SEC Company Response from GRUPO SIMEC, S.A.B. de C.V. (SIM) (CIK 0000887153) (SIM) — Oct 16, 2009
GRUPO SIMEC, S.A.B. de C.V. (SIM) (CIK 0000887153)
Date: Oct. 16, 2009 · CIK: 0000887153 · Accession: 0000891092-09-003923
AI Filing Summary & Sentiment
Reasoning
Referenced dates: September 8, 2009
Letter
S I M P S O N T H A C H E R & B A R T L E T T L L P
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DIRECT DIAL NUMBER E-MAIL ADDRESS
212-455-7433 dwilliams@stblaw.com
October 16, 2009
Mr. John Cash
Accounting Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-7010
Re: Grupo Simec, S.A.B. de C.V. Form 20-F for Fiscal Year Ended December 31, 2008 Filed July 20, 2009, File No. 1-11176
Ladies and Gentlemen:
On behalf of Grupo Simec, S.A.B. de C.V. (Grupo Simec) (the “Company”), we are writing to respond to the comments set forth in the Commission’s staff’s comment letter dated September 8, 2009 (the “comment letter”) relating to the above-referenced annual report (the “Annual Report”) of the Company originally submitted on July 20, 2009, pursuant to the Securities Act of 1933, as amended.
In addition, we are providing the following responses to the comments contained in the comment letter. For convenience of reference, we have reproduced below in italics the text of the comments of the Staff. The responses and information described below are based upon information provided to us by the Company.
Form 20-F for the fiscal year Ended December 31, 2008
Operating Results, page 49
1.
Please revise future filings to address the following:
We note from your disclosure on page 16 that a significant portion of your sales are to the automotive industry. If changes in sales to this industry have a significant impact on your results, please present a specific, quantified discussion of such changes on a comparative basis.
We note from your disclosure on page 16 that customers in the automotive industry continually seek price reductions. Please include a quantified discussion of the impact of these reductions on your operating results.
We note that you experienced a significant decrease in sales during the six month period ended June 30, 2009. Please more fully discuss management’s expectations regarding future sale trends and any plans to address such trends.
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 2 -
October 16, 2009
Please address if and how any decreases in sales to a particular industry or on a consolidated basis may impact your liquidity.
In response to the Staff’s comment, the Company advises the Staff that it undertakes to address in future filings (i) the impact of changes in sales to the automotive industry, (ii) the impact of price reductions, (iii) management’s expectations regarding future sale trends (and any plans to address such trends) and (iv) the impact on liquidity of decreases in sales to a particular industry or on a consolidated basis, in each case if significant.
Critical Accounting Policies, page 58
2.
Please provide us and revise future filings to include a more specific and comprehensive discussion regarding your basis for determining that deferred tax assets will be realized in the future. In this regard, please include a qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based on reasonably likely changes. Please also identify all the positive and negative evidence you considered in determining if a valuation allowance is necessary. Refer to paragraphs 23 and 24 of SFAS 109.
In response to the Staff’s comment, the Company advises the staff that in order to evaluate the recoverability of deferred tax assets, it considered whether the probability of not recovering all or a portion of them was more likely than not. The final realization of deferred tax assets depends on the generation of taxable profits in the periods when the temporary differences are deductible. Upon carrying out this evaluation, the Company considered the expected reversal of deferred tax liabilities, projected taxable profit and planning strategies. As part of its analysis, the Company also considered the impact of Mexico’s Flat-Rate Business Tax in the projected utilization of NOLs to determine which tax system (the regular income tax or the Flat Rate Business Tax) would be more likely to limit the realization of deferred tax assets. To the extent that the Flat Rate Business Tax did not limit recognition of deferred tax assets, the Company projected future taxable profits for a period of four years. Based on the Company’s evaluation, it determined the amount of deferred tax asset that is more likely than not to be realized in the future against those taxable profits, and it recorded an allowance for the deferred tax asset amount that it does not expect to recover in the future. Any deferred tax amounts which were not recovered in that time period or through the reversal of deferred tax liabilities had a valuation allowance provided for their realization.
To prepare its projected taxable profit and evaluate the realization of deferred tax assets the Company considered the following:
Its history of tax asset realization
Its history of profitability
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 3 -
October 16, 2009
Current and expected market and operating conditions.
The deductible period of deferred tax assets
The key assumptions made in projecting the Company’s profitability are that, in general, business activity will be lower in 2009 than in 2008 and will recover somewhat in 2010. After that time, the Company anticipates that its revenues will grow at approximately 5% average per year until 2013. Assumptions used in the analysis considered the current market conditions in developing short and long-term growth expectations. In projecting its profits, the Company also considered the expiration year of its NOLs in accordance with the Mexican Income Tax Law. Based on the Company’s sensitivity analysis, it considered that a 10% decrease on its estimated revenues used to determine its projected taxable profit would not significantly affect the final realization of its net deferred tax asset recorded; because most of the deferred tax allowance results from its estimate that the Flat Rate Business Tax would be more likely to limit the realization of the NOL deferred tax asset. As positive evidence of the determination of the Company’s valuation allowance, it is important to mention that its net deferred tax amount is a liability. Therefore, the materialization of such liability will generate additional taxable profit, lowering the Company’s risk to fail to realize its deferred tax assets. The Company is not aware of any material negative evidence (such as those described in paragraph 23 in SFAS 109) beyond that described above which limits the recognition of a deferred tax asset.
The Company undertakes to describe its basis for determining the realization of deferred tax assets more specifically and comprehensively in future filings.
3.
Please provide us and revise future filings to include a more specific and comprehensive discussion of your impairment policy for goodwill. Reference SFAS 142. In this regard, please specifically address the following:
A qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based on reasonably likely changes.
How the assumptions and methodologies used for valuing goodwill in the current year changed since the prior year, highlighting the impact of any changes.
Quantitative information regarding any significant known trends.
Any other material and useful information you gather and analyze regarding the risks and recoverability of goodwill.
In response to the Staff’s comment, the Company advises the Staff that in 2008, it recorded goodwill as a result of the Grupo SAN acquisition. Previous to this year, it did not record goodwill. In assessing the recoverability of its goodwill, the Company made assumptions regarding estimated future cash flows and other factors to determine its fair value. The impairment review process compares the fair value of the reporting unit in which goodwill resides (Grupo SAN) to its carrying value. The Company
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 4 -
October 16, 2009
estimated the reporting unit’s fair value based on a discounted future cash flow approach that requires estimating income from operations based on historical results adjusted for current operating conditions and discount rates based on a weighted average cost of capital from a market participant perspective. In order to estimate its cash flows used in its impairment computations, the Company considered the following:
Its history of earnings
Its history of capital expenditures
The remaining useful lives of its primary assets
Current and expected market and operating conditions.
Its weighted average cost of capital
Based on the above information, the key assumptions made are that, in general, business activity will be lower in 2009 than in 2008 and will recover somewhat in 2010 After that time, the Company anticipates that revenues will grow at approximately 5% average per year until 2013. As part of its analysis, the Company considered that its weighted average cost of capital would be 16.5% for its Mexican operations and 11% for its U.S. operations. As of December 31, 2008, the estimated fair value of Grupo SAN exceeded its respective carrying value. Therefore, the Company determined there was no impairment of goodwill as of that date. Also, if the Company’s estimated discounted cash flows were to decrease 10% (either by an increase in its weighted average cost of capital or by a decrease in its estimated revenues) at its Grupo SAN reporting unit, its fair value would still exceed the value of its goodwill and therefore no impairment recognition would be required.
Additionally, as part of its impairment review process, the Company reconciled the aggregate fair value of the reporting units to its total market capitalization. The total premium of aggregate fair value to market capitalization was approximately 157 percent. The Company believes that a portion of this is due to the general economic environment, and this was corroborated by independent valuation analyses available to the public that suggested that the Company’s market capitalization as of December 2008 was significantly undervalued. An independent estimate obtained from an analyst report with respect to the Company’s stock indicated an implied control premium of approximately 41 percent. This implied control premium is consistent with recently observed control premiums. Assumptions used in the analysis considered the current market conditions in developing short and long-term growth expectations. The reconciliation includes such factors as historical and industry multiples, industry performance statistics and recent comparable transaction pricing among others.
The Company undertakes to describe its goodwill impairment policy more specifically and comprehensively in future filings
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 5 -
October 16, 2009
Item 15. Controls and Procedures
A. Disclosure Control and procedures, page 99
4.
Given the material weaknesses in internal control over financial reporting, discuss in reasonable detail the basis for management’s conclusion that the company’s disclosure controls and procedures were nonetheless effective as of the end of the period covered by the report.
In response to the Staff’s comment, the Company advises the Staff that its principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a- 15(e)) as of December 31, 2008, have concluded that the Company’s disclosure controls and procedures were not effective as of such date, as expressed in Item 15(b). Item 15A of the Company’s amended 2008 Form 20-F will be revised as set forth on Appendix A hereto.
B. Management’s Annual Report on Internal Control over Financial Reporting, page 99
5.
In management’s report, include a statement that the registered public accounting firm that audited the financial statements included in the annual report has issued an attestation report on management’s assessment of the issuer’s internal control over financial reporting as required by Item 15(b)(4) of Form 20-F.
In response to the Staff’s comment, the Company advises the Staff that the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2008, has been audited by Mancera, S.C., a member firm of Ernst & Young Global, an independent registered public accounting firm, as stated in their report which appears in Item 15C. Item 15B of the Company’s amended 2008 Form 20-F will be revised as set forth on Appendix B hereto.
6.
Revise your disclosure in the second sentence to conform to the language defining internal control over financial reporting in Rule 13a-15(f) under the Exchange Act.
In response to the Staff’s comment, the Company advises the Staff that the second sentence of Item 15B of the Company’s amended 2008 Form 20-F will be revised to conform to the language defining internal control over financial reporting in Rule 13a- 15(f) under the Exchange Act, as set forth on Appendix B.
D. Changes in Internal Control over Financial Reporting, page 102
7.
We note your disclosure that, “Except as described in Items 15B and 15C in this annual report, there were no changes in or internal control over financial reporting…”. Revise to state clearly, if correct, that there were changes in your internal control over financial reporting that occurred during the fiscal year that have
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 6 -
October 16, 2009
materially affected or are reasonably likely to materially affect, your internal control over financial reporting.
In response to the Staff’s comment, the Company advises the Staff that there was a change in its internal control over financial reporting during the period covered by the annual report of 2008 that materially affected, or was reasonably likely to materially affect, its internal control over financial reporting. Due to the Company’s continuing growth during the year ended December 31, 2008, the existing structure of its finance department became no longer sufficient to allow key supervision controls to function effectively with respect to its financial statement closing process, deferred taxes and business acquisitions processes. The Company’s management has determined that these deficiencies constitute a material weakness. Accordingly, the Company’s management has concluded that it did not maintain effective internal control over financial reporting as of December 31, 2008. Item 15D in the Company’s amended 2008 20-F will be revised as set forth on Appendix C hereto.
Item 19. Exhibits, page 105
8.
We note the disclosure that several of the exhibits have been previously filed. Please revise to indicate that you are incorporating these exhibits by reference and indicate the filing(s) from which you are incorporating by
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S I M P S O N T H A C H E R & B A R T L E T T L L P
4 2 5 L E X I N G T O N A V E N U E
N E W Y O R K , N . Y . 1 0 0 1 7 - 3 9 5 4
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DIRECT DIAL NUMBER
E-MAIL ADDRESS
212-455-7433
dwilliams@stblaw.com
October 16, 2009
Mr. John Cash
Accounting Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-7010
Re:
Grupo Simec, S.A.B. de C.V. Form 20-F for Fiscal Year Ended December 31, 2008 Filed July 20, 2009, File No. 1-11176
Ladies and Gentlemen:
On behalf of Grupo Simec, S.A.B. de C.V. (Grupo Simec) (the “Company”), we are writing to respond to the comments set forth in the Commission’s staff’s comment letter dated September 8, 2009 (the “comment letter”) relating to the above-referenced annual report (the “Annual Report”) of the Company originally submitted on July 20, 2009, pursuant to the Securities Act of 1933, as amended.
In addition, we are providing the following responses to the comments contained in the comment letter. For convenience of reference, we have reproduced below in italics the text of the comments of the Staff. The responses and information described below are based upon information provided to us by the Company.
Form 20-F for the fiscal year Ended December 31, 2008
Operating Results, page 49
1.
Please revise future filings to address the following:
We note from your disclosure on page 16 that a significant portion of your sales are to the automotive industry. If changes in sales to this industry have a significant impact on your results, please present a specific, quantified discussion of such changes on a comparative basis.
We note from your disclosure on page 16 that customers in the automotive industry continually seek price reductions. Please include a quantified discussion of the impact of these reductions on your operating results.
We note that you experienced a significant decrease in sales during the six month period ended June 30, 2009. Please more fully discuss management’s expectations regarding future sale trends and any plans to address such trends.
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 2 -
October 16, 2009
Please address if and how any decreases in sales to a particular industry or on a consolidated basis may impact your liquidity.
In response to the Staff’s comment, the Company advises the Staff that it undertakes to address in future filings (i) the impact of changes in sales to the automotive industry, (ii) the impact of price reductions, (iii) management’s expectations regarding future sale trends (and any plans to address such trends) and (iv) the impact on liquidity of decreases in sales to a particular industry or on a consolidated basis, in each case if significant.
Critical Accounting Policies, page 58
2.
Please provide us and revise future filings to include a more specific and comprehensive discussion regarding your basis for determining that deferred tax assets will be realized in the future. In this regard, please include a qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based on reasonably likely changes. Please also identify all the positive and negative evidence you considered in determining if a valuation allowance is necessary. Refer to paragraphs 23 and 24 of SFAS 109.
In response to the Staff’s comment, the Company advises the staff that in order to evaluate the recoverability of deferred tax assets, it considered whether the probability of not recovering all or a portion of them was more likely than not. The final realization of deferred tax assets depends on the generation of taxable profits in the periods when the temporary differences are deductible. Upon carrying out this evaluation, the Company considered the expected reversal of deferred
tax liabilities, projected taxable profit and planning strategies. As part of its analysis, the Company also considered the impact of Mexico’s Flat-Rate Business Tax in the projected utilization of NOLs to determine which tax system (the regular income tax or the Flat Rate Business Tax) would be more likely to limit the realization of deferred tax assets. To the extent that the Flat Rate Business Tax did not limit recognition of deferred tax assets, the Company projected future
taxable profits for a period of four years. Based on the Company’s evaluation, it determined the amount of deferred tax asset that is more likely than not to be realized in the future against those taxable profits, and it recorded an allowance for the deferred tax asset amount that it does not expect to recover in the future. Any deferred tax amounts which were not recovered in that time period or through the reversal of deferred tax liabilities had a valuation allowance provided for their realization.
To prepare its projected taxable profit and evaluate the realization of deferred tax assets the Company considered the following:
Its history of tax asset realization
Its history of profitability
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 3 -
October 16, 2009
Current and expected market and operating conditions.
The deductible period of deferred tax assets
The key assumptions made in projecting the Company’s profitability are that, in general, business activity will be lower in 2009 than in 2008 and will recover somewhat in 2010. After that time, the Company anticipates that its revenues will grow at approximately 5% average per year until 2013. Assumptions used in the analysis considered the current market conditions in developing short and long-term growth expectations. In projecting its profits, the Company also considered the expiration year of its NOLs in accordance with the Mexican Income Tax Law. Based on the Company’s sensitivity analysis,
it considered that a 10% decrease on its estimated revenues used to determine its projected taxable profit would not significantly affect the final realization of its net deferred tax asset recorded; because most of the deferred tax allowance results from its estimate that the Flat Rate Business Tax would be more likely to limit the realization of the NOL deferred tax
asset. As positive evidence of the determination of the Company’s valuation allowance, it is important to mention that its net deferred tax amount is a liability. Therefore, the materialization of such liability will generate additional taxable profit, lowering the Company’s risk to fail to realize its deferred tax assets. The Company is not aware of any material negative evidence (such as those described in paragraph 23 in SFAS 109) beyond that described above which limits the recognition of a deferred tax asset.
The Company undertakes to describe its basis for determining the realization of deferred tax assets more specifically and comprehensively in future filings.
3.
Please provide us and revise future filings to include a more specific and comprehensive discussion of your impairment policy for goodwill. Reference SFAS 142. In this regard, please specifically address the following:
A qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based on reasonably likely changes.
How the assumptions and methodologies used for valuing goodwill in the current year changed since the prior year, highlighting the impact of any changes.
Quantitative information regarding any significant known trends.
Any other material and useful information you gather and analyze regarding the risks and recoverability of goodwill.
In response to the Staff’s comment, the Company advises the Staff that in 2008, it recorded goodwill as a result of the Grupo SAN acquisition. Previous to this year, it did not record goodwill. In assessing the recoverability of its goodwill, the Company made assumptions regarding estimated future cash flows and other factors to determine its fair value. The impairment review process compares the fair value of the reporting unit in which goodwill resides (Grupo SAN) to its carrying value. The Company
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 4 -
October 16, 2009
estimated the reporting unit’s fair value based on a discounted future cash flow approach that requires estimating income from operations based on historical results adjusted for current operating conditions and discount rates based on a weighted average cost of capital from a market participant perspective. In order to estimate its cash flows used in its impairment computations, the Company considered the following:
Its history of earnings
Its history of capital expenditures
The remaining useful lives of its primary assets
Current and expected market and operating conditions.
Its weighted average cost of capital
Based on the above information, the key assumptions made are that, in general, business activity will be lower in 2009 than in 2008 and will recover somewhat in 2010 After that time, the Company anticipates that revenues will grow at approximately 5% average per year until 2013. As part of its analysis, the Company considered that its weighted average cost of capital would be 16.5% for its Mexican operations and 11% for its U.S. operations. As of December 31, 2008, the estimated fair value of Grupo SAN exceeded its respective carrying value. Therefore, the Company determined there was no impairment of goodwill as of that date. Also, if the Company’s estimated discounted cash flows were to decrease 10% (either by an increase in its weighted average cost of capital or by a decrease in its estimated revenues) at its Grupo SAN reporting unit, its fair value would still exceed the value of its goodwill and therefore no impairment recognition would be required.
Additionally, as part of its impairment review process, the Company reconciled the aggregate fair value of the reporting units to its total market capitalization. The total premium of aggregate fair value to market capitalization was approximately 157 percent.
The Company believes that a portion of this is due to the general economic environment, and this was corroborated by independent valuation analyses available to the public that suggested that the Company’s market capitalization as of December 2008 was significantly undervalued. An independent estimate obtained from an analyst report with respect to the Company’s stock indicated an implied control premium of approximately 41 percent. This implied control premium is consistent with recently observed control premiums. Assumptions used in the analysis considered the current market conditions in developing short and long-term growth expectations. The reconciliation includes such factors as historical and
industry multiples, industry performance statistics and recent comparable transaction pricing among others.
The Company undertakes to describe its goodwill impairment policy more specifically and comprehensively in future filings
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 5 -
October 16, 2009
Item 15. Controls and Procedures
A. Disclosure Control and procedures, page 99
4.
Given the material weaknesses in internal control over financial reporting, discuss in reasonable detail the basis for management’s conclusion that the company’s disclosure controls and procedures were nonetheless effective as of the end of the period covered by the report.
In response to the Staff’s comment, the Company advises the Staff that its principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a- 15(e)) as of December 31, 2008, have concluded that the Company’s disclosure controls and procedures were not effective as of such date, as expressed in Item 15(b). Item 15A of the Company’s amended 2008 Form 20-F will be revised as set forth on Appendix A hereto.
B. Management’s Annual Report on Internal Control over Financial Reporting, page 99
5.
In management’s report, include a statement that the registered public accounting firm that audited the financial statements included in the annual report has issued an attestation report on management’s assessment of the issuer’s internal control over financial reporting as required by Item 15(b)(4) of Form 20-F.
In response to the Staff’s comment, the Company advises the Staff that the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2008, has been audited by Mancera, S.C., a member firm of Ernst & Young Global, an independent registered public accounting firm, as stated in their report which appears in Item 15C. Item 15B of the Company’s amended 2008 Form 20-F will be revised as set forth on Appendix B hereto.
6.
Revise your disclosure in the second sentence to conform to the language defining internal control over financial reporting in Rule 13a-15(f) under the Exchange Act.
In response to the Staff’s comment, the Company advises the Staff that the second sentence of Item 15B of the Company’s amended 2008 Form 20-F will be revised to conform to the language defining internal control over financial reporting in Rule 13a- 15(f) under the Exchange Act, as set forth on Appendix B.
D. Changes in Internal Control over Financial Reporting, page 102
7.
We note your disclosure that, “Except as described in Items 15B and 15C in this annual report, there were no changes in or internal control over financial reporting…”. Revise to state clearly, if correct, that there were changes in your internal control over financial reporting that occurred during the fiscal year that have
S I M P S O N T H A C H E R & B A R T L E T T L L P
Mr. John Cash
Securities and Exchange Commission
- 6 -
October 16, 2009
materially affected or are reasonably likely to materially affect, your internal control over financial reporting.
In response to the Staff’s comment, the Company advises the Staff that there was a change in its internal control over financial reporting during the period covered by the annual report of 2008 that materially affected, or was reasonably
likely to materially affect, its internal control over financial reporting. Due to the Company’s continuing growth during the year ended December 31, 2008, the existing structure of its finance department became no longer sufficient to allow key supervision controls to function effectively with respect to its financial statement closing process, deferred taxes and business acquisitions processes. The Company’s management has determined that these deficiencies constitute a material weakness. Accordingly, the Company’s management has concluded that it did not maintain effective internal control over financial reporting as of December 31, 2008. Item 15D in the Company’s amended 2008 20-F will be revised as set
forth on Appendix C hereto.
Item 19. Exhibits, page 105
8.
We note the disclosure that several of the exhibits have been previously filed. Please revise to indicate that you are incorporating these exhibits by reference and indicate the filing(s) from which you are incorporating by