAP. Note 19 to the 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 total stockholders’ equity, net income
and operating income, a consolidated statement of changes in stockholders’
equity and a condensed statement of cash flows under U.S. GAAP as of December
31, 2006 and 2007 and for the years ended December 31, 2005, 2006 and
2007.
In
accordance with Mexican FRS rules on price-level restatement of financial
statements, the financial statements included with this disclosure recognize
certain effects of inflation. In addition, the financial statements and, unless
otherwise specified, the other financial data included herein are restated
in
constant pesos as of December 31, 2007. The effects of price-level restatement
in accordance with Mexican FRS have not been reversed in the reconciliation
to
U.S. GAAP.
General
In
the
following discussion we describe various trends and how they affected our
results of operations for the years ended December 31, 2005, 2006 and
2007.
Mexican
Economic Conditions
In
2004,
the Mexican economy showed signs of recovery; GDP growth was 4.4%, which was
better than initial expectations. Interest rates on 28-day Cetes
increased to an average of 6.8% for the year and an average of 8.5% in the
last
month of the year. Inflation increased to a rate of 5.2%, and the peso
appreciated against the U.S. dollar by 0.8% at year-end.
In
2005,
the Mexican economy was stable and GDP increased by 3.0%; the inflation rate
was
3.3%, and rates on 28-day Cetes
increased to an average of 9.2% for the year and an average of 8.2% during
December 2005. The peso appreciated against the U.S. dollar by 4.9% at
year-end.
In
2006
the Mexican economy showed signs of volatility during the first part of the
year, before the presidential election. After the election the economy showed
stability with an annual inflation rate of 4.1% and a reasonably stable
peso-dollar exchange rate with a final depreciation of the peso against the
dollar of 1.6%, as compared to the end of 2005, Rates on 28-day Cetes
decreased to an average of 7.2% for the year.
In
2007
the Mexican economy was stable with an annual inflation rate of 3.8% and a
final
dollar-peso depreciation rate of the peso against the dollar of 1.1%, as
compared to the end of 2006. Rates on 28 day Cetes had an average of 7.19%
for
the year.
In
addition to the effects that the Mexican economy has on our business and results
of operations, Mexican political events may significantly affect our operations
and the performance of Mexican securities generally. See Item 3, “Key
Information—Risk Factors.” A downturn in México’s economic conditions, civil
unrest or other adverse social, political or economic developments in or
affecting México could adversely affect our business, results of operations,
financial condition, ability to obtain financing and prospects for future
business.
The
Mexican economy and financial and securities markets are, to varying degrees,
influenced by economic conditions in other countries. Economic or financial
conditions in one country or region may undermine investors’ confidence in other
countries, such as México, and decrease the attractiveness of securities
investments in such countries. See Item 3, “Key Information — Risk
Factors.”.
Effects
of Economic Conditions on the Company
Mexican
economic conditions have had an important impact on México’s chicken market.
Feed costs constitute a substantial portion of the cost of goods sold and are
priced with reference to U.S. dollars. We use financial instruments to mitigate
the cost of goods sold in currencies other than Mexican pesos. See Note 2-p
of
the Consolidated Financial Statements.
In
2003,
average producer prices increased significantly by 10.6%, due primarily to
an
increase in raw materials prices during most of the year.
In
2004,
average producer prices increased by 6.7%, due mainly to strong increases in
the
cost of feed ingredients, in particular soybean meal, and a moderate increase
of
supply in the Mexican market.
In
2005,
average producer prices decreased by approximately 1.7%, mainly as a result
of a
decrease in the cost of the main feed ingredients worldwide, and a strong
oversupply during the last quarter of the year.
In
2006,
average producer prices decreased by approximately 3.0% mainly from oversupply
conditions in the market during the first part of the year and as market
conditions return to more normalized levels as compared with the first three
quarters of 2005.
In
2007,
average producer prices increased by approximately 10.0% mainly due to increases
in the cost of raw materials and a balance between supply and demand in the
market, particularly in the second and third quarter of the year.
As
of
December 31, 2007, we have an outstanding total indebtedness of Ps.109.6 million
all denominated in Mexican pesos. In 2007, we had foreign exchange loss of
Ps.3.4 million due to fluctuations of the peso against the U.S. dollar, as
compared to a foreign exchange gain of Ps.40.8 million in 2006 and a foreign
exchange loss of Ps.62.3 million in 2005.
Any
erosion of the purchasing power of Mexican consumers may adversely affect demand
for our products and, as a result, our net revenues and profitability. Inflation
and changing prices affect our ability to raise prices as well as consumer
demand, supplier prices and other costs and expenses, consumer purchasing power
and competitive factors, all of which in turn affect our net revenues and
operating results. Peso devaluations and high inflation levels could further
adversely affect our operations and financial position.
Volume
of Chicken Sold
The
volume of our chicken sold decreased by 1.5% in 2003 and increased by 11.8%,
5.5%, 0.1% and 8.2% in each of 2004, 2005, 2006 and 2007, respectively.
The
decrease in volume in 2003 was mainly due to the effects of Hurricane Isidore
on
our Peninsula Complex, this situation affected our production during most of
the
year.
The
increase in 2004 was due mainly to the completion of growing projects in our
Northwest and Peninsula complexes, and productivity improvements in the rest
of
our operations.
The
increase in 2005 was due mainly to productivity improvements achieved by the
Company and the Sanjor acquisition in the second quarter of the
year.
The
increase in 2006 was due mainly to productivity improvements, offset by the
negative effects of Hurricane Lane on our Northwest Complex during the
second half of the year, and a reduction in yield as the Company moves to
offering value-added products.
The
8.2%
increase in the volume in 2007 was mainly due the business agreements entered
into in 2007, domestic grow and productivity efforts.
Trends
in Product Prices
Our
results of operations are significantly affected by the cyclical and volatile
nature of Mexican prices for chicken, feed, eggs and swine.
In
2003,
the Company was affected by higher feed ingredient costs and oversupply
conditions due to an increase in domestic production. The continued weakness
of
the Mexican economy affected the purchasing power of customers, and as a result
the Company was unable to increase its prices. During 2003, our chicken prices
decreased 2.7% primarily as a result of oversupply conditions in the domestic
chicken market as well as a decrease in consumer purchasing power.
In
2004,
our chicken prices increased by 6.4%, mainly as a result of an increase in
the
cost of our main feed ingredients which pushed the prices up in the industry,
a
moderate supply of chicken in the Mexican market, mainly in the second part
of
the year, and our commercial and marketing strategies.
In
2005,
our chicken prices increased 1.6%, as a result of a strong demand in the first
three quarters of the year, partially compensated by weak prices in the last
quarter of the year.
In
2006,
our chicken prices decreased 3.7% due to oversupply in the market, in the first
part of the year, and a lower more normalized historical demand compared to
2005.
In
2007,
our chicken prices increased 8.3% as a result of a stable market conditions
and
increases in the cost of our main raw materials.
Prices
for feed tend to follow trends in prices of feed ingredients, which we discuss
below.
In
2003,
egg prices increased by 17.5%, mainly due to a reduced supply of this product
in
the market.
In
2004,
egg prices increased by 7.3%, mainly due to an increase in the price of feed
ingredients and a moderate supply during the first part of the year in the
Mexican market.
In
2005,
our egg prices decreased by 15.7% as a result of continued oversupply conditions
in the Mexican market due to domestic production.
In
2006,
our egg prices increased 3.9% compared to 2005, as a result of a more stable
supply.
In
2007
our egg prices increased 18.5% as a result of a strong demand, particularly
in
the second half of the year.
Bachoco
continues to work to improve its sales mix by increasing the mix of packaged
product with brand identification with better profit margins.
In
2003,
swine prices began to recover, increasing by 7.0%, due mostly to very modest
growth in domestic production and imports.
In
2004,
our swine price increased by 25.8% as there was only a moderate supply in the
Mexican market.
In
2005,
our swine prices decreased by 9.0% as imports into Mexico increased.
In
2006,
our swine prices declined 11.9% as a result of greater competition from imports
and a more fragmented Mexican market.
The
same
conditions in the swine market that were present in 2006 were also present
in
2007, causing a 5.5% decline in our swine prices.
We
believe that, among other factors, industry price competition may continue
to
exert downward pressure on chicken prices, and that prices for chicken, feed,
eggs and swine are also likely to remain volatile and subject to cyclical
variation. Due to the time needed to complete the chicken growth cycle, chicken
producers generally cannot adjust production to respond immediately to cyclical
variations, and, accordingly, in times of oversupply, prices may decline due
to
overproduction.
Trends
in Prices of Feed Ingredients
The
single largest component of our cost of sales is the cost of ingredients used
to
prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and,
for certain chicken products, marigold extract. The prices of these feed
ingredients are subject to significant volatility due to a number of variables,
including, among other factors, weather, harvest size, transportation and
storage costs, government agricultural policies and currency exchange rates.
The
price at which we may obtain feed ingredients from Mexican producers relative
to
U.S. producers is also subject to volatility depending on these
variables.
At
present, Mexican feed prices tend to parallel U.S. and international prices.
In
2003, the percentage of grain purchased from domestic markets was 38%. In 2004,
it was approximately 35%, in 2005 it was 30%, in 2006 it was 31.3% and in 2007
it was approximately 36.4%.
Due
to
low inventories worldwide at the end of 2003 and during most of 2004, soybean
meal reached historically high prices worldwide. Consequently, the price of
other sources of protein, including grain, increased. As a result, the cost
of
our feed increased substantially. It was not possible for us to pass these
increases to our customers, leading us to poor results during the first part
of
the year. In the second part of the year, mainly in the last quarter, prices
resumed more normalized levels, allowing us to improve our results. In 2005,
prices of our raw materials were on the average lower compared to 2004; during
the year prices were rather constant with a slight trend to increase during
the
second part of the year.
During
the second part of 2006, and through 2007, international corn prices increased
significantly as a result of lower inventories and increases in alternative
uses
of corn, such as ethanol production.
International
grain prices also increased dramatically in 2007 reaching historically high
prices worldwide in that year, due mainly to strong demand and alternative
uses
for grain such as ethanol production. Soybean meal prices alse increased,
particularly in the second half of the year, due to strong demand, and lower
inventories worldwide.
In
recent
years, reductions in tariffs under NAFTA have generally resulted in reductions
of our costs of importing feed ingredients. Restriction on importing grain
under
NAFTA, began to phase out in the beginning of 2008.
Acquisitions
& Dispositions
Our
operations have been affected during the periods we discuss herein, by a series
of acquisitions and production arrangements that we have made in recent
years:
|
·
|
During
2003, we implemented two important projects to expand the facilities
at
our Northwest Complex and Peninsula Complex to increase production
capacity in our chicken business. Both complexes were expanded to
increase
capacity by approximately 50% and were completed by the third quarter
of
2004.
|
|
·
|
In
July 2004, we reached an agreement for renting the facilities of
UPAVAT
and UPATEC, a small producer of table eggs in the state of Puebla,
south
of México City, with an annual capacity of about 0.7 million of lying
hens.
|
|
·
|
In
November 2004, the Company acquired all the shares of Secba, S.A.
de C.V.,
from a related party for Ps.15.0 million. As of the date of the
acquisition, the figures of Secba, S.A. de C.V. have been consolidated
with the Company’s figures. The excess of the purchase price paid over the
book value of this investment amounted to Ps. 0.3 million, and was
recognized in other income.
|
|
·
|
In
June 2005, the Company acquired certain assets of Sanjor, a private
poultry company located in the Yucatán Peninsula, with production of
approximately 300 thousand chickens per week and 100 thousand table
egg
laying hens, which allow us to reinforce our leadership in this region
of
the country.
|
|
·
|
In
December 2006, the Company started operations at a new complex in
the
state of Sonora by acquiring the farms from and leasing the processing
plant and feed mill of “Del Mezquital Alimentos” in accordance with our
strategic plans.
|
|
·
|
In
February 2007, the Company reached a business agreement with “Grupo Libra”
a company located in northeast México. The agreement establishes a lease
for the use of their facilities, which included breeders and chicken
farms
with a capacity of approximately 3.0 million chickens per cycle,
along
with a slaughter plant, and a processing center. In addition, Bachoco
acquired all of Grupo Libra’s working capital and
brands.
|
|
·
|
In
December 2007, we reached an agreement with “Grupo Agra”, a table eggs
producer company located in the states of Nuevo Leon and Coahuila
in
Northeast Mexico. The agreement provides for leasing of their facilities,
which include laying hens farms with a capacity of approximately
1.0
million hens, a processing table eggs plant, distribution centers
and the
Agra brands. In addition, we acquired all their working
capital.
|
Summary
of Results of Operations
The
following table sets forth selected components of our results of operations
as a
percentage of net revenues for each of the periods indicated:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(percentage
of net revenues)
|
|
Net
revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
(71.9
|
)
|
|
(77.5
|
)
|
|
(79.5
|
)
|
Gross
profit
|
|
|
28.1
|
|
|
22.5
|
|
|
20.5
|
|
Selling,
general and administrative expenses
|
|
|
(12.8
|
)
|
|
(13.3
|
)
|
|
(12.3
|
)
|
Operating
income
|
|
|
15.2
|
|
|
9.2
|
|
|
8.2
|
|
Comprehensive
financing (cost) income
|
|
|
(0.5
|
)
|
|
0.4
|
|
|
0.1
|
|
Income
tax and asset tax
|
|
|
(2.4
|
)
|
|
(3.9
|
)
|
|
(1.7
|
)
|
Net
income
|
|
|
12.2
|
|
|
5.8
|
|
|
7.0
|
|
The
following table sets forth, for each of the periods indicated, our net revenues
of chicken, feed, eggs, swine and other products as a percentage of total net
revenues in each period:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(percentage
of net revenues)
|
|
Chicken
|
|
|
80.1
|
%
|
|
77.6
|
%
|
|
77.6
|
%
|
Feed
|
|
|
7.2
|
%
|
|
9.0
|
%
|
|
8.0
|
%
|
Eggs
|
|
|
8.7
|
%
|
|
9.2
|
%
|
|
9.6
|
%
|
Swine
and Others
|
|
|
4.0
|
%
|
|
4.2
|
%
|
|
4.8
|
%
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Results
of Operations for the Years Ended December 31, 2006 and
2007
General
In
2007,
the Mexican economy showed signs of stability: GDP grew by 3.3%, the annual
inflation rate was 3.8% and the peso-dollar exchange rates was reasonably stable
with a dollar-peso depreciation rate of 1.1% at the end of the year, as compared
to the end of 2006.
According
to the UNA, the production volume of the Mexican chicken industry grew by
approximately 3.5% in 2007. Consumer preference for healthier products, income
increases per capita, and chicken as a low-cost protein alternative to other
meat sources have all had a favorable effect on per capita poultry consumption
in the country.
With
respect to the egg industry, domestic production decreased by almost 5.3%,
which
contributed to a better balanced supply in the market particulary in the second
half of the year.
We
were
able to increase our sales in all our main product lines. We sold our entire
production and achieved an operating margin of 8.2%, which is lower than the
9.2% reached in 2006.
Net
revenues
Net
sales
during 2007 were Ps. 18,219.6 million, 17.2% higher than the Ps. 15,551.0
million reported in 2006. This was due to an increase in sales in all of our
business lines.
Chicken
sales grew by 17.3% as compared to the sales in 2006. The increase was due
to an
8.3% price increase, as a result of a balance between supply and demand in
the
chicken market for most of the year. Chicken volume grew by 8.2%, due to
increases in capacity driven by the business agreements with the “Del Mezquital”
and “Libra” companies, as detailed previously.
Table
egg
sales grew by 22.2% in 2007 as compared to sales in 2006, due to an 18.5% price
increase, while volume grew by 3.1%. The sales increase was due to a stable
supply in the Mexican table eggs industry, particularly during the second half
of the year and more than 50% of our eggs being packaged under our brand
name.
In
2007,
balanced feed sales grew by 4.2%, while the volume of balanced feed sold
decreased by 9.4% in comparison to 2006. Balanced feed price increased by 15.1%
with respect to the prior year, driven by increases in the costs of raw
materials.
We
increased our pork sales by 24.3% in 2007, due to a 31.5% increase in volume
sold while the price fell by 5.5% in comparison with 2006. This price drop
was
caused by a greater supply of these products in the Mexican market.
We
recognized Ps.10.9 million in our 2007 revenue as a result of fair valuing
part
of the Company’s inventories, see Note 2-h, and 5-b in our audited financial
statements.
Cost
of sales
The
consolidated cost of sales was Ps. 14,477.9 million, an increase of 20.1% with
respect to the prior year, as a result of increases in the prices of raw
materials, particularly grains, which are one of our main raw
materials.
Gross
profit
As
a
percentage of net sales, gross profit was 20.5% in 2007, compared to 22.5%
reported in 2006. The decline was due primarily to the increase in the cost
of
sales, resulting of the increase in cost of our main raw materials.
Sales,
general and administrative expenses
Operating
expenses increased to Ps. 2,245.5 million in 2007, an 8.4% increase over the
prior year, primarily as a result of the increase in the volume of sales. These
expenses represented 12.3% of the Company’s sales, which was lower than the
13.3% reported in 2006.
Operating
income
Consolidated
operating income in 2007 was Ps. 1,496.3 million; 4.9% more than the Ps. 1,426.4
million reported in 2006. The operating margin was 8.2% in 2007, lower than
the
9.2% reported in 2006.
Comprehensive
cost of financing
Comprehensive
financing income (cost) represents the net effect of interest expense, interest
income, foreign exchange gain (loss) and gain (loss) on net monetary position,
which arises from the effect of inflation on the average net balance of monetary
assets and liabilities. We had a comprehensive financing income of Ps. 19.1
million primarily due to Ps. 177.3 million of net interest income. This result
was lower than the Ps. 61.4 million reported in 2006.
Other
income, net
Other
income, net represented a net gain of Ps.69.6 million in 2007 as compared to
a
gain of Ps.18.4 million in 2006. Other income, net in both 2007 and 2006 was
attributable mainly to sales of used equipment, income from governmental aid
and
miscellaneous services. See Note 16 of the Consolidated Financial Statements
for
more detail.
Income
before income tax, asset tax, and minority interested
Income
before income tax, asset tax, and minority interest was Ps, 1,585.0 million
in
2007, Ps. 78.7 million more than Ps. 1,506.3 reported in 2006. In 2007, taxes
recognized by the Company amounted to Ps. 312.7 million, a decrease with respect
to the Ps. 599.6 million recognized in 2006, primarily due to a unique charge
amount in deferred taxes recognized at the end of 2006, due to the tax rate
increase that affected the poultry industry and consequently our Company in
fiscal year 2007, see note 15-a of the Consolidated Financial Statements for
more detail.
Net
income
Net
income was Ps. 1,272.2 million in 2007, 40.2% higher than the Ps. 907.1 million
reported in 2006. Earnings per share of Ps. 2.12 (US$ 2.33 per ADR), compared
to
Ps.1.51 (US$ 1.66 per ADR) reported in 2006.
Results
of Operations for the Years Ended December 31, 2005 and
2006
General
In
2006,
the Mexican economy showed signs of stability: GDP grew by 4.8%, an annual
inflation was 4.1% and the peso-dollar exchange rates was reasonably stable
with
a final depreciation of 1.6% of the peso against the dollar at the end of the
year, as compared to 2005.
According
to the UNA, the production volume of the Mexican chicken industry grew
approximately 3.7% in 2006. Consumer preference for healthier products, income
increases per capita, and chicken as a low-cost protein alternative to other
meat sources, have all had a favorable effect on per capita poultry consumption
in the country.
With
respect to the egg industry, domestic production increased by almost 1.3%,
which
contributed to the excess supply in the market during the year.
We
were
able to increase our sales volume in all our main product lines. We sold our
entire production and achieved an operating margin of 9.2%.
Net
revenues
Consolidated
net revenues during 2006 amounted to Ps.15.6 billion, compared to $15.6 billion
reported in 2005, a 0.4% decrease. This was mostly due to a decrease in the
sales of chicken, our main product line.
Our
chicken sales decreased by 3.5% due to a decrease in price of 3.6%, while volume
increased smoothly by 0.1%, mainly as a result of an increase in supply in
the
chicken market as compared to the previous year.
Our
revenues from egg sales increased by 5.9% in 2006, as a result of a 3.9% price
increase, and 1.9 % increase in volume, due to more stable supply and prices
in
the year throughout the industry.
In
2006,
there was a significant growth in sales of 25.4% of balanced feed, while the
volume achieved 24.3% compared to 2005. This was the result of focused
strategies that Bachoco has implemented in this line of business.
We
recognized Ps.10.9 million in our 2006 revenue as a result of fair valuing
part
of the Company’s inventories, see Note 2-h and 5-b in our audited financial
statements.
Cost
of sales
The
consolidated cost of sales in 2006 was Ps.12.1 billion, representing an increase
over 2005 of Ps.0.82 billion, or 7.3%, as a result of higher costs in raw
materials, particularly during the second half of the year.
Gross
profit
Bachoco’s
gross profit reached Ps.3.5 billion during 2006, a decrease of 20.2% compared
with the previous year. Gross profit, as a percentage of net sales, was 22.5%,
compared to 28.1% reached in 2005. The decline was mostly due to cost increase
and a decrease in sales.
Sales,
general and administrative expenses
Sales
and
administrative expenses in 2006 amounted to Ps.2.1 billion. This represents an
increase of only 3.3% over 2005 and is mainly attributable to sales expenses
due
mainly to delivering product to more points of sales.
Operating
income
Consolidated
operating income in 2006 totaled Ps.1.4 billion, a decrease of 40% over the
previous year’s results, largely due to a lower gross profit and higher
operating expenses. The operating margin for the year was 9.2% compared to
15.2%
in 2005.
Comprehensive
cost of financing
Comprehensive
financing income (cost) represents the net effect of interest expense, interest
income, foreign exchange gain (loss) and gain (loss) on net monetary position,
which arises from the effect of inflation on the average net balance of monetary
assets and liabilities. Comprehensive financing cost had a positive impact
(gain) of Ps.61.4 million in 2006, compared with a cost of Ps. 74.0 million
in
2005.
This
change was due mainly to a net gain in foreign exchange of Ps. 40.8 million
due
to a more efficiency in buying U.S. dollars needed for our normal operations
and
larger net interest income due to higher level of cash, partially offset by
a
higher loss on net monetary positions, since the inflation rate was higher
in
2006.
Other
income, net
Other
income, net represented a net gain of Ps.18.4 million in 2006 as compared to
a
net expense of Ps.26.0 million in 2005. Other income, net in both 2006 and
2005
was attributable mainly to sales of used equipment, income from government
supports and miscellaneous services. This variation was mainly due to better
results of used equipment less amount of obsolete inventories, and larger
government supports.
Income
before provision for income tax, asset tax, employee profit sharing
Income
before provision for income tax, asset tax, employee profit sharing and
cumulative effect of accounting change decreased in 2006, from Ps.2, 278.2
million to Ps.1,506.3 million, due primarily to a decrease in operating income.
Net
income
Net
income for 2006 decreased to Ps.907.1 million compared to Ps.1, 910.3 million
reached in 2005. This result includes a Ps.336.4 million decrease due to
deferred taxes as a result of rate changes in the taxation of the Mexican
agricultural and livestock sector, in place as of 2007. This change had no
effect on the Company’s cash flow.
Income
Tax, Asset Tax and Employee Profit Sharing, Year 2007
For
a
more detailed discussion on this topic, please see Note 15 to our Consolidated
Financial Statements. We and each of our subsidiaries file individual tax
returns and may be subject to different tax regimes.
In
December 2004, a reduction in the 33% general income tax rate was approved,
so
that the rate was 30% in 2005, 29% in 2006 and 28% in 2007 and succeeding years.
The
Simplified Regime taxed corporate income at a rate of 35% for 2002, with a
gradual yearly decrease of one percent, until the tax rate was reduced to 29%
in
2006; however, companies subject to the New Simplified Regime also received
reductions on the above corporate rates, so that companies under this regime
had
an effective tax rate of 16% for 2004, 2005 and 2006.
As
of
January 1, 2006, the tax rate for taxpayers that pay income tax under the New
Simplified Regime was determined by applying the reduction of 44.83% in 2006,
to
the regular income tax rates of 29%, resulting in the fixed rate of
16%.
In
2006
changes were made to Mexican Law that will increase the tax rate from 16% to
19%
for 2007. This charge resulted in a debit of Ps.336.4 millions to income,
reflected in deferred taxes.
As
a
result, the income tax rate under the New Simplified Regime was 19% in
2007.
In
addition to income tax, we, along with our subsidiaries, are also subject to
an
alternative minimum tax known as “asset tax,” which is assessed on the average
value of most assets, net of certain liabilities. The general asset tax rate
was
1.25% in 2007, (1.8% in year 2006); BSACV is subject to a 0.848% rate pursuant
to the New Simplified Regime (unchanged from the Simplified Regime). We benefit
from special rules that exclude a number of assets from the asset tax and from
tax incentives in connection with certain of our investments. We (together
with
our subsidiaries) are subject to asset tax if the amount of asset tax exceeds
the computed income tax liability. Asset tax can be credited against income
tax
in subsequent years (up to ten years). The asset tax in 2005, 2006 and 2007
amounted to Ps.21.4 million, Ps.28.3 million and Ps.27.2 million, respectively.
In each of the three years we credited against these amounts the income tax
paid.
As
of
December 31, 2007, we had Ps.6.4 million in asset tax credits. See Note 15-b
to
the Consolidated Financial Statements for more detail.
During
2007, a new tax reform was enacted and it abolished the asset tax effective
in
2008 as discussed below.
In
2007,
we recognized a total income tax and asset tax charge of Ps.312.7 million,
(an
effective income tax rate of 19.80%), compared to a total income and asset
tax
charge of Ps.599.1 million in 2006 and Ps.367.8 million in 2005. This amount
was
lower than the amount recognized in 2006 due to the recognition of deferred
taxes in 2006 as a result of the tax rate increase on the Mexican poultry
industry for 2007. (See Note 15-a to the Consolidated Financial
Statements).
Neither
Industrias Bachoco, S.A.B. de C.V. nor Bachoco, S.A. de C.V. have employees,
but
each of our other subsidiaries is required under Mexican law to pay employees,
in addition to their compensation and benefits, profit sharing in an aggregate
amount equal to 10% of such subsidiary’s taxable income subject to certain
adjustments. According to the interpretation of Mexican FRS 4, employee profit
sharing must be presented in the statements of income as an ordinary expense.
Thus, effective 2007, we classified employee profit-sharing included it in
the
“other ordinary expenses” section of the income statement (in prior years it was
disclosed as a single caption before net income). (See Notes 16 and 2-x to
the
Consolidated Financial Statements).
Flat-Rate
Business Tax (FRBT or IETU in Spanish).
The
Flat-Rate Business Tax (FRBT or IETU in Spanish) Law was published in the
Official Gazette on October 1, 2007. This Law came into effect as of January
1,
2008 and abolished the Asset Tax Law.
The
current-year FRBT is computed by applying the 17.5% rate to income determined
on
the basis of cash flows (as defined), net of authorized credits. The rate for
2008 is 16.5% and for 2009 is 17.0%.
FRBT
credits derive principally from the unamortized negative FRBT base and salary
credits and social security contributions, as well as credits derived from
the
deduction of certain investments, such as inventories and fixed assets, during
the transition period, which began starting on the date on which the FRBT came
into force.
FRBT
shall be payable only to the extent it exceeds income tax for the same period.
Should a negative FRBT base be determined because deductions exceed taxable
income, there will be no FRBT payable. The amount of the negative base
multiplied by the FRBT rate results in a FRBT credit, which may be applied
against income tax for the same year or, if applicable, against FRBT payable
in
the next ten years.
Based
on
tax result projections, we consider that our Company will be subject to the
payment of income tax in the following years. (See Note 15-c to our Consolidated
Financial Statements).
Liquidity
and Capital Resources
Our
working capital (current assets less current liabilities) increased year over
year from Ps.5.7 billion on December 31, 2006 to Ps.6.5 billion on December
31,
2007. We believe that our working capital is sufficient for our present
requirements. The ratio of current assets to current liabilities on December
31,
2007 was 5.4. Cash and cash equivalents were Ps.3.0 billion on December 31,
2007, representing a decrease of Ps.544.0 million from the previous year
primarily due to increases in the working capital required by our operations
and
an increase in our level of capital expenditures.
Inventories
were Ps.3.3 billion as of December 31, 2007, representing an increase of Ps.1.1
billion from the previous year, due mainly to larger inventories and higher
cost
of raw materials.
Total
debt, including the current portion of long term debt, equaled Ps.109.6 million
as of December 31, 2007, an increase of Ps. 64.14 million from December 31,
2006.
Stockholders’
equity increased to Ps.15.1 billion on December 31, 2007 from Ps.14.1 billion
on
December 31, 2006.
Long
term
debt on December 31, 2006 represented 0.3% of our capitalization, without change
as compared to 0.3% on December 31, 2006.
In
2007,
capital investments amounted to Ps.991.7 million, all of which were financed
from resources generated from our own operations. These capital investments
were
used mainly to finance productivity projects, production growing capabilities
and infrastructure maintenance to keep facilities in good operating conditions.
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. The amount of
dividends payable by our subsidiaries and us is also subject to general
limitations under Mexican corporate law.
We
expect
to finance our capital expenditures and debt service obligations from our
current liquidity and capital resources, cash flows and from additional
borrowings from our existing sources of debt financing, although we will also
consider other sources of debt financing if they are available on advantageous
terms. For a discussion of our use of hedging instruments, please see Item
8
below.
Our
major
categories of indebtedness included the following:
|
• |
As
of December 31, 2007, we have Ps. 40.0 million in notes payable to
banks.
|
|
• |
Long
term debt to banks, as of December 31, 2007, was Ps.50.8 million
outstanding (excluding current portion). The weighted average interest
rate on long term debt was 7.892%.
|
The
following table summarizes certain contractual liabilities as of December 31,
2007. The table does not include short term debt, accounts payable or pension
liabilities.
|
|
Payments
Due by Period
(millions
of constant pesos as of December 31, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Long-term
debt
|
|
Ps. |
50.8
|
|
|
0.0
|
|
|
19.8
|
|
|
19.8
|
|
Ps. |
7.5
|
|
Ps. |
3.7
|
|
Operating
leases
|
|
|
310.9
|
|
Ps. |
70.0
|
|
Ps. |
62.7
|
|
Ps. |
56.7
|
|
|
55.1
|
|
|
54.4
|
|
Total
|
|
Ps. |
361.7
|
|
Ps. |
70.0
|
|
Ps. |
82.5
|
|
Ps. |
76.5
|
|
Ps. |
62.6
|
|
Ps. |
58.1
|
|
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements of the type that we are required to
disclose under Item 5.E of Form 20-F.
Reconciliation
to U.S. GAAP
The
principal differences between Mexican FRS and U.S. GAAP, as they relate to
us,
concern (i) net cost of labor obligations (ii) capitalization of financing
costs, (iii) biological assets and agricultural products valuation at fair
value, and (iv) treatment of minority interest. Each of these differences also
affects our balance sheet.
Our
consolidated net income under U.S. GAAP was Ps.1, 893.3 million in 2005,
Ps.895.5 million in 2006 and Ps.1, 261.8 million
in 2007, compared to Ps.1, 910.3 million, Ps.907.1 million
and Ps.1,272.2 million, respectively, under Mexican FRS. For further
explanation, please see Note 19 to the Consolidated Financial
Statements.
Bachoco
has applied Statement of Financial Accounting Standards (SFAS) No.109,
Accounting
for Income Taxes, for
all
periods presented. In the Company’s case the application of the rule did not
generate a reconciling difference in 2005, 2006 and 2007, therefore, there
is no
difference between Mexican FRS and US GAAP in those years.
The
Company also adopted the requirements of Statement 144 on January 1, 2002 and
has not identified any impairment adjustments to the carrying value of its
long
lived assets.
Use
of Estimates in Certain Accounting Policies
In
preparing our 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
presentation.
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 2007 amounted to Ps. 6,702.7
million. As applied to our 2007 financial results, the depreciation was Ps.571.4
million, or 3.1% of our net revenues. For further explanation, see Notes 2-i
and
6 to the Consolidated Financial Statements.
Allowance
for Productivity Declines
In
estimating the inventory value of our breeder birds, swine and layers, we make
allowances for productivity declines. We estimate such allowances based on
expected future production and deduct them from inventories. The estimates
of
future production are based on standards for the breeder line and the
performance of the most recent flocks. We refer to the standards provided by
the
company that sells us the breeder line in question. Each company that sells
breeder lines publishes its own particular standards for its proprietary breeder
line.
Inventory
Valuation
Since
January 1, 2003, for Mexican FRS purposes, our inventories are valued using
market prices. According to Bulletin E-1, biological assets and 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.
Poultry
being fattened (less than 6.5 weeks old), incubatable eggs, 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.
Poultry
being fattened from age 6.5 weeks to the time birds are ready for sale is valued
at fair value net of estimated costs at point of sale, considering the sales
price per kilogram of processed chicken at the date of valuation.
Laying
hens are depreciated based on eggs produced using an estimated factor for
productive useful life.
Processed
chicken, turkey, beef and commercial eggs are valued at their fair value net
of
costs at point of sale, considering the sales price per kilogram of processed
chicken and commercial eggs at the time such items are considered agricultural
products; from this date, the valuation is considered to be cost up to the
time
of sale, not in excess of net realizable value.
For
more
details, see “Inventories and biological assets” in Note 2-h and 5 of the
Consolidated Financial Statements.
Allowance
for Doubtful Accounts
We
periodically and systematically review the aging and collection of our accounts
receivable. We consider that such accounts are those which are more than 60
days
overdue or in litigation. See Note 2-g to our Consolidated Financial Statements.
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
in
our Consolidated Financial Statements.
This
plan
includes:
-
Defined
contribution plan: This fund consists of employee and Company contributions.
The
employee contribution percentage ranges from 1% to 5%. The Company contribution
ranges from 1% to 2% in the case of employees with less than 10 years’
seniority, and the same contribution percentage as the employee (5%) 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.
ITEM
6.
|
Directors,
Senior Management and
Employees
|
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.
Before
September 2006, holders of Series B Shares elected directors and alternate
directors at a general ordinary stockholders’ meeting, while holders of Series L
Shares had the right to appoint or elect two directors and two alternate
directors to the Board of Directors.
Since
September 2006, we have only Series B Shares with full voting
rights.
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.
The
following table identifies our directors, alternate directors, Honorary Chairman
of the board and Secretary of the board as of June 2008, their positions and
their years of service:
Name
|
|
Position
|
|
Years
as
a
Member
of the
Board
of Director
|
Enrique
Robinson Bours Almada
|
|
Honorary
Chairman of the board
|
|
54
|
Mario
Javier Robinson Bours Almada
|
|
Life
Honorary Shareholder Director
|
|
54
|
Francisco
Javier R. Bours Castelo
|
|
Chairman
of the Board and Proprietary Shareholder Director
|
|
26
|
Eduardo
Rojas Crespo
|
|
Secretary
of the Board
|
|
Since
April, 2008
|
Jose
Gerardo Robinson Bours Castelo
|
|
Proprietary
Shareholder Director
|
|
Since
April, 2008
|
Juan
Bautista Salvador Robinson Bours
|
|
Proprietary
Shareholder Director
|
|
54
|
Arturo
Bours Griffith
|
|
Proprietary
Shareholder Director
|
|
14
|
Jesús
Enrique Robinson Bours Muñoz
|
|
Proprietary
Shareholder Director
|
|
14
|
Ricardo
Aguirre Borboa
|
|
Proprietary
Shareholder Director
|
|
14
|
Octavio
Robinson Bours Griffith
|
|
Proprietary
Shareholder Director
|
|
11
|
Jesús
Rodolfo Robinson Bours Muñoz
|
|
Proprietary
Shareholder Director
|
|
6
|
José
Eduardo Robinson Bours Castelo
|
|
Alternate
Director
|
|
14
|
Juan
Salvador Robinson Bours Martínez
|
|
Alternate
Director
|
|
14
|
José
Francisco Robinson Bours Griffith
|
|
Alternate
Director
|
|
14
|
Guillermo
Pineda Cruz
|
|
Alternate
Director
|
|
14
|
Avelino
Fernández Salido
|
|
Independent
Director
|
|
5
|
Humberto
Schwarzbeck Noriega
|
|
Independent
Director
|
|
5
|
|
· |
Enrique
Robinson Bours Almada, Mario Javier Robinson Bours Almada and Juan
Bautista Salvador Robinson Bours are brothers.
|
|
· |
Francisco
Javier R. Bours Castelo, José Gerardo Robinson Bours Castelo and José
Eduardo Robinson Bours Castelo are sons of Mario Javier Robinson
Bours.
|
|
· |
Arturo
Bours Griffith, José Francisco Bours Griffith and Octavio Robinson Bours
are nephews of Enrique Robinson Bours Almada, Mario Javier Robinson
Bours
Almada and Juan Bautista Salvador Robinson Bours.
|
|
· |
Jesús
Enrique Robinson Bours Muñoz and Jesús Rodolfo Robinson Bours Muñoz are
sons of Enrique Robinson Bours Almada.
|
|
· |
Juan
Salvador Robinson Bours Martínez is the son of Juan Bautista Salvador
Robinson Bours.
|
|
· |
Guillermo
Pineda Cruz is the son-in-law of Enrique Robinson Bours Almada, and
Ricardo Aguirre Borboa is the son-in-law of Juan Bautista Salvador
Robinson Bours.
|
Our
bylaws 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.
In
April
2002, we announced the retirement of Mr. Enrique Robinson Bours Almada, Chairman
of the board and co-founder of the Company. Mr. Bours led the Company for 50
years. The board named as his successor Mr. Javier Robinson Bours Castelo,
Mr.
Enrique Robinson Bours’s nephew. Mr. Bours Castelo has been at Bachoco for 26
years as a member of the board and served as Vice-Chairman for nine years.
Mr.
Bours Castelo was named Chairman of the board in 2002.
During
the Annual Shareholder meeting on April 23, 2008 the Company announced the
retirement of Mr. Mario Javier Robinson Bours Almada as a member of the Board
of
Directors and he was named as a Life Honorary Propriety Shareholder Director.
Also during this meeting Mr. José Gerardo Robinson Bours Castelo was named as a
Proprietary Shareholder Director in the place of Mr. Mario Javier Robinson
Bours
Almada.
In
order
to fully comply with current Mexican Corporate and Securities Market Laws as
well as other recent regulatory amendments in the various markets in which
Bachoco’s Shares are traded, we appointed a new Board of Directors at our
ordinary stockholders’ meeting held on April 30, 2003. We ratified our Board of
Directors at our stockholders’ meeting held on April 23, 2008.
Our
board, as of June 2008, is composed of the following members:
Proprietary
Shareholder Directors:
Francisco
Javier R. Bours Castelo
Jose
Gerardo Robinson Bours Castelo
Juan
Bautista S. Robinson Bours Almada
Jesús
Enrique Robinson Bours Muñoz
Jesús
Rodolfo Robinson Bours Muñoz
Arturo
Bours Griffith
Octavio
Robinson Bours Griffith
Ricardo
Aguirre Borboa
Alternate
Directors:
José
Eduardo Robinson Bours Castelo
Juan
Salvador Robinson Bours Martínez
José
Francisco Robinson Bours Griffith
Guillermo
Pineda Cruz
Independent
Directors:
Avelino
Fernández Salido
Humberto
Schwarzbeck Noriega
Life
Honorary Chairman of the Board:
Enrique
Robinson Bours Almada
Life
Honorary Shareholder Director:
Mario
Javier Robinson Bours Almada
Francisco
Javier R. Bours Castelo, Chairman of the Board of Directors, has been a member
of the board for 26 years, and has been Chairman since April 2002. Before that,
he was Vice-Chairman for several years. Mr. Bours holds a degree in Civil
Engineering from the Instituto Tecnológico y de Estudios Superiores Monterrey
(ITESM). He currently serves as Chairman of the boards of directors of the
following companies: Grupo Megacable, S.A. de C.V., Congeladora Hortícola, S.A.
de C.V., Inmobiliaria of Trento S.A. de C.V., Acuícola Boca S.A. de C.V.,
Agriexport S.A. de C.V., Industrias Boca, S.A. de C.V., and Promotora
Empresarial del Noroeste, S.A. de C.V.
Jose
Gerardo Robinson Bours Castelo, Proprietary Shareholder Director, is member
of
the board since April, 2008. He previously served as Systems Manager. Mr. Bours,
holds a degree in Computer Engineering from the Instituto Tecnológico y de
Estudios Superiores Monterrey (ITESUM). He currently serves as member of the
following companies: Grupo Megacable, S.A. de C.V., Congeladora Hortícola, S.A.
de C.V., Acuícola Boca, S.A. de C.V., Industrias Boca, S.A. de C.V. and
Promotora Empresarial del Noroeste, S.A. de C.V. He is also Chairman of
Fundación Mexicana para el Desarrollo Rural and Instituto Tecnológico y de
Estudios Superiores de Monterrey Campus Obregón.
Juan
Bautista S. Robinson Bours Almada, Proprietary Shareholder Director, has been
a
member of the board for 54 years and is a co-founder of Industrias Bachoco
S.A.B. de C.V.
Jesús
Enrique Robinson Bours Muñoz, Proprietary Shareholder Director, has been a
member of the board for 14 years, having previously served 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 Corporación S.A. de C.V., and Megacable S.A. de C.V.
Jesús
Rodolfo Robinson Bours Muñoz, Proprietary Shareholder Director, has been a
member of the board for 6 years. 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
Agrícola Monte Cristo S.A. de C.V., Agrícola Río Yaqui S.P.R. de R.L., Agrícola
Nacapul S.P.R. de R.L. and Ganadera Cocoreña S.P.R. de R.L.
Arturo
Bours Griffith, Proprietary Shareholder Director, has been a member of the
board
for 14 years. 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, S.A. de C.V., Promotora
Empresarial del Noroeste, S.A. de C.V., and Taxis Aereos del Noroeste, S.A.
de
C.V.
Octavio
Robinson Bours Griffith, Proprietary Shareholder Director, has been a member
of
the board for 11 years. Mr. Robinson Bours holds a degree in Agricultural
Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey
(ITESM). He has experience in producing swine, and is also a member of the
board
of Choya, S.A. de C.V., and Granos Santa Fe, S.A. de C.V.
Ricardo
Aguirre Borboa, Proprietary Shareholder Director, was also an Independent
Director until April 2007. Mr. Aguirre has been a member of the board for 14
years. He is also a member of the Board of Directors of the newspaper El Debate
and he holds a degree in Agricultural Engineering from the Instituto Tecnológico
y de Estudios Superiores de Monterrey (ITESM). He has experience in agriculture
and pork production. Mr. Aguirre Borboa is also member of the board of
Gasolinera Servicios del Valle del Fuerte S.A. de C.V., Periódico el Debate de
los Mochis, and Tepeyac Produce, Inc.
José
Eduardo Robinson Bours Castelo, Alternate Director, has been a member of the
board for 14 years. Mr. Robinson Bours holds a degree in Industrial Engineering
from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He
was previously Commercial Director of Industrias Bachoco, a Senator of the
Mexican Congress and is currently governor of the state of Sonora.
Juan
Salvador Robinson Bours Martínez, Alternate Director, has been a member of the
board for 14 years, and has served Bachoco as Purchasing Manager. Mr. Robinson
Bours holds a degree in Industrial Engineering from the Instituto Tecnológico y
de Estudios Superiores de Monterrey (ITESM). His other appointments include
Chairman of the board and CEO of Llantas y Accesorios, S.A. de C.V.
José
Francisco Robinson Bours Griffith, Alternate Director, has been a member of
the
board for 14 years. He holds a degree in Civil Engineering from the Universidad
Autónoma de Guadalajara. Mr. Robinson Bours has worked at Bachoco as Engineering
Manager, and is currently dedicated to agricultural operations.
Guillermo
Pineda Cruz, Alternate Director, has been a member of the board for 14 years.
He
is also a member of the Board of Directors of Banamex and was a regional member
of the Board of Directors of Grupo Financiero Serfín, Inverlat and Inverméxico.
Mr. Pineda holds a degree in Civil Engineering from the Instituto Tecnológico y
de Estudios Superiores de Monterrey (ITESM) and a master’s degree in Business
Administration from the Instituto Tecnológico. y de Estudios Superiores de
Sonora (ITSON). He co-founded Edificadora Pi-Bo, S.A. de C.V. in 1983 and is
its
President and CEO.
Avelino
Fernández Salido, Independent Director, was named a member of the board on April
30, 2003. He is also a member of the board of Banco Nacional de México, BBVA
Bancomer, and Banca Serfín. His business experience is in the marketing of
grains.
Humberto
Schwarzbeck Noriega, Independent Director, was named a member of the board
on
April 30, 2003. He holds a degree in economics from the Instituto Tecnológico y
de Estudios Superiores de Monterrey (ITESM). He is currently CEO of Yeso
Industrial de Navojoa S.A. de C.V. and Chairman of the Board of Promotora de
Manufacturas S.A. de C.V.
Executive
Officers
Our
executive officers as of December 31, 2007 are set forth in the table
below:
Name
|
|
Position
|
|
Age
|
Cristóbal
Mondragón Fragoso
|
|
Chief
Executive Officer
|
|
62
|
Daniel
Salazar Ferrer
|
|
Chief
Financial Officer
|
|
43
|
David
Gastélum Cazares
|
|
Director
of Sales
|
|
56
|
José
Luis López Lepe
|
|
Director
of Personnel
|
|
62
|
Rodolfo
Ramos Arvizu
|
|
Technical
Director
|
|
50
|
Ernesto
Salmón Castelo
|
|
Director
of Operations
|
|
45
|
Andres
Morales Astiazaran
|
|
Director
of Marketing and Value-added Products
|
|
39
|
Cristóbal
Mondragón Fragoso,
Chief
Executive Officer, joined us in 1982 and assumed his current position in 2001.
Previously, Mr. Mondragón served as Administration Manager, as Manager of
Corporate Finance and as Chief Financial Officer. Before joining us, Mr.
Mondragón worked as an accountant for three years. Later he joined La Hacienda,
S.A. de C.V., where he held the positions of Auditor, Accountant, Head of
Processing Systems, Audit Manager, Administration Manager and Comptroller.
Mr.
Mondragón holds an Accounting degree from Universidad Nacional Autónoma de
México (UNAM).
Daniel
Salazar Ferrer,
Chief
Financial Officer, joined
us
in 2000 and assumed his current position in January 2003. Previously, Mr.
Salazar worked for four years as Chief Financial Officer at Grupo Covarrubias
and as Comptroller at Negromex, a company of Grupo Desc. Mr. Salazar holds
an
Accounting degree from Universidad
Tecnológica de México and
a
master’s degree in Business Administration from
Instituto Tecnológico de Estudios Superiores de Monterrey
(ITESM).
David
Gastélum Cazares,
Director of Sales, joined us in 1979 and assumed his current position in 1992.
Previously, Mr. Gastélum served as a pullet salesman in the states of Sonora and
Sinaloa, National Sales Manager of Live Animals and Eggs, Manager of the
Northwest Division, Manager of the México City Division and National Sales
Manager. Before joining us, Mr. Gastelúm worked at La Hacienda, S.A. de C.V. as
Technical Advisor and as Area Officer for the Southeast Division. Mr. Gastélum
holds a degree in Veterinary Medicine from the school of Veterinary Medicine
of
Universidad
Nacional Autónoma de México
(UNAM).
José
Luis López Lepe, Director
of Personnel, joined us in 1993. Previously, Mr. López worked as a teacher in
several institutions as well as with Grupo Condumex, where he was Director
of
Personnel. Mr. López holds a degree in Physics and Chemistry from the
Escuela
Normal Superior
and a
degree in Business Administration from Instituto
Tecnológico Autónomo de México.
Rodolfo
Ramos Arvizu, Technical
Director, joined us in 1980. Previously, Mr. Ramos 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. Mr. Ramos holds a degree
in
Agricultural Engineering from
Instituto Tecnológico de Estudios Superiores de Monterrey
(ITESM).
Ernesto
Salmón Castelo, Director
of Operations, joined us in 1991 and assumed his current position in 2000.
Previously, Mr. Salmón 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.
Salmón holds a degree in Chemical Engineering from Instituto Tecnológico
de Sonora
and a
master’s degree in Business Administration from
Instituto Tecnológico de Estudios Superiores de Monterrey
(ITESM).
Andrés
Morales Astiazaran, Director
of Marketing and Value-added Products since July 2006. Before joining us, Mr.
Morales worked during 4 years as Sales and Marketing Vice President in
Smithfield Foods a U.S. Company with offices in Sonora, Mexico. Previously
Mr.
Morales worked for Bachoco as Marketing Manager, Manager of the Northeast
division and then as National Manager of Bachoco. Mr. Morales holds an
accounting degree from Instituto
Tecnológico de Monterrey (ITESM) and
marketing courses by the universities of Northwestern University (Kellog),
University of Chicago, ITESM and the IPADE (D1).
Statutory
Auditor
According
with the Mexican market security law, the Statutory Auditor is not required
for
public companies since June 2006. The activities of the Statutory Auditor will
be performed by the Audit Committee.
Audit
Committee
In
January 2001, the Mexican Commission of Business Leaders (Consejo
Coordinador Empresarial), with
the
support of the Comisión
Nacional Bancaria y de Valores
(Mexican
Banking and Securities Commission, or “CNBV”), issued a Código
de Mejores Prácticas Corporativas
(“Code
of Best Practices”) for publicly traded Mexican companies, recommending certain
actions with respect to various areas of corporate governance. Subsequently,
the
Securities Market Law was amended, effective June 2006, to require that all
publicly traded Mexican companies have an audit committee.
The
mandate of the Audit Committee 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 must do the following:
|
(a)
|
Submit
an annual report to the Board of
Directors;
|
|
(b)
|
Provide
the Board of Directors with its opinion on the matters that pertain
to the
Auditing Committee, in accordance with the Securities Market
Law;
|
|
(c)
|
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;
|
|
(d)
|
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;
|
|
(e)
|
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;
|
|
(f)
|
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;
|
|
(g)
|
Call
Shareholders Meetings and cause the items it deems pertinent to be
inserted into the agendas of such Shareholders’ Meetings,
and
|
|
(h)
|
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.
|
In
order
to fully comply with current Mexican Corporate and Securities Market Laws as
well as other recent regulatory amendments in the various markets in which
Bachoco’s Shares are traded, we named an audit committee during our annual
ordinary stockholders’ meeting on April 30, 2003.
There
were changes in the audit committee during the ordinary stockholder’s meeting
held on April 25, 2007; Mr. Francisco Javier R. Bours Castelo is no longer
a
member of the audit committee and the audit committee is now comprised of the
following members:
Avelino
Fernández Salido (President)
Humberto
Schwarzbeck Noriega
Ricardo
Aguirre Borboa
Mr.
Ricardo Aguirre Borboa represents the controlling shareholders and has no voting
rights in the audit committee.
Compensation
of Directors and Officers
For
the
year ended December 31, 2007, we paid approximately Ps.33.4 million in aggregate
compensation to our directors and executive officers, for services they rendered
in their respective capacities.
Board
Practices
In
2001,
we began to review our board practices to bring them into compliance with the
recent requirements for companies listed on the Mexican Stock Exchange. As
a
result of this review, we have changed the composition of our board and
appointed an audit committee. See “Directors” and “Audit Committee.”
Employees
As
of
December 31, 2005, 2006 and 2007, we had approximately 20,432, 21,035 and 23,088
employees, respectively.
In
2007,
approximately 62.4% of our employees were members of labor unions. Labor
relations with our employees are governed by 59 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 México,
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.
We
believe that we have good relations with our employees. We have not experienced
significant work stoppages as a result of labor problems.
Share
Ownership
To
the
best of our knowledge, no individual director or managers holds share ownership
of more than one percent of our Shares. At this time, we have not developed
a
share options plan for our employees.
Comparison
of our Corporate Governance Rules and the Rules of the NYSE Applicable to U.S.
Registered Companies
On
November 4, 2003, the SEC approved the final corporate governance rules of
the
NYSE. According to such rules, foreign private issuers are subject to a more
limited set of requirements regarding corporate governance than those imposed
on
U.S. domestic issuers. As a foreign private issuer, we must comply with four
rules imposed by the NYSE:
|
·
|
prior
to July 31, 2005, we must comply with the requirements set forth
by the
SEC concerning audit committees;
|
|
·
|
we
must submit an annual Written Affirmation to the NYSE and an Interim
Written Annual Affirmation each time a change occurs in the Board
of
Directors or the Audit Committee.
|
|
·
|
our
CEO must promptly notify the NYSE in writing after any executive
officer
becomes aware of any material non-compliance with any of the applicable
NYSE corporate governance rules;
and
|
|
·
|
we
must provide a brief description disclosing any significant ways
in which
our corporate governance practices differ from those followed by
U.S.
companies under NYSE listing
standards.
|
A
brief
description disclosing the significant ways in which our corporate governance
practices differ from those followed by U.S. companies under NYSE listing
standards is available in our webpage http://www.bachoco.com.mx/?p=94
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 hold 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.
In
April
1995, the Robinson Bours Stockholders created the Control Trust to hold certain
Units owned by members of the Robinson Bours family. The Robinson Bours
Stockholders, through the Control Trust and a separate trust established in
connection with our 1997 initial public offering (the “Family Trust”),
Before
September 2006, the Control Trust and the Family Trust was:
Title of Class
|
|
Identity of Group
|
|
Amount Owned
|
|
Percent of Class
|
|
|
|
|
|
|
|
|
|
Series
B(1)
|
|
Control Trust and Family Trust
|
|
|
398,250,000
|
|
|
88.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Series
L(2)
|
|
Control
Trust and Family Trust
|
|
|
98,250,000
|
|
|
65.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
All
Classes(3)
|
|
Control
Trust and Family Trust
|
|
|
496,500,000
|
|
|
82.8
|
%
|
(1)
|
Percentage
is based on 450,000,000 Series B Shares, including 300,000,000 Shares
not
registered under Section 12 of the Securities and Exchange Act of
1934.
|
(2)
|
Percentage
is based on 150,000,000 Series L
Shares.
|
(3) Percentage
is based on 600,000,000 Shares.
As
of
December 31, 2006 the Control Trust and the Family Trust owned 496,500,000
Shares outstanding, (82.75%), all Series B Shares.
Apart
from the ownership set forth above, at the end of April 2008, Fidelity Low
Priced Stock Fund and Fidelity Management & Research Co. each own 5.03% of
our Common Stock, representing a total of 2,515,000 and 2,515,200 shares
respectively.
In
November 1998, in accordance with rules established by the CNBV, we established
a reserve in the amount of Ps.180.0 million in nominal pesos, for the repurchase
of Shares. At the end of 2007, the Company had repurchased zero
Shares.
During
our stockholders’ meeting of April 23, 2008, we capped the share repurchase
program for 2008 to a maximum amount of Ps.313.6 million. As of May 20, 2008,
we
had repurchased zero Shares.
The
following table sets the percentages of the Shares held in México and other
Countries as of December 31, 2007.
Year
|
|
Percentage
|
|
|
|
|
|
México
|
|
|
85.0
|
%
|
Other
Countries
|
|
|
15.0
|
%
|
From
the
100% of the total Shares of the Company we accounted for approximately 48
shareholders in the NYSE and 58 in the BMV.
Interest
of Management in Certain 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 4 to the 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.58.6 million, Ps. 63.5 million and Ps.95.8 million for the
years ended December 31, 2005, 2006 and 2007, 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 own Taxis Aéreos del Noroeste, S.A. de C.V. (“TAN”),
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 TAN
Ps.
4.7 million, Ps.4.2 million and Ps.3.2 million for the years ended December
31,
2005, 2006 and 2007, respectively, for such transportation.
We
purchased feed and packaging materials from enterprises owned by the family
of
Enrique Robinson Bours and the family of Juan Bautista Robinson Bours. The
cost
of such purchases was Ps.194.1 million, Ps.251.9.0 million and Ps.192.8 million
for the years ended December 31, 2005, 2006 and 2007, respectively.
Our
accounts payable to related parties totaled Ps.12.7 million and Ps.26.8 million
as of ended December 31, 2006 and 2007, respectively. These transactions took
place among companies owned by the same set of stockholders. See Note 4 to
the
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.
ITEM
8.
|
Financial
Information
|
Our
Consolidated Financial Statements are included in Item 18. The financial
statements were audited by an independent registered public accounting firm
and
are accompanied by an audit report.
The
financial statements include a consolidated balance sheet, consolidated
statements of income, consolidated statements of changes in stockholders’
equity, and consolidated statements of changes in financial position and Notes
relating to the Consolidated Financial Statements.
The
Consolidated Financial Statements have been prepared in accordance with Mexican
FRS, which differ in certain respects from U.S. GAAP. Note 19 to the
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 total stockholders’ equity, operating income and
net income, a consolidated statement of changes in stockholders’ equity and a
condensed cash flow statement under U.S. GAAP as of December 31, 2006 and 2007,
and for the years ended December 31, 2005, 2006 and 2007.
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 us.
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.
We
declared and paid dividends in nominal pesos of Ps.239.1 million in 2005,
Ps.353.9 million in 2006 and Ps.353.9 million in 2007.
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 up to approximately 20% 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% 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% 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.
Significant
Changes in Accounting Practices
New
Accounting pronouncements
The
most
important new accounting pronouncements that came into effect in 2007 are:
Mexican FRS B-3, (Statement of Operation), Mexican FRS C-13, (Related Parties),
Mexican FRS D-6, (Capitalization of the Comprehensive Cost of Financing),
Mexican IFRS 4, (Presentation of Employee Profit Sharing in the Statement of
Operation) and Mexican IFRS8, (Effects of the Flate-Rate Business Tax (FRBT)).
For more detail see Note 2-x and Note 18 to the Consolidated Financial
Statements.
The
most
important new accounting pronouncements that will come into effect in 2008
are:
Mexican FRS B-2, (Statement of Cash Flows), Mexican FRS B-10 (Effects of
Inflation), Mexican FRS D-3, (Employees Benefits), Mexican FRS D-4, (Taxes
on
Profits), Mexican FRS 5, (Accounting Recognition of the Additional Consideration
Agreed at the Inception of a Derivative to Adjust the Instrument to its Fair
Value), Mexican FRS 6, (Formally Designating a Hedge) and Mexican FRS 7,
(Application of Comprehensive Income Item Generated by a Cash Flow Hedge on
a
Forecasted Purchase of a Non-financial Asset).
We
consider that the application of the Mexican FRS 5, Mexican FRS 6 and Mexican
FRS 7 will have no material effect on our financial position or results of
operations. We will apply Mexican FRS B-10 by ceasing to recognize the effects
of inflation in our financial information and we are analyzing the effect of
Mexican FRS B-2, FRS D-3 and FRS D-4. For more detail see Note 18 to the
Consolidated Financial Statements.
ITEM
9.
|
The
Offer and Listing
|
On
September 19, 1997, Bachoco commenced trading on the Mexican Stock Exchange
through Units (each comprised of one Series B Share and one Series L Share),and
on the New York Stock Exchange thought American Depositary Shares (“ADSs,” each
comprised of six Units). The ADSs are evidenced by American Depositary Receipts
(“ADRs”) issued
by
The Bank of New York, as Depositary under a Deposit Agreement among the Company,
the Depositary and the holders from time to time of ADRs.
In
September 2006, the Company separated the UBL and UBB Units into their
components, and converted their Series L Shares into Series B Shares, on a
one
to one basis. Consequently, now all our Common Stock Shares are Series B Shares
with full voting rights. This change had not modified the face value of the
Shares.
On
May 1,
2008, there were 7,654 thousands ADSs outstanding, representing 15.3% of the
total Shares outstanding, which were held by five holders (including the
Depositary Trust Company) with registered addresses in the United
States.
The
following tables set forth for each year from 2003 to 2007, for each quarter
from 2006 and 2007 and for each complete month from December 2007 to May 2008,
the high, low and close prices of the Shares on the Mexican Stock as reported
by
the Mexican Stock Exchange and the high, low and close price of the ADSs on
the
NYSE as reported by the New York Stock Exchange.
Mexican
Stock Exchange
(Nominal
pesos per Share)
Year
|
|
High
|
|
Low
|
|
Close
|
|
2003
|
|
|
9.65
|
|
|
7.00
|
|
|
9.45
|
|
2004
|
|
|
13.35
|
|
|
8.50
|
|
|
13.10
|
|
2005
|
|
|
20.70
|
|
|
12.22
|
|
|
17.25
|
|
2006
|
|
|
23.70
|
|
|
15.70
|
|
|
23.66
|
|
2007
|
|
|
30.96
|
|
|
20.00
|
|
|
28.60
|
|
New
York Stock Exchange
(U.S.$
per ADS)
Year
|
|
High
|
|
Low
|
|
Close
|
|
2003
|
|
|
10.78
|
|
|
7.73
|
|
|
10.45
|
|
2004
|
|
|
14.19
|
|
|
8.8
|
|
|
14.19
|
|
2005
|
|
|
23.02
|
|
|
12.87
|
|
|
19.50
|
|
2006
|
|
|
29.00
|
|
|
16.33
|
|
|
29.00
|
|
2007
|
|
|
35.11
|
|
|
24.10
|
|
|
31.81
|
|
Mexican
Stock Exchange
(Nominal
pesos per Share)
Period
|
|
High
|
|
Low
|
|
Close
|
|
First
Quarter 2006
|
|
|
17.25
|
|
|
15.70
|
|
|
15.95
|
|
Second
Quarter 2006
|
|
|
19.10
|
|
|
15.85
|
|
|
18.50
|
|
Third
Quarter 2006
|
|
|
20.00
|
|
|
16.90
|
|
|
20.00
|
|
Fourth
Quarter 2006
|
|
|
23.66
|
|
|
18.70
|
|
|
23.66
|
|
First
Quarter 2007
|
|
|
28.00
|
|
|
20.00
|
|
|
25.80
|
|
Second
Quarter 2007
|
|
|
30.08
|
|
|
25.89
|
|
|
28.60
|
|
Third
Quarter 2007
|
|
|
30.96
|
|
|
24.00
|
|
|
29.50
|
|
Fourth
Quarter 2007
|
|
|
29.02
|
|
|
23.00
|
|
|
27.01
|
|
New
York Stock Exchange
(U.S.$
per ADS)
Period
|
|
High
|
|
Low
|
|
Close
|
|
First
Quarter 2006
|
|
|
19.58
|
|
|
16.33
|
|
|
17.43
|
|
Second
Quarter 2006
|
|
|
20.90
|
|
|
17.30
|
|
|
18.29
|
|
Third
Quarter 2006
|
|
|
22.45
|
|
|
17.97
|
|
|
22.25
|
|
Fourth
Quarter 2006
|
|
|
29.00
|
|
|
20.65
|
|
|
29.00
|
|
First
Quarter 2007
|
|
|
30.75
|
|
|
24.10
|
|
|
28.34
|
|
Second
Quarter 2007
|
|
|
33.55
|
|
|
28.51
|
|
|
32.25
|
|
Third
Quarter 2007
|
|
|
35.11
|
|
|
27.14
|
|
|
32.06
|
|
Fourth
Quarter 2007
|
|
|
32.61
|
|
|
26.04
|
|
|
30.77
|
|
Mexican
Stock Exchange
(Nominal
pesos per Share)
Month
|
|
High
|
|
Low
|
|
Close
|
|
December
2007
|
|
|
29.02
|
|
|
26.91
|
|
|
28.60
|
|
January
2008
|
|
|
30.15
|
|
|
26.35
|
|
|
28.50
|
|
February
2008
|
|
|
28.50
|
|
|
22.00
|
|
|
26.00
|
|
March
2008
|
|
|
26.33
|
|
|
22.00
|
|
|
25.12
|
|
April
2008
|
|
|
25.56
|
|
|
22.11
|
|
|
25.05
|
|
May
2008
|
|
|
25.36
|
|
|
23.71
|
|
|
25.36
|
|
New
York Stock Exchange
(U.S.$
per ADS)
Period
|
|
High
|
|
Low
|
|
Close
|
|
December
2007
|
|
|
32.61
|
|
|
30.00
|
|
|
31.81
|
|
January
2008
|
|
|
33.34
|
|
|
29.46
|
|
|
30.90
|
|
February
2008
|
|
|
29.53
|
|
|
27.39
|
|
|
29.30
|
|
March
2008
|
|
|
29.99
|
|
|
28.23
|
|
|
29.12
|
|
April
2008
|
|
|
29.25
|
|
|
27.80
|
|
|
29.03
|
|
May
2008
|
|
|
29.48
|
|
|
27.56
|
|
|
29.00
|
|
Trading
on the Mexican Stock Exchange
The
Mexican Stock Exchange, located in México City, is the only stock exchange in
México. Founded in 1894, the Mexican Stock Exchange is organized as a
corporation whose Shares are held by brokerage houses, which are currently
the
only entities allowed to own them. These brokerage houses are currently the
only
entities authorized to trade on the floor of the Mexican Stock Exchange. Trading
on the Mexican Stock Exchange takes place principally through an automated
inter-dealer quotation system known as SENTRA, which is open for trading between
the hours of 8:30 a.m. and 3:00 p.m., México City time, each business day. Each
trading day is divided into six trading sessions with ten-minute periods
separating each session. Trades in securities listed on the Mexican Stock
Exchange can, subject to certain requirements, also be realized off the
Exchange. Due primarily to Mexican tax considerations, however, most
transactions in listed securities are effected through the Exchange. The Mexican
Stock Exchange operates a system of automatic suspension of trading in Shares
of
a particular issuer as a means of controlling excessive price volatility, but
under current regulations this system does not apply to securities such as
the
Units that are directly or indirectly (for example, through ADSs) quoted on
a
stock exchange outside México.
Settlement
is effected two business days after a share transaction on the Mexican Stock
Exchange. Deferred settlement, even by mutual agreement, is not permitted
without the approval of the CNBV. Most securities traded on the Mexican Stock
Exchange are on deposit with S.D.
Indeval Institución para el Depósito de Valores, S.A. de C.V., (Central
Securities Depository for the Mexican Securities Market, or “Indeval”), a
privately owned central securities depositary that acts as a clearing house,
depositary, custodian and registrar for Mexican Stock Exchange transactions,
eliminating the need for physical transfer of securities.
The
Mexican Stock Exchange is one of Latin America’s largest exchanges in terms of
market capitalization, but it remains relatively small and illiquid compared
to
major world markets, and is therefore subject to greater volatility. There
is no
formal over-the-counter market for securities in México.
The
market value of securities of Mexican companies is, to varying degrees, affected
by economic and market conditions in other emerging market
countries.
Market
Regulation
The
predecessor of the CNBV was established in 1946 to regulate stock market
activity. The Ley
del Mercado de Valores
(“Securities Market Law”) of 1975, as amended, regulates the securities markets
and brokerage houses and sets standards for the registration of brokers in
the
Intermediaries Section of the Registro
Nacional de Valores e Intermediarios
(National Registry of Securities and Intermediaries, or “RNVI”), such
registration being a prerequisite to becoming a member of the Mexican Stock
Exchange. Prior to registration in the RNVI, a brokerage house must be
authorized by the Ministry of Finance upon the recommendation of the CNBV.
Legislative provisions under NAFTA allow foreign securities firms in a NAFTA
country to establish and control brokerage firms in México. There are several
foreign brokerage houses authorized to operate in México. In addition, a number
of other foreign brokerage firms have submitted preliminary applications to
be
authorized to operate on the Mexican Stock Exchange. The Securities Market
Law
also empowers the CNBV to regulate the public offering and trading of
securities. The governing committee of the CNBV is composed of representatives
of the Ministry of Finance, the Mexican Central Bank, the
Comisión Nacional de Seguros y Fianzas
(“National Insurance and Bonding Commission”), the Comisión
Nacional del Sistema de Ahorro para el Retiro
(“National Retirement Savings Fund Commission”) and the CNBV.
Under
the
Mexican Securities Market Law, the CNBV must be notified before stockholders
of
a company listed on the Mexican Stock Exchange effect one or more simultaneous
or successive transactions resulting in the transfer of 10% or more of such
company’s capital stock. The holders of the Shares being transferred in the
transactions are also obligated to inform the CNBV of the results of the
transactions within three days of completion of the last transaction, or that
the transactions have not been completed. The CNBV will notify the Mexican
Stock
Exchange of such transactions, without specifying the names of the parties
involved.
The
CNBV
and the Mexican Stock Exchange must also be notified in the event of any of
the
following contingencies:
|
·
|
on
the following day of operation if any stockholder of a company listed
on
the Mexican Stock Exchange effects one or more transactions resulting
in
the ownership of more than 10% and less of 30% of capital
stock;
|
|
·
|
on
the following day of operation if any Related Person increases his
ownership of the stock of a company;
and
|
|
·
|
at
least 15 days before the operation becomes effective if any stockholder
of
a company listed on the Mexican Stock Exchange undertakes in a Public
Offering one or more transactions resulting in the ownership of more
than
30% but less than 50% of capital
stock.
|
In
June
2006, the
Ley del Mercado de Valores
(“Securities Market Law”) was updated. Our bylaws were also updated accordingly,
which are available in an English version, in our web page.
Some
of
the changes, among others are:
|
a) |
We
had to change our name from “Industrias Bachoco S.A. de C.V.” to
“Industrias Bachoco, S.A.B. de
C.V.”
|
|
b) |
Defines
more specifically the concept of “Control” or
“Controlled”
|
|
c) |
Defines
and assigns specific duties to the General Director or
CEO.
|
|
d) |
Defines
more precisely and widely the duties of the Board of
Directors.
|
|
e) |
Assign
more ample responsibilities to the audit
committee.
|
|
f) |
The
Statutory Auditor no longer exists for Public Companies, his duties
were
assumed by the Audit Committee.
|
ITEM
10.
|
Additional
Information
|
Memorandum
and Articles of Association
Information
regarding the memorandum and articles of association was included in the Initial
Registration 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 and January 2007 we made further changes, the most important
are summarized below. An English translation of our bylaws was submitted with
our annual report for year 2006 and is incorporated by reference herein and
is
also available on our web page www.bachoco.com.mx.
Aside
from these changes, the information contained in the Initial Registration Form
F-1 is applicable to this Annual Report.
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 anónima de capital variable) under the laws of México. To fully comply
with Mexican laws, the Company modified its name to Industrias Bachoco, S.A.B.
de C.V. (sociedad anónima 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. Each Unit consisted of one
Series B Share and one Series L Share. 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.
Originally
for a period of 10 years after the Global Offering, the Series B Shares will
be
issuable only in the form of Units and B Units, and the Series L Shares only
in
the form of Units. Commencing 10 years from the date of the Global Offering,
Units will automatically separate into their component Series B Shares and
Series L Shares, B Units will automatically separate into their component Series
B Shares, and each Series L Share underlying the Units will automatically
convert into one Series B Share.
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. The Series L Shares were converted 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. These Shares are currently trading
on
the Mexican Stock Market. Each ADS still consists of 12 underlying Shares,
but
they are all Series B Shares.
The
Series B Shares had full voting rights and the Series L Shares had limited
voting rights. Nevertheless the Series B Shares and the Series L Shares had
the
same economic rights. Each Series B Share entitled the holder thereof to one
vote at any general meeting of the stockholders. The Series L Shares were
entitled to vote only with respect to certain limited matters as described
under
“—Voting Rights and Stockholders’ Meetings.”
The
Robinson Bours Stockholders have advised us that they intend to ensure that
the
Control Trust will hold at least 51% of the Series B Shares at any time
outstanding. See “—Foreign Investment Legislation.”
Registration
and Transfer
Series
B
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. See
“Description of American Depositary Receipts.”
In
accordance with Article 130 of the Ley
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% 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% 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 violate 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% 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
Series B Share 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 Shareholders 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% (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.
Before
September 2006, any holder of Series L Shares representing 10% or more of the
outstanding capital stock had the right to appoint one member and one alternate
member of the Board of Directors during a Shareholders’ meeting.
Under
our
bylaws, the quorum on first call for a general ordinary meeting is at least
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% 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% of the outstanding Shares with voting
rights on the matters to be addressed in that meeting are
represented.
Our
bylaws require
the approval of holders of at least 95% of the outstanding Shares and the
approval of the CNBV for the amendment of the controlling stockholders’
obligation under the bylaws to
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 at www.bachoco.com.mx
Holders
of ADRs are entitled to instruct the Depositary as to the exercise of the voting
rights. See “Description of American Depositary Receipts—Voting of Deposited
Securities.”
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% 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 Shares having voting rights, including limited or restricted voting
rights or holders of Shares without voting rights that jointly or individually
represent 5% (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 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% (ten percent)
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% (ten
percent) 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 the
Diario Oficial de la Federación (“Official Gazette”) or in a newspaper of
general circulation in México City. Stockholders’ meetings may be held without
such publication provided that 100.0% 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:
|
(i) |
The
Board of Directors will be integrated by a minimum of 5 (five) and
a
maximum of 21 (twenty-one) principal
members.
|
|
(ii) |
At
least 25% (twenty-five percent) of the members of the Board of Directors
must be independent, in accordance with the terms of article 24 of
the
Securities Market Law.
|
|
(iii) |
For
each principal member, a substitute will be appointed, in the
understanding that the substitutes of independent Board members must
also
be independent.
|
Besides
from 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 México 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% 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.
Statutory
Auditor
According
with the Mexican market law, the Statutory Auditor is not required for public
companies since June 2006. The activities of the Statutory Auditor will be
performed by the Audit Committee.
Dividend
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 Series B Shares for their consideration.
The holders of Series B Shares, once they have approved the financial
statements, determine the allocation of our net profits, if any, for the
preceding year. They are required by law to allocate 5% of such net profits
to a
legal reserve, which is not thereafter available for distribution until the
amount of the legal reserve equals 20% of our historical capital stock (before
giving effect to the restatement thereof in constant pesos). As of December
31,
2007, our legal reserve fund was equal to at least 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 Series B Shares 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
Shares 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 require
that any capital increase affected pursuant to a capital contribution be
represented by new Series B 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 the Diario
Oficial de la Federación (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 ADRs 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. See “Description of
American Depositary Receipts—Dividends, Other Distributions and
Rights.”
Foreign
Investment Legislation
Ownership
by foreigners of Shares of Mexican companies is regulated by the Ley
de Inversión Extranjera
(“Foreign Investment Law”) and by the Reglamento
de la Ley para Promover la Inversión Mexicana y Regular la Inversión 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% 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% 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%.
Other
Provisions
Fixed
and Variable Capital. As
a
sociedad
anónima 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.
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% of the paid in capital stock.
Forfeiture
of Shares. As
required by Mexican law, our bylaws provide
that our current and future foreign stockholders are formally bound to the
Mexican Secretaría
de Relaciones Exteriores (“Ministry
of Foreign Relations”) to consider themselves as Mexican nationals with respect
to our Shares that they may acquire or of which they may be owners, and with
respect to the property, rights, concessions, participations or interests that
we may own or rights and obligations that are based on contracts to which we
are
party with the Mexican authorities, and not to invoke the protection of their
government under penalty, should they do so, of forfeiting to the Mexican State
the corporate participation that they may have acquired. In the opinion of
Galicia & Robles, S.C., our special Mexican counsel, under this provision a
non-Mexican stockholder (including a non-Mexican holder of ADSs) is deemed
to
have agreed not to invoke the protection of his own government by requesting
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 with respect to its investment in
us,
including any rights under U.S. securities laws. If the stockholder should
invoke such governmental protection in violation of this agreement, its Shares
could be forfeited to the Mexican State. Mexican law requires that such a
provision be included in the bylaws of
all
Mexican corporations unless such bylaws prohibit
ownership of capital stock by foreign investors.
Exclusive
Jurisdiction. Our
bylaws provide
that legal actions relating to any conflict between our stockholders and us,
or
among the stockholders in connection with matters related to us, may be brought
only in courts in México City. Therefore, our stockholders are restricted to the
courts of México City.
Duration;
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.
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 the Ley
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% of the voting capital stock, vote against the issuance
of these Shares, such issuance can not 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% (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 under
the terms and conditions outlined below:
The
Audit
Committee will consist of members of the Board of Directors. The President
of
the audit committee and a majority of the audit committee members must be
independent, as independence is defined under the Mexican Securities Market
Law.
The
mandate of the audit committee 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 must do the following:
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·
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Submit
an annual report to the Board of
Directors;
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·
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Provide
the Board of Directors with its opinion on the matters that pertain
to the
Auditing Committee, in accordance with the Securities Market
Law;
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|
·
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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;
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|
·
|
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;
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|
·
|
Receive
observations formulated by shareholders, Board members, relevant
officers,
employees and, in general, any third party with regard to the matters
under his duties, as well as carry out the actions that, in its judgment,
may be appropriate in connection with such observations;
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|
·
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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 propose the actions
that
should be taken;
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·
|
Call
Shareholders Meetings and cause the items it deems pertinent to be
inserted into the agendas of such Shareholder’s Meetings, and
|
|
·
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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.
|
See
the
Article35 of the Mexican Security Market Law for more detail.
Transactions
that depart from the ordinary course of business, and which would be entered
into by and between subsidiaries of the Company and its stockholders, with
persons who form part of the management of the Company’s subsidiaries or with
those with whom such persons maintain monetary ties or, if applicable, have
a
family relationship of consanguinity or affinity up to the second degree, a
spouse or concubine; which represent the purchase or sale of 10% or more of
assets; the granting of guaranties in an amount in excess of 30% of assets,
as
well as transactions other than the foregoing which represent more than 1%
of
the Company’s assets, shall be submitted for the opinion of the Company’s audit
committee and for approval by the Company’s Board of Directors.
Material
Contracts
Not
applicable.
Exchange
Controls
Ownership
by foreigners of Mexican companies is regulated by the Foreign Investment Law
and by the 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 Goverment 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 100% 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 shall be necessary in order
for
foreign investment to exceed 49% 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 of his shares. Pursuant to our bylaws, foreigners may only
own
Shares up to 49% of such Series.
Taxation
The
following is a general summary of the principal U.S. federal tax consequences
and the principal Mexican federal tax consequences of the acquisition, ownership
and disposition of Shares or ADSs. This summary does not purport to address
all
material tax consequences that may be relevant to holders of Shares or ADSs,
and
does not take into account the specific circumstances of any particular
investors, some of which (such as tax-exempt entities, banks, insurance
companies, broker-dealers, traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings, regulated
investment companies, real estate investment trusts, partnerships and other
pass-through entities, investors liable for the U.S. alternative minimum tax,
investors that own or are treated as owning 10% or more of our voting stock,
investors that hold Shares or ADSs as part of a straddle, hedge, conversion
transaction or other integrated transaction and U.S. Holders (as defined below)
whose functional currency is not the U.S. dollar) may be subject to special
tax
rules. In addition, this summary is based in part upon the representations
of
the Depositary and the assumption that each obligation in the deposit agreement,
and in any related agreement, will be performed in accordance with its
terms.
For
purposes of this discussion, a “U.S. Holder” is any beneficial owner of Shares
or ADSs that, for U.S. federal income tax purposes, is:
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1.
|
an
individual who is a citizen or resident of the United
States;
|
|
2.
|
a
corporation (or other entity taxable as a corporation for U.S. federal
income tax purposes) organized in or under the laws of the United
States,
any state thereof, or the District of
Columbia;
|
|
3.
|
an
estate, the income of which is subject to U.S. federal income tax
without
regard to its source; or
|
|
4.
|
a
trust that is subject to the primary supervision of a U.S. court
and the
control of one or more U.S. persons, or that has a valid election
in
effect under applicable Treasury regulations to be treated as a U.S.
person.
|
If
a
partnership holds Shares or ADSs, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership. A partner of a partnership considering the purchase of Shares
or
ADSs should consult its own independent tax advisor regarding the U.S. federal
income tax consequences of investing in Shares or ADSs through a
partnership.
Except
where specifically described below, this discussion assumes that we are not
a
passive foreign investment company, or PFIC, for U.S. federal income tax
purposes. See “—Passive Foreign Investment Company Rules.” This summary is based
on the federal income tax laws and regulations of the United States and México,
judicial decisions, published rulings and administrative pronouncements, all
as
in effect on the date hereof, and all of which are subject to change (and some
changes may have retroactive effect) and different interpretations. Further,
this discussion does not address U.S. federal estate and gift tax or the
alternative minimum tax consequences of holding Shares or ADSs or the indirect
consequences to holders or equity interests in partnerships (or any other entity
treated as a partnership for U.S. federal income tax purposes) that own Shares
or ADSs. In addition, this discussion does not address the non-U.S.,
non-Mexican, state or local tax consequences of holding Shares or ADSs.
Prospective purchasers of Shares or ADSs should consult their own tax advisors
as to the U.S., Mexican or other tax consequences of the purchase, ownership
and
disposition of Shares or ADSs, including, in particular, the effect of any
non-U.S., non-Mexican, state or local tax laws.
A
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and a Protocol thereto, between the
United States and México (the “Tax Treaty”) took effect on January 1, 1994. The
Tax Treaty was amended by a second Protocol signed November 26, 2002, the
provisions of which took effect in part on September 1, 2003, and in part on
January 1, 2004. The United States and México have also entered into an
agreement concerning the exchange of information with respect to tax
matters.
In
general, for U.S. federal income tax purposes, holders of ADRs evidencing ADSs
will be treated as the beneficial owners of the Shares represented by those
ADSs.
U.S.
Federal Income Taxation
U.S.
Holders
The
following discussion is a summary of the material U.S. federal income tax
consequences to holders of our Shares and of ADSs that are U.S. Holders and
that
hold those Shares or ADSs as capital assets (generally, for investment
purposes).
Taxation
of Dividends
Cash
dividends paid with respect to the Shares constituting the Shares or Shares
represented by ADSs to the extent paid out of our earnings and profits (as
determined under U.S. federal income tax principles) will be included in the
gross income of a U.S. Holder as ordinary income on the day on which the
dividends are received by the U.S. Holder, in the case of Shares, or the
Depositary, in the case of Shares represented by ADSs, and will not be eligible
for the dividends-received deduction allowed to corporations under the Internal
Revenue Code of 1986, as amended (the “Code”). We do not currently maintain
calculations of our earnings and profits under U.S. federal income tax
principles. Because these calculations are not made, distributions should be
presumed to be taxable dividends for U.S. federal income tax
purposes.
A
U.S.
Holder will be entitled, subject to a number of complex limitations and
conditions, to claim a U.S. foreign tax credit in respect of any Mexican income
taxes withheld on dividends received on Shares or ADSs. U.S. Holders who do
not
elect to claim a credit for any foreign income taxes paid during the taxable
year may instead claim a deduction in respect of such Mexican income taxes.
Dividends received with respect to Shares or ADSs will be treated as foreign
source income, subject to various classifications and other limitations. For
purposes of the U.S. foreign tax credit limitation, foreign source income is
separated into different “baskets,” and the credit for foreign taxes on income
in any basket is limited to the U.S. federal income tax allocable to such
income. Dividends paid with respect to Shares or ADSs generally will constitute
“passive category income” in most cases. The U.S. Treasury Department has
expressed concerns that parties to whom depositary shares such as the ADSs
are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits by U.S. Holders of such ADSs. Accordingly, the analysis
of
the creditability of Mexican income taxes described above could be affected
by
future actions that may be taken by the U.S. Treasury Department. The rules
relating to computing foreign tax credits or deducting foreign taxes are
extremely complex, and U.S. Holders are urged to consult their own independent
tax advisors regarding the availability of foreign tax credits with respect
to
any Mexican income taxes withheld.
Dividends
paid in pesos will be included in the gross income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the
day
they are received by the U.S. Holder, in the case of Share, or the Depositary,
in the case of Share represented by ADSs (regardless of whether such pesos
are
in fact converted into U.S. dollars on such date). If such dividends are
converted into U.S. dollars on the date of receipt by the U.S. Holder or the
Depositary, as the case may be, the U.S. Holder generally should not be required
to recognize foreign currency gain or loss in respect of the dividends. U.S.
Holders should consult their own tax advisors regarding the treatment of foreign
currency gain or loss, if any, on any pesos received which are converted into
U.S. dollars on a date subsequent to receipt.
Subject
to certain exceptions for short-term and hedged positions, and provided that
we
are not a passive foreign investment company (as discussed below), dividends
received by certain U.S. Holders (including individuals) prior to January 1,
2011 with respect to the Shares or ADSs will be subject to U.S. federal income
taxation at a maximum rate of 15% if such dividends represent “qualified
dividend income.” Dividends paid on the ADSs will be treated as qualified
dividend income if (i) the ADSs are readily tradable on an established
securities market in the United States and (ii) we were not in the year prior
to
the year in which the dividend was paid, and are not in the year in which the
dividend is paid, a PFIC. Under current guidance recently issued by the Internal
Revenue Service (“IRS”), the ADSs should qualify as readily tradable on an
established securities market in the United States so long as they are listed
on
the New York Stock Exchange, but no assurances can be given that the ADSs will
be or remain readily tradable under future guidance.
Based
on
existing guidance, it is not entirely clear whether dividends received with
respect to Shares will be treated as qualified dividend income, because the
Shares are not themselves listed on a U.S. exchange. In addition, the U.S.
Treasury Department has announced its intention to promulgate rules pursuant
to
which shareholders (and intermediaries) will be permitted to rely on
certifications from issuers to establish that dividends qualify for the reduced
rate of U.S. federal income taxation. Because such procedures have not yet
been
issued, we are not certain that we will be able to comply with them. U.S.
Holders of Shares or ADSs should consult their own tax advisors regarding the
availability of the reduced rate in the light of their own particular
circumstances.
Distributions
to U.S. Holders of additional Shares with respect to their Shares or ADSs that
are made as part of a pro rata distribution to all of our stockholders generally
will not be subject to U.S. federal income tax. If holders of the ADSs are
restricted in their ability to participate in the exercise of preemptive rights,
the preemptive rights may give rise to a deemed distribution to holders of
the
Shares under Section 305 of the Code. Any deemed distributions will be taxable
as a dividend in accordance with the general rules of the income tax treatment
of dividends discussed above.
Taxation
of Capital Gains
Gain
or
loss recognized by a U.S. Holder on the sale or other taxable disposition of
Shares or ADSs generally will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between such U.S.
Holder’s adjusted tax basis in the Shares or ADSs and the amount realized on the
disposition. A U.S. Holder generally will have an adjusted tax basis in a Shares
or an ADS equal to its U.S. dollar cost. Gain or loss recognized by a U.S.
Holder on the sale or other disposition of Shares or ADSs will generally be
long-term gain or loss if, at the time of disposition, the U.S. Holder has
held
the Shares or ADSs for more than one year.
Certain
U.S. Holders, including individuals, are eligible for preferential rates of
U.S.
federal income tax in respect of long-term capital gains. The deduction of
a
capital loss is subject to limitations under the Code.
Gain
realized by a U.S. Holder on a sale or other disposition of Shares or ADSs
generally will be treated as U.S. source income for U.S. foreign tax credit
purposes. Consequently, if any Mexican withholding tax is imposed on the sale
or
disposition of the Shares, a U.S. holder that does not receive significant
foreign source income from other sources may not be able to derive effective
U.S. foreign tax credit benefits in respect of these Mexican taxes. U.S. holders
should consult their own tax advisors regarding the application of the foreign
tax credit rules to their investment in, and disposition of, the Shares or
ADSs.
Deposits
and withdrawals of Shares by U.S. Holders in exchange for ADSs will not result
in the realization of gain or loss for U.S. federal income tax
purposes.
Passive
Foreign Investment Company Rules
A
non-U.S. corporation generally will be classified as a passive foreign
investment company (a “PFIC”) for U.S. federal income tax purposes in any
taxable year in which, after applying look-through rules, either (1) at least
75% of its gross income is passive income, or (2) on average at least 50% of
the
gross value of its assets is attributable to assets that produce passive income
or are held for the production of passive income. Passive income for this
purpose generally includes, among other things, dividends, interest, royalties,
rents and gains from commodities and securities transactions. The PFIC
determination is made annually and generally is based on the value of a non-U.S.
corporation’s assets (including goodwill) and composition of its income. In
determining whether we are a PFIC, a pro rata portion of the income and assets
of each subsidiary in which we own, directly or indirectly, at least a 25%
interest by value is taken into account.
Based
on
current estimates of our income and assets, we do not believe that we were
classified for our most recently-ended taxable year, or will be classified
for
our current taxable year, as a PFIC for U.S. federal income tax purposes, and
we
intend to continue our operations in such a manner that we will not become
a
PFIC in the future, although no assurances can be made regarding determination
of our PFIC status in the current or any future taxable year. If we are treated
as a PFIC for any taxable year, a U.S. Holder would be subject to special rules
(and may be subject to increased tax liability) with respect to (a) any gain
realized on the sale or other disposition of Units or ADSs, and (b) any “excess
distribution” made by us to the U.S. Holder (generally, any distribution during
a taxable year in which distributions to the U.S. Holder on the Units or ADSs
exceed 125% of the average annual distributions the U.S. Holder received on
the
Units or ADSs during the preceding three taxable years or, if shorter, the
U.S.
Holder’s holding period for the Units or ADSs). Under those rules, (a) the gain
or excess distribution would be allocated ratably over the U.S. Holder’s holding
period for the Units or ADSs, (b) the amount allocated to the taxable year
in
which the gain or excess distribution is realized and to taxable years before
the first day on which we became a PFIC would be taxable as ordinary income,
(c)
the amount allocated to each prior year in which the Issuer was a PFIC would
be
subject to U.S. federal income tax at the highest tax rate in effect for that
year and (d) the interest charge generally applicable to underpayments of U.S.
federal income tax would be imposed in respect of the tax attributable to each
prior year in which we were treated as a PFIC. In addition, a U.S. Holder
generally would be required to annually file IRS Form 8621 to disclose ownership
of an equity interest in a PFIC. Moreover, dividends that a U.S. Holder receives
from us will not be eligible for the reduced U.S. federal income tax rates
described above if we are a PFIC either in the taxable year of the distribution
or the preceding taxable year (and instead will be taxable at rates applicable
to ordinary income).
Prospective
investors should consult their own tax advisors regarding the potential
application of the PFIC rules to Shares or ADSs.
Non-U.S.
Holders
The
following discussion is a summary of the principal U.S. federal income tax
consequences to beneficial holders of Shares or ADSs that are neither U.S.
Holders nor partnerships for U.S. federal income tax purposes (“Non-U.S.
Holders”).
Subject
to the discussion below under “U.S. Backup Withholding,” a Non-U.S. Holder of
Shares or ADSs will not be subject to U.S. federal income or withholding tax
on
gain realized on the sale of Shares or ADSs, unless (i) such gain is effectively
connected with the conduct by such Non-U.S. Holder of a trade or business in
the
United States (and, if an applicable tax treaty requires, is attributable to
a
U.S. permanent establishment or fixed base of such Non-U.S. Holder) or (ii)
in
the case of gain realized by an individual Non-U.S. Holder, such holder is
present in the United States for 183 days or more in the taxable year of the
sale and certain other conditions are met.
U.S.
Backup Withholding
and Information Reporting
In
general, dividends on Shares or ADSs, and payments of the proceeds of a sale
or
other taxable disposition of Shares or ADSs, paid within the United States,
by
the U.S. payor or through certain U.S.-related financial intermediaries to
a
U.S. Holder are subject to information reporting and may be subject to backup
withholding at a current rate of 28% unless the holder (i) establishes that
it
is a corporation or other exempt recipient or (ii) with respect to backup
withholding, provides an accurate taxpayer identification number and certifies
that it is a U.S. person and that no loss of exemption from backup withholding
has occurred. Payments made within the United States, by a U.S. payor or through
certain U.S.-related financial intermediaries to a Non-U.S. Holder will not
be
subject to backup withholding tax and information reporting requirements if
an
appropriate certification is provided by the holder to the payor or intermediary
and the payor or intermediary does not have actual knowledge or a reason to
know
that the certificate is incorrect.
Backup
withholding is not an additional tax. The amount of any backup withholding
withheld from a payment to a U.S. Holder will be allowed as a credit against
the
U.S. Holder’s U.S. federal income tax liability, provided that the required
information is timely furnished to the IRS. A U.S. Holder generally may obtain
a
refund of any amounts withheld under the backup withholding rules that exceed
its U.S. federal income tax liability by filing a timely refund claim with
the
IRS.
Mexican
Taxation
Taxation
of Dividends
Dividends,
either in cash or in any other form, paid with respect to the Shares
constituting the Shares or the ADSs will not be subject to Mexican withholding
tax.
Taxation
of Capital Gains
Gain
on
the sale or other disposition of ADSs by holders who are not Mexican Residents
(as defined below) will not be subject to Mexican income tax. Deposits of Shares
in exchange for ADSs and withdrawals of Shares in exchange for ADSs will not
give rise to Mexican income tax.
Gain
on
the sale of Shares by a holder who is not a Mexican Resident (as defined below)
will not be subject to Mexican tax if the transaction is carried out through
the
Mexican Stock Exchange or other securities markets approved by the Mexican
Ministry of Finance, and provided certain requirements set forth by the Mexican
Income Tax Law are complied with. Sales or other dispositions of Shares made
in
other circumstances generally would be subject to Mexican tax, except to the
extent that a holder is eligible for benefits under an income tax treaty to
which México is a party of. Under the Tax Treaty, gain on the sale or other
disposition of Shares by a U.S. resident (if eligible for benefits under the
Tax
Treaty) who is a holder of less than 25% of our capital stock during the
twelve-month period preceding such sale or disposition will not be subject
to
Mexican tax, unless (i) 50% or more of the fair market value of our assets
consist of “immovable property” (as defined in the Tax Treaty) situated in
México, or (ii) such gains are attributable to a permanent establishment or
fixed base of such U.S. resident in México.
For
a
holder that is not a Mexican Resident and that does not meet the requirements
referred to above, gross income realized on the sale of Shares will be subject
to a 5% Mexican withholding tax if the transaction is carried out through the
Mexican Stock Exchange. Alternatively, a holder that is not a Mexican Resident
can choose to be subject to a 20% withholding rate on the net gain obtained,
as
calculated pursuant to Mexican Income Tax Law provisions.
The
Mexican tax rules governing the taxation of gains of holders who are not Mexican
Residents on dispositions of their Shares or ADSs were amended during 2002.
Holders who are not Mexican Residents who disposed of their Shares or ADSs
during 2003 should consult their own Mexican tax advisors on the Mexican tax
treatment of such dispositions.
For
purposes of Mexican taxation (Ley
del Impuesto sobre la renta),
an
individual is a resident of México (a “Mexican Resident”) if he or she has
established his or her home in México, unless he or she has resided in another
country for more than 183 days, whether consecutive or not, during a calendar
year and can demonstrate that he or she has become a resident of that country
for tax purposes. A legal entity is a Mexican Resident if it has been
incorporated under Mexican law. A company is also considered to be a Mexican
Resident if its headquarters are located in México. A Mexican citizen is
presumed to be a resident of México for tax purposes unless such person can
demonstrate otherwise. If a person is deemed to have a permanent establishment
or fixed base in México for tax purposes, such permanent person shall be
required to pay taxes in México on income attributable to such permanent
establishment or fixed base, in accordance with applicable tax
laws.
Other
Mexican Taxes
There
are
no Mexican inheritance, succession or similar taxes applicable to the ownership,
transfer or disposition of ADSs or Shares by holders that are not Mexican
Residents; provided, however, that gratuitous transfers of Shares may in certain
circumstances cause a Mexican federal tax to be imposed on the recipient. There
is no Mexican stamp, issue, registration or similar taxes or duties payable
by
holders of ADSs or Shares. Brokerage fees on securities transactions carried
out
through the Mexican Stock Exchange are subject to a 15% valued added
tax.
Documents
on Display
The
documents concerning us which are referred to in this document are available
at
the our company headquarters, located at Ave. Tecnológico No.401, Cd.
Industrial, Celaya, Guanajuato, 38010, México, for any inspection required. Part
of this information is available on our web page, at www.bachoco.com.mx.
ITEM
11.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
In
the
normal course of our business, we hold or issue various financial instruments
that expose us to financial risks involving fluctuations in currency exchange
rates and interest rates. Also, we are exposed to commodity price risk in
connection with fluctuations in the prices for our feed
ingredients.
Currency
Fluctuation
Our
exposure to market risk associated with changes in foreign currency exchange
rates relates primarily to expenses which are denominated in U.S. dollars.
Since
we have liabilities denominated in U.S. dollars, we are exposed to foreign
exchange losses when the peso declines in value against the U.S. dollar. The
peso has been subject to significant volatility in the past and may be subject
to significant fluctuations in the future.
We
do not
have debt denominated in U.S. dollars as of December 2007. We experienced
foreign exchange losses of Ps.62.3 million in 2005, since we had more assets
(cash and cash equivalents) than liabilities denominated in U.S. dollars, and
in
2005 the Mexican peso appreciated during most of the year with respect to the
U.S. dollar. We had a gain of Ps.40.8 million in 2006, due to the net position
of our liabilities and assets. In 2007, we experienced a foreign exchange loss
of Ps.3.4 million since the Mexican peso demonstrated low volatility during
the
year.
No
assurance can be given as to the future valuation of the Mexican peso and how
further movements in the peso could affect our future earnings.
We
manage
our exchange rate exposure primarily through management of our financial
structure, specifically by maintaining most of our debt through long-term debt
instruments. We engage in only limited hedging of our exposure to foreign
exchange risk, since hedging instruments have historically not been economically
feasible. We plan over a six-month period into the future and, depending on
the
expected uncertainty for that period, decide if it is economically advisable
to
purchase or sell any hedging instrument.
During
2006 and 2007, we have observed different strategies with respect to derivatives
which involve call and put options in U.S. dollars.
At
December 31, 2007, we maintained positions in several financial instrument
derivatives. For details, please see Note 9 to our Consolidated Financial
Statements.
Based
on
our position in December 2007 (please see Note 12 to our Consolidated Financial
Statements), we estimate that a hypothetical 10% devaluation of the Mexican
peso
against the U.S. dollar would result in losses of Ps.15.4 million and gains
of
Ps.78.6 million in our Foreign Exchange Results.
Interest
Rates
Based
on
our position on December 31, 2007, we estimate that a hypothetical interest
rate
variation of 0.5% on our Mexican peso denominated debt would result in increased
interest expenses of approximately Ps.0.5 million per annum. Any such increase
would likely be offset by an increase in interest income due to our significant
cash and cash equivalent position.
Feed
Ingredients
The
largest single component of our
cost
of
sales is the cost of ingredients used to prepare feed, including principally,
sorghum, soy
meal,
corn,
fish
meal, meat
meal
and,
for
certain chicken products, marigold extract. The price of these ingredients
is
subject to significant volatility resulting,
among
other factors, from weather, the size of harvests, transportation and storage
costs, governmental agricultural policies and currency exchange rates. In order
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.
During
2007, grain reached historically high prices worldwide, due principally to
strong demand and alternative uses of grain such as ethanol production. Soybean
meal prices also increased, particularly in the second half of the year, as
a
result of strong demand coupled with lower supply than expected worldwide.
This
situation also extended into 2008.
ITEM
12.
|
Description
of Securities Other Than Equity
Securities
|
Not
applicable.
PART
II
ITEM
13.
|
Default,
Dividend Arrearages and
Delinquencies
|
None.
ITEM
14.
|
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
None.
ITEM
15.
|
Controls
and Procedures
|
We
carried out an evaluation under the supervision and with the participation
of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2007. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding
of
the controls and procedures. Accordingly, even effective disclosure controls
and
procedures can only provide reasonable assurance of achieving their control
objectives. Based upon and as of the date of our evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls
and
procedures are effective to provide reasonable assurance that information
required to be disclosed in the reports we file and submit under the Securities
Exchange Act is recorded, processed, summarized and reported as and when
required.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining effective
internal control over financial reporting as defined in Rules 13a-15(f) under
the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Effective control over financial reporting
cannot, and does not, provide absolute assurance of achieving our control
objectives. Also, any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures
may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on
this assessment, management concluded that, as of December 31, 2007, the
Company’s internal control over financial reporting is effective based on those
criteria.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007, has been audited by Mancera, S.C., a member of Ernst &
Young Global, an independent registered public accounting firm, as stated in
their report which appears herein.
Changes
in Internal Controls
There
has
been no change in our internal control over financial reporting in the period
covered by this annual report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Attestation
Report of the Registered Public Accounting Firm
Report
of
Independent Registered Accounting Firm on Internal Control Over Financial
Reporting
The
Board
of Directors and stockholders’ of Industrias Bachoco, S.A.B. de
C.V.
We
have
audited Industrias Bachoco, S.A.B. de C.V.’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Industrias Bachoco, S.A.B.
de
C.V.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that
our
audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with Mexican Financial Reporting Standards, including the reconciliation to
U.S
generally accepted accounting principles, in accordance with Item 18 of Form
20-F. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that,
in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with Mexican Financial Reporting Standards, including
the reconciliation to U.S. generally accepted accounting principles in
accordance with Item 18 of Form 20-F, and that receipts and expenditures of
the
company are being made only in accordance with authorizations of management
and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, Industrias Bachoco, S.A.B. de C.V. maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2007, based on the COSO criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States of America), the consolidated balance sheets
of
Industrias Bachoco, S.A.B. de C.V. and subsidiaries, as of December 31, 2007
and
2006, and the related consolidated statements of income, changes in
stockholders’ equity, and changes in financial position for each of the three
years in the period ended December 31, 2007 of Industrias Bachoco, S.A.B. de
C.V. and our report dated June 26, 2008 expressed an unqualified opinion
thereon.
Mancera
S.C.
|
A
Member Practice of
|
Ernst
& Young Global
|
|
C.P.C.
José Sánchez González
|
|
ITEM
16A. |
Audit
Committee Financial Expert
|
Currently,
no member of our audit committee possesses all the characteristics included
in
the definition of an “audit committee financial expert” within the meaning of
this Item 16A. We consider that the combined financial expertise of the members
of our audit committee meet much of this requirement. Our audit committee has
the authority and appropriate funding to obtain outside advice, as it deems
necessary, to carry out its duties.
We
have
adopted a code of ethics, as defined in Item 16B of Form 20-F under the
Securities Exchange Act of 1934, as amended. Our code of ethics applies to
our
Chief Executive Officer, Chief Financial Officer, controller and
persons performing similar functions, as well as to other officers and
employees. Our code of ethics is available free of charge upon request through
our website www.bachoco.com.mx
If we
amend the provisions of our code of ethics that apply to our Chief Executive
Officer, Chief Financial Officer, controller and persons performing similar
functions, or if we grant any waiver of such provisions, we will disclose such
amendment or waiver on our website at the same address.
|
ITEM
16C. |
Principal
Accountant Fees and
Services
|
Audit
and Non-Audit Fees
The
following table sets forth the fees billed to us in nominal pesos by our
independent auditors, Mancera, S.C., independent registered public accountanting
firm, during the fiscal years ended December 31, 2006 and 2007:
|
|
Year ended December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
Audit
fees
|
|
Ps. |
2,724,350
|
|
Ps. |
4,456,250
|
|
Audit-related
fees
|
|
|
—
|
|
|
—
|
|
Tax
fees
|
|
|
872,006
|
|
|
953,465
|
|
All
other fees
|
|
|
—
|
|
|
—
|
|
Total
fees
|
|
Ps. |
3,596,356
|
|
Ps. |
5,409,715
|
|
Audit
fees in the above table are the aggregate fees billed by Mancera, S.C., in
connection with the audit of our annual financial statements and statutory
and
regulatory audits.
Tax
fees
in the above table are fees billed by Mancera, S.C. for services related to
tax
refund claims.
Audit
Committee Approval Policies and Procedures
Our
audit
committee has not established pre-approval policies and procedures for the
engagement of our independent auditors for services. Our audit committee
expressly approves on a case-by-case basis any engagement of our independent
auditors for audit and non-audit services provided to our subsidiaries or to
us.
|
ITEM
16D. |
Exemptions
from the Listing Standards for Audit
Committees
|
Not
applicable.
|
ITEM
16E. |
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
Not
applicable.
PART
III
ITEM
17.
|
Financial
Statements
|
Not
applicable.
ITEM
18.
|
Financial
Statements
|
See
the
Audited Financial Statements including notes, incorporated herein by
reference.
Index
of Exhibits
Documents
filed as exhibits to this Annual Report:
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
An
English translation of the Bylaws (estatutos
sociales)
of Industrias Bachoco, S.A. de C.V. dated June 29, 2007 (incorporated
by
reference to Exhibit 1.1 on Form 20-F filed with the U.S. Securities
and
Exchange Commission on June 29, 2007 (File No.
333-07950)).
|
|
|
|
2.1
|
|
Form
of Amended and Restated Deposit Agreement, among Industrias Bachoco,
S.A.
de C.V., the Depositary and each Owner and Beneficial Owner from
time to
time of American Depositary Receipts issued thereunder, including
the form
of American Depositary Receipt (incorporated by reference to Exhibit
1.1
on Form F-6 filed with the U.S. Securities and Exchange Commission
on
August 18, 2006 (File No. 333-07480)).
|
|
|
|
2.2
|
|
Trust
Agreement, dated April 1, 1995, among Banco Internacional, S.A.,
Institución de Banca Múltiple, Grupo Financiero Prime Internacional, as
trustee, and the stockholders of the Company named therein, together
with
an English translation, (incorporated by reference on our registration
statement on Form F-1 filed with the U.S. Securities and Exchange
Commission on August 22, 1997 (File No. 333-7472)).
|
|
|
|
2.3
|
|
Trust
Agreement, dated August 20, 1997, among Banco Internacional, S.A.,
Institución de Banca Múltiple, Grupo Financiero Bital, as trustee, and the
stockholders of the Company named therein, together with an English
translation, (incorporated by reference on our registration statement
on
Form F-1 filed with the U.S. Securities and Exchange Commission on
August
22, 1997 (File No. 333-7472)).
|
|
|
|
8.1
|
|
Subsidiaries
of Industrias Bachoco S.A. de C.V.
|
|
|
|
12.1
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
12.2
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
13.1
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURE
The
registrant hereby certifies that it meets all of the requirements for filing
on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
|
|
|
By:
|
/s/
Daniel Salazar Ferrer
|
|
Daniel
Salazar Ferrer
|
|
Chief
Financial Officer
|
Date:
June 30, 2008
INDUSTRIAS
BACHOCO, S.A.B. DE C.V.
AND
SUBSIDIARIES
Consolidated
Financial Statements
As
of
December
31, 2006 and 2007
With
Report of Independent Registered Public Accounting Firm
INDUSTRIAS
BACHOCO, S.A.B. DE C.V.
AND
SUBSIDIARIES
Consolidated
Financial Statements
As
of
December 31, 2005, 2006 and 2007
Content
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
Consolidated
Financial Statements:
|
|
|
|
Balance
Sheets
|
F-4
|
Statements
of Income
|
F-5
|
Statements
of Changes in Stockholders’ Equity
|
F-6
|
Statements
of Changes in Financial Position
|
F-7
|
Notes
to the Financial Statements
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders of
Industrias
Bachoco, S.A.B. de C.V.
We
have
audited the accompanying consolidated balance sheets of Industrias Bachoco,
S.A.B. de C.V. and subsidiaries as of December 31, 2006 and 2007, and the
related consolidated statements of income, stockholders’ equity and changes in
financial position for each of the three years in the period ended December
31,
2007. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Industrias Bachoco,
S.A.B. de C.V. and subsidiaries at December 31 2006 and 2007, and the
consolidated results of their operations and their cash flows for each of
the
three years in the period ended December 31, 2007, in conformity with Mexican
Financial Reporting Standards which differ in certain respects from U.S.
generally accepted principles (see Note 19).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Industrias Bachoco, S.A.B. de C.V.'s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission and our report dated
June 27
2008 expressed an unqualified opinion thereon.
|
Mancera,
S.C.
A
Member Practice of
Ernst
& Young Global
Francisco
José Sánchez González
|
Mexico
City, Mexico
June
27,
2008
INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES
Consolidated
balance sheets
(Thousands
of constant Mexican pesos as of December 31, 2007)
|
|
December
31,
|
|
|
|
|
|
|
|
(Thousands
of U.S. dollars )
|
|
|
|
|
|
|
|
(Note
2)
|
|
|
|
2006
|
|
2007
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
Ps
|
3,583,891
|
|
Ps
|
3,039,876
|
|
$
|
278,453
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
Trade,
net
|
|
|
539,874
|
|
|
765,502
|
|
|
70,120
|
|
Value
added and other recoverable taxes
|
|
|
330,490
|
|
|
440,945
|
|
|
40,391
|
|
Total
accounts receivable
|
|
|
870,364
|
|
|
1,206,447
|
|
|
110,511
|
|
Inventories,
net –Note 5
|
|
|
2,224,095
|
|
|
3,329,340
|
|
|
304,968
|
|
Biological
current assets –Note 5
|
|
|
91,905
|
|
|
108,502
|
|
|
9,939
|
|
Derivative
financial instruments– Note 9
|
|
|
-
|
|
|
123,503
|
|
|
11,313
|
|
Prepaid
expenses and other current assets
|
|
|
98,119
|
|
|
129,582
|
|
|
11,870
|
|
Total
current assets
|
|
|
6,868,374
|
|
|
7,937,250
|
|
|
727,054
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net –Note 6
|
|
|
9,835,895
|
|
|
10,256,239
|
|
|
939,474
|
|
Biological
non-current assets –Note 5
|
|
|
515,118
|
|
|
575,413
|
|
|
52,708
|
|
Intangible
assets from labor obligations–Note 13
|
|
|
22,232
|
|
|
28,341
|
|
|
2,596
|
|
Goodwill,
net –Note 7
|
|
|
300,848
|
|
|
300,848
|
|
|
27,558
|
|
Other
assets
|
|
|
16,772
|
|
|
18,333
|
|
|
1,679
|
|
TOTAL
ASSETS
|
|
Ps
|
17,559,239
|
|
Ps
|
19,116,424,
|
|
$
|
1,751,069
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to banks –Note 8
|
|
Ps
|
-
|
|
Ps
|
40,000
|
|
$
|
3,664
|
|
Current
portion of long-term debt –Note 8
|
|
|
9,708
|
|
|
18,844
|
|
|
1,726
|
|
Accounts
payable
|
|
|
837,445
|
|
|
1,138,011
|
|
|
104,242
|
|
Related
parties –Note 4
|
|
|
12,650
|
|
|
26,819
|
|
|
2,457
|
|
Income
tax
|
|
|
45,390
|
|
|
-
|
|
|
-
|
|
Other
taxes payable and other accruals –Note 11
|
|
|
243,573
|
|
|
243,429
|
|
|
22,298
|
|
Derivative
financial instruments– Note 9
|
|
|
10,818
|
|
|
-
|
|
|
-
|
|
Total
current liabilities
|
|
|
1,159,584
|
|
|
1,467,103
|
|
|
134,387
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt –Note 8
|
|
|
35,494
|
|
|
50,757
|
|
|
4,649
|
|
Deferred
income tax –Note 15
|
|
|
2,182,034
|
|
|
2,375,025
|
|
|
217,553
|
|
Labor
obligations –Note 13
|
|
|
79,173
|
|
|
96,373
|
|
|
8,828
|
|
TOTAL
LIABILITIES
|
|
|
3,456,285
|
|
|
3,989,258
|
|
|
365,417
|
|
COMITMENTS
AND CONTINGENCIES –Note
10
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY –Note 14
|
|
|
|
|
|
|
|
|
|
|
Majority
stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
2,294,927
|
|
|
2,294,927
|
|
|
210,216
|
|
Paid-in
capital
|
|
|
743,674
|
|
|
743,674
|
|
|
68,121
|
|
Reserve
for repurchase company stock
|
|
|
159,455
|
|
|
159,455
|
|
|
14,606
|
|
Retained
earnings
|
|
|
13,707,747
|
|
|
14,250,225
|
|
|
1,305,324
|
|
Net
majority income of the year
|
|
|
906,186
|
|
|
1,270,941
|
|
|
116,418
|
|
Minimum
seniority premium liability adjustment –Note 13
|
|
|
(916
|
)
|
|
(2,512
|
)
|
|
(230
|
)
|
Deficit
from restatement of stockholders’ equity
|
|
|
(3,753,915
|
)
|
|
(3,735,254
|
)
|
|
(342,150
|
)
|
Derivative
financial instruments–Note 9
|
|
|
370
|
|
|
98,922
|
|
|
9,061
|
|
Total
majority stockholders' equity
|
|
|
14,057,528
|
|
|
15,080,378
|
|
|
1,381,366
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
45,426
|
|
|
46,788
|
|
|
4,286
|
|
Total
stockholders' equity
|
|
|
14,102,954
|
|
|
15,127,166
|
|
|
1,385,652
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
Ps
|
17,559,239
|
|
Ps
|
19,116,424
|
|
$
|
1,751,069
|
|
See
accompanying notes.
INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES
Consolidated
statements of income
(Thousands
of constant Mexican pesos, except per share amounts, as of
December
31, 2007)
|
|
Years
ended December 31,
|
|
|
|
|
|
|
|
|
|
(Thousands of
U.S.
dollars)
|
|
|
|
|
|
|
|
|
|
(Note
2)
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
Ps
|
15,618,192
|
|
Ps
|
15,550,965
|
|
Ps
|
18,219,647
|
|
$
|
1,668,924
|
|
Cost
of sales
|
|
|
(11,234,562
|
)
|
|
(12,052,986
|
)
|
|
(14,477,861
|
)
|
|
(1,326,176
|
)
|
Gross
profit
|
|
|
4,383,630
|
|
|
3,497,979
|
|
|
3,741,786
|
|
|
342,748
|
|
Selling,
general and administrative expenses
|
|
|
(2,005,544
|
)
|
|
(2,071,553
|
)
|
|
(2,245,522
|
)
|
|
(205,690
|
)
|
Operating
income
|
|
|
2,378,086
|
|
|
1,426,426
|
|
|
1,496,264
|
|
|
137,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financing income (cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
316,514
|
|
|
302,910
|
|
|
318,879
|
|
|
29,209
|
|
Interest
expense and financing costs
|
|
|
(209,504
|
)
|
|
(131,852
|
)
|
|
(141,578
|
)
|
|
(12,969
|
)
|
Net
interest income
|
|
|
107,010
|
|
|
171,058
|
|
|
177,301
|
|
|
16,240
|
|
Foreign
exchange (loss) gain, net
|
|
|
(62,259
|
)
|
|
40,782
|
|
|
(3,351
|
)
|
|
(307
|
)
|
Loss
on net monetary position
|
|
|
(118,724
|
)
|
|
(150,438
|
)
|
|
(154,814
|
)
|
|
(14,181
|
)
|
|
|
|
(73,973
|
)
|
|
61,402
|
|
|
19,136
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
ordinary (expense) income, net –Note 16
|
|
|
(25,961
|
)
|
|
18,427
|
|
|
69,571
|
|
|
6,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax, asset tax, and minority interest
|
|
|
2,278,152
|
|
|
1,506,255
|
|
|
1,584,971
|
|
|
145,184
|
|
Income
tax and asset tax –Note 15
|
|
|
(367,833
|
)
|
|
(599,126
|
)
|
|
(312,745
|
)
|
|
(28,648
|
)
|
NET
INCOME
|
|
Ps
|
1,910,319
|
|
Ps
|
907,129
|
|
|
1,272,226
|
|
$
|
116,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Majority
net income
|
|
|
1,908,535
|
|
|
906,186
|
|
|
1,270,941
|
|
|
116,418
|
|
Minority
net income
|
|
|
1,784
|
|
|
943
|
|
|
1,285
|
|
|
118
|
|
NET
INCOME
|
|
Ps
|
1,910,319
|
|
Ps
|
907,129
|
|
Ps
|
1,272,226
|
|
$
|
116,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (in
thousands)
|
|
|
599,694
|
|
|
599,571
|
|
|
600,000
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
MAJORITY INCOME PER SHARE
|
|
Ps
|
3.18
|
|
Ps
|
1.51
|
|
Ps
|
2.12
|
|
$
|
0.19
|
|
See
accompanying notes.
INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES
Consolidated
statements of changes in stockholders’ equity
Years
ended December 31, 2005, 2006 and 2007
(Thousands
of constant Mexican pesos as of
December
31, 2007)
|
|
Number
of shares of capital
stock
(thousands)
|
|
Capital
stock
|
|
Paid-in
capital
|
|
Reserve
for
repurchase
of company stock
|
|
Retained
earnings
|
|
Net
income
of
the
year
|
|
Labor
obligations
minimum
liability adjustment
|
|
Deficit
from restatement of
stockholders’
equity
|
|
Derivative
financial instru-ments
|
|
Total
majority
stockholders’ equity
|
|
Minority
interest
|
|
Total
stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
599,200
|
|
Ps
|
2,294,711
|
|
Ps
|
723,116
|
|
Ps
|
170,917
|
|
Ps |
11,656,919
|
|
Ps
|
784,087
|
|
Ps
|
(1,129
|
)
|
Ps |
(
3,541,472
|
)
|
Ps
|
-
|
|
Ps
|
12,087,149
|
|
Ps
|
45,879
|
|
Ps
|
12,133,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of prior year´s net income based on stockholders´meeting held in April,
2005.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
784,087
|
|
|
(784,087
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Repurchase
of stock
|
|
|
(920
|
)
|
|
(251
|
)
|
|
-
|
|
|
(11,462
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,713
|
)
|
|
-
|
|
|
(11,713
|
)
|
Sales
of repurchased stock
|
|
|
800
|
|
|
222
|
|
|
2,954
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,176
|
|
|
-
|
|
|
3,176
|
|
Cash
dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(263,719
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(263,719
|
)
|
|
-
|
|
|
(263,719
|
)
|
Comprehensive
income, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,908,535
|
|
|
(2,207
|
)
|
|
(172,155
|
)
|
|
(92,374
|
)
|
|
1,641,799
|
|
|
487
|
|
|
1,642,286
|
|
Balance
at December 31, 2005
|
|
|
599,080
|
|
|
2,294,682
|
|
|
726,070
|
|
|
159,455
|
|
|
12,177,287
|
|
|
1,908,535
|
|
|
(3,336
|
)
|
|
(3,713,627
|
)
|
|
(92,374
|
)
|
|
13,456,692
|
|
|
46,366
|
|
|
13,503,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of prior year´s net income based on stockholders´meeting held in April,
2006.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,908,535
|
|
|
(1,908,535
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Sales
of repurchased stock
|
|
|
920
|
|
|
245
|
|
|
17,604
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,849
|
|
|
-
|
|
|
17,849
|
|
Cash
dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(378,075
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(378,075
|
)
|
|
-
|
|
|
(378,075
|
)
|
Comprehensive
income, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
906,186
|
|
|
2,420
|
|
|
(40,288
|
)
|
|
92,744
|
|
|
961,062
|
|
|
(940
|
)
|
|
960,122
|
|
Balance
at December 31, 2006
|
|
|
600,000
|
|
|
2,294,927
|
|
|
743,674
|
|
|
159,455
|
|
|
13,707,747
|
|
|
906,186
|
|
|
(916
|
)
|
|
(3,753,915
|
)
|
|
370
|
|
|
14,057,528
|
|
|
45,426
|
|
|
14,102,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of prior year´s net income based on stockholders´meeting held in April,
2007.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
906,186
|
|
|
(906,186
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash
dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(363,708
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(363,708
|
)
|
|
-
|
|
|
(363,708
|
)
|
Comprehensive
income, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,270,941
|
|
|
(1,596
|
)
|
|
18,661
|
|
|
98,552
|
|
|
1,386,558
|
|
|
1,362
|
|
|
1,387,920
|
|
Balance
at December 31, 2007 (Note 14)
|
|
|
600,000
|
|
|
2,294,927
|
|
Ps
|
743,674
|
|
Ps
|
159,455159,455
|
|
Ps
|
14,250,225
|
|
Ps
|
1,270,941
|
|
Ps
|
(
2,512
|
)
|
|
(3,735,254
|
)
|
Ps
|
98,922
|
|
Ps |
15,080,378
|
|
Ps |
46,788
|
|
Ps
|
15,127,166
|
|
See
accompanying notes.
INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES
Consolidated
statements of changes in financial position
(Thousands
of constant Mexican pesos as of December 31, 2007)
|
|
Years
ended December 31,
|
|
|
|
|
|
|
|
|
|
(Thousands
of U.S. dollars) (Note 2)
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
Ps
|
1,910,319
|
|
Ps
|
907,129
|
|
Ps
|
1,272,226
|
|
$
|
116,536
|
|
Adjustments
to reconcile net income to resources provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
497,819
|
|
|
537,383
|
|
|
571,393
|
|
|
52,340
|
|
Deferred
income tax
|
|
|
1,068
|
|
|
346,110
|
|
|
169,716
|
|
|
15,547
|
|
Labor
obligations, net period cost
|
|
|
40,505
|
|
|
37,464
|
|
|
42,112
|
|
|
3,857
|
|
|
|
|
2,449,711
|
|
|
1,828,086
|
|
|
2,055,447
|
|
|
188,280
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(190,464
|
)
|
|
(51,435
|
)
|
|
(336,083
|
)
|
|
(30,785
|
)
|
Inventories
and biological assets
|
|
|
(352,768
|
)
|
|
(535,933
|
)
|
|
(1,140,124
|
)
|
|
(104,437
|
)
|
Prepaid
expenses and other current assets
|
|
|
(34,523
|
)
|
|
(11,081
|
)
|
|
(31,463
|
)
|
|
(2,882
|
)
|
Accounts
payable
|
|
|
(25,527
|
)
|
|
364,813
|
|
|
300,566
|
|
|
27,531
|
|
Related
parties
|
|
|
(168
|
)
|
|
6,002
|
|
|
14,169
|
|
|
1,298
|
|
Taxes
payable and other accruals
|
|
|
137,953
|
|
|
(73,193
|
)
|
|
(45,534
|
)
|
|
(4,170
|
)
|
Labor
obligations, plan
contributions
|
|
|
(26,149
|
)
|
|
(27,576
|
)
|
|
(32,617
|
)
|
|
(2,988
|
)
|
Derivative
financial instruments
|
|
|
-
|
|
|
(6,407
|
)
|
|
(35,769
|
)
|
|
(3,276
|
)
|
Resources
provided by operating activities
|
|
|
1,958,065
|
|
|
1,493,276
|
|
|
748,592
|
|
|
68,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
185
|
|
|
-
|
|
|
40,000
|
|
|
3,664
|
|
Proceeds
from issuance of notes payable to banks
|
|
|
176,405
|
|
|
-
|
|
|
40,000
|
|
|
3,664
|
|
Repayment
of long-term debt and notes payable
|
|
|
(206,375
|
)
|
|
(104,836
|
)
|
|
(13,963
|
)
|
|
(1,279
|
)
|
Constant
pesos effect on notes payable to banks and long
term-debt
|
|
|
(6,194
|
)
|
|
(6,081
|
)
|
|
(1,638
|
)
|
|
(150
|
)
|
Cash
dividends paid
|
|
|
(263,719
|
)
|
|
(378,075
|
)
|
|
(363,708
|
)
|
|
(33,316
|
)
|
Sales
(repurchases) of Company’s own stock, net
|
|
|
(8,537
|
)
|
|
17,849
|
|
|
-
|
|
|
-
|
|
Resources
used in financing activities
|
|
|
(308,235
|
)
|
|
(471,143
|
)
|
|
(299,309
|
)
|
|
(27,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment, net
|
|
|
(835,529
|
)
|
|
(856,227
|
)
|
|
(991,737
|
)
|
|
(90,843
|
)
|
Other
assets
|
|
|
(2,709
|
)
|
|
(2,060
|
)
|
|
(1,561
|
)
|
|
(143
|
)
|
Resources
used in investing activities
|
|
|
(838,238
|
)
|
|
(858,287
|
)
|
|
(993,298
|
)
|
|
(90,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
811,592
|
|
|
163,846
|
|
|
(544,015
|
)
|
|
(49,832
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
2,608,453
|
|
|
3,420,045
|
|
|
3,583,891
|
|
|
328,285
|
|
Cash
and cash equivalents at end of year
|
|
Ps
|
3,420,045
|
|
Ps
|
3,583,891
|
|
Ps
|
3,039,876
|
|
$
|
278,453
|
|
See
accompanying notes.
INDUSTRIAS
BACHOCO, S.A.B. DE C.V.
AND
SUBSIDIARIES
Notes
to the consolidated financial statements
Years
ended December 31, 2005, 2006 and 2007
(Thousands
of constant Mexican pesos as of
December
31, 2007, except per share amounts)
1.
Organization
and Business Activity
Industrias
Bachoco, S.A.B. de C.V. and subsidiaries (collectively “Bachoco” or the
“Company”) was incorporated on February 8, 1980 and it is engaged in breeding,
processing and marketing of poultry (chicken and eggs), swine and other products
(principally balanced animal feed). Industrias Bachoco, S.A.B. de C.V. is
the
controlling company of a group of subsidiaries.
In
June
2006, the new Securities Trading Act came into effect, which, among other
provisions, established that corporations listed on the Mexican stock exchange
must change their entity names from variable capital stock corporation (S.A.
de
C.V.) to variable capital stock market corporation(S. A. B. de C.V.); as
of
February 1, 2007, the Company’s name is Industrias Bachoco, S.A.B. de C.V., in
compliance with the aforementioned law.
On
March
18, 2008, the accompanying financial statements and related notes were
authorized by the Company’s Finance Director, Daniel Salazar Ferrer, for the
Audit Committee and Board of Directors´approval and issuance.
2.
Accounting Policies and Practices
The
Company’s consolidated financial statements are prepared in accordance with
Mexican Financial Reporting Standards (Mexican FRS). The significant accounting
policies and practices observed by the Company in the preparation of the
financial statements are described below:
a)
Consolidation
The
consolidated financial statements include the accounts of the Company and
all of
its majority-owned subsidiaries.
The
ownership interests of other stockholders in such subsidiaries are shown
as
minority interest.
Intercompany
balances, investments and transactions have been eliminated in consolidation.
The
results of operations of the subsidiaries and affiliates were included in
the
Company’s consolidated financial statements as of the month following the
acquisition.
The
accompanying consolidated financial statements include the following
consolidated subsidiaries as of December 31, 2005, 2006 and 2007:
|
|
Percentage
equity interest
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
%
|
|
%
|
|
%
|
|
Acuícola
Bachoco, S.A. de C.V.
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Aviser,
S.A. de C.V.
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Bachoco,
S.A. de C.V. (“BSACV”) (Consolidated)
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Bachoco,
Comercial, S.A. de C.V
|
|
|
-
|
|
|
-
|
|
|
100
|
|
Campi
Alimentos, S.A. de C.V.
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Huevo
y Derivados, S.A. de C.V.
|
|
|
97
|
|
|
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
|
|
The
main
subsidiaries of the group are as follows:
-
Bachoco, S.A. de C.V. (“BSACV”) (Consolidated)
This
company is engaged in breeding, processing and marketing of poultry (chicken
and
eggs).
-
Campi
Alimentos, S.A. de C.V.
-
Acuícola Bachoco S.A. de C.V.
These
companies are engaged in producing and marketing of balanced animal
feed.
-
Aviser,
S.A. de C.V.
-
Operadora de Servicios de Personal, S.A. de C.V.
-
Secba,
S.A. de C.V.
-
Sepetec, S.A. de C.V.
-
Servicios de Personal Administrativo, S.A. de C.V.
These
companies are engaged in providing administrative and operative services
to
their related parties.
On
December, 2006 and July, 2007, the subsidiaries Induba Pavos, S.A. de C.V.
and
Bachoco Comercial, S.A. de C.V. were incorporated. Both entities have 100%
ownership from its holding company, Industrias Bachoco, S.A.B. These entities
are engaged to import and trading of turkey.
b)
Revenue recognition
In
conformity with International Financial Reporting Standard (IFRS) No. 18
“Revenues”.
Revenues
are recognized when each of the following criteria is met:
-
There
is evidence of an arrangement.
-
Delivery has occurred.
-
The
seller fixes or determines the prices with the buyer.
-
Collectability is reasonably certain.
c)
Recognition of the effects of inflation on financial
information
The
financial information recognizes the effects of inflation and therefore the
amounts shown in the accompanying financial statements and in these notes
are
expressed in thousands of Mexican pesos with purchasing power at December
31,
2007. The restatement factor applied to the financial statements for the
years
ended December 31, 2005 and 2006 was 1.0796 and 1.0376, respectively, which
corresponds to the annual rate of inflation from December 31, 2005 and December
31, 2006, respectively, through December 31, 2007, based on the Mexican National
Consumer Price Index (NCPI) published by Banco de Mexico.
A
summary
of the key inflation accounting concepts and procedures is as
follows:
-
Property, plant and equipment
Property,
plant and equipment were carried at replacement cost, determined annually
by an
independent appraiser, through 1996. The fifth amendment to bulletin B-10
Accounting
Recognition of the Effects of Inflation on Financial
Information
(as
modified), which is applicable to financial statements for periods beginning
on
or after January 1, 1997, disallows the use of appraisals. Based on such
amendment, the Company restated the appraised value at December 31, 1996
and
property, plant and equipment purchases since January 1, 1997 are carried
at
cost adjusted by the NCPI.
-
Stockholders’ equity
Capital
stock, paid-in capital, reserve for stock repurchase of Company’s own shares and
retained earnings were restated using adjustment factors obtained from the
NCPI.
-
Net
monetary gain (loss)
The
net
monetary gain (loss) represents the impact of inflation on monetary assets
and
liabilities. The net monetary gain (loss) of each year is included in the
statements of income as a part of the comprehensive financing income (cost).
-
Deficit
from restatement of stockholders’ equity
The
deficit from restatement of stockholders’ equity comprises the accumulated
monetary position loss at the time the provisions of bulletin B-10 were first
applied and the subsequent gain or loss from holding nonmonetary assets,
principally inventories. Deficit from restatement of stockholders’ equity is
originated when the replacement cost of these assets is lower than the cost
of
these assets restated by the NCPI.
d)
Statement of Changes in Financial Position
Mexican
accounting bulletin B-12, Statement
of Changes in Financial Position,
specifies the appropriate presentation of the statement of changes in financial
position based on financial statements restated in constant Mexican pesos
in
accordance with bulletin B-10. Bulletin B-12 identifies the sources and
applications representing differences between beginning and ending financial
statement balances in constant Mexican pesos. The bulletin also requires
that
monetary and foreign exchange gains and losses not be treated as non-cash
items
in the determination of resources provided by operating activities.
e)
Estimates in financial statements
The
preparation of financial statements in conformity with MexFRS requires the
use
of estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
f)
Cash and cash equivalents
Cash
and
cash equivalents consist primarily of bank deposits and highly liquid
investments with original maturities of less than 90 days. Such investments
are
stated at acquisition cost plus accrued interest, similar to market
value.
g)
Allowance for doubtful accounts
The
Company policy is to record an allowance for doubtful accounts for balances
which are not likely to be recovered. Management considers that such accounts
are those which are more than 60 days overdue or in litigation.
h)
Inventories and biological assets
Inventories
are recognized at historical acquisition cost and are valued using the
average-cost method.
Inventories
are restated using the specific-cost method. The stated value of inventories
is
not in excess of net realizable value. Cost of sales is restated to Mexican
pesos with purchasing power at year-end by applying the same method as for
inventories. The deficit from restatement of stockholders’ equity is comprised
of the difference between the increase in the specific value of inventories
and
cost of sales, and the increase as measured based solely on the
NCPI.
The
allowance for decline in the productivity of breeder chickens and pigs is
estimated based on expected future production.
-Agriculture
The
financial statements recognize the requirements of MexFRS E-1, “Agriculture”,
which
establishes the rules for recognizing, valuing, presenting and disclosing
biological assets and agricultural products.
Bulletin
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.
The
Company’s biological assets consist of poultry in different stages, incubatable
eggs and breeder pigs. Agricultural products are processed chicken, commercial
eggs and commercial pigs.
Broiler
chicks less than six 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 week 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.
The
Company is exposed to financial risks due to changes in the price of chicken.
The Company estimates that the price of chicken will not fall significantly
in
the future; consequently, the Company has not entered into any derivative
agreement or any other type of agreement to offset the risk of a drop in
the
price of chicken.
The
Company reviews periodically the price of chicken so as to evaluate the need
for
a financial instrument to offset such risk.
In
conformity with bulletin E-1, biological assets and agricultural products
were
classified as either current or non-current assets based on their availability
and the business operating cycle.
i)
Property, plant and equipment
Property,
plant and equipment are carried at cost and then restated based on adjustment
factors derived from the NCPI.
As
of
January 1, 2007, as a result of the adoption of MexFRS D-6 “Capitalization
of the Comprehensive Cost of Financing”,
the
Company started the capitalization of the comprehensive financing cost incurred
during the construction or installation of property, plant and equipment
in
process, which is subsequently restated by applying factors based on the
NCPI.
The amount of comprehensive financing cost to be capitalized is determined
by
applying the weighted average interest rate of financing to the weighted
average
of the investments in qualifying assets made during the qualifying period.
In
the case of foreign currency denominated financing, comprehensive financing
cost
includes the related exchange gains or losses.
Depreciation
of property, plant and equipment is computed on restated values using the
straight-line method, based on the estimated useful lives of the related
assets
(see
Note
6).
The
value
of property, plant and equipment is reviewed whenever there are indications
of
impairment in their value. The related loss is determined based on the
recoverable amount of the related asset, which is defined as the higher of
the
asset’s net selling price and its value in use. An impairment loss is recognized
if the net carrying amount of the asset exceeds the recoverable
amount.
For
the
years ended December 31, 2006 and 2007, there were no indications of impairment
in the Company’s fixed assets.
j)
Leases
Leased
property, plant and equipment arrangements are recognized as capital leases
if
a) the ownership of the leased asset is transferred to the lessee upon
termination of the lease; b) the agreement includes an option to purchase
the
asset at a reduced price; c) the term of the lease is basically the same
as the
remaining useful life of the leased asset; or d) the present value of minimum
lease payments is basically the same as the market value of the leased asset,
net of any benefit or scrap value.
When
the
risks and benefits inherent to the ownership of the leased good remain mostly
with the lessor, they are classified as operating leases and accrued rent
is
charged to income.
k)
Goodwill
Goodwill
represents the difference between the purchase price and the fair value of
the
net assets acquired at the purchase date.
Goodwill
is recorded initially at acquisition cost and then restated using adjustment
factors derived from the NCPI. Goodwill is subject to annual impairment testing.
At
December 31, 2006 and 2007, the Company recognized no loss from impairment
in
the value of goodwill shown in the consolidated balance sheet.
l)
Liabilities, provisions, contingent liabilities and
commitments
Liability
provisions are recognized whenever: (i) the Company has current obligations
(legal or assumed) derived from past events, (ii) it is more likely than
not
that the liability will give rise to a future cash disbursement for its
settlement and (iii) the liability can be reasonably estimated.
If
the
effect of the time value of money is material, provision amounts are determined
as the present value of the expected disbursements to settle the obligation.
The
discount rate is determined on a pre-tax basis and reflects current market
conditions at the balance sheet date and, where appropriate, the risks specific
to the liability. Where discounting is used, the increase in the provision
due
to the passage of time is recognized as an interest expense.
Contingent
liabilities are recognized only when it is probable they will give rise to
a
future cash disbursement for their settlement. Also, commitments are only
recognized when it is probable they will generate a loss.
m)
Pension plan, seniority premiums and severance benefits
The
Mexican Institute of Public Accountants (IMCP) issued the revised MexFRS
D-3,
Labor Obligations, which came into force on January 1, 2005. The revised
bulletin establishes additional new rules for the valuation, presentation
and
disclosure of “other post-retirement benefits” and the reduction and early
extinguishment of such benefits. Bulletin D-3 also modifies the rules applicable
to employee severance benefits.
Bachoco
has a retirement plan in which all non-union workers participate. Pension
benefits are determined based on the salary of workers in their final three
years of service, the number of years worked and their age at retirement;
this
plan includes:
-
Defined
contribution plan: This fund consists of employee and Company contributions.
The
employee contribution percentage ranges from 1% to 5%. The Company contribution
ranges from 1% to 2% in the case of employees with less than 10 years’
seniority, and the same contribution percentage as the employee (5%) 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.
The
Company recognizes 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
including effect of inflation.
n)
Foreign exchange differences
Transactions
denominated in foreign currency are recorded at the prevailing exchange rate
on
the day of the related transactions. Foreign currency denominated monetary
assets and liabilities are translated at the prevailing exchange rate at
the
balance sheet date. Exchange rate differences determined from such date are
charged or credited to income of the year.
See
Note
12 for the Company’s foreign currency position at the end of each year and the
exchange rates used to translate balances denominated in foreign currency.
o)
Comprehensive income
Comprehensive
income consists of the net income or loss for the year, plus the result from
holding non-monetary assets, the tax effect of the items which are recorded
directly in stockholders’ equity, the effective portion of the unrealized gain
or loss on cash flow hedges, the minimum liability adjustment for labor
obligations and the minimum effect of minority interest as required by MexFRS
B-4, Comprehensive Income.
p)
Derivative financial instruments acquired for hedging
purposes
In
order
to reduce its financial risks, the Company uses derivative financial instruments
as hedges against certain risks.
In
the
normal course of business, the Company is exposed to foreign currency exchange
risks and the price of corn and sorgum. The Company mitigates these risks
through a program that includes the use of derivative financial
instruments.
The
Company’s policy establishes a range of hedging from 25% to 30% of its total
U.S. dollar denominated transactions. The Company uses options and futures
contracts to mitigate its exposure to exchange rate fluctuations on its
short-term cash flows denominated in U.S. dollars (forecasted transaction).
These instruments are not used for speculative purposes and the counterparties
are major financial institutions.
The
derivatives are recognized in conformity with the rules established in MexFRS
C-10 and Statement of Financial Accounting Standard (SFAS) 133, “Accounting for
Derivative Instruments and Hedging Activities”, and its related interpretations
(US GAAP). When the company does not meet the requirements for hedge accounting,
the fair value of the financial instruments are recorded directly in the
income
statement. ,
The
Company has entered into the following agreements involving derivative financial
instruments:
Options
Options
are derivatives that give the buyer the right, albeit not the obligation,
to buy
or sell an asset (in this case dollars) at an established exercise price,
known
as the strike
price,
at a
defined date in exchange for the payment of a premium. The issuer of the
option
is obligated to buy or sell when the option is exercised by the buyer. When
the
right that is acquired is the right to sell, the option is known as a put,
when
it is to buy, it is known as a call. In Bachoco’s case, the options entered into
are of the European type; that is, they can only be exercised at the maturity
date.
The
options in more of the 90% of the cases do not involve the payment of a premium,
as the instruments consist of both call and put options and the combination
of
the premiums payable and receivable is equal to zero. Under this plan, Bachoco
acts as both the buyer and the seller and assumes rights (when it purchases)
and
obligations (when it sells) from these contracts.
Also,
in
conformity with SFAS 133, Implementation Issue No. G20, “Cash flow hedges:
assessing and measuring the effectiveness of a purchased option used in a
cash
flow hedge”, when designating a purchased option (including a combination of
options that comprise either a net purchased option or a zero cost collar)
as
hedging the exposure to variability in expected future cash flows attributable
to a particular rate or price (in this case exchange rate) beyond a specified
level, an entity documents that the assessment of effectiveness will be based
on
total changes in the option's cash flows (that is, the assessment will include
the hedging instrument's entire change in fair value—its entire gain or loss),
rather than documenting that the assessment of effectiveness will be based
on
only the changes in the hedging instrument's intrinsic value as permitted
by
paragraph 63(a). For this type of instrument, the hedging ratio may be
considered perfectly effective and, consequently, there will be no recognition
of ineffectiveness in income, provided the certain criteria are met such
as:
1.
The
critical terms of the hedging instrument (such as notional amount, underlying
and maturity date, etc.) completely match the related terms of the hedged
forecasted transaction.
2.
The
strike price (or prices) of the hedging option (or combination of options)
matches the specified level (or levels) beyond (or within) which the Company’s
exposure is being hedged.
3.
The
hedging instrument’s inflows (outflows) at its maturity date completely offset
the change in the hedged transaction’s cash flows for the risk being hedged.
4.
The
hedging instrument can only be exercised on a single date (its maturity
date).
In
2006,
the Company followed G20, as a supplement to FRS, in regards to the measurement
of effectiveness.
The
Company meets with these criteria for zero cost collar derivative financial
instruments and therefore, the Company’s contracts of this type of instrument
are valued at their fair value at the beginning and later on a monthly basis,
until their maturity. These instruments are recorded in other comprehensive
income at their fair value as of December 31, 2006, rather than being
reclassified to results of operations they are cancelled upon their maturity,
as
they are considered perfectly effective in accordance with G20. As of December
31, 2007, the Company did not follow G20 because it did not have such
instruments.
For
derivatives other than zero cost collar (the Company did not have such
instruments at December 31, 2007) or those that are combination of call option,
the Company determines the effective portion for such derivatives and records
it
in other comprehensive income, while the ineffective portion is recorded
in
income, as is established in bulletin C-10 and SFAS 133.
Effective
in 2007, the Company entered into hedge transactions through ASERCA (Support
and
Services related to Agricultural Trading, which is a governmental entity
related
to the National Ministry of Agriculture and Farming), in order to monitor
the
availability of grains, like corn, sorgum and wheat. The Company has bought
from
a counterparty a combined instrument comprised of a future of a grain price
and
a put option. The future instruments will guarantee a future price of the
grain.
Otherwise, the put option has a strike price related to the future price
agreement and both are based on the price of Chicago Board of Trade at a
specific date. Additionally, the Company receives a 50% subsidy of the premium
related to the put option from ASERCA.
As
a
result of this combined instrument Bachoco will obtain the best market price
for
the grain; therefore if the market price goes below of the future price
contracted by Bachoco the strike price of the option will be paid and ASERCA
will refund the difference between the strike price and the market price.
In
2007,
the premium paid on behalf of the Company by ASERCA amounts USD 2,944 thousands.
The Company can not predict whether these subsidies will be available in
the
future.
Futures
Futures
are contracts that obligate two entities to exchange an asset or value (in
this
case grain) at a future date for a pre-established and agreed quantity, quality
and price. In this type of contract, there is no premium payment, as there
is
only a gain or a loss for the Company when the market price of the grain
exceeds
the strike price (gain) or the market price falls below the price agreed
to in
the contract (loss). The Company engaged in futures contracts during 2006
and
2007. The Company holds deposits with some of its counterparties to guarantee
the execution of its futures contracts. Such deposits bear market interest
at
market rates.
Assessment
of effectiveness
The
effectiveness of the Company’s hedges is determined at the time the financial
derivatives are designated as hedges and is assessed on a periodic basis.
Hedges
considered as highly effective are those in which the fair value or cash
flows
of the hedged item are offset on a period-by-period or cumulative basis by
changes in the fair value or cash flows of the financial derivative itself
within a range of 80% and 125%.
In
conformity with bulletin C-10 and SFAS 133, paragraph 30, the effective portion
of a loss or gain on a cash flow hedge is recorded in comprehensive income
net
of related income taxes (stockholders’ equity) while the ineffective portion is
recorded in results of operations.
q)
Deferred taxes
The
Company records deferred taxes on temporary differences between in the balance
sheet accounts for financial and tax reporting purposes, using the enacted
income tax rate at the balance sheet date, or the enacted rate that will
be in
effect at the time the temporary differences giving rise to deferred tax
assets
and liabilities are expected to be recovered or settled.
The
possibility of recovering deferred tax assets is evaluated periodically and,
if
necessary, a valuation allowance is created for those assets that are unlikely
to be recovered.
Deferred
employee profit sharing is recognized only on temporary differences considered
non-recurring with a known turnaround time.
Asset
tax
is recorded as part of deferred taxes, after making the appropriate evaluation
of its recovery.
As
a
result of the adoption of interpretation to MexIFRS8, Effects
of the Flat-Rate Business Tax, as
of
October 2007, the Company has taken into account the provision related to
the
effects of deferred FRBT established in the interpretation (see Note
15).
r)
Concentration of risk
The
Company invests a portion of its surplus cash in cash deposits in financial
institutions with good credit ratings and has established guidelines related
to
diversification and maturities that the Company believes maintains safety
and
liquidity. The Company has not experienced any losses on its cash equivalents.
The Company does not believe it has significant concentrations of credit
risks
in its accounts receivable, because the Company’s customer base is diverse, thus
spreading the credit risk.
s)
Income statement presentation
Costs
and
expenses in the Company’s income statement are presented based on their
function, since such classification allows for an accurate evaluation of
both
operating income and gross profit margins.
Although
MexFRS B-3 Statement
of income,
does
not require the presentation of operating income, this caption is shown in
the
income statement, since operating income is an important indicator used to
evaluate the Company’s performance. Operating income consists of ordinary
revenues and operating costs and expenses and thus excludes other ordinary
income (expenses).
This
presentation is comparable to the one used in the financial statements for
the
year ended December 31, 2006.
t)
Net income per share
Net
majority income per share has been computed based on majority net income
and on
the weighted average number of shares outstanding, as established in MexFRS
B-14.
u)
Financial information by segments
Requirements
of bulletin B-5, Financial
Information by Segments,
issued
by the IMCP, went into effect in April 2003. This bulletin establishes the
rules
for disclosing financial information by segment.
Financial
information by segment is prepared based on a management’s approach, in
conformity with bulletin B-5, considering a segment to be an operating component
that is subject to risks and benefits that are different from other business
segments.
The
financial information by segment is disclosed in Note 17.
v)
Convenience translation
United
States dollar amounts as of December 31, 2007, shown in the accompanying
consolidated financial statements, have been included solely for the convenience
of the reader and are translated from Mexican pesos to US dollars as a matter
of
arithmetic computation only, at an exchange rate of Ps 10.917 to one U.S.
dollar, which was the exchange rate at December 31, 2007. Such translation
should not be construed as a representation that the Mexican peso amounts
could
have been or could be converted into U.S. dollars at this or any other rate.
Figures shown in US Dollars do not represent the translation of the financial
statements in accordance with US GAAP (SFAS
52 “Foreign Currency Translation”).
w) Reclassifications
Certain
captions shown in the 2005 and 2006 financial statements as originally issued
have been reclassified for uniformity of presentation with the 2007 financial
statements.
The
changes in these reclassifications were recognized retrospectively in the
statement of income at December 31, 2005 and 2006, in conformity with MexFRS
B-1, Accounting
Changes and Error Corrections.
As of
December 2005 and 2006, the employee profit sharing is charged to the statement
of income, under the caption other income (expenses). The effects of the
reclassifications are as follows:
Other
ordinary (expenses) income net
|
|
2005
|
|
2006
|
|
Original
amount
|
|
Ps
|
(22,504
|
)
|
Ps
|
22,789
|
|
Reclassified
|
|
|
(25,961
|
)
|
|
18,427
|
|
x)
New accounting pronouncements
The
most
important new pronouncements that came into force in 2007 are as
follows:
MexFRS
B-3, Statement
of Operations
MexFRS
B-3 establishes the guidelines for classifying income, costs and expenses
as
either ordinary or non-ordinary and modifies certain MexFRS. The primary
sections of the statement of income have been redefined to embody the concepts
of “ordinary items” and the classification of income. Also, the caption Initial
accumulated effect of accounting changes has been eliminated from the income
statement, as established in MexFRS B-1, Accounting
Changes and Error Corrections.
MexFRS
B-3 also allows entities to present costs and expenses in the statement of
operations, based on their function or nature or a combination of both. MexFRS
B-3 does not require the presentation of operating income in the statement
of
operations, but still allows for it when operating income is deemed to be
an
important indicator for evaluating a particular entity’s performance. When an
entity does decide to include the operating income caption, MexFRS B-3 requires
the disclosure of the items comprising such caption and a justification for
its
inclusion in the statement of income.
MexFRS
C-13, Related
Parties
This
MexFRS broadens the definition of related parties to include the immediate
family members of key management personnel or directors and funds derived
from
labor obligation plans, as well. MexFRS C-13 also requires the following
disclosures:
1)
the
relationship between the controlling company and its subsidiaries, irrespective
of whether transactions were actually carried out between them in the period;
2)
the name of the direct controlling company and, when different from such,
the
name of the principal controlling company of the economic group to which
the
entity belongs; 3)
compensations granted to the entity’s key management personnel or directors (in
the case of public companies). Lastly, this standard allows entities to disclose
that the pricing of its transactions carried out with its related parties
are
similar to prices that would be established for similar transactions between
third parties, provided that such parity may be demonstrated.
MexFRS
D-6, Capitalization
of the Comprehensive Cost of Financing
MexFRS
D-6 establishes that entities must capitalize comprehensive financing cost
(CFC), which had been optional under the previous MexFRS C-6, Property,
Plant and Equipment;
this
rule eliminated the choice to capitalize or not the comprehensive cost of
financing.
Capitalizable
CFC is defined as the amount attributable to qualifying assets that could
have
been avoided if such acquisition had not taken place, and includes in the
case
of Mexican peso denominated financing, interest and the net monetary position,
and in the case of foreign currency denominated financing, it also includes
exchange gains and exchange losses. Qualifying assets are defined as those
assets acquired by an entity requiring a prolonged acquisition or construction
period for their use, as well as assets that are to be sold or leased that
require a prolonged period to be acquired or readied for sale or
lease.
The
capitalization of the comprehensive cost of financing starts and continues
provided the investments in the acquisition are actually being made, the
activities required for conditioning the asset for sale or use are underway
and
interest is being accrued.
MexFRS
D-6 establishes that the amount of capitalizable CFC will be determined based
on
the loans that were specifically use to acquire the qualifying assets, or
if
such identification can not be made, by applying the weighted average
capitalization rate for financing to the weighted average of investments
in
qualifying assets made during the acquisition period. Financing with imputed
interest cost may be capitalized against the cost of acquired assets, since
the
financing is recognized at its present value.
The
adoption of MexFRS D-6 did not materially affect the comprehensive financing
income as of December 31, 2007.
MexFRS
4, Presentation
of Employee Profit Sharing in the Statement of
Operations
The
Interpretation to MexFRS 4 establishes, based on the result of the analysis
of
MexFRS B-3, MexFRS D-3 and MexFRS D-4, that employee profit sharing must
be
presented in the statements of income as an ordinary expense, then effective
2007, employee profit-sharing is classified and disclosed in “other ordinary
expenses” into the income statement (prior years was disclosed as a single
caption before net income). For comparative purposes this MexFRS is disclosed
retroactively for 2005 and 2006. (See Note 16).
MexFRS
8, Effects
of the Flat-Rate Business Tax (FRBT)
In
December 2007, the CINIF issued the Interpretation to MexFRS 8, which is
effective for years beginning on or after October 1, 2007. Such standard
was
created as a result of the need to clarify whether the flat-rate business
tax
should be treated as a tax on profits and to establish the guidelines for
its
accounting treatment.
MexFRS
8
establishes that the FRBT is a tax on profit and that for the year ended
December 31, 2007, its effects should be recognized in conformity with the
provisions of MexFRS D-4, Accounting
for Income Tax, Asset Tax and Employee Profit Sharing,
and as
of January 1, 2008, in conformity with MexFRS D-4, Taxes
on Profits.
Based
on the conclusions of this Interpretation, an entity must first determine
whether its tax base generates FRBT payable or income tax payable. To do
so,
taxpayers should carry out financial projections to determine if their
tax-on-profits base will be for income tax or FRBT. Based on the results
of
these projections, taxpayers will be able to plan in advance for either FRBT
or
income tax as it arises each year.
Entities
that have determined that they will essentially pay FRBT must recognize the
effects of deferred FRBT in their financial statements at December 31, 2007.
This deferred tax must correspond to the temporary differences and FRBT credits
existing in 2007 for which payment or recovery of FRBT is expected as of
or
after 2008. Therefore, those entities that have determined that they will
essentially pay FRBT in the future must eliminate the deferred income tax
asset
or liability recognized at such date. These adjustments give rise to an expense
or income that must be recognized in the 2007 statement of operations as
part of
the caption Taxes on profits or in stockholders’ equity when it relates to other
comprehensive items.
In
the
determination of deferred FRBT asset or liability, taxpayers must consider
that
certain FRBT credits generate a deferred tax asset, provided that the law
establishes the possibility of applying such credits against the FRBT of
future
periods. These credits must be reviewed at least once a year and written
down
for those portions for which there is uncertainty as to
recoverability.
The
deferred tax rate is the rate enacted and established in the tax provisions
at
the date of the financial statements or the rate that is expected to be in
force
at the time the deferred FRBT assets and liabilities will be realized (16.5%
for
2008, 17% for 2009 and 17.5% for 2010 and subsequent years).
Deferred
FRBT for the period must be recognized as a deferred tax expense or income
in
the income statement of the period as part of the tax on profits caption
(in
stockholders’ equity for those amounts associated with comprehensive income
items) and as a non-current asset or long-term liability in the balance sheet.
In the notes to the financial statements, the Company must disclose an analysis
of the taxes on profits presented in the income statement, listing the amounts
of payable and deferred FRBT. The entity must also mention the deferred FRBT
related to other comprehensive items.
Under
the
FRBT Law, an entity must determine the amount of asset tax generated through
2007 that it will be able to recover as of 2008. Such amount must be recognized
in the 2007 financial statements as a recoverable tax account and any amount
of
asset tax considered unrecoverable must be cancelled from the 2007 balance
sheet
and recognized as an expense in the statement of operations of the same period
as part of the Taxes on profit caption. As of 2008, the balance of recoverable
taxes must be reviewed on each financial statement closing date and written
down
when there is evidence that some amounts may not be recoverable after
all.
The
effects of adopting this new accounting pronouncement are described in Note
15.
3.
Accounts receivable
Accounts
receivable at December 31, 2006 and 2007, are shown net of an allowance for
bad
debts for $ 31,852 and $ 36,154, respectively.
4.
Related Parties
The
companies mentioned above are considered affiliates, as the Company’s
stockholders are also stockholders in such companies.
a)
A
summary of related party accounts payable as of December 31, is as
follows:
|
|
Relation
|
|
2006
|
|
2007
|
|
Vimifos,
S.A. de C.V.
|
|
|
Affiliate
|
|
Ps
|
9,234
|
|
Ps
|
21,311
|
|
Maquinaria
Agrícola, S.A. de C.V.
|
|
|
Affiliate
|
|
|
3,042
|
|
|
3,382
|
|
Autos
y Accesorios, S.A. de C.V.
|
|
|
Affiliate
|
|
|
318
|
|
|
438
|
|
Llantas
y Accesorios, S.A. de C.V.
|
|
|
Affiliate
|
|
|
56
|
|
|
1,168
|
|
|
|
|
|
|
Ps
|
12,650
|
|
Ps
|
26,819
|
|
At
December 31, 2006 and 2007, balances due to related parties correspond to
unsecured current accounts that bear no interest and are payable within 30
days.
b)
For
the years ended December 31, 2005, 2006 and 2007, the Company had the following
transactions with related parties:
|
|
2005
|
|
2006
|
|
2007
|
|
Purchases
of feed, raw materials and packing supplies
|
|
|
|
|
|
|
|
|
|
|
Vimifos,
S.A. de C.V.
|
|
Ps |
194,053
|
|
Ps |
251,931
|
|
Ps |
192,188
|
|
Qualiplast,
S.A. de C.V.
|
|
|
-
|
|
|
-
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of vehicles, tires and spare parts
|
|
|
|
|
|
|
|
|
|
|
Maquinaria
Agrícola, S.A. de C.V.
|
|
|
16,229
|
|
|
17,585
|
|
|
47,155
|
|
Llantas
y accesorios, S.A. de C.V.
|
|
|
11,341
|
|
|
12,289
|
|
|
23,349
|
|
Autos
y Accesorios, S.A. de C.V.
|
|
|
30,994
|
|
|
33,585
|
|
|
14,985
|
|
Alfonso
R. Bours, S.A. de C.V.
|
|
|
-
|
|
|
-
|
|
|
2,171
|
|
Distribuidora
Automotriz los Mochis, S.A. de C.V.
|
|
|
-
|
|
|
-
|
|
|
8,095
|
|
|
|
|
|
|
|
|
|
|
|
|
Airplane
leasing expenses
|
|
|
|
|
|
|
|
|
|
|
Taxis
Aéreos del Noroeste, S.A, de C.V.
|
|
|
4,687
|
|
|
4,196
|
|
|
3,153
|
|
Sales
and
purchases transactions with related parties are made at markets prices, which
are similar to other independent parties.
c)
For
the year ended December 31, 2007, the Company paid approximately Ps.33.4 million
in aggregate compensation to our directors and executive officers, for services
they rendered in their respective capacities. The Company has not implemented
a
share options plan for executives or employees.
5.
Inventories and biological assets
a)
Inventories consist of the following:
|
|
2006
|
|
2007
|
|
Raw
materials and byproducts
|
|
Ps |
1,087,148
|
|
Ps |
2,004,691
|
|
Medicine,
materials and spare parts
|
|
|
356,397
|
|
|
369,337
|
|
Finished
feed
|
|
|
42,694
|
|
|
56,608
|
|
|
|
|
1,486,239
|
|
|
2,430,636
|
|
Agricultural
products:
|
|
|
|
|
|
|
|
Live
chicken
|
|
|
565,879
|
|
|
667,022
|
|
Processed
chicken
|
|
|
147,361
|
|
|
177,719
|
|
Commercial
egg
|
|
|
24,616
|
|
|
22,551
|
|
Turkey
|
|
|
-
|
|
|
28,339
|
|
Beef
|
|
|
-
|
|
|
2,708
|
|
Others
|
|
|
-
|
|
|
365
|
|
|
|
|
737,856
|
|
|
898,704
|
|
Total
|
|
Ps |
2,224,095
|
|
Ps |
3,329,340
|
|
b)
Biological assets at December 31, 2006 and 2007 consist of the
following:
|
|
2006
|
|
2007
|
|
Current
biological assets:
|
|
|
|
|
|
|
|
Breeder
pigs
|
|
Ps |
24,775
|
|
Ps |
32,464
|
|
Incubatable
eggs for fattening
|
|
|
67,130
|
|
|
76,038
|
|
Total
current biological assets
|
|
|
91,905
|
|
|
108,502
|
|
|
|
|
|
|
|
|
|
Non-current
biological assets:
|
|
|
|
|
|
|
|
Laying
and breeder hens
|
|
|
173,927
|
|
|
202,214
|
|
Incubatable
eggs for laying hens
|
|
|
7,714
|
|
|
-
|
|
Pigs
|
|
|
25,231
|
|
|
27,280
|
|
Laying
hens
|
|
|
521,044
|
|
|
577,043
|
|
Allowance
for productivity declines
|
|
|
(212,798
|
)
|
|
(231,124
|
)
|
Total
non-current biological assets
|
|
|
515,118
|
|
|
575,413
|
|
Total
inventories and biological assets
|
|
Ps |
2,831,118
|
|
Ps |
4,013,255
|
|
The
change in the historical value of biological assets and agricultural products
to
be presented at their fair value was Ps. 28,072 in 2005 (increase), Ps. 10,879
in 2006 (increase) and Ps. 10,882 in 2007 (increase). In 2005, 2006 and 2007,
the effects were included as part of the caption Net revenue.
6.
Property, Plant and Equipment
a)
Property, plant and equipment consists of the following as of December
31:
|
|
Useful
lives
(years)
|
|
2006
|
|
2007
|
|
Land
|
|
|
-
|
|
Ps |
811,584
|
|
Ps |
856,486
|
|
Buildings,
farm structures and equipment
|
|
|
7-27
|
|
|
13,270,667
|
|
|
13,987,063
|
|
Office,
furniture and equipment
|
|
|
3
|
|
|
218,498
|
|
|
227,183
|
|
Transportation
equipment
|
|
|
6
|
|
|
1,159,922
|
|
|
1,162,747
|
|
|
|
|
|
|
|
15,460,671
|
|
|
16,233,479
|
|
Accumulated
depreciation
|
|
|
|
|
|
(6,264,119
|
)
|
|
(6,702,709
|
)
|
Net
|
|
|
|
|
|
9,196,552
|
|
|
9,530,770
|
|
Construction
in progress
|
|
|
|
|
|
639,343
|
|
|
725,469
|
|
Total
|
|
|
|
|
Ps |
9,835,895
|
|
Ps |
10,256,239
|
|
b)
Depreciation expense for the years ended December 31, 2005, 2006 and 2007,
was
Ps
497,819, Ps 537,383, and Ps 571,393, respectively.
7.
Goodwill
In
1999,
goodwill was derived from the purchase of the shares of Grupo Campi, S.A. de
C.V. in the amount of Ps. 367,135. At December 31, 2005 and 2006, accumulated
amortization aggregates Ps. 66,287. As mentioned in Note 2 k), in 2006 and
2007,
goodwill was not amortized derived from the adoption of bulletin B-7,
Business
Acquisitions.
8.
Notes Payable to Banks and Long-term Debt
a)
Short-term notes payable to banks, as of December 31, consists of the
following:
|
|
2006
|
|
2007
|
|
Unsecured
notes payable to banks:
|
|
|
|
|
|
|
|
Denominated
in Mexican pesos, interest rate: TIIE(1) FIRA(2) rate less 3.00
points
|
|
|
-
|
|
|
40,000
|
|
Total
notes payable to bank
|
|
Ps |
-
|
|
Ps |
40,000
|
|
The
weighted average interest rate on short-term notes payable at December 31,
2006
and 2007 was 5.32%, and 4.93%, respectively. Average interest rates on
short-term debt for the years ended December 31, 2006 and 2007 were 5.25% and
4.68%, respectively.
b)
Long-term notes payable to banks, as of December 31, consists of the
following:
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Long-term
debt to banks:
|
|
|
|
|
|
|
|
Secured
by equipment:
|
|
|
|
|
|
|
|
Denominated
in Mexican pesos, repayable in monthly installments:
|
|
|
|
|
|
|
|
Through
December, 2010, at CETES(3) rate plus 2 points
|
|
Ps |
41,089
|
|
Ps |
30,400
|
|
|
|
|
|
|
|
|
|
Unsecured:
|
|
|
|
|
|
|
|
Denominated
in Mexican pesos, at TIIE(1) FIRA(2) rate less 3.30 points, with
minimum
rate of 2.90%, through December, 2010
|
|
|
4,113
|
|
|
39,201
|
|
Total
|
|
|
45,202
|
|
|
69,601
|
|
Less
current portion
|
|
|
(9,708
|
)
|
|
(18,844
|
)
|
Total
long-term debt
|
|
Ps |
35,494
|
|
Ps |
50,757
|
|
(1)
TIIE
= Interbank Equilibrium Rate
(2)
FIRA
= Fideicomisos
Instituidos en Relación con la Agricultura
(3)
CETE
= Certificados de la Tesorería
Weighted
average interest rates on long-term debt at December 31, 2006 and 2007 were
8.58% and 7.80%, respectively. The weighted average interest rate on the
Company’s total long term debt for the years ened as of December 31, 2006 and
2007 was 9.26%, and 7.92%, respectively.
The
weighted average interest rate of the Company’s total debt at December 31, 2006
and 2007 was 6.67% and 6.75%, respectively.
c)
At
December 31, 2006 and 2007, unused lines of credit totaled Ps 835,918 and
Ps
956,050, respectively. In 2006 and 2007, the Company did not pay any fee for
unused lines of credit.
d)
The
book value of assets collateralizing long-term debt was Ps 145,438 at December
31, 2006 and Ps 137,857 at December 31, 2007.
e)
Maturities of long-term debt as of December 31, 2007 are as
follows:
Year
|
|
Amount
|
|
2009
|
|
Ps |
19,768
|
|
2010
|
|
|
19,769
|
|
2011
|
|
|
7,480
|
|
2012
|
|
|
3,740
|
|
|
|
Ps |
50,757
|
|
9.
Financial Instruments
The
Company has entered into contracts with Merrill Lynch, JP Morgan and Fimat
USA,
LLC, to hedge U.S. dollar exchange rates and corn and sorgum for the Company’s
projected cash expenditures for the period from January through December
2008.
A
summary
of instruments as of December 31, 2006 and 2007 is as follows:
2006
|
|
|
|
|
|
|
|
|
|
Other
|
|
Ineffective
|
|
Derivatives
financial
Instruments
|
|
|
Type
|
|
|
Posi-tion
|
|
|
Notional
Amount
|
|
|
Fair
value
|
|
comprehensive
income
|
|
portion
(income)
|
|
Financial
Instruments – Hedging
|
Exchange
rate options
|
|
|
Call
|
|
|
Short
|
|
Ps |
161,719
|
|
Ps |
(24,351
|
)
|
Ps |
(4,121
|
)
|
|
|
|
Exchange
rate options
|
|
|
Call
|
|
|
Long
|
|
|
220,169
|
|
|
21,365
|
|
|
4,698
|
|
|
|
|
Exchange
rate options
|
|
|
Put
|
|
|
Short
|
|
|
80,309
|
|
|
(47,394
|
)
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,380
|
)
|
|
458
|
|
|
|
|
Financial
Instruments
|
Exchange
rate options
|
|
|
Put
|
|
|
Long
|
|
|
160,785
|
|
|
30,552
|
|
|
-
|
|
Ps |
30,552
|
|
Bean
and soy futures
|
|
|
|
|
|
Long
|
|
|
3,181
|
|
|
2,143
|
|
|
-
|
|
|
2,143
|
|
Corn
futures
|
|
|
|
|
|
Long
|
|
|
9,846
|
|
|
3,809
|
|
|
-
|
|
|
3,809
|
|
Bean
and soy options
|
|
|
Call
|
|
|
Long
|
|
|
622
|
|
|
236
|
|
|
-
|
|
|
236
|
|
Bean
and soy options
|
|
|
Put
|
|
|
Short
|
|
|
1,167
|
|
|
(216
|
)
|
|
-
|
|
|
(216
|
)
|
Corn
options
|
|
|
Call
|
|
|
Long
|
|
|
2,967
|
|
|
3,305
|
|
|
-
|
|
|
3,305
|
|
Corn
options
|
|
|
Put
|
|
|
Short
|
|
|
8,290
|
|
|
(267
|
)
|
|
-
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
39,562
|
|
|
-
|
|
Ps |
39,562
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(10,818
|
)
|
|
458
|
|
|
|
|
Deferred
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
|
(88
|
)
|
|
|
|
Total
net of taxes |
|
|
|
|
|
|
|
|
|
|
Ps |
(8,763
|
)
|
Ps |
370
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Other
|
|
Ineffective
|
|
Derivatives
financial
Instruments
|
|
Type
|
|
Posi-
tion
|
|
Notional
Amount
|
|
Fair
value
|
|
comprehensive
income
|
|
portion
(income)
|
|
Financial
Instruments – Hedging
|
Bean
and soy futures
|
|
|
|
|
|
Short
|
|
Ps |
2,469
|
|
Ps |
(3,442
|
)
|
Ps |
(3,442
|
)
|
|
|
|
Bean
and soy futures
|
|
|
|
|
|
Long
|
|
|
2,379
|
|
|
4,424
|
|
|
4,424
|
|
|
|
|
Corn
futures
|
|
|
|
|
|
Short
|
|
|
167
|
|
|
(420
|
)
|
|
(420
|
)
|
|
|
|
Corn
futures
|
|
|
|
|
|
Long
|
|
|
553
|
|
|
1,424
|
|
|
1,424
|
|
|
|
|
Bean
and soy options
|
|
|
Call
|
|
|
Long
|
|
|
1,890
|
|
|
1,947
|
|
|
1,947
|
|
|
|
|
Bean
and soy options
|
|
|
Put
|
|
|
Long
|
|
|
3,480
|
|
|
(255
|
)
|
|
(255
|
)
|
|
|
|
Corn
options
|
|
|
Call
|
|
|
Long
|
|
|
2,870
|
|
|
3,815
|
|
|
3,815
|
|
|
|
|
Corn
options
|
|
|
Put
|
|
|
Short
|
|
|
5,380
|
|
|
(226
|
)
|
|
(226
|
)
|
|
|
|
Corn
options Acerca
|
|
|
Put
|
|
|
Long
|
|
|
48,438
|
|
|
99,310
|
|
|
99,310
|
|
|
|
|
Embedded
corn futures
|
|
|
|
|
|
Long
|
|
|
16,356
|
|
|
15,549
|
|
|
15,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,126
|
|
|
122,126
|
|
|
|
|
Financial
Instruments
|
Exchange
rate options
|
|
|
Call
|
|
|
Long
|
|
|
49,500
|
|
|
9,424
|
|
|
-
|
|
Ps |
9,424
|
|
Exchange
rate options
|
|
|
Put
|
|
|
Long
|
|
|
7,500
|
|
|
429
|
|
|
-
|
|
|
429
|
|
Exchange
rate options
|
|
|
Call
|
|
|
Short
|
|
|
8,500
|
|
|
(15,632
|
)
|
|
-
|
|
|
(15,632
|
)
|
Exchange
rate options
|
|
|
Put
|
|
|
Short
|
|
|
85,000
|
|
|
(3,871
|
)
|
|
-
|
|
|
(3,871
|
)
|
Exchange
rate forward
|
|
|
Call
|
|
|
Long
|
|
|
147,500
|
|
|
21,246
|
|
|
-
|
|
|
21,246
|
|
Exchange
rate forward
|
|
|
Put
|
|
|
Short
|
|
|
120,000
|
|
|
(10,219
|
)
|
|
-
|
|
|
(10,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377
|
|
|
-
|
|
Ps |
1,377
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
123,503
|
|
|
122,126
|
|
|
|
|
Deferred
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
(23,466
|
)
|
|
(23,204
|
)
|
|
|
|
Total
net of taxes
|
|
|
|
|
|
|
|
|
|
|
Ps |
100,037
|
|
Ps |
98,922
|
|
|
|
|
As
a part
of the exchange rate strategy, there are certain financial derivatives to reduce
the exchange rate risk in purchase transactions. There are contract agreements
for call and put options for short-term hedge which cover assets of U.S. 367
thousand for 2006 and U.S.277 thousand for 2007, as well as liabilities of
U.S.
233 thousand and U.S. 225 thousand for 2006 and 2007, respectively. These
contracts resulted in a charge to the income statement by Ps 70,495 for 2006
and
a credit by Ps 8,097 for 2007 included in the comprehensive cost of
financing.
10.
Commitments
a)
The
Company has entered into operating leases for certain offices, production sites,
automotive and computer equipment. Most leases contain renewal options. Rental
expense was as follows:
Year
ended
December
31,
|
|
Amount
|
|
2005
|
|
Ps |
33,160
|
|
2006
|
|
|
30,762
|
|
2007
|
|
|
40,733
|
|
b)
Future
minimum annual rental payments under existing operating leases with initial
terms in excess of one year as of December 31, 2007, are as
follows:
Year
ended
December
31,
|
|
Amount
|
|
2008
|
|
Ps |
69,989
|
|
2009
|
|
|
62,658
|
|
2010
|
|
|
56,671
|
|
2011
|
|
|
55,141
|
|
2012
|
|
|
54,447
|
|
2013
and thereafter
|
|
|
12,006
|
|
Total
|
|
Ps |
310,912
|
|
c)
In
2005, 2006, and 2007 annual rental expense under operating leases was
Ps.
139,597, Ps 124,028, and Ps 153,165, respectively.
11.
Other taxes payable and other accruals
An
analysis of other taxes payable and other accruals presented in the financial
statements is as follows:
|
|
2006
|
|
2007
|
|
Expenses
payable
|
|
Ps |
123,122
|
|
Ps |
91,981
|
|
IMSS,
SAR and INFONAVIT
|
|
|
49,491
|
|
|
56,476
|
|
Other
accounts payable
|
|
|
21,907
|
|
|
39,005
|
|
Trade
advances
|
|
|
32,914
|
|
|
38,204
|
|
Employee
profit sharing
|
|
|
5,254
|
|
|
5,756
|
|
Salaries
payable
|
|
|
5,707
|
|
|
4,514
|
|
Tax
payable
|
|
|
3,235
|
|
|
4,128
|
|
Payroll
tax
|
|
|
971
|
|
|
2,637
|
|
Interest
payable
|
|
|
972
|
|
|
728
|
|
Total
|
|
Ps |
243,573
|
|
Ps |
243,429
|
|
12.
Foreign Currency Position
a)
A
summary of the Company’s assets and liabilities denominated in U.S. dollars (the
only foreign currency) as of December 31 is as follows:
|
|
(Thousands
U.S. dollars)
|
|
|
|
2006
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
23,776
|
|
$
|
34,862
|
|
Advances
to suppliers (included in inventories and property,
plant and equipment)
|
|
|
39,001
|
|
|
37,116
|
|
|
|
|
62,777
|
|
|
71,978
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(15,984
|
)
|
|
(14,148
|
)
|
Net
long position
|
|
$
|
46,793
|
|
$
|
57,830
|
|
b)
As of
December 31, 2006 and 2007, the exchange rate was Ps 10.82 and Ps 10.91 per
dollar, respectively. At March 17, 2008, the date of the audit report on these
financial statements, the exchange rate was $ 10.76 per U.S.
dollar.
c)
Assets
from foreign origin included in the consolidated balance sheets as of December
31, 2006 and 2007, were:
|
|
(Thousands
of U.S. dollars)
|
|
|
|
2006
|
|
2007
|
|
Inventories
|
|
$
|
20,654
|
|
$
|
29,899
|
|
Property,
plant and equipment
|
|
|
140,093
|
|
|
141,695
|
|
d)
Imported raw materials, in thousands of U.S. dollars, were $ 416,974 in 2005,
$
483,278
in 2006 and $ 655,922 in 2007.
13.
Labor Obligations
An
analysis of the net period cost, reserve amounts and the assumptions considered
in the pension plan, the seniority premium and severance obligation at December
31 is as follows:
|
|
Pension
plan
|
|
Seniority
Premium
|
|
Severance
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
2007
|
|
Net
period cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
cost
|
|
Ps |
10,798
|
|
Ps |
11,791
|
|
Ps |
15,429
|
|
Ps |
3,296
|
|
Ps |
3,781
|
|
Ps |
4,361
|
|
Ps |
9,143
|
|
Ps |
9,475
|
|
Ps |
9,191
|
|
Return
on plan assets
|
|
|
(7,369
|
)
|
|
(8,395
|
)
|
|
(10,090
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of unrecognized prior past service costs
|
|
|
2,698
|
|
|
2,429
|
|
|
2,239
|
|
|
3,439
|
|
|
3,757
|
|
|
1,215
|
|
|
4,583
|
|
|
1,530
|
|
|
4,250
|
|
Interest
cost
|
|
|
7,906
|
|
|
7,864
|
|
|
8,890
|
|
|
2,090
|
|
|
2,298
|
|
|
2,348
|
|
|
1,877
|
|
|
1,993
|
|
|
1,765
|
|
Net
period cost
|
|
Ps |
14,033
|
|
Ps |
13,689
|
|
Ps |
16,468
|
|
Ps |
8,825
|
|
Ps |
9,836
|
|
Ps |
7,924
|
|
Ps |
15,603
|
|
Ps |
12,998
|
|
Ps |
15,206
|
|
Loss
from early extinguishment of obligations
|
|
Ps |
-
|
|
Ps |
-
|
|
Ps |
-
|
|
Ps |
-
|
|
Ps |
-
|
|
Ps |
-
|
|
Ps |
2,044
|
|
Ps |
941
|
|
Ps |
2,514
|
|
|
|
Pension
plan
|
|
Seniority
Premium
|
|
Severance
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Labor
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
Ps |
160,280
|
|
Ps |
186,865
|
|
Ps |
33,063
|
|
Ps |
36,306
|
|
Ps |
31,936
|
|
Ps |
38,567
|
|
Current
benefit obligation
|
|
|
99,220
|
|
|
124,592
|
|
|
28,202
|
|
|
30,821
|
|
|
31,036
|
|
|
38,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
|
189,355
|
|
|
199,333
|
|
|
49,098
|
|
|
56,601
|
|
|
36,053
|
|
|
42,895
|
|
Plan
assets
|
|
|
(160,421
|
)
|
|
(182,017
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unrecognized
prior service cost
|
|
|
(22,971
|
)
|
|
(20,959
|
)
|
|
(6,930
|
)
|
|
(6,283
|
)
|
|
-
|
|
|
-
|
|
Transition
liability
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27,913
|
)
|
|
(23,198
|
)
|
Unrecognized
net gains
|
|
|
36,756
|
|
|
48,415
|
|
|
(15,784
|
)
|
|
(21,490
|
)
|
|
7,223
|
|
|
(455
|
)
|
Unrecognized
changes or improvements
|
|
|
(28,545
|
)
|
|
(27,322
|
)
|
|
104
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
projected benefit obligation
|
|
|
14,174
|
|
|
17,450
|
|
|
26,488
|
|
|
28,828
|
|
|
15,363
|
|
|
19,242
|
|
Unfunded
accumulated benefit obligation
|
|
|
4,624
|
|
|
15,960
|
|
|
33,063
|
|
|
36,307
|
|
|
31,936
|
|
|
38,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
net liability over net projected liability in some
subsidiaries
|
|
|
-
|
|
|
4,049
|
|
|
6,575
|
|
|
7,479
|
|
|
16,573
|
|
|
19,325
|
|
Additional
liability
|
|
|
-
|
|
|
(4,049
|
)
|
|
(6,575
|
)
|
|
(7,479
|
)
|
|
(16,573
|
)
|
|
(19,325
|
)
|
Intangible
assets
|
|
|
-
|
|
|
4,049
|
|
|
5,659
|
|
|
5,967
|
|
|
16,573
|
|
|
18,325
|
|
Minimum
labor obligation liability adjustment
|
|
Ps |
-
|
|
Ps |
-
|
|
Ps |
916
|
|
Ps |
1,512
|
|
Ps |
-
|
|
Ps |
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
Ps |
152,360
|
|
Ps |
189,355
|
|
Ps |
46,546
|
|
Ps |
49,097
|
|
Ps |
42,671
|
|
Ps |
36,053
|
|
Service
cost
|
|
|
11,791
|
|
|
15,429
|
|
|
3,781
|
|
|
4,361
|
|
|
9,475
|
|
|
9,191
|
|
Interest
cost
|
|
|
7,864
|
|
|
8,890
|
|
|
2,298
|
|
|
2,348
|
|
|
1,992
|
|
|
1,765
|
|
Actuarial
differences
|
|
|
8,518
|
|
|
(12,587
|
)
|
|
2,339
|
|
|
6,379
|
|
|
(
6,077
|
)
|
|
9,726
|
|
Benefits
paid
|
|
|
(1,554
|
)
|
|
(1,754
|
)
|
|
(5,867
|
)
|
|
(5,584
|
)
|
|
(8,803
|
)
|
|
(13,840
|
)
|
Changes
to plan not applied
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,205
|
)
|
|
-
|
|
Increase
for plan improvement
|
|
|
10,376
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Projected
benefit obligation at end of year
|
|
Ps |
189,355
|
|
Ps |
199,333
|
|
Ps |
49,097
|
|
Ps |
56,601
|
|
Ps |
36,053
|
|
Ps |
42,895
|
|
|
|
Pension
plan
|
|
|
|
2006
|
|
2007
|
|
Changes
in plan assets:
|
|
|
|
|
|
|
|
Plan
assets at beginning of the year
|
|
Ps |
130,742
|
|
Ps |
160,421
|
|
|
|
|
|
|
|
|
|
Actual
return on plan assets
|
|
|
8,395
|
|
|
10,090
|
|
Employer
contribution
|
|
|
14,039
|
|
|
13,193
|
|
Actuarial
differences
|
|
|
8,799
|
|
|
67
|
|
Benefit
paid
|
|
|
(1,554
|
)
|
|
(1,754
|
)
|
Fair
value of plan assets at end of year
|
|
|
160,421
|
|
|
182,017
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(28,934
|
)
|
|
(17,316
|
)
|
Unrecognized
net actuarial loss (gain)
|
|
|
(36,758
|
)
|
|
(48,415
|
)
|
Unrecognized
prior service cost (benefit)
|
|
|
22,971
|
|
|
20,959
|
|
Net
amount recognized
|
|
Ps |
(42,721
|
)
|
Ps |
(44,772
|
)
|
The
Company used December 2005, 2006 and 2007 measurement date for pension plan,
seniority premium, and December 31, 2006 and 2007 for the severance
plan.
The
transition liability, the prior service cost and plan changes, and actuarial
differences assumptions will be amortized over a period ranging from 21 to
25
years (the average remaining working life of employees).
The
asset
allocation for the Company’s pension plan at the end of 2005, 2006 and 2007 and
the target allocation for 2008 by asset category are as follows:
|
|
Percentage
of plan at year end
|
|
Target
allocation
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
Fixed-income
securities
|
|
|
75
|
%
|
|
74
|
%
|
|
77
|
%
|
|
75
|
%
|
Fixed-variable
income securities
|
|
|
25
|
%
|
|
26
|
%
|
|
23
|
%
|
|
25
|
%
|
Target
asset allocations reflect its investment strategy of maximizing the rate of
return on plan assets and the resulting funded status, within an appropriate
level of risk.
The
rates
considered in the actuarial study in 2004, 2005 and 2006 are as
follows:
|
|
2005
|
|
2006
|
|
2007
|
|
Labor
obligations discount
|
|
|
5.25
|
%
|
|
5.25
|
%
|
|
5.25
|
%
|
Future
salary increases
|
|
|
1.00
|
%
|
|
1.00
|
%
|
|
1.00
|
%
|
Return
on assets
|
|
|
6.25
|
%
|
|
6.25
|
%
|
|
6.25
|
%
|
The
information about the expected cash flow for the pension benefit plant and
seniority premium is as follows:
|
|
Pension
plan
|
|
Seniority
premium
|
|
Severance
|
|
Expected
benefit payment:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
Ps |
6,972
|
|
Ps |
6,395
|
|
Ps |
8,215
|
|
2009
|
|
|
8,222
|
|
|
6,857
|
|
|
7,431
|
|
2010
|
|
|
9,482
|
|
|
7,145
|
|
|
7,002
|
|
2011
|
|
|
10,859
|
|
|
7,282
|
|
|
6,651
|
|
2012
|
|
|
11,957
|
|
|
7,369
|
|
|
6,303
|
|
2013-2017
|
|
|
76,959
|
|
|
37,704
|
|
|
27,856
|
|
Total
|
|
Ps |
124,451
|
|
Ps |
72,752
|
|
Ps |
63,458
|
|
The
above
table reflects the total benefits expected to be paid from the
plan.
14.
Stockholders’ Equity
a)
In
April 1997, Bachoco had a stock split and created so-called “BL” units, which
consist of one series “B” share and one series “L” share, and so-called “BB”
units, which consist of two series “B” shares. Series “L” shares have limited
voting rights.
In
September 2006, the Company separated the BL units into B and L shares and
converted the series L shares into series B shares; consequently only one series
remains (series B). All shares issued and outstanding shares have voting
rights.
b)
In
2005, 2006 and 2007, the Company declared and paid cash dividends at nominal
values of Ps 239,098, Ps 353,880 and Ps 353,880, respectively (Ps 263,719,
Ps
378,025 and Ps 363,708, in constant Mexican pesos) or Ps 0.40, Ps 0.59 and
Ps
0.59, respectively, per share in nominal pesos.
c)
The
Mexican Corporation Act 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, 2006 and 2007, included in retained earnings, was Ps
205,735.
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
Ps 180,000 (Ps 303,861 expressed in constant Mexican pesos) through the
appropriation of retained earnings in 1998. During 2005 the Company repurchased
920 thousand shares for Ps 11,462. During 2006 and 2007, no shares were
repurchased. In 2005, and 2006, the Company sold 800 thousand and 920 thousand
of shares, respectively, previously repurchased; the sales value of latter
was
for Ps 2,954 and
Ps
17,604, respectively. In 2007 no shares were sold.
e)
The
Company is required to pay taxes on dividends distributed to stockholders only
to the extent 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.
The
Company obtains the majority of its revenues and net profit from Bachoco, S.A.
de C.V. (BSACV). For the years 2005 through 2007, pretax income of BSACV,
represented between 90% and 94% of Bachoco’s consolidated pretax income.
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.
f)
From
1999 through December 31, 2001, under Mexican income tax law, corporate
taxpayers were extended the option of deferring payment of a portion of their
annual corporate income tax, so that the tax payable will represent 30% of
taxable income. 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.
15.
Income Tax, Asset Tax, and Flat-Rate Business Tax
a)
Income
tax
The
Company and each of its subsidiaries file separate income tax returns. BSACV,
the Company’s principal operating subsidiary, is subject to payment of corporate
income tax under the provisions of the simplified regime, which is applicable
to
companies engaged exclusively in agriculture, cattle-raising, fishing, forestry
and certain other activities the income tax law establishes that are exclusive
when the companies obtain no more than 10% of their revenues from the production
of processed products, with which rule BSACV has complied.
The
simplified regime establishes that the taxable base for income tax is determined
on revenues collected net of deductions paid. The tax rate for this regime
was
16% in 2005, and 2006. In 2007 it was 19%.
The
income tax reforms passed in December 2004 include the elimination, as from
beginning in the 2006 fiscal year, of the taxable deduction of purchases so
as
to permit only the deduction of cost of sales. This reform is only applicable
to
the subsidiary Campi Alimentos S.A. de C.V. as it pays taxes under the general
regime, while for BSACV it is not applicable, due to the fact that it pays
taxes
under the simplified regime.
In
2006
changes were made to Mexican tax law that as of 2007, will increase the tax
rate
from 16% to 19%. This change resulted in a charge of Ps. 336,376 to income,
reflected in deferred taxes under “change in tax rates”.
b)
Asset
tax
As
of
January 1, 2007, asset tax rate is payable at the 1.25% rate and liabilities
are
no longer deductible from the asset tax base. Through
December 31, 2007, the 1.8% asset tax was payable on the average value of most
assets net of certain liabilities. The asset tax in 2005, 2006 and 2007 amounted
to Ps 21,418, Ps 28,267 and Ps 27,189, respectively. In each of the three years
the Company credited against these amounts the income tax paid.
The
Company and its subsidiaries are required to pay asset tax if the amount of
asset tax exceeds the computed income tax liability. Asset tax paid can be
credited against income tax in subsequent years (up to ten years). At December
31, 2007, the Company had Ps 6,420 in asset tax credits.
Base
year
|
|
Asset
tax paid
|
|
Year
of expiration
|
|
2004
|
|
Ps |
10
|
|
|
2014
|
|
2005
|
|
|
3,258
|
|
|
2015
|
|
2006
|
|
|
3,152
|
|
|
2016
|
|
|
|
Ps |
6,420
|
|
|
|
|
During
2007, a new tax reform was enacted and it abolished the asset tax effective
in
2008.
c)
Flat-Rate Business Tax (FRBT)
The
Flat-Rate Business Tax (FRBT) Law was published in the Official Gazette on
October 1, 2007. This Law will come into force as of January 1, 2008 and abolish
the Asset Tax Law.
Current-year
FRBT is computed by applying the 17.5% (16.5% for 2008 and 17% for 2009) rate
to
income determined on the basis of cash flows, as defined, net of authorized
credits.
FRBT
credits derive mainly from the unamortized negative FRBT base and salary credits
and social security contributions, as well as credits derived from the deduction
of certain investments, such as inventories and fixed assets, during the
transition period starting on the date on which the FRBT came into
force.
FRBT
shall be payable only to the extent it exceeds income tax for the same period.
In other words, to determine FRBT payable, income tax paid in a given period
shall first be subtracted from the current FRBT of the same period and the
difference shall be the FRBT payable.
Should
a
negative FRBT base be determined because deductions exceed taxable income,
there
will be no FRBT payable. The amount of the negative base multiplied by the
FRBT
rate results in a FRBT credit, which may be applied against income tax for
the
same year or, if applicable, against FRBT payable in the next ten years.
Based
on
tax result projections, the Company considers that it will be subject to the
payment of income tax in the following years.
d)
Income
tax charged to results
For
the
years ended December 31, 2005, 2006 and 2007, income tax charged (credited)
to
results of operations was as follows:
|
|
2005
|
|
2006
|
|
2007
|
|
Current
year income tax
|
|
Ps |
363,587
|
|
Ps |
250,519
|
|
Ps |
143,029
|
|
Current
year asset tax
|
|
|
3,178
|
|
|
2,497
|
|
|
-
|
|
Deferred
income tax
|
|
|
1,068
|
|
|
346,110
|
|
|
169,716
|
|
Total
income tax
|
|
Ps |
367,833
|
|
Ps |
599,126
|
|
Ps |
312,745
|
|
e)
Deferred income tax
On
the
basis of the financial projections for the next four years based on future
computations and retrospectively, based on historical results, the Company
considers that it will pay income tax, therefore, the new FRBT will not have
effect on the Company’s financial information.
The
component of the Company’s deferred income tax (assets) and liabilities are as
follows:
|
|
2006
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
Ps |
(151,984
|
)
|
Ps |
(196,460
|
)
|
Labor
obligations
|
|
|
(3,032
|
)
|
|
(8,082
|
)
|
Tax
loss carryforward
|
|
|
(6,186
|
)
|
|
(4,613
|
)
|
|
|
|
(161,202
|
)
|
|
(209,155
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
Inventories
|
|
|
330,483
|
|
|
420,993
|
|
Accounts
receivable
|
|
|
229,851
|
|
|
396,437
|
|
Other
provisions
|
|
|
2,491
|
|
|
269
|
|
Derivative
financial instruments
|
|
|
-
|
|
|
23,204
|
|
Fixed
assets
|
|
|
1,443,692
|
|
|
1,450,073
|
|
Effect
due to change in tax rate
|
|
|
336,376
|
|
|
-
|
|
Additional
liability from stockholders’ equity
|
|
|
6,529
|
|
|
288,591
|
|
|
|
|
2,349,422
|
|
|
2,579,567
|
|
Less:
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
6,186
|
|
|
4,613
|
|
Total
deferred income tax liability, net
|
|
Ps |
2,182,034
|
|
Ps |
2,375,025
|
|
At
December 31, 2006 and 2007, the deferred income tax liability determined by
considering stockholders’ equity as a temporary item is greater than the amount
determined using the assets and liabilities method. Due to the above, the
Company recognized an additional liability of Ps. 290,214 in 2006 and Ps.
359,717 in 2007 in order to recognize the difference between deferred tax
determined using the asset and liability method and by considering the
stockholders’ equity as the only temporary item.
The
most
significant items that gave rise to a difference between the total amount of
current year income tax and the current year deferred tax determined at the
statutory rate are as follows:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
%
|
|
%
|
|
%
|
|
Statutory
income tax rate
|
|
|
16.00
|
|
|
16.00
|
|
|
19.00
|
|
Effect
of companies outside simplified regime
|
|
|
2.3
|
|
|
4.42
|
|
|
4.20
|
|
Effect
of non-taxable items
|
|
|
(
2.2
|
)
|
|
(
3.04
|
)
|
|
(
3.40
|
)
|
Effect
due to change in tax rate from 16% to 19% in 2007
|
|
|
|
|
|
22.27
|
|
|
|
|
Effective
income tax rate
|
|
|
16.1
|
|
|
39.65
|
|
|
19.80
|
|
f)
Net
loss carryforward
At
December 31, 2007, the Company has net loss carryforwards restated in accordance
with the actual Mexican Tax Law, which can offset the future taxable income
for
the next ten years, as follows:
Net
loss carryforward
|
|
Base
year
|
|
Year
of
expiration
|
|
Restated
amount
|
|
2001
|
|
|
2011
|
|
Ps |
16,092
|
|
2005
|
|
|
2015
|
|
|
229
|
|
|
|
|
|
|
Ps |
16,321
|
|
g)
Equity
tax value
At
December 31, 2006 and 2007, the tax value of the Company’s equity, which will
not be subject to taxation, is comprised of the following:
|
|
2006
|
|
2007
|
|
Restated
contributed capital (CUCA)
|
|
Ps |
1,877,344
|
|
Ps |
1,877,344
|
|
Net
tax profit (CUFIN) and net reinvested tax profit (CUFINRE)
|
|
|
2,399,602
|
|
|
2,574,183
|
|
Total
|
|
Ps |
4,276,946
|
|
Ps |
4,451,527
|
|
16.
Other ordinary income, expense net
As
of
December 31, 2006 and 2007, other ordinary income, expense net were as
follows:
|
|
2005
|
|
2006
|
|
2007
|
|
Other
ordinary income:
|
|
|
|
|
|
|
|
|
|
|
Sales
of waste animals, raw materials, by-products and others.
|
|
Ps |
215,587
|
|
Ps |
206,528
|
|
Ps |
276,094
|
|
Tax
incentives
|
|
|
9,054
|
|
|
32,379
|
|
|
73,054
|
|
Total
other ordinary income
|
|
|
224,641
|
|
|
238,907
|
|
|
349,148
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
ordinary expense:
|
|
|
|
|
|
|
|
|
|
|
Cost
of waste animals, raw materials, by-products and others.
|
|
|
(189,998
|
)
|
|
(182,324
|
)
|
|
(261,703
|
)
|
Employee
profits sharing
|
|
|
(3,457
|
)
|
|
(4,362
|
)
|
|
(4,828
|
)
|
Other
|
|
|
(57,147
|
)
|
|
(33,794
|
)
|
|
(13,046
|
)
|
Total
other ordinary expense
|
|
|
(250,602
|
)
|
|
(220,480
|
)
|
|
(279,577
|
)
|
Total
other ordinary income net:
|
|
Ps |
(25,961
|
)
|
Ps |
18,427
|
|
Ps |
69,571
|
|
Employee
profits sharing
The
Company and BSACV have no employees, but each of the subsidiaries of the Company
that has employees is required under Mexican law to pay employees, in addition
to their compensation and benefits, profit sharing in an aggregate amount equal
to 10% of such subsidiary’s taxable income subject to certain
adjustments.
Employee
profit sharing is recorded as part of the other expenses caption.
17.
Financial information by segments
The
segments to be reported are focused by product line. Inter-segment transactions
have been eliminated. Our Poultry segment is comprised of our chicken and egg
products due to its similarity and to the fact that egg sales do not exceed
10%
of total revenue for the years ended on December 31, 2005, 2006 and 2007. The
information included under “Others” corresponds to pigs, balanced animal feed
and other sundry sub-products. The required disclosures are shown
below:
|
|
As
of and for the year ended December 31, 2005
|
|
|
|
Poultry
|
|
Others
|
|
Total
|
|
Net
revenues
|
|
Ps |
13,871,147
|
|
Ps |
1,747,045
|
|
Ps |
15,618,192
|
|
Cost
of sales
|
|
|
(9,740,992
|
)
|
|
(1,493,570
|
)
|
|
(11,234,562
|
)
|
Gross
profit
|
|
|
4,130,155
|
|
|
253,475
|
|
|
4,383,630
|
|
Interest
income
|
|
|
304,045
|
|
|
12,469
|
|
|
316,514
|
|
Interest
expense and other financing costs
|
|
|
(209,129
|
)
|
|
(375
|
)
|
|
(209,504
|
)
|
Loss
on net monetary position
|
|
|
(118,724
|
)
|
|
-
|
|
|
(118,724
|
)
|
Income
tax and asset tax
|
|
|
(335,554
|
)
|
|
(32,279
|
)
|
|
(367,833
|
)
|
Majority
net income
|
|
|
1,830,128
|
|
|
78,407
|
|
|
1,908,535
|
|
Property,
plant and equipment, net
|
|
|
9,300,678
|
|
|
216,373
|
|
|
9,517,051
|
|
Total
assets
|
|
|
15,836,258
|
|
|
694,647
|
|
|
16,530,905
|
|
Total
liabilities
|
|
|
(2,838,443
|
)
|
|
(189,405
|
)
|
|
(3,027,848
|
)
|
Capital
expenditures
|
|
|
835,529
|
|
|
-
|
|
|
835,529
|
|
Expenses
not requiring cash disbursement:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
489,396
|
|
|
8,423
|
|
|
497,819
|
|
|
|
As
of and for the year ended December 31, 2006
|
|
|
|
Poultry
|
|
Others
|
|
Total
|
|
Net
revenues
|
|
Ps |
13,486,020
|
|
Ps |
2,064,945
|
|
Ps |
15,550,965
|
|
Cost
of sales
|
|
|
(10,220,870
|
)
|
|
(1,832,116
|
)
|
|
(12,052,986
|
)
|
Gross
profit
|
|
|
3,265,150
|
|
|
232,829
|
|
|
3,497,979
|
|
Interest
income
|
|
|
288,932
|
|
|
13,978
|
|
|
302,910
|
|
Interest
expense and other financing costs
|
|
|
(129,506
|
)
|
|
(2,346
|
)
|
|
(131,852
|
)
|
Loss
on net monetary position
|
|
|
(150,438
|
)
|
|
-
|
|
|
(150,438
|
)
|
Income
tax and asset tax
|
|
|
(567,933
|
)
|
|
(31,193
|
)
|
|
(599,126
|
)
|
Majority
net income
|
|
|
826,642
|
|
|
79,544
|
|
|
906,186
|
|
Property,
plant and equipment, net
|
|
|
9,576,266
|
|
|
259,629
|
|
|
9,835,895
|
|
Total
assets
|
|
|
16,833,872
|
|
|
725,367
|
|
|
17,559,239
|
|
Total
liabilities
|
|
|
(3,321,636
|
)
|
|
(134,649
|
)
|
|
(3,456,285
|
)
|
Capital
expenditures
|
|
|
856,227
|
|
|
-
|
|
|
856,227
|
|
Expenses
not requiring cash disbursement:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
523,720
|
|
|
13,663
|
|
|
537,383
|
|
|
|
As
of and for the year ended December 31,
2007
|
|
|
|
Poultry
|
|
Others
|
|
Total
|
|
Net
revenues
|
|
$
|
15,885,828
|
|
|
Ps2,333,819
|
|
|
Ps18,219,647
|
|
Cost
of sales
|
|
|
(12,353,458
|
)
|
|
(2,124,403
|
)
|
|
(14,477,861
|
)
|
Gross
profit
|
|
|
3,532,370
|
|
|
209,416
|
|
|
3,741,786
|
|
Interest
income
|
|
|
304,030
|
|
|
14,849
|
|
|
318,879
|
|
Interest
expense and other financing costs
|
|
|
(133,913
|
)
|
|
(7,665
|
)
|
|
(141,578
|
)
|
Loss
on net monetary position
|
|
|
(151,035
|
)
|
|
(3,779
|
)
|
|
(154,814
|
)
|
Income
tax and asset tax
|
|
|
(280,792
|
)
|
|
(31,953
|
)
|
|
(312,745
|
)
|
Majority
net income
|
|
|
1,203,149
|
|
|
67,792
|
|
|
1,270,941
|
|
Property,
plant and equipment, net
|
|
|
9,986,129
|
|
|
270,110
|
|
|
10,256,239
|
|
Total
assets
|
|
|
18,264,882
|
|
|
851,542
|
|
|
19,116,424
|
|
Total
liabilities
|
|
|
3,798,656
|
|
|
190,602
|
|
|
3,989,258
|
|
Capital
expenditures
|
|
|
987,322
|
|
|
4,415
|
|
|
991,737
|
|
Expenses
not requiring cash disbursement:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
Ps |
556,188
|
|
Ps |
15,205
|
|
Ps |
571,393
|
|
Revenues
from our poultry segment are analized as follows:
|
|
As
of and for the year ended December 31, 2005
|
|
|
|
Chicken
|
|
Egg
|
|
Total
|
|
Net
revenues
|
|
Ps |
12,517,765
|
|
Ps |
1,353,382
|
|
Ps |
13,871,147
|
|
|
|
As
of and for the year ended December 31, 2006
|
|
|
|
Chicken
|
|
Egg
|
|
Total
|
|
Net
revenues
|
|
Ps |
12,053,293
|
|
Ps |
1,432,727
|
|
Ps |
13,486,020
|
|
|
|
As
of and for the year ended December 31, 2007
|
|
|
|
Chicken
|
|
Egg
|
|
Total
|
|
Net
revenues
|
|
Ps |
14,135,242
|
|
Ps |
1,750,586
|
|
Ps |
15,885,828
|
|
18.
New accounting Pronouncements
The
most
important new pronouncements that will come into force in 2008 are as
follows:
MexFRS
B-2, Statement
of Cash Flows
In
November 2007, MexFRS B-2 was issued by the CINIF to replace MexFRS B-12,
Statement
of Changes in Financial Position.
This
standard establishes that the statement of changes in financial position will
be
substituted by a statement of cash flows as part of the basic financial
statements. The main differences between both statements lie in the fact that
the statement of cash flows will show the entity’s cash receipts and
disbursements for the period, while the statement of changes in financial
position showed the changes in the entity’s financial structure rather than its
cash flows. In an inflationary environment, the amounts of both financial
statements are expressed in constant Mexican pesos. However, in preparing the
statement of cash flows, the entity must first eliminate the effects of
inflation for the period and, accordingly, determine cash flows at constant
Mexican pesos, while in the statement of changes in financial position, the
effects of inflation for the period are not eliminated.
MexFRS
B-2 establishes that in the statement of cash flows, the entity must first
present cash flows derived from operating activities, then from investing
activities, the sum of these activities and finally cash flows derived from
financing activities. The statement of changes in financial position first
shows
the entity’s operating activities, then financing activities and finally its
investing activities. Under this new standard, the statement of cash flows
may
be determined by applying the direct or indirect method.
The
transitional rules of MexFRS B-2 establish that the application of this standard
is prospective. Therefore, the financial statements for years ended prior to
2008 presented for comparative purposes, should include a statement of changes
in financial position, as established by MexFRS B-12. The Company is analyzing
the method to be applied as of January 1, 2008.
MexFRS
B-10, Effects
of Inflation
In
July
2007, the CINIF issued MexFRS B-10, Effects
of Inflation,
which
is applicable for years beginning on or after January 1, 2008 and replaces
MexFRS B-10, Accounting
Recognition of the Effects of Inflation on Financial
Information.
MexFRS
B-10 defines the two economic environments in Mexico that will determine whether
or not entities must recognize the effects of inflation on financial
information: 1) inflationary, when inflation is equal to or higher than 26%
accumulated in the preceding three fiscal years (an 8% annual average); and
2)
non-inflationary, when accumulated inflation for the preceding three fiscal
years is less than the aforementioned accumulated 26%. Based on these
definitions, the effects of inflation on financial information must be
recognized only when entities operate in an inflationary
environment.
This
standard also abolishes the use of the specific-indexation method for the
valuation of imported fixed assets and the replacement-cost method for the
valuation of inventories, thus eliminating the result from holding non-monetary
assets. Therefore, at the date this MexFRS comes into force, entities which
have
recognized any accumulated result from holding non-monetary assets in their
stockholders’ equity, under Retained earnings (accumulated deficit), must
identify the realized and unrealized portions of such result.
The
realized result from holding non-monetary assets must be reclassified to
Retained earnings, while the unrealized portion must be maintained as such
within stockholders’ equity, and reclassified to results of operations when the
asset giving rise to it is realized. Whenever it is deemed impractical to
separate the realized from the unrealized result from holding non-monetary
assets, the full amount of this item may be reclassified to the Retained
earnings caption.
The
effect of the adoption of this standard on the Company’s 2008 financial
statements shall be the Company’s ceasing to recognize the effects of inflation
on its financial information and reclassifying the total amount of the result
from holding non-monetary assets to retained earnings.
MexFRS
D-3, Employees
Benefits
On
January 1, 2008, the new MexFRS D-3, Employee
Benefits,
issued
by the CINIF, went into effect and replaced the old MexFRS D-3, Labor
Obligations. The
most
significant changes contained in MexFRS D-3 are as follows: i) shorter periods
for the amortization of unamortized items, with the option to credit or charge
actuarial gains or losses directly to results of operations, as they accrue;
ii)
elimination of the recognition of an additional liability and resulting
recognition of an intangible asset and comprehensive income item; iii)
accounting treatment of current-year and deferred employee profit sharing,
requiring that deferred employee profit sharing be recognized using the asset
and liability method established under MexFRS D-4; and iv) current-year and
deferred employee profit sharing expense is to be presented as an ordinary
expense in the income statement rather than as part of taxes on
profits.
The
adoption of this standard in 2008 will require that both the additional
liability and the related intangible asset and comprehensive income item be
eliminated and that the unamortized items be carried to results of operations
in
a period not exceeding five years. The initial effect of the recognition of
deferred employee profit sharing must be charged or credited to retained
earnings with no effect on results of operations for the year ending December
31, 2008.
At
the
date of the audit report on these financial statements, management is evaluating
what effect the observance of this accounting pronouncement will have on the
Company’s results of operations and financial position. Such effects are
expected to be material.
MexFRS
D-4, Taxes
on Profits
In
July
2007, the CINIF issued MexFRS D-4, Taxes
on Profits,
which
is applicable for years beginning on or after January 1, 2008 and replaces
MexFRS D-4, Accounting
for Income Tax, Asset Tax and Employee Profit Sharing.
The
most significant changes included in this standard with respect to MexFRS D-4
are as follows: i) the concept of permanent differences is eliminated, since
the
asset and liability method requires the recognition of deferred taxes on all
differences in balance sheet accounts for financial and tax reporting purposes,
regardless of whether they are permanent or temporary; ii) since current-year
and deferred employee profit sharing is considered as an ordinary expense,
its
treatment is excluded from this standard and is now addressed under MexFRS
D-3;
iii) asset tax is required to be recognized as a tax credit and, consequently,
as a deferred income tax asset only in those cases in which there is certainty
as to its future realization; and iv) the cumulative effect of adopting MexFRS
D-4 is to be reclassified to retained earnings, unless it is identified with
comprehensive items in stockholders’ equity not yet taken to income.
MexFRS
5, Accounting
Recognition of the Additional Consideration Agreed at the Inception of a
Derivative to Adjust the Instrument to its Fair Value
In
November 2007, the CINIF issued the Interpretation to MexFRS 5, which is
effective for years beginning on or after January 1, 2008. This Interpretation
is intended to clarify whether or not the additional consideration agreed at
the
inception of a derivative to adjust the instrument to its fair value should
be
amortized over the life of the hedge.
MexFRS
C-10, Derivative
Financial Instruments and Hedging Activities,
establishes that transaction costs and cash flows received or delivered to
adjust the derivative to its fair value at the inception of the hedge (excluding
premiums on options) must be amortized over the life of the hedge. However,
Bulletin C-10 requires derivatives to be recognized at their fair value and
consequently, under this bulletin, the additional consideration should not
be
amortized, since it is part of the value of the derivative.
This
Interpretation clarifies that the additional consideration is part of the fair
value of the derivative and, accordingly, it must be included in the value
at
which the derivative is initially recorded, which will be adjusted to its fair
value in subsequent periods. Therefore, the additional consideration should
not
be amortized.
The
effects of the change established by this Interpretation must be prospectively
recognized, affecting the result of operations of the period in which it is
effective. If the effect of the change is significant, the entity must make
the
related disclosure.
Whenever
changes to outstanding derivatives are agreed and give rise to considerations
similar to those described in this Interpretation, such considerations must
be
valued based on the procedure established in the
Interpretation.
MexFRS
6, Formally
Designating a Hedge
In
November 2007, the CINIF issued the Interpretation to MexFRS 6, which is
effective for years beginning on or after January 1, 2008. This Interpretation
is intended to clarify whether or not a derivative may be formally designated
as
a hedge on a date subsequent to its contract date.
MexFRS
C-10, Derivative
Financial Instruments and Hedging Activities,
requires the hedging relationship to be documented from the “inception of the
hedge” to prevent the need for retrospective designation in the future. However,
this bulletin fails to clarify the meaning of “inception of the
hedge”.
The
Interpretation to MexFRS 6 establishes that a derivative may be designated
as a
hedge at its inception date or contract date or at a subsequent date, provided
that it meets the conditions established in MexFRS C-10 for such designation.
Also, this standard establishes that the hedge accounting treatment must not
commence until such time as the entity evaluates whether the instrument
qualifies as and meets the conditions for hedge accounting.
When
a
derivative is designated as a hedge on a date subsequent to the agreement date,
the related effects will only be recognized as of the date on which it first
meets the formal conditions and qualifies for consideration as a
hedge.
This
Interpretation complements MexFRS C-10 with respect to the conclusion reached
by
the CINIF as to when a hedge may be formally designated.
MexFRS
7, Application
of Comprehensive Income Item Generated by a Cash Flow Hedge on a Forecasted
Purchase of a Non-financial Asset
In
November 2007, the CINIF issued the Interpretation to MexFRS 7, which is
effective for years beginning on or after January 1, 2008. This Interpretation
is intended to clarify whether or not the amount resulting from a cash flow
hedge on a forecasted transaction, that is recognized in stockholders’ equity as
part of comprehensive income, may be included in the cost of the non-financial
asset whose value is being set by the hedge.
MexFRS
C-10, Derivative
Financial Instruments and Hedging Activities,
establishes that if the result of a hedge of a forecasted transaction gives
rise
to the recognition of an asset or liability, the associated gains and losses
that were previously recognized in stockholders’ equity as part of Comprehensive
income shall be reclassified to the earnings of the same period or periods
in
which the asset or liability is carried to income.
This
standard clarifies that if a derivative is designated as a cash flow hedge
on a
forecasted transaction, to set the price of the non-financial asset to the
functional currency, the effect recognized in comprehensive income is considered
a complement to the cost of the asset and, therefore, must be included in such
cost.
Accordingly,
MexFRS C-10 is complemented by the conclusion of the Interpretation to MexFRS
7.
The
effect of the adoption of this Interpretation to MexFRS 7 must be recognized
by
reclassifying, at the Interpretation’s effective date, all relevant balances
presented in Comprehensive income to the cost of the asset
acquired.
Management
considers that the application of the MexFRS 5, FRS 6, and FRS 7 will have
no
material effect on the Company’s financial position or on its results of
operations.
19.
Differences Between Mexican FRS 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
Mexican and U.S. GAAP prior periods amounts, included throughout Note 18, are
presented in constant Mexican pesos by using the 1.0376 and 1.0796 Mexican
inflation factor, respectively. The reconciliation to U.S. GAAP does not include
the reversal of the adjustments to the financial statements for the effects
of
inflation required under MexFRS because the application of bulletin B-10
represents a comprehensive measure of the effects of price level changes in
the
Mexican economy and, as such, is considered a more meaningful presentation
than
historical cost based financial reporting for both Mexican and US accounting
purposes as permitted by the “Securities and Exchange Commission”
(SEC).
The
principal differences between MexFRS and U.S. GAAP, as they relate to us, are
described below together with an explanation, where appropriate, of the method
used to determine the adjustments that affect income and stockholders’ equity.
Cash
flow information:
Under
MexFRS, the Company presents consolidated statements of changes in financial
position, as described in Note 2 d).
Statement
of Financial Accounting Standards No. 95 (“SFAS 95”), Statement
of Cash Flows,
does
not provide guidance with respect to inflation adjusted financial statements.
In
accordance with MexFRS, the changes in current and long-term debt due to
re-expression in constant pesos, including the effect of exchange differences,
is presented in the statement of changes in financial position in the financing
activities section. Also, under U.S. GAAP non-cash investing activities are
not
reported in the Statement of Cash Flows, including the capitalization of debt;
whereas under MexFRS non-cash transactions affecting the financial structure
of
an entity, such as converting debt into equity, must be presented separately
in
the statement of changes in financial position.
A
consolidated statements of cash flows derived from information prepared in
accordance with U.S. GAAP would be as follows:
Cash
Flow Information
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
Ps |
1,893,395
|
|
Ps |
895,570
|
|
Ps |
1,261,883
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
500,684
|
|
|
540,862
|
|
|
575,306
|
|
Deferred
income tax
|
|
|
(2,126
|
)
|
|
330,982
|
|
|
168,405
|
|
Loss
(gain) on net monetary position
|
|
|
118,414
|
|
|
149,825
|
|
|
154,765
|
|
Labor
obligations, net period cost
|
|
|
40,505
|
|
|
58,155
|
|
|
44,619
|
|
|
|
|
2,550,872
|
|
|
1,975,394
|
|
|
2,204,978
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(214,857
|
)
|
|
(85,313
|
)
|
|
(375,590
|
)
|
Inventories
and biological assets
|
|
|
(603,362
|
)
|
|
(780,452
|
)
|
|
(1,418,210
|
)
|
Prepaid
expenses and other accounts receivable
|
|
|
(36,925
|
)
|
|
25,502
|
|
|
(74,556
|
)
|
Accounts
payable
|
|
|
(9,645
|
)
|
|
392,321
|
|
|
338,084
|
|
Related
parties
|
|
|
53
|
|
|
6,410
|
|
|
14,944
|
|
Other
taxes payable and other accruals
|
|
|
148,024
|
|
|
(60,488
|
)
|
|
(35,827
|
)
|
Labor
obligations, net
|
|
|
(58,474
|
)
|
|
(26,085
|
)
|
|
(37,610
|
)
|
Derivative
financial instruments
|
|
|
-
|
|
|
(5,856
|
)
|
|
(36,131
|
)
|
Cash
flows provided by operating activities
|
|
|
1,775,686
|
|
|
1,441,433
|
|
|
580,082
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of notes payable to banks
|
|
|
176,590
|
|
|
-
|
|
|
80,000
|
|
Repayment
of long-term debt and notes payable
|
|
|
(212,570
|
)
|
|
(107,324
|
)
|
|
(12,529
|
)
|
Cash
dividends paid
|
|
|
(263,719
|
)
|
|
(378,075
|
)
|
|
(363,708
|
)
|
Repurchase
(sale) of stock
|
|
|
(8,536
|
)
|
|
17,849
|
|
|
-
|
|
Cash
flows used in financing activities
|
|
|
(308,234
|
)
|
|
(467,550
|
)
|
|
(296,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
(847,821
|
)
|
|
(904,300
|
)
|
|
(998,622
|
)
|
Other
assets
|
|
|
(2,711
|
)
|
|
(2,696
|
)
|
|
(2,216
|
)
|
Cash
flows used in investing activities
|
|
|
(850,532
|
)
|
|
(906,996
|
)
|
|
(1,000,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of inflation accounting
|
|
|
194,673
|
|
|
96,959
|
|
|
172,978
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
( decrease ) increase in cash and cash
equivalents
|
|
|
811,592
|
|
|
163,846
|
|
|
(544,015
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
2,608,453
|
|
|
3,420,045
|
|
|
3,583,891
|
|
Cash
and cash equivalents at end of year
|
|
Ps |
3,420,045
|
|
Ps |
3,583,891
|
|
Ps |
3,039,876
|
|
Agriculture
The
Company follows the requirements of the MexFRS E-1, Agriculture,
which
establishes the rules for recognizing, valuing, presenting and disclosing
biological assets and agricultural products; it also establishes the treatment
to be given to government subsidies on biological assets.
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
conformity with U.S. GAAP, under SOP 85-3 biological assets and agricultural
products are to be valued at cost. Accordingly, the reconciliation between
MexFRS and U.S. GAAP for 2005, 2006 and 2007 includes a reversal of the
unrealized (gain) on valuation of biological assets and agricultural products
at
fair value, which gave rise to a decrease of
Ps
(28,072), Ps. (10,879) and Ps (10,882), respectively.
Capitalized
interest:
Under
U.S. GAAP, interest on borrowings in foreign currencies or comprehensive cost
of
financing incurred during the qualifying construction period must be considered
as an additional cost of qualifying constructed assets to be capitalized in
plant, property and equipment and depreciated over the lives of the related
assets. The amount of the capitalized comprehensive cost of financing for U.S.
GAAP purposes was determined by applying the weighted average interest
rate.
Under
MexFRS in force through December 31, 2006, the Company did not capitalize the
comprehensive cost of financing in the MexFRS financial statements. Starting
January 1, 2007, although we adopted the policy of capitalizing the
comprehensive result of financing on assets under construction, as a result
of
MexFRS D-6, we did not capitalize any comprehensive result of financing due
to
its immateriality as described in Note 2. The reconciling items for 2007, 2006
and 2005 show the capitalization of interest as required under
U.S.GAAP.
Deferred
income tax and deferred employee profit sharing:
As
mentioned in Note 15, under MexFRS, deferred income tax is determined on all
differences in balance sheets accounts for financial and tax reporting purposes,
using the enacted tax rate at the balance sheet date, which also is in
conformity with Statement of Financial Accounting Standards No. 109 (“SFAS
109”), Accounting
for Income Taxes.
As
of
December 31 2006 and 2007, the deferred tax liability is Ps 2,174,307 and
Ps
2,365,939, respectively, for US GAAP purposes. Current deferred tax liability
is
Ps
497,282 and Ps 739,444 for 2006 and 2007 respectively. Under US GAAP, the
balance sheet classification is based on the classification of the underlying
item which gives rise to the deferred income taxes. Under MexFRS, the balance
sheet classification is non-current.
The
Company is required to pay employee profit sharing in accordance with Mexican
labor law. Deferred employee profit sharing under U.S. GAAP is determined
following the guidelines of SFAS No.109, while under MexFRS, the deferred
consequences of employee profit sharing are determined only on temporary
non-recurring differences with a known turnaround time. Our reconciliations
between MexFRS and U.S. GAAP do not include deferred employee profit sharing
as
related amounts are not significant.
The
deferred tax adjustment included in the net income and stockholders’ equity
reconciliations also includes the effect of deferred taxes on all U.S. GAAP
adjustments reflected in the reconciliation between MexFRS and U.S.
GAAP.
Severance
indemnities.
Under
MexFRS, revised D-3, effective 2005, companies are required to recognize a
severance indemnity liability calculated based on actuarial valuations. Similar
recognition criteria under U.S. GAAP are established in SFAS No. 112,
"Employers'
Accounting for Post-employment Benefits"
which
requires that a liability for certain termination benefits provided under an
ongoing benefit arrangement such as these statutorily mandated severance
indemnities be recognized in income when the likelihood of future settlement
is
probable and the liability can be reasonably estimated. MexFRS allows for the
Company to amortize the transition obligation related to the adoption of revised
MexFRS D-3 over the expected service life of the employees, (as from January
1,
2008 the transition obligation must be amortized at most in five years).
As
of
December 31, 2006 and 2007, the amount of past service cost to be amortized
under MexFRS amounts to Ps 20,691 and Ps 2,507, respectively. These amounts
were
included in the US GAAP reconciliation of equity.
SFAS
158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106 and
132(R)”:
This
statement requires (1) recognition on the balance sheet of an asset for a
defined benefit plan’s overfunded status or a liability for a plan’s underfunded
status, (2) measurement of a defined benefit plan’s assets and its obligations
that determine its funded status as of the end of the employer’s fiscal year,
and (3) recognition of the changes in the funded status of a defined benefit
postretirement plan as a component of other comprehensive income in the year
the
changes occur.
In
2006
the Company adopted SFAS 158 for USGAAP reconciliation purposes
The
incremental effects of adopting of this adoption on the individual line items
as
of December 31, 2006 on the consolidated US GAAP balance sheet is shown in
the
following table:
|
|
2006
|
|
|
|
Before
|
|
SFAS
158
|
|
After
|
|
Net
projected benefit obligation (pension)
|
|
Ps |
14,175
|
|
Ps |
14,759
|
|
Ps |
28,934
|
|
Net
projected benefit obligation (seniority premium)
|
|
|
26,488
|
|
|
22,610
|
|
|
49,098
|
|
Net
projected benefit obligation (Severance)
|
|
|
36,053
|
|
|
-
|
|
|
36,053
|
|
Minimum
labor obligation liability adjustment (Seniority premium)
|
|
|
916
|
|
|
(916
|
)
|
|
-
|
|
|
|
|
|
|
Ps |
36,453
|
|
Ps |
114,085
|
|
The
components of the plan funded status that are reflected in the consolidated
statement of financial position as of December 31, 2007 and 2006 are as
follows:
|
|
2006
|
|
|
|
Pension
plan
|
|
Seniority
premium
|
|
Severance
|
|
Total
|
|
Projected
benefit obligation
|
|
Ps |
189,355
|
|
Ps |
49,098
|
|
Ps |
36,053
|
|
Ps |
274,506
|
|
Market
value of plan assets
|
|
|
160,421
|
|
|
-
|
|
|
-
|
|
|
160,421
|
|
Under-funded
defined benefit plan
|
|
Ps |
28,934
|
|
Ps |
49,098
|
|
Ps |
36,053
|
|
Ps |
114,085
|
|
|
|
2007
|
|
|
|
Pension
plan
|
|
Seniority
premium
|
|
Severance
|
|
Total
|
|
Projected
benefit obligation
|
|
Ps |
199,333
|
|
Ps |
56,601
|
|
Ps |
42,895
|
|
Ps |
298,829
|
|
Market
value of plan assets
|
|
|
182,017
|
|
|
-
|
|
|
-
|
|
|
182,017
|
|
Under-funded
defined benefit plan
|
|
Ps |
17,316
|
|
Ps |
56,601
|
|
Ps |
42,895
|
|
Ps |
116,812
|
|
Effects
of inflation accounting on U.S. GAAP adjustments:
To
determine the net effect on the consolidated financial statements of recognizing
the U.S.GAAP adjustments described throughout this Note, it is also necessary
to
recognize the effects of inflation on such adjustments as described in Note
2.
These effects are taken into consideration in the preparation of U.S. GAAP
reconciliations of net income and stockholders’ equity.
Goodwill
Beginning
January 1, 2005, due to the adoption of MexFRS B-7, goodwill is no longer
amortized, but rather is subject to periodic impairment valuations.
For
US
GAAP purposes, the Company adopted SFAS No. 142, “Goodwill and Other Intangible
Assets” in 2002. Up to December 31, 2004, the Company recognized and accumulated
effect (increase in equity) of Ps. 58,716 for the non amortization of goodwill,
under US GAAP.
In
2005,
2006 and 2007, the Company performed the required impairment tests of goodwill
and the tests did not result in an impairment charge.
Reporting
comprehensive income
For
US
GAAP reconciliation purposes, the Company has adopted the SFAS No. 130,
“Reporting Comprehensive Income” SFAS 130, which establishes rules for reporting
and disclosure of comprehensive income and its components. Comprehensive income
consists of current year net income plus the following items applied to
stockholders’ equity: the result from holding non-monetary assets net of taxes,
the cumulative effect of deferred taxes, the effect of adopting SFAS158 and
the
effective portion of changes in the fair value of financial instruments.
Reclassification
Certain
amounts were reclassified to conform to the 2007 presentation.
Disclosure
about fair value of financial instruments:
In
accordance with Statement of Financial Accounting Standards No. 107 (“SFAS
107”), “Disclosures
about fair value of financial instruments,” under
U.S. GAAP it is necessary to provide information about the fair value of certain
financial instruments for which it is practicable to estimate that value. The
carrying amounts of cash and short-term investments, accounts receivable,
accounts payable , accrued liabilities and notes payable approximate fair values
due to the short term maturity of these instruments.
Accounting
for uncertainty in income taxes:
In
July
2006, the FASB issued the final interpretation No. 48 (FIN 48). The Company
adopted the provisions of FIN 48 as of January 1, 2007. This statement requires
a company to recognize the financial statement impact of a tax position when
it
is more likely than not that the position will be sustained upon
examination.
If
the
tax position meets the more-likely-than-not recognition threshold, the tax
effect is recognized at the largest amount of the benefit that is greater than
50% (cumulative probability basis) likely of being realized upon ultimate
settlement.
The
Company applied the provisions of FIN No. 48 to all its tax positions under
SFAS
No. 109 upon initial adoption. The adoption of FIN 48 did not have a material
impact on the Company’s consolidated financial position and did no result in a
cumulative adjustment to retained earnings at adoption.
Recent
Accounting Pronouncements:
Fair
value measurement (FASB Statement 157):
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurement”.
SFAS
No. 157 defines fair value, establishes a framework for the measurement of
fair
value, and enhances disclosures about fair value measurements. The statement
does not require any new fair value measures.
The
statement is effective for fair value measures already required or permitted
by
other standards for fiscal years beginning after November 15, 2007. The Company
is required to adopt SFAS No. 157 beginning on January 1, 2008. SFAS No. 157
is
required to be applied prospectively, except for certain financial instruments.
Any transition adjustment will be recognized as an adjustment to opening
retained earnings in the year of adoption. The Company is currently evaluating
the effect of adopting this standard on its consolidated results of operations
and financial position.
Amendment
of FASB Interpretation No. 39 (FSP FIN 39-1)
In
April
2007, the FASB issued FASB Staff Position (“FSP”) FIN 39-1, which amends certain
aspects of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain
Contracts - an interpretation of APB Opinion No. 10 and FASB Statement No.
105
(“FSP FIN 39-1”). FSP FIN 39-1 amends paragraph 10 of FIN 39 to permit a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts, including amounts that
approximate fair value, recognized for derivative instruments executed with
the
same counterparty under the same master netting arrangement. Derivative
instruments permitted to be netted for the purposes of the FSP include those
instruments that meet the definition of a derivative in FASB Statement No.
133,
Accounting for Derivative Financial Instruments and Hedging Activities,
including those that are not included in the scope of Statement 133 (for
example, a financial guarantee, weather derivatives, etc.). The decision to
apply the guidance of the FSP FIN 39-1 is an accounting policy decision and
should be consistently applied.
The
FSP
is effective for fiscal years beginning after November 15, 2007, with early
application permitted. A reporting entity should recognize the effects of
applying this FSP as a change in accounting principle through retrospective
application for all financial statement presented. If it is impracticable to
apply the guidance in this FSP retrospectively for all financial statements
presented, the reporting entity should disclose why it is impracticable and
apply the guidance in this FSP retrospectively for as many consecutive prior
financial statements as practicable.
Upon
adoption of this FSP, a reporting entity is permitted to change its accounting
policy to offset or not offset fair value amounts recognized for derivative
instruments under master netting arrangements. The Company has not determined
the effect of this new pronouncement.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
("FAS") No. 141 (revised 2007), Business
Combinations (“FAS 141(R)")
which
replaces FAS No.141, Business Combination. FAS 141(R) retains the underlying
concepts of FAS 141 in that all business combinations are still required to
be
accounted for at fair value under the acquisition method of accounting but
FAS
141(R) changed the method of applying the acquisition method in a number of
significant aspects.
FAS
141(R) is effective on a prospective basis for all business combinations for
which the acquisition date is on or after the beginning of the first annual
period subsequent to December 15, 2008, with the exception of the accounting
for
valuation allowances on deferred taxes and acquired tax contingencies. FAS
141(R) amends FAS 109 such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions
that
closed prior to the effective date of FAS 141(R) would also apply the provisions
of FAS 141(R). Early adoption is not allowed. The
Company is currently evaluating the impact of adopting this standard on its
consolidated results of operations and financial position.
“Noncontroling
Interest in Consolidated Financial Statements” SFAS No.
160
In
December 2007, the FASB issued Statement of Financial Accounting Standards
("FAS") No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB 51 (“FAS
160)").
FAS 160
amends ARB 51 to establish new standards that will govern the accounting for
and
reporting of (1) noncontrolling interest in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. FAS 160 is effective
on a prospective basis for all fiscal years, and interim periods within those
fiscal years beginning, on or after December 15, 2008, except for the
presentation and disclosure requirements, which will be applied retrospectively.
Early adoption is not allowed. The Company is currently evaluating the impact
of
adopting this standard on its consolidated results of operations and financial
position.
“Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133” or SFAS 161
On
March
19, 2008, the FASB issued Statement No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (FAS
161).
This
new standard requires enhanced disclosures for derivative instruments, including
those used in hedging activities. It is effective for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged.
The
Company is currently evaluating the impact of adopting this standard on its
consolidated results of operations and financial position.
Hierarchy
if Generally Accepted Accounting Principles or SFAS No.
162
In
May
2008, the FASB issued Statement No. 162, The
Hierarchy of Generally Accepted Accounting Principles (FAS 162),
which
identifies the sources of accounting principles and the framework for selecting
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. The Company is
currently evaluating the impact of adopting this standard on its consolidated
results of operations and financial position.
The
Fair Value Option for Financial Assets and Financial Liabilities, Including
an
amendment
of FASB Statement No. 115 (FASB Statement No. 159)
In
February 2007 the FASB published SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
liabilities.”
This
statement permits entities to choose to measure many financial instruments
and
certain other items at fair value that are not currently required to be measured
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities.
This
statement does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. This Statement does
not establish requirements for recognizing and measuring dividend income,
interest income, or interest expense. This statement does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS
No.
157, Fair Value Measurements, and SFAS No. 107, Disclosures about Fair Value
of
Financial Instruments. SFAS No. 159 will be effective for all fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact this statement will have on its financial position, results of operations
and disclosures, should the Company elect to measure certain financial
instruments at fair value.
Summary
of adjustments to reconcile MexFRS and U.S. GAAP
The
following is a summary of net income adjusted to take into account certain
material differences between MexFRS and U.S. GAAP.
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Net
income as reported under Mexican FRS
|
|
Ps |
1,910,319
|
|
Ps |
907,129
|
|
Ps |
1,272,226
|
|
Adjustments
to reconcile net income to U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
Biological
assets and agricultural products valuation at fair value
|
|
|
(28,072
|
)
|
|
(10,879
|
)
|
|
(10,882
|
)
|
Interest
cost capitalized
|
|
|
12,293
|
|
|
8,692
|
|
|
6,885
|
|
Depreciation
of capitalized interest
|
|
|
(2,865
|
)
|
|
(3,479
|
)
|
|
(3,913
|
)
|
Net
period cost due SFAS 112
|
|
|
-
|
|
|
(20,691
|
)
|
|
(2,507
|
)
|
Deferred
income tax on US GAAP adjustments
|
|
|
3,194
|
|
|
15,128
|
|
|
1,310
|
|
Effect
of inflation accounting on U.S. GAAP adjustments
|
|
|
310
|
|
|
613
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(1,784
|
)
|
|
(943
|
)
|
|
(1,285
|
)
|
Net
income under U.S. GAAP
|
|
Ps |
1,893,395
|
|
Ps |
895,570
|
|
Ps |
1,261,883
|
|
Weighted
average number of shares outstanding (thousands)
|
|
|
599,694
|
|
|
599,571
|
|
|
600,000
|
|
Net
income per share
|
|
Ps |
3.16
|
|
Ps |
1.49
|
|
Ps |
2.10
|
|
Classification
differences:
There
are
certain other classification differences between MexFRS and US GAAP, as follows:
-Employee
profit sharing expenses are presented as other expenses for MexFRS and as
selling, general and administrative expenses for US GAAP.
-Tax
incentives are presented as other income for MexFRS and as income taxes for
US
GAAP.
The
reconciliation
of the stockholders’ equity between MexFRS and US GAAP
is as
follows:
|
|
Years
ended December 31
|
|
|
|
2006
|
|
2007
|
|
Majority
stockholders' equity as reported under Mexican FRS
|
|
Ps |
14,057,528
|
|
Ps |
15,080,378
|
|
Adjustments
to reconcile majority stockholders’ equity to U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biological
assets and agricultural products valuation at fair value
|
|
|
(84,502
|
)
|
|
(95,384
|
)
|
Accumulated
differences between the financing cost capitalized for MexFRS and
U.S.
GAAP purposes
|
|
|
87,596
|
|
|
94,481
|
|
Accumulated
depreciation on the above items
|
|
|
(16,682
|
)
|
|
(20,595
|
)
|
Net
period cost due SFAS 112
|
|
|
(20,691
|
)
|
|
(23,198
|
)
|
Deferred
income taxes on U.S. GAAP adjustments
|
|
|
7,727
|
|
|
9,086
|
|
Accumulated
amortization of goodwill
|
|
|
58,716
|
|
|
58,716
|
|
SFAS
158 effect
|
|
|
(36,453
|
)
|
|
-(31,735
|
)
|
Majority
stockholders’ equity as reported under U.S. GAAP
|
|
Ps |
14,053,239
|
|
Ps |
15,071,749
|
|
The
effects of the above adjustments do not have any impact on minority
interest.
The
consolidated statements of changes in stockholders’ equity in accordance with
U.S. GAAP is as follows:
|
|
Capital
stock
|
|
Paid
in-capital
|
|
Stock
repurchase reserve
|
|
Retained
earnings
|
|
Other
comprehensive income
|
|
Comprehensive
income
|
|
Total
stockholders’ equity
|
|
Balance
at December 31, 2004
|
|
Ps |
2,294,711
|
|
Ps |
723,116
|
|
Ps |
170,917
|
|
Ps |
12,498,927
|
|
Ps |
(3,542,601
|
)
|
|
|
|
Ps |
12,145,070
|
|
Repurchase
of stock
|
|
|
(251
|
)
|
|
-
|
|
|
(11,462
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,713
|
)
|
Sales
of repurchased stock
|
|
|
222
|
|
|
2,954
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,176
|
|
Cash
dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(263,719
|
)
|
|
-
|
|
|
-
|
|
|
(263,719
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,893,395
|
|
|
-
|
|
|
1,893,395
|
|
|
1,893,395
|
|
Components
of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
from holding of non monetary assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(172,155
|
)
|
|
(172,155
|
)
|
|
(172,155
|
)
|
Derivative
financial instruments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(92,374
|
)
|
|
(92,374
|
)
|
|
(92,374
|
)
|
Minimum
labor obligations liability adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,207
|
)
|
|
(2,207
|
)
|
|
(2,207
|
)
|
Other
comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(266,736
|
)
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ps |
1,626,659
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
2,294,682
|
|
|
726,070
|
|
|
159,455
|
|
|
14,128,603
|
|
|
(3,809,337
|
)
|
|
|
|
|
13,499,473
|
|
Sales
of repurchased stock
|
|
|
245
|
|
|
17,604
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,849
|
|
Cash
dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(378,075
|
)
|
|
-
|
|
|
-
|
|
|
(378,075
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
895,570
|
|
|
-
|
|
|
895,570
|
|
|
895,570
|
|
Components
of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
from holding of non monetary assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(40,288
|
)
|
|
(40,288
|
)
|
|
(40,288
|
)
|
Derivative
financial instruments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
92,744
|
|
|
92,744
|
|
|
92,744
|
|
Minimum
labor obligations liability adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,420
|
|
|
2,420
|
|
|
2,420
|
|
Other
comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,876
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ps |
950,446
|
|
|
|
|
Other
comprehensive income SFAS 158 adoption
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(36,454
|
)
|
|
-
|
|
|
(36,454
|
)
|
Balance
at December 31, 2006
|
|
|
2,294,927
|
|
|
743,674
|
|
|
159,455
|
|
|
14,646,098
|
|
|
(3,790,915
|
)
|
|
|
|
|
14,053,239
|
|
Sales
of repurchased stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash
dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(363,708
|
)
|
|
-
|
|
|
-
|
|
|
(363,708
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,261,883
|
|
|
-
|
|
|
1,261,883
|
|
|
1,261,883
|
|
Components
of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
from holding of non monetary assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,661
|
|
|
18,661
|
|
|
18,661
|
|
Derivative
financial instruments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
98,552
|
|
|
98,552
|
|
|
98,552
|
|
Other
comprehensive income SFAS 158 effect
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,122
|
|
|
3,122
|
|
|
3,122
|
|
Other
comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,335
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ps |
1,382,218
|
|
|
|
|
Balance
at December 31, 2007
|
|
Ps |
2,294,927
|
|
Ps |
743,674
|
|
Ps |
159,455
|
|
Ps |
15,544,273
|
|
Ps |
(3,670,580
|
)
|
|
|
|
Ps |
15,071,749
|
|