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Risk Factors

Risks Relating to Our Business

Equipment failures, delays in deliveries or unanticipated losses at any of our plants could lead to production or service curtailments or shutdowns.

We manufacture our products at our plants in the cities of Joinville and Mauá in Brazil and in the cities of Saltillo and Ramos Arizpe in Mexico. An interruption in production or service capabilities at any of these plants as a result of equipment failure or otherwise may result in our inability to produce our products, which would reduce our sales and earnings for the affected period. In the event of a stoppage in production at any of our plants, even if only temporary, or a delay as a result of events that are beyond our control, deliveries to our customers may be affected. Any significant delay in deliveries to our customers may lead to contractual fines or cancellations and cause us to lose future sales. Our plants are also subject to unanticipated events such as fires, explosions or extreme weather conditions, which may temporarily disrupt our operations and materially and adversely affect our business. We may experience plant shutdowns or periods of reduced production as a result of equipment failure, delays in deliveries or catastrophic loss, each of which could have a material adverse effect on our business, financial conditions and results of operations.

Our level of indebtedness may materially and adversely affect our financial condition, diminishing our ability to obtain resources to finance our operations or to recover from changes in the economy.

As of June 30, 2013, the aggregate principal amount of our indebtedness with financial institutions totaled R$1,977.2 million, of which R$287.8 million was short-term indebtedness, comprising short-term borrowings in the aggregate amount of R$287.6 million and short-term indebtedness relating to our derivative agreements in the aggregate amount of R$0.2 million. As of the same date, (1) the remainder of our indebtedness with financial institutions totaled R$1,689.4 million, comprising long-term borrowings in the aggregate amount of R$1,686.8 million and long-term indebtedness relating to our derivative agreements in the aggregate amount of R$2.6 million and (2) our total indebtedness (net of our cash and cash equivalents (R$657.4 million), financial investments (R$21.0 million) and derivative financial instruments (R$22.1 million)) was R$1,276.7 million.

The level and composition of our indebtedness could have significant consequences for us, including: (1) requiring a substantial portion of our cash flow from operations to be committed to the payment of principal and interest on our indebtedness, thereby reducing our available cash to finance our working capital and investments; (2) limiting our flexibility in planning for or reacting to changes in our business or the industries that we service; (3) limiting our ability to obtain necessary financing in the future or increasing the cost of our capital; or (4) placing us at competitive disadvantage compared to competitors whose level of indebtedness might be lower than ours.

In addition, certain of our financing agreements impose operating and other restrictions (including financial covenants with which we must comply) on our business and prohibit us from incurring additional indebtedness, subject to certain exceptions, unless we are able to satisfy certain financial ratios and other restrictions. Our ability to meet our financial ratios may be affected by events beyond our control, such as the effects of any market deteriorations on our business. We cannot assure you that we will be able to meet these ratios. These provisions may negatively affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business and/or market.

We may not be able to fully implement our business strategy.

Our ability to implement our business strategy depends on several factors, among which is our ability to:

  • maintain our leadership position in the cast iron engine block and cylinder head markets;
  • disseminate best operating and corporate practices throughout our company;
  • broaden the scope of machining projects that complement our foundry business;
  • explore opportunities to supply products to the Brazilian industrial hydraulics sector; and
  • increase the sales of our highly technological products.

We cannot ensure that we will successfully or completely fulfill any of these objectives. Any impact on the main factors related to the implementation of our strategy could have a material adverse effect on our business, financial condition and results of operations.

Our growth depends in part on the timely development and customer acceptance of new processes to enhance products based on technological innovation.

Our success is dependent upon our ability to develop and to adapt to highly advanced technological processes that meet the specifications of our customers’ products. If we do not develop new processes and materials to enhance products based on technological innovation on a timely basis, our operations will become technologically obsolete over time, and our revenue, cash flow, profitability and competitive position may be materially and adversely affected. Our success depends on several factors, including our ability to:

  • correctly identify and predict customer needs and preferences;
  • anticipate and respond to our competitors’ development of new products and the processes necessary to manufacture and enhance them; and
  • differentiate our processes from those of our competitors.

Any failure to accomplish these objectives may materially and adversely affect our business, financial condition and results of operations.

If we do not or cannot adequately protect our intellectual property or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.

We believe that our trademark "TUPY" provides us with a significant competitive advantage. In addition, we own numerous other trademarks, patents and licenses to intellectual property, such as "Fuco" and "Versa-Bar," which we believe in the aggregate are important to our operations. In addition, we market our iron pipe fittings under important trademarks, such as "TUPY BSP," "TUPY NPT" and "TUPYPRES." The steps that we and our licensors have adopted to maintain and protect our intellectual property may not prevent our intellectual property from being challenged, invalidated or circumvented. In certain circumstances, enforcement may not be available to us for various judicial reasons. Our failure or inability to: (1) obtain intellectual property rights that convey a competitive advantage, particularly in the case of pipe fittings; (2) adequately protect our intellectual property; or (3) prevent circumvention or unauthorized use of such property, may materially and adversely impact our competitive position and, consequently, our business, financial condition and results of operations.

Adverse changes in our relationships with, or the financial condition or performance of, our key distributors could materially and adversely affect our results of operations of our pipe fittings sales.

Our sales of iron pipe fittings are made through key distributors with whom we enter into commercial agreements. However, these contracts may be breached by distributors or terminated without due cause upon prior written notice. Consequently, if our contracts with our distributors were to be breached, not renewed, or terminated, the sale of our products may be materially and adversely affected, which could materially and adversely affect our business, financial condition and results of operations. Moreover, adverse changes in our relationships with our key distributors and our other partners or adverse developments in their financial condition or performance could materially and adversely affect our business, financial condition and results of operations.

If we fail to retain our executive officers or highly-skilled workers in Brazil or Mexico, our business could be harmed.

Our success largely depends on the efforts and abilities of our executive officers and highly-skilled workers. Their skills, experience and industry contacts significantly contribute to the success of our business. Any inability to replace the loss of any one of our executive officers or highly-skilled workers may have a material adverse effect on our business, financial conditions and results of operations. In addition, our future success and our profitability depend, in part, upon our continuing ability to attract and retain highly qualified personnel.

Unfavorable outcomes in our judicial or administrative proceedings may materially and adversely affect us.

We are, and may be in the future, party to judicial proceedings relating to civil, tax and labor matters, as well as administrative proceedings (particularly before tax, labor, environmental and competition authorities, among others). We and our subsidiaries are currently plaintiffs in 35 civil lawsuits involving a total aggregate amount of R$11.9 million. We have provisioned R$79.3 million as of June 30, 2013 with respect to our civil contingencies for which our risk of loss has been deemed probable (including provisions for civil contingencies that are unrelated to lawsuits).

In addition, we are defendants in 730 labor lawsuits filed by former employees, which generally relate to: (1) the recovery of labor dues; (2) payment of damages resulting from occupational incidents; and (3) additional payments for allegedly unsafe and dangerous working conditions. These proceedings are being adjudicated before labor courts in the states of Santa Catarina and São Paulo. The total amount involved in these labor proceedings totaled approximately R$34.6 million as of June 30, 2013. Based on the advice of our external counsel, we have provisioned R$17.6 million as of June 30, 2013 with respect to labor proceedings for which our risk of loss has been deemed probable. In addition, as of June 30, 2013, labor proceedings for which our risk of loss has been deemed possible and remote involved an aggregate R$15.1 million and R$1.9 million, respectively.

In addition, we have collective bargaining agreements with labor unions and authorization from the Ministry of Labor and Employment, or MTE, to optimize the productivity and work week of our employees, particularly with respect to schedules for work breaks. The non-renewal of these collective bargaining agreements or the cancellation of the MTE authorization may lead to modifications to certain of our employees’ working shifts, generating inefficiency in our production plants or increases in our costs, as well as subjecting us to labor claims, each of which may materially and adversely affect our operations. We cannot guarantee that the results of our proceedings will be favorable to us. We also outsource certain of our activities, which are subject to the supervision of tax and labor authorities, and may potentially generate liability for us resulting from the actions of third parties. Finally, anticompetitive conduct allegedly committed by us and other competitors, in the steel grits sector for cutting marble and granite, has been presented to the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica).

We are also party to five administrative environmental proceedings (pursuant to which we are subject to fines in the total aggregate amount of R$125.6 thousand) relating to (1) air emissions, (2) the environmental licensing of an electric power transmission line and (3) incidents relating to landfills. We are also involved in a police investigation relating to the improper disposal of waste and the alleged improper use of expired goods. Any criminal or class-action proceeding resulting from these investigations may have a material adverse effect on us.

As of June 30, 2013, we and our subsidiaries were plaintiffs in 85 administrative and judicial tax and social security proceedings involving a total aggregate amount of R$550.1 million and defendants in 100 administrative and judicial tax and social security proceedings involving an aggregate R$628.5 million, for which we have provisioned R$8.0 million in respect of tax and social security contingencies for which our risk of loss has been deemed possible.

Judicial and administrative decisions that are rendered contrary to our interests may restrict our operations and the use of our resources, which may, in turn, prevent us from fulfilling financial and other obligations to our shareholders (such as, for example, the payment of dividends and interest on shareholders’ equity) or other third parties. Judgments rendered contrary to our interests may also involve amounts for which we have not established sufficient provisions. The occurrence of any of these risks may materially and adversely affect our business, financial condition and results of operations. For further information, see "Business — Administrative and Judicial Proceedings".

Losses and other liabilities that are not covered by our insurance policies may result in additional costs to us.

We maintain various insurance policies, some of which are required by law. The occurrence of losses or other liabilities that may not be covered by these policies or that exceed their limits may result in significantly and unforeseeably higher costs, which may materially and adversely affect us. In addition, there are certain types of risk that may not be covered by our insurance policies (such as war, acts of God and force majeure and discontinuation of certain activities). Should we experience any such event not covered by insurance, or if the limit of our insurance coverage in not sufficient to cover the risk, we may incur additional costs for rebuilding and/or repairing damaged assets or for indemnifying third parties that suffered harm, which may materially and adversely affect our business, results of operations and financial condition.

We may be unable to obtain or renew our licenses, authorizations and permits necessary for our operations.

We are in the process of obtaining or renewing our licenses, authorizations and permits necessary for our operations and which we are required to maintain by relevant governmental authorities. In the event we are unable to obtain or renew these licenses, authorizations and permits, our business, financial condition and results of operations may be materially and adversely affected.

We may not be able to fully realize all of the anticipated synergies from our acquisition of Tupy Mexico.

We may not be able to fully realize all of the anticipated synergies from our acquisition of Tupy Mexico. The ability to realize the anticipated benefits of this acquisition will depend, to a large extent, on our ability to successfully integrate the businesses of Tupy Mexico with ours. The integration of businesses is a complex, costly and time-consuming process. As a result, we will be required to devote significant management attention and resources to integrating our business practices and operations with Tupy Mexico.

The integration process may affect our business in Brazil and/or our Mexican operations and, if not effectively implemented, would jeopardize the full realization of the expected benefits. The integration may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer and supplier relationships and diversion of management’s attention. The challenges we face in integrating the operations of Tupy Mexico with ours include, among others:

  • consolidating corporate and administrative infrastructures and eliminating duplicative operations;
  • maintaining employee morale and retaining and hiring key personnel;
  • coordinating geographically separate organizations;
  • addressing unanticipated issues in integrating information technology, communications and other systems; and
  • managing tax costs or inefficiencies.

If we are unable to successfully achieve synergies from our acquisition of Tupy Mexico, our business, financial condition and results of operations may be materially and adversely affected.

We may not be able to successfully integrate the operations of companies we acquire or benefit from growth opportunities.

We intend to pursue selected growth opportunities in the future. These opportunities may expose us to successor liability relating to actions involving any acquired entities, their respective management or contingent liabilities incurred prior to our involvement. A material liability associated with these opportunities or our failure to successfully integrate any acquired entities into our business may materially and adversely affect our reputation and have a material adverse effect on us.

Undisclosed liabilities from our previous acquisitions may materially and adversely affect our financial condition and operating results. If we carry out acquisitions in the future, the acquisitions may be structured in such a manner that would result in the assumption of undisclosed liabilities or liabilities not identified during pre-acquisition due diligence. Any such liabilities could harm our financial condition and operating results.

Moreover, we may not be able to successfully integrate any growth opportunities we may undertake in the future or successfully implement appropriate operational, financial and administrative systems and controls to achieve the expected benefits. These risks include: (1) the failure of the acquired entities/investments to achieve expected results; (2) the inability to retain or hire key personnel of the acquired entities; and (3) the inability to achieve expected synergies and/or economies of scale. In addition, the process of integrating businesses could cause interruption of, or a loss of momentum in, the activities of our existing business. The diversion of our management’s attention and any delays or difficulties encountered in connection with the integration of these businesses may materially and adversely affect our business, taken as a whole, results of operations and financial condition.

A material portion of our revenue is dependent on a limited number of customers, which represent a significant portion of our sales.

Our two major customers represented approximately 19.1% and 13.8% of our total sales revenue during the six-month period ended on June 30, 2013. An eventual decrease in the sale of the products to those customers, for any reason, including from temporary or permanent difficulties in their business or financial condition, may have a material adverse effect on us.

Additionally, the decision of any of our customers to no longer acquire our products may have a material adverse effect on us. We cannot guarantee that our commercial contracts with our customers will not be terminated early or that they will be renewed under similar terms when they expire. In the event a material number of our contracts are terminated early or are not renewed, our business, financial condition and results of operations may be materially and adversely affected. Moreover, if we lose our primary customers, who represent the majority of our sales, we may not be able to replace them, which may materially and adversely affect our business, results of operations and financial condition.

Our customers may, at any time, exert pressure on us to lower our prices. Our ability to negotiate with certain customers may be limited, and price reductions may have a material adverse effect on our business, financial condition and results of operations.

Our business could be affected by complaints from our customers, which may lead to product recalls.

We endeavor to supply our products in accordance with our customers’ quality specifications. Nonetheless, problems with quality that are not timely detected may occur, which could have a material adverse effect on the quality of the products delivered to our customers. As a consequence, our business is subject to the risk of product liability claims or recalls.

Despite our civil liability insurance policies that cover claims from our customers and final consumers, we cannot guarantee that any coverage from our insurance policies will be sufficient to cover all of the claims our customers or final consumers may make. Any claim not covered by our insurance policies may have a material adverse effect on our financial condition and any complaint may have a material adverse effect on our market reputation, future orders and, consequently, our results of operations.

We are subject to the risk of exposure to product liability and product recall claims in the event any of our products cause property damage, personal injury or death, or do not conform to specifications. We may be unable to continue to maintain suitable and adequate insurance in excess of our self-insured amounts on acceptable terms that will provide adequate protection against potential liabilities. In addition, if any of our products prove to be defective, we may be required to recall them.

A successful claim brought against us in excess of available insurance coverage, if any, or a requirement to recall our products, may have a material adverse effect on our business, financial condition or results of operations.

Our operations outside of Brazil expose us to additional risks that may materially and adversely affect our business.

We operate in markets outside of Brazil, either directly or through partnerships, including in the United States, Japan and Mexico. Foreign markets accounted for approximately 63.2% and 65.8% of our sales in 2012 and the six-month period ended June 30, 2013, respectively. Operating in different regions and countries exposes us to political, economic and other risks as well as multiple foreign regulatory requirements that are subject to change, including:

  • economic downturns in foreign countries or geographic regions where we have significant operations;
  • economic tensions between governments and changes in international trade and investment policies, including imposing restrictions on the repatriation of dividends;
  • foreign regulations restricting our ability to sell our products in these countries;
  • differing local product preferences and product requirements, including fuel economy, vehicle emissions and safety;
  • differing labor regulations and union relationships;
  • consequences from changes in tax, labor and environmental laws;
  • difficulties in obtaining financing in foreign countries for local operations; and
  • political and economic instability, natural disasters, war and terrorism.

The effects of these risks and other similar risks may, individually or in the aggregate, materially and adversely affect our business, financial condition and results of operations.

Risks Relating to Our Industry

If we cannot adjust our purchases of raw materials and equipment required for our manufacturing activities to reflect changing market conditions or customer demand, our revenue and results of operations may be materially and adversely affected.

We purchase raw materials and equipment from third parties to manufacture our products. Our results of operations may be adversely impacted if we are unable to adjust our purchases to reflect changes in customer demand and market fluctuations. During a market upturn, suppliers may extend lead times, limit supplies or increase prices. If we cannot purchase sufficient raw materials and quality equipment at competitive prices and on a timely basis to meet increasing demand, we may be unable to satisfy market demand, product shipments may be delayed or our raw materials and/or manufacturing costs may increase substantially. Conversely, in order to secure supplies for the manufacturing of our products, we occasionally enter into non-cancelable purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. Additionally, supplier price increases might harm our profitability if we are unable to pass on the increases to our customers in order to preserve our profit margins.

Our operations are energy-intensive, and energy shortages or higher energy prices could have a material adverse effect on us.

Our operations are energy-intensive, with electricity representing a significant cost component at our plants (approximately 4.5% of our costs and expenses in the six-month period ended June 30, 2013). Hydroelectric power is the principal source of electricity in Brazil, with the operating capacity of hydroelectric power plants in Brazil dependent upon reservoir levels and, consequently, rainfall indices. Below average rainfall prior to 2001 resulted in low reservoir levels and low hydroelectric operating capacity in the southeastern, midwestern and northeasten regions of Brazil, and since then, attempts to offset dependence on hydroelectric power plants with gas-fired thermoelectric plants were delayed due to regulatory and other issues.

On May 15, 2001, in response to the energy shortage, the Brazilian government created the Energy Crisis Management Chamber (Câmara de Gestão de Crise de Enegia Elétrica) to regulate and administer the Rationing Program (Programa de Racionamento). The Rationing Program established limits for electricity consumption for industrial, commercial and residential customers, which ranged from a 15.0% to a 25.0% reduction in electricity consumption and lasted from June 2001 until February 2002. As a result of the Rationing Program, our electricity consumption decreased and our energy costs increased, materially and adversely affecting our operations. Recently, due to the continuous decrease in water levels in Brazilian reservoirs, the Brazilian government has begun taking measures to avoid rationing of energy consumption. However, if Brazil experiences another electricity shortage, the Brazilian government may implement policies to address the shortage, including such rationing, which may increase our energy costs or otherwise have a material adverse effect on our business, financial condition and results of operations.

Our business is highly dependent on sales volume in the motor vehicle sector, particularly sales of diesel vehicles, and on the general market conditions of the industries in which our customers operate.

As of June 30, 2013, approximately 91.9% of our revenue from sales derived from the motor vehicle industry, including 62.0% from sales of commercial vehicles, construction, industrial and rural vehicles and diesel-powered vehicles, and 8.1% of our revenue from sales to the industrial sector. A number of economic and market conditions drive changes in these sectors, and the motor vehicle sector in particular has historically experienced cycles of growth and retraction. These changes and variations may result from situations that are beyond our control, including levels of unemployment, the availability of credit, industrial investment levels, harvest volumes, freight volumes and prices of commodities, among other factors. We cannot predict with certainty the future economic and market conditions that could materially and adversely affect sales volumes in the motor vehicle sector and consequently our business, financial conditions and results of operations.

If we cannot adjust our manufacturing capacity to reflect the demand for our products, our revenue and results of operations may be affected.

Given that we cannot immediately adapt our production capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed our production requirements or fall short of our production requirements. These problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise materially and adversely affect our business, financial condition and results of operations.

An increase in the demand for the use of aluminum as a substitute for iron in certain of our products may materially and adversely affect us.

We produce our engine blocks, including engine blocks for us in light commercial vehicles, exclusively from iron, and we do not presently intend to produce aluminum-based engine blocks. However, certain of our customers, particularly manufacturers of light commercial vehicles, have required the use of aluminum as a substitute for iron in the production of engine blocks. Should the substitution of iron for aluminum by manufacturers of light commercial vehicles and other vehicles proliferate, our business, financial conditions and results of operations may be materially and adversely affected.

We operate in competitive industries and if we are unable to compete effectively, we may face decreased demand or price reductions for our products.

We operate in industries that are competitive, particularly with respect to the pricing of our products. In order to compete effectively, we must retain longstanding relationships with major customers and continue to grow our business by establishing relationships with new customers, continually developing new processes and services designed to maintain our brand recognition and leadership position. Any failure to compete effectively may reduce our revenue, profitability and cash flow, and pricing pressures resulting from competition may adversely impact our business, financial condition and results of operations.

Our equipment, plants and operations are subject to several environmental, health, safety and labor regulations that could become stricter in the future and result in increased obligations and capital investment.

Our activities are subject to stringent regulations relating to environmental protection and health and workplace safety. Compliance with environmental regulations is monitored by governmental bodies and agencies that can impose administrative sanctions for any failure to comply with such regulation. These sanctions could include, among others, the imposition of fines, revocation of licenses and the temporary or permanent suspension of our activities, among other sanctions. The adoption of stricter environmental protection regulations in the countries in which we operate could result in the need to increase our capital investments, thereby altering the allocation of our planned investments, which may have a material adverse effect on our financial condition and results of our operations. In particular, changing emission standards in the manufacturing of motor vehicles could substantially alter the demand for our products and materially and adversely affect our business and results of operations.

We depend on environmental licenses for our operations. Environmental licensing delays or the refusal of environmental agencies to issue or renew required environmental permits, as well as any impossibility in meeting the requirements of these agencies may harm or even impede the development and/or operation of our plants.

We are also subject to subpoenas in respect of environmental motions that may negatively impact our image. Failure to observe safety, health and environmental regulations or the obligations we have assumed under consent decrees or judicial settlements could also have a material adverse effect on our image, revenue and results of operations. For additional information regarding environment regulations, see "Business—Environmental and Regulatory Matters."

Effects of labor market instability and employment legislation to which we are subject could affect the development of our activities in Brazil and/or Mexico

We operate in labor-intensive industries and the effects of instabilities in the labor market, including strikes, work stoppages, protests and changes in employment regulations, increases in wages and the conditions of collective bargaining agreements could directly affect the development of our activities and those of our customers, which could have a material adverse effect on our results. The automotive industry has experienced these types of instabilities in the past and we cannot assure you that these instabilities will not occur again. Over the past three years, due to discussions regarding salary adjustments, we experienced two work stoppages at our Brazilian plants.

Additionally, we are subject to risks from workplace accidents and/or illnesses of the workers in our plants, for which we may be held liable. The occurrence of workplace accidents and/or illnesses as well as changes in workplace regulations, may materially and adversely affect the conduct of our activities.

It is possible that our current insurance policies may not be sufficient to cover all workplace claims that may be made. Any claim that is outside the scope of our current coverage may have a significant impact on our business, financial condition and results of operations.

Risks Relating to Brazil and Mexico

The Brazilian and Mexican federal governments have exercised, and continue to exercise, significant influence over their respective economies. Brazilian and Mexican political and economic conditions could have an adverse effect on us.

The Brazilian and Mexican economies have been characterized by frequent, and occasionally drastic, intervention by their respective governments, which have often changed their respective policies and rules. The Brazilian and Mexican government’s efforts to control inflation and other policies have often involved, among others, raising interest rates, changing tax policy, wage and price controls, fluctuations in exchange rates, exchange controls, restrictions on remittances abroad, and limitations on imports. We do not control and cannot foresee the Brazilian or Mexican government’s future policies or measures. Our business, financial condition, cash flow and results of operation may be materially and adversely affected by changes in rules or policies relating to the following:

  • interest rate fluctuations and inflation;
  • exchange control and limitations on remittances abroad;
  • exchange rate fluctuations;
  • changes in labor rules;
  • liquidity of the Brazilian and Mexican capital and financial markets;
  • growth or downturn in the Brazilian or Mexican economy;
  • tax policy and changes in tax laws, including those from which we currently benefit;
  • controls on imports and exports;
  • social and political stability;
  • political, social, economic and diplomatic developments in or affecting Brazil or Mexico; and;
  • energy rationing.

The deterioration of economic and market conditions in other countries, particularly in the United States, the European Union and in emerging markets may materially and adversely affect the Brazilian and Mexican economy, our business and the market price of our common shares.

Our business may be materially and adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of credit and capital markets, consumer spending rates, energy availability and costs and the effects of governmental initiatives to manage economic conditions. Furthermore, our growth rate may decline if the markets into which we sell our products decline or do not grow as anticipated. In 2008, despite the escalation of the global economic crisis in the final quarter of the year, we registered the best results in our history. However, our growth depends on the growth of the markets in which we operate and 2009 was dedicated to protecting the gains achieved in prior years. This allowed us to achieve satisfactory results and maintain an adequate financial position. Nevertheless, any decline or lower than expected growth in our served markets could result in lower demand for our products and services, which would materially and adversely affect our growth rate and profitability.

The market for securities issued by Brazilian companies is influenced, in varying degrees, by economic and market conditions in Brazil and other countries, including the United States, the European Union and emerging markets. The financial crisis in the United States that emerged during the third quarter of 2008 caused a global economic downturn. Changes in the prices of common shares issued by public companies, credit contraction, deflation, global economic downturns, floating foreign exchange rates and inflation may materially and adversely affect, directly or indirectly, the Brazilian economy and capital markets. Crises in the United States, the European Union or in emerging markets may reduce investor demand for the securities of Brazilian companies, including our common shares.

The prices of common shares traded on the BM&FBOVESPA, for example, are highly affected by fluctuations in the U.S. dollar foreign exchange rate and by the performance of the main U.S. stock exchanges. Any increase in the interest rate in other countries, especially in the United States, may reduce global liquidity and investors’ interest in investing in the Brazilian capital markets.

We cannot assure you that the capital markets will continue to be open to Brazilian companies or that the cost of financing in this market will be favorable. Crises in other emerging markets may reduce investor interest in securities issued by Brazilian companies, sometimes producing a "contagion" effect in which an entire region or class of investment is disfavored by international investors, including our common shares. This can affect liquidity and the market price of our common shares, as well as affect our future access to capital markets and financing at acceptable terms, which may materially and adversely affect the market price of our common shares.

With exception to our subsidiaries in Mexico, we are subject to currency risks on sales, purchases and loans set in a currency other than the real. Our main foreign currency transactions are denominated in U.S. dollars. Additionally, the operations of our subsidiaries in Mexico are recorded in U.S. dollars (their functional currency) and have limited exposure to the Mexican peso.

Exchange rate instability and the devaluation of the real may materially and adversely affect the Brazilian economy and us.

As a result of inflationary pressures, the Brazilian real, in the past, has varied periodically in relation to the U.S. dollar and other foreign currencies. The Brazilian government has, in the past, implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. As a result of the crisis in the global financial markets since mid-2008, the real depreciated 31.9% against the U.S dollar over the course of 2008 and reached R$2.3370 per U.S.$1.00 on December 31, 2008. In 2009, the real began a trend of appreciation against the U.S. dollar, reaching R$1.7412 per U.S.$1.00 on December 31, 2009. This trend continued in 2010, and on December 31, 2010, the real/U.S. dollar exchange rate was R$1.6662 per U.S.$1.00. In 2011, the real depreciated against the U.S. dollar and on December 31, 2011, the real/U.S. dollar exchange rate was R$1.8758 per U.S.$1.00. On December 31, 2012, the real/U.S. dollar exchange rate was R$2.0435 per U.S.$1.00. As of June 30, 2013, the real/U.S. dollar exchange rate was R$2.21 per $1.00.

Devaluations of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil, which could lead to increases in interest rates, limit our access to foreign financial markets and prompt the adoption of recessionary policies by the Brazilian government. Conversely, the appreciation of the real against the U.S. dollar may lead to a deterioration of Brazil’s current account and balance of payments and cause a decrease in Brazilian exports. Any of the foregoing developments may negatively affect the Brazilian economy as a whole, and, consequently, our results of operations and the market price of our common shares.

In addition, as of June 30, 2013, 65.8% of our revenue derives from international customers with whom we execute transactions that are denominated in foreign currencies. Assuming the international market prices of our produces remain constant, when the real depreciates against the U.S. dollar, our revenue from export sales increases. Conversely, when the real appreciates against the U.S. dollar and the international market prices for our produces remain constant, our revenue from export sales decreases. This variation occurs because many of our customers pay for our export products in U.S. dollars but we maintain our accounting records in reais.

Given the importance of our operations in Mexico, a devaluation of the Mexican peso, particularly regarding the costs incurred in Mexican pesos, as well as any deterioration in the Mexican economy, could have a material adverse impact on our operations and results.

Brazilian government efforts to combat inflation may hinder the growth of the Brazilian economy and may materially and adversely affect our business.

Inflation and the Brazilian government’s measures to combat inflation, principally through the Central Bank, have had and may have significant effects on the Brazilian economy and our business. Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit. Conversely, more lenient government and Central Bank policies, in addition to interest rate decreases, may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business. Moreover, we may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure.

Risks Relating to Our Common Shares

Your investment in our common shares may be diluted in the future.

We may be required to raise additional funds in the future, including through public or private issuances of our common shares or securities convertible or exchangeable for our common shares. Any additional capital raised through the issuance of common shares or securities convertible into common shares may not be subject to the preemptive rights of our shareholders, and may decrease the price of the common shares and dilute the percentage interests of our existing shareholders. Moreover, we may in the future approve a stock option plan for the issuance of common shares to our management and other employees that may result in the immediate dilution of our shareholders’ interest in us.

We may not pay dividends to owners of our common shares.

In accordance with our bylaws and Brazilian Corporate Law, we must pay shareholders a mandatory dividend of at least 25% of our adjusted annual profit for the year. The results of a given year may be used to offset accumulated losses or to pay any statutory compensation to our directors, management or employees, which would reduce the amount available for distribution to our shareholders. Notwithstanding the mandatory dividend payments described above, it is possible that no dividends will be paid to our shareholders in a fiscal year if our board of directors reports to our shareholders at the annual shareholders’ meeting that such payment would be inadvisable considering our financial condition.

This is a free translation of the original version in Portuguese

Last Update on November 26, 2014

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