UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
|_| 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,
2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
OR
|_| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this
shell company report
Commission file number 1-14946
-----------------------------------------------
CEMEX, S.A. de C.V.
--------------------------------------------------------------------------------
(Exact name of the registrant as specified in its charter)
CEMEX MEXICO, S.A. de C.V.
EMPRESAS TOLTECA DE MEXICO, S.A. de C.V.
--------------------------------------------------------------------------------
(Exact names of co-registrants and guarantors as specified
in their respective charters)
CEMEX CORPORATION
--------------------------------------------------------------------------------
(Translation of registrant's name into English)
CEMEX MEXICO CORPORATION
EMPRESAS TOLTECA DE MEXICO CORPORATION
--------------------------------------------------------------------------------
(Translation of co-registrants' and guarantors' names into English)
United Mexican States
--------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
Av. Ricardo Margain Zozaya #325, Colonia Valle del Campestre, Garza
Garcia, Nuevo Leon, Mexico 66265
--------------------------------------------------------------------------------
(Address of principal executive offices)
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
("ADSs"), each ADS representing ten
Ordinary Participation Certificates
(Certificados de Participacion
Ordinarios)("CPOs"), each CPO
representing two Series A shares
and one Series B share New York Stock Exchange
------------------------------------- ----------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
--------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
9.625% Notes due 2009 guaranteed by CEMEX Mexico, S.A. de C.V. and Empresas
Tolteca de Mexico, S.A. de C.V.
--------------------------------------------------------------------------------
(Title of Class)
Guarantees of the 9.625% Notes due 2009 by CEMEX Mexico, S.A. de C.V. and
Empresas Tolteca de Mexico, S.A. de C.V.
--------------------------------------------------------------------------------
(Title of Class)
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.
3,714,456,977 CPOs (1)
7,676,571,754 Series A shares (including Series A shares underlying CPOs) (1)
3,838,285,877 Series B shares (including Series B shares underlying CPOs) (1)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes X No
--- ---
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. Yes No X
--- ---
Note--checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant 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 X Accelerated Filer
------- -------
Non-accelerated filer
------
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
------- -------
(1) This information does not give effect to the two-for-one stock split
approved by shareholders on April 27, 2006, which is expected to be effected
in July 2006. For further description of the stock split, see "Presentation
of Financial Information."
TABLE OF CONTENTS
Page
----
PART I.........................................................................3
Item 1 - Identity of Directors, Senior Management and Advisors.............3
Item 2 - Offer Statistics and Expected Timetable...........................3
Item 3 - Key Information...................................................3
Risk Factors..............................................................3
Mexican Peso Exchange Rates...............................................9
Selected Consolidated Financial Information..............................10
Item 4 - Information on the Company.......................................14
Business Overview........................................................14
Our Production Processes.................................................19
User Base................................................................19
Our Business Strategy....................................................20
Our Corporate Structure..................................................23
North America............................................................24
Europe...................................................................31
South America, Central America and the Caribbean.........................41
Africa and the Middle East...............................................47
Asia.....................................................................48
Our Trading Operations...................................................50
Regulatory Matters and Legal Proceedings.................................50
Recent Developments......................................................58
Item 4A - Unresolved Staff Comments.......................................59
Item 5 - Operating and Financial Review and Prospects.....................60
Cautionary Statement Regarding Forward Looking Statements................60
Overview.................................................................60
Critical Accounting Policies.............................................61
Results of Operations....................................................64
Liquidity and Capital Resources..........................................87
Research and Development, Patents and Licenses, etc......................92
Trend Information........................................................92
Summary of Material Contractual Obligations and Commercial
Commitments............................................................95
Off-Balance Sheet Arrangements...........................................96
Qualitative and Quantitative Market Disclosure...........................96
Investments, Acquisitions and Divestitures..............................100
U.S. GAAP Reconciliation................................................102
Newly Issued Accounting Pronouncements Under U.S. GAAP..................102
Item 6 - Directors, Senior Management and Employees.......................105
Senior Management and Directors.........................................105
Board Practices.........................................................110
Compensation of Our Directors and Members of Our Senior Management......111
Employees...............................................................115
Share Ownership.........................................................116
Item 7 - Major Shareholders and Related Party Transactions...............116
Major Shareholders......................................................116
Related Party Transactions..............................................117
i
Item 8 - Financial Information...........................................117
Consolidated Financial Statements and Other Financial Information.......117
Legal Proceedings.......................................................117
Dividends...............................................................117
Significant Changes.....................................................119
Item 9 - Offer and Listing...............................................120
Market Price Information................................................120
Item 10 - Additional Information.........................................121
Articles of Association and By-laws.....................................121
Material Contracts......................................................129
Exchange Controls.......................................................132
Taxation................................................................132
Documents on Display....................................................135
Item 11 - Quantitative and Qualitative Disclosures About Market Risk.....135
Item 12 - Description of Securities Other than Equity Securities.........135
PART II......................................................................136
Item 13 - Defaults, Dividend Arrearages and Delinquencies................136
Item 14 - Material Modifications to the Rights of Security Holders
and Use of Proceeds............................................136
Item 15 - Controls and Procedures........................................136
Item 16A - Audit Committee Financial Expert..............................137
Item 16B - Code of Ethics................................................137
Item 16C - Principal Accountant Fees and Services........................137
Item 16D - Exemptions from the Listing Standards for Audit Committees....138
Item 16E - Purchases of Equity Securities by the Issuer and Affiliated
Purchasers....................................................138
PART III.....................................................................139
Item 17 - Financial Statements...........................................139
Item 18 - Financial Statements...........................................139
Item 19 - Exhibits.......................................................139
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES ....................F-1
SCHEDULE I - Parent Company Only Financial Statements .......................S-2
SCHEDULE II - Valuation and Qualifying Accounts .............................S-9
ii
INTRODUCTION
CEMEX, S.A. de C.V. is incorporated as a stock corporation with
variable capital organized under the laws of the United Mexican States, or
Mexico. Except as the context otherwise may require, references in this annual
report to "CEMEX," "we," "us" or "our" refer to CEMEX, S.A. de C.V., its
consolidated subsidiaries and, except for accounting purposes, its
non-consolidated affiliates. For accounting purposes, references in this annual
report to "CEMEX," "we," "us" or "our" refer solely to CEMEX, S.A. de C.V. and
its consolidated subsidiaries. See note 1 to our consolidated financial
statements included elsewhere in this annual report. At our 2005 annual
shareholders' meeting held on April 27, 2006, our shareholders authorized the
change of CEMEX's legal and commercial name to CEMEX, Sociedad Anonima Bursatil
de Capital Variable, or CEMEX, S.A.B. de C.V., effective as of July 3, 2006.
The change in our corporate name, which means that we will now be called a
Publicly Held Company (Sociedad Anonima Bursatil), was made to comply with the
requirements of the new Mexican Securities Law enacted on December 28, 2005,
which will become effective on June 28, 2006.
PRESENTATION OF FINANCIAL INFORMATION
Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Generally Accepted
Accounting Principles in Mexico ("Mexican GAAP"), which differ in significant
respects from U.S. GAAP. We are required, pursuant to Mexican GAAP, to present
our financial statements in constant Pesos representing the same purchasing
power for each period presented. Accordingly, unless otherwise indicated, all
financial data presented in this annual report are stated in constant Pesos as
of December 31, 2005. See note 25 to our consolidated financial statements
included elsewhere in this annual report for a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to us. Non-Peso
amounts included in those statements are first translated into Dollar amounts,
in each case at a commercially available or an official government exchange
rate for the relevant period or date, as applicable. Those Dollar amounts are
then translated into Peso amounts at the CEMEX accounting rate, described under
Item 3 -- "Key Information -- Mexican Peso Exchange Rates" as of the relevant
period or date, as applicable.
On April 27, 2006, our shareholders approved a new stock split, which
we expect to occur in July 2006. In connection with the stock split, each of
our existing series A shares will be surrendered in exchange for two new series
A shares, and each of our existing series B shares will be surrendered in
exchange for two new series B shares. Concurrent with this stock split, our
shareholders authorized the amendment of the CPO trust agreement pursuant to
which our CPOs are issued to provide for the substitution of two new CPOs for
each of our existing CPOs, with each new CPO representing two new series A
shares and one new series B share. In connection with the stock split and at
our request, Citibank, N.A., as depositary for the ADSs, will distribute one
additional ADS for each ADS outstanding as of the record date for the stock
split. The ratio of CPOs to ADSs will not change as a result of the stock
split; each ADS will represent ten (10) new CPOs following the stock split and
the CPO trust amendment. The proportional equity interest participation of
existing shareholders will not change as a result of the stock split. The
financial data set forth in this annual report have not been adjusted to give
retroactive effect to the stock split.
References in this annual report to "U.S.$" and "Dollars" are to U.S.
Dollars, references to "(euro)" are to Euros, references to "(pound)"and
"Pounds" are to British Pounds, references to "(Y)" and "Yen" are to Japanese
Yen and, unless otherwise indicated, references to "Ps," "Mexican Pesos" and
"Pesos" are to constant Mexican Pesos as of December 31, 2005. The Dollar
amounts provided in this annual report and the financial statements included
elsewhere in this annual report, unless otherwise indicated, are translations
of constant Peso amounts, at an exchange rate of Ps10.62 to U.S.$1.00, the
CEMEX accounting rate as of December 31, 2005. However, in the case of
transactions conducted in Dollars, we have presented the Dollar amount of the
transaction and the corresponding Peso amount that is presented in our
consolidated financial statements. These translations have been prepared solely
for the convenience of the reader and should not be construed as
representations that the Peso amounts actually represent those Dollar amounts
or could be converted into Dollars at the rate indicated. See Item 3 -- "Key
Information -- Selected Consolidated Financial Information."
The noon buying rate for Pesos on December 30, 2005 was Ps10.63 to
U.S.$1.00 and on May 31, 2006 was Ps11.29 to U.S.$1.00.
1
CO-REGISTRANTS
Our co-registrants are wholly-owned subsidiaries that have provided a
corporate guarantee guaranteeing payment of our 9.625% Notes due 2009. These
subsidiaries, which we refer to as our guarantors, are CEMEX Mexico, S.A. de
C.V., or CEMEX Mexico, and Empresas Tolteca de Mexico, S.A. de C.V., or
Empresas Tolteca de Mexico. The guarantors, together with their subsidiaries,
account for substantially all of our revenues and operating income. See Item 4
-- "Information on the Company -- North America -- Our Mexican Operations."
Pursuant to Rule 12h-5 under the Securities Exchange Act of 1934 (the "Exchange
Act"), no separate financial statements or other disclosures concerning the
guarantors other than the narrative disclosures and financial information set
forth in note 25(x) to our consolidated financial statements have been
presented in this annual report.
2
PART I
Item 1 - Identity of Directors, Senior Management and Advisors
-----------------------------------------------------
Not applicable.
Item 2 - Offer Statistics and Expected Timetable
---------------------------------------
Not applicable.
Item 3 - Key Information
---------------
Risk Factors
Many factors could have an effect on our financial condition, cash
flows and results of operations. We are subject to various risks resulting from
changing economic, environmental, political, industry, business, financial and
climate conditions. The principal factors are described below.
WE ARE CONTINUALLY ANALYZING POSSIBLE ACQUISITIONS OF NEW OPERATIONS, SOME OF
WHICH MAY HAVE A MATERIAL IMPACT ON OUR FINANCIAL POSITION, AND WE MAY NOT BE
ABLE TO REALIZE THE EXPECTED BENEFITS FROM ANY SUCH FUTURE ACQUISITIONS OR FROM
THE RMC ACQUISITION.
A key element of our growth strategy is to acquire new operations and
integrate such operations with our existing operations. Our ability to realize
the expected benefits from these acquisitions depends, in large part, on our
ability to integrate the new operations with existing operations and to apply
our business practices in the new operations in a timely and effective manner.
These efforts may not be successful. Furthermore, our growth strategy depends
on our ability to identify and acquire suitable assets at desirable prices. We
are continually analyzing possible acquisitions of assets which in some cases,
such as the case of the RMC acquisition described below, may have a material
impact on our financial position. We cannot assure you that we will be
successful in identifying or purchasing suitable assets in the future. If we
fail to make further acquisitions, we may not be able to continue to grow in
the long term at our historic rate.
On March 1, 2005, we completed our acquisition of RMC Group p.l.c., or
RMC, a leading international producer and supplier of cement, ready-mix
concrete and aggregates, for a total purchase price of approximately U.S.$6.5
billion, which included approximately U.S.$2.2 billion of assumed debt. RMC,
which was headquartered in the United Kingdom, had significant operations in
the United Kingdom, Germany, France and the United States, as well as
operations in other European countries and globally. As of December 31, 2005,
we had identified approximately U.S.$360 million of annual savings that we
expect to achieve by 2007 through cost-saving synergies, including
approximately U.S.$240 million during 2006. Our success in realizing these cost
savings and deriving significant benefits from this acquisition will depend on
our ability to standardize management processes, capitalize on trading network
benefits, consolidate logistics and improve global procurement and energy
efficiency.
In addition, although we have substantially realized our expected
benefits from acquisitions in the past, the acquired companies prior to the RMC
acquisition were primarily engaged in cement operations, which have
traditionally been the focus of our business. Also, the companies we have
acquired in the past have had significant operations in only one country. The
integration of RMC's worldwide operations, which consist primarily of ready-mix
concrete and aggregates operations, has presented new challenges as it requires
us to simultaneously integrate operations in many different countries and focus
on ready-mix concrete and aggregates operations on a global scale, in addition
to our traditional focus on cement operations. Additional acquisitions may also
present formidable integration challenges. See Item 4 "Information on the
Company -- Our Business Strategy."
OUR ABILITY TO PAY DIVIDENDS AND REPAY DEBT DEPENDS ON OUR SUBSIDIARIES'
ABILITY TO TRANSFER INCOME AND DIVIDENDS TO US.
We are a holding company with no significant assets other than the
stock of our wholly-owned and non-wholly-owned subsidiaries and our holdings of
cash and marketable securities. Our ability to pay dividends and
3
repay debt depends on the continued transfer to us of dividends and other income
from our wholly-owned and non-wholly-owned subsidiaries. The ability of our
subsidiaries to pay dividends and make other transfers to us is limited by
various regulatory, contractual and legal constraints that affect our
subsidiaries.
WE HAVE INCURRED AND WILL CONTINUE TO INCUR DEBT, WHICH COULD HAVE AN ADVERSE
EFFECT ON THE PRICE OF OUR CPOS AND ADSS, RESULT IN US INCURRING INCREASED
INTEREST COSTS AND LIMIT OUR ABILITY TO DISTRIBUTE DIVIDENDS, FINANCE
ACQUISITIONS AND EXPANSIONS AND MAINTAIN FLEXIBILITY IN MANAGING OUR BUSINESS
ACTIVITIES.
We have incurred and will continue to incur significant amounts of
debt, particularly in connection with financing acquisitions, which could have
an adverse effect on the price of our Ordinary Participation Certificates, or
CPOs, and American Depositary Shares, or ADSs. Our indebtedness may have
important consequences, including increased interest costs if we are unable to
refinance existing indebtedness on satisfactory terms. In addition, the debt
instruments governing a substantial portion of our indebtedness contain various
covenants that require us to maintain financial ratios, restrict asset sales
and restrict our ability to use the proceeds from a sale of assets.
Consequently, our ability to distribute dividends, finance acquisitions and
expansions and maintain flexibility in managing our business activities could
be limited. As of December 31, 2005, we had outstanding debt equal to Ps101
billion (U.S.$9.5 billion). The aggregate amount of debt we incurred in
connection with the RMC acquisition was approximately U.S.$6.5 billion,
including our assumption of approximately U.S.$2.2 billion of RMC's debt.
WE HAVE TO SERVICE OUR DOLLAR DENOMINATED DEBT WITH REVENUES GENERATED IN PESOS
OR OTHER CURRENCIES, AS WE DO NOT GENERATE SUFFICIENT REVENUE IN DOLLARS FROM
OUR OPERATIONS TO SERVICE ALL OUR DOLLAR DENOMINATED DEBT. THIS COULD ADVERSELY
AFFECT OUR ABILITY TO SERVICE OUR DEBT IN THE EVENT OF A DEVALUATION OR
DEPRECIATION IN THE VALUE OF THE PESO, OR ANY OF THE OTHER CURRENCIES OF THE
COUNTRIES IN WHICH WE OPERATE.
A substantial portion of our outstanding debt is denominated in
Dollars; as of March 31, 2006, our Dollar denominated debt represented
approximately 75% of our total debt (after giving effect to our
currency-related derivatives as of such date). This debt, however, must be
serviced by funds generated from sales by our subsidiaries. As of the date of
this annual report, we do not generate sufficient revenue in Dollars from our
operations to service all our Dollar denominated debt. Consequently, we have to
use revenues generated in Pesos, Euros or other currencies to service our
Dollar denominated debt. See Item 5 -- "Operating and Financial Review and
Prospects -- Qualitative and Quantitative Market Disclosure -- Interest Rate
Risk, Foreign Currency Risk and Equity Risk -- Foreign Currency Risk." A
devaluation or depreciation in the value of the Peso, Euro or any of the other
currencies of the countries in which we operate, compared to the Dollar, could
adversely affect our ability to service our debt. During 2005, Mexico, Spain,
the United Kingdom and the Rest of Europe region, our main
non-Dollar-denominated operations, together generated approximately 53% of our
sales (approximately 19%, 9%, 9% and 16%, respectively), before eliminations
resulting from consolidation. In 2005, approximately 25% of our sales were
generated in the United States, with the remaining 22% of our sales being
generated in several countries, with a number of currencies having material
depreciations against the Dollar. During 2005, the Peso appreciated
approximately 5% against the Dollar, while the Euro and the Pound depreciated
approximately 13% and 11%, respectively, against the Dollar. Although we have
foreign exchange forward contracts and cross currency swap contracts in place
to mitigate our currency-related risks and expect to enter into future currency
hedges, they may not be effective in covering all our currency-related risks.
As of March 31, 2006, our Euro denominated debt represented
approximately 20% of our total debt (after giving effect to our
currency-related derivatives as of such date). However, we believe that our
generation of revenues in Euros from our operations in Spain and the Rest of
Europe region will be sufficient to service these obligations. As of March 31,
2006, our Yen denominated debt represented approximately 5% of our total debt
(after giving effect to our currency-related derivatives as of such date). As
of that date, we had no Pound denominated debt outstanding.
WE ARE DISPUTING SOME TAX CLAIMS, AN ADVERSE RESOLUTION OF WHICH MAY RESULT IN
A SIGNIFICANT ADDITIONAL TAX EXPENSE.
We have received notices from tax authorities in Mexico and the
Philippines of tax claims in respect of several prior tax years for a total
amount of approximately U.S.$70 million and U.S.$59 million, respectively,
4
including interest and penalties through December 31, 2005. We believe that
these claims will not have a material adverse effect on our net income.
In addition, during May 2006, we and some of our Mexican subsidiaries
were notified by the Mexican tax office of several tax assessments with respect
to tax years 1992 and 2002 in a total amount of approximately Ps3,793 million
(U.S.$335 million). The tax assessments are based primarily on: (i) disallowed
restatement of consolidated tax loss carryforwards in the same period in which
they occurred and (ii) investments made in entities incorporated in foreign
countries with preferential tax regimes (Regimenes Fiscales Preferentes). We
plan to contest these tax claims, and we are in the process of filing an appeal
for each of these tax claims before the Mexican federal tax court. If we fail
to obtain favorable rulings on appeal, these tax claims may have a material
impact on us.
We are also challenging the constitutionality of several amendments to
Mexican income tax legislation that became effective in 2005 and that would
increase taxes we pay on passive income from some of our foreign operations. We
believe these amendments are contrary to Mexican constitutional principles, and
on August 8, 2005, we filed a motion in the Mexican federal court challenging
the constitutionality of the amendments. On December 23, 2005, we obtained a
favorable ruling from the Mexican federal court that the amendments were
unconstitutional; however, the Mexican tax authority has appealed this ruling.
If the final ruling is not favorable to us, these amendments may have a material
impact on us. See Item 4 -- "Information on the Company --Regulatory Matters
and Legal Proceedings -- Tax Matters."
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS.
Our operations are subject to laws and regulations relating to the
protection of the environment in the various jurisdictions in which we operate,
such as regulations regarding the release of cement into the air or emissions
of greenhouse gases. Stricter laws and regulations, or stricter interpretation
of existing laws or regulations, may impose new liabilities on us or result in
the need for additional investments in pollution control equipment, either of
which could result in a material decline in our profitability in the short
term.
In addition, our operations in the United Kingdom, Spain and the Rest
of Europe are subject to binding caps on carbon dioxide emissions imposed by
Member States of the European Union as a result of the European Union's
directive implementing the Kyoto Protocol on climate change. Under this
directive, companies receive from the relevant Member States allowances that
set limitations on the levels of carbon dioxide emissions from their industrial
facilities. These allowances are tradable so as to enable companies that manage
to reduce their emissions to sell their excess allowances to companies that are
not reaching their emissions objectives. Failure to meet the emissions caps is
subject to heavy penalties. Based on our production forecasts, we expect to
have a consolidated surplus of carbon dioxide allowances for the initial
allocation period of 2005 to 2007. However, for the next allocation period of
2008 through 2012, we expect a reduction in the allowances granted by the
environmental agencies in substantially all the Member States, which may result
in a consolidated deficit in our carbon dioxide allowances during that period.
We believe we may be able to reduce the impact of any deficit by either
reducing carbon dioxide emissions in our facilities or by implementing Clean
Development Mechanism (CDM) projects that reduce greenhouse gas emissions in
emerging markets authorized by the United Nations. If we are not successful in
implementing emission reductions in our facilities or obtaining credits from
CDM projects, we may have to purchase a significant amount of allowances in the
market, the cost of which may have an impact on our operating results. See Item
4 -- "Information on the Company -- Regulatory Matters and Legal Proceedings --
Environmental Matters."
WE ARE SUBJECT TO RESTRICTIONS DUE TO MINORITY INTERESTS IN OUR CONSOLIDATED
SUBSIDIARIES.
We conduct our business through subsidiaries. In some cases,
third-party shareholders hold minority interests in these subsidiaries. Various
disadvantages may result from the participation of minority shareholders whose
interests may not always coincide with ours. Some of these disadvantages may,
among other things, result in our inability to implement organizational
efficiencies and transfer cash and assets from one subsidiary to another in
order to allocate assets most effectively.
5
HIGHER ENERGY AND FUEL COSTS MAY HAVE A MATERIAL ADVERSE AFFECT ON OUR
OPERATING RESULTS.
Our operations consume significant amounts of energy and fuel, the
cost of which has significantly increased worldwide in recent years. To
mitigate high energy and fuel costs and volatility, we have implemented the use
of alternative fuels such as petcoke and tires, which has resulted in reduced
energy and fuel costs and less vulnerability to potential price spikes. We have
also implemented technical improvements in several facilities and entered into
long term supply contracts of petcoke and electricity to mitigate price
volatility. Despite these measures, we cannot assure you that our operations
would not be materially adversely affected in the future if prevailing
conditions remain for a long period of time or if energy and fuel costs
continue to increase.
OUR OPERATIONS CAN BE AFFECTED BY ADVERSE WEATHER CONDITIONS.
Construction activity, and thus demand for our products, decreases
substantially during periods of cold weather, when it snows or when heavy or
sustained rainfalls occur. Consequently, demand for our products is
significantly lower during the winter in temperate countries and during the
rainy season in tropical countries. With the acquisition of RMC in 2005,
particularly its operations in Europe and the United States, our operations are
more exposed to weather seasonality. Winter weather in our European and North
American operations significantly reduces our first quarter sales volumes, and
to a lesser extent our fourth quarter sales volumes. Sales volumes in these and
similar markets generally increase during the second and third quarters because
of normally better weather conditions. However, high levels of rainfall can
adversely affect our operations during these periods as well. Such adverse
weather conditions can adversely affect our results of operations and
profitability if they occur with unusual intensity, during abnormal periods, or
last longer than usual in our major markets, especially during peak
construction periods.
WE ARE AN INTERNATIONAL COMPANY AND ARE EXPOSED TO RISKS IN THE COUNTRIES IN
WHICH WE HAVE SIGNIFICANT OPERATIONS OR INTERESTS.
We are dependent, in large part, on the economies of the countries in
which we market our products. The economies of these countries are in different
stages of socioeconomic development. Consequently, like many other companies
with significant international operations, we are exposed to risks from changes
in foreign currency exchange rates, interest rates, inflation, governmental
spending, social instability and other political, economic or social
developments that may materially reduce our net income.
With the acquisition of RMC in 2005, our geographic diversity has
significantly increased. We currently have operations in Mexico, the United
States, the United Kingdom, Spain, the Rest of Europe region (including Germany
and France), South America, Central America and the Caribbean (including
Venezuela and Colombia), Africa and the Middle East and Asia. As of December
31, 2005, our U.S. operations represented approximately 18% of our total
assets, our Mexican operations represented approximately 18% of our total
assets, our United Kingdom operations represented approximately 12% of our
total assets, our Spanish operations represented approximately 7% of our total
assets, our Rest of Europe operations represented approximately 12% of our
total assets, our South America, Central America and the Caribbean operations
represented approximately 7% of our total assets, our Africa and the Middle
East operations represented approximately 2% of our total assets and our Asia
operations represented approximately 3% of our total assets. For the year ended
December 31, 2005, before eliminations resulting from consolidation, our U.S.
operations represented approximately 25% of our net sales, our Mexican
operations represented approximately 19% of our net sales, our United Kingdom
operations represented approximately 9% of our net sales, our Spanish
operations represented approximately 9% of our net sales, our Rest of Europe
operations represented approximately 16% of our net sales, our South America,
Central America and the Caribbean operations represented approximately 9% of
our net sales, our Africa and the Middle East operations represented
approximately 3% of our net sales and our Asia operations represented
approximately 2% of our net sales. Adverse economic conditions in any of these
countries or regions may produce a negative impact on our net income from our
operations in that country or region. For a geographic breakdown of our net
sales for the year ended December 31, 2005 on a pro forma basis giving effect
to the RMC acquisition as though it had been completed on January 1, 2005,
please see Item 4 -- "Information on the Company -- Geographic Breakdown of Pro
Forma 2005 Net Sales."
6
If the Mexican economy experiences a recession or if Mexican inflation
and interest rates increase significantly, our net income from our Mexican
operations may decline materially because construction activity may decrease,
which may lead to a decrease in sales of cement and ready-mix concrete. The
Mexican government does not currently restrict the ability of Mexicans or
others to convert Pesos to Dollars, or vice versa. The Mexican Central Bank has
consistently made foreign currency available to Mexican private sector entities
to meet their foreign currency obligations. Nevertheless, if shortages of
foreign currency occur, the Mexican Central Bank may not continue its practice
of making foreign currency available to private sector companies, and we may
not be able to purchase the foreign currency we need to service our foreign
currency obligations without substantial additional cost.
Although we have a diversification of revenue sources in Europe, a
number of countries, particularly Germany and Italy, have experienced economic
stagnation recently, while France and the United Kingdom have experienced slow
economic growth. To the extent recovery from these economic conditions does not
materialize or otherwise takes place over an extended period of time, our
business, financial condition and results of operations may be adversely
affected. In addition, the economic stagnation in Germany and Italy and slow
economic growth in France and the United Kingdom may negatively impact the
economic growth and integration of the ten new countries admitted into the
European Union in May 2004, including Poland, the Czech Republic, Hungary,
Latvia and Lithuania, in which we acquired operations in the RMC acquisition.
Our operations in South America, Central America and the Caribbean are
faced with several risks that are more significant than in other countries.
These risks include political instability and economic volatility. For example,
in recent years, Venezuela has experienced volatility and depreciation of its
currency, high interest rates, political instability, increased inflation,
decreased gross domestic product and labor unrest, including a general strike.
In response to this situation, and in an effort to shore up the economy and
control inflation, Venezuelan authorities have imposed foreign exchange and
price controls on specified products, including cement. Any significant
political instability or political instability and economic volatility in the
countries in South America, Central America and the Caribbean in which we have
operations may have an impact on cement prices and demand for cement and
ready-mix concrete, which may adversely affect our results of operations.
Our operations in Africa and the Middle East have faced rising
instability as a result of, among other things, civil unrest, extremism, the
continued deterioration of Israeli-Palestinian relations and the war in Iraq.
There can be no assurance that political turbulence in the Middle East will
abate at any time in the near future or that neighboring countries, including
Egypt and the United Arab Emirates, will not be drawn into the conflict or
experience instability.
There have been terrorist attacks in the United States, Indonesia,
Spain and the United Kingdom, countries in which we maintain operations, and
ongoing threats of future terrorist attacks in the United States and abroad.
Although it is not possible at this time to determine the long-term effect of
these terrorist threats, there can be no assurance that there will not be other
attacks or threats in the United States or abroad that will lead to economic
contraction in the United States or any other of our major markets. Economic
contraction in the United States or any of our major markets could affect
domestic demand for cement and have a material adverse effect on our
operations.
PT Semen Gresik (Persero) Tbk., or Gresik, an Indonesian cement
producer in which we own a 25.5% interest, has experienced ongoing difficulties
at PT Semen Padang, or Semen Padang, the subsidiary of Gresik that owns and
operates the Padang plant, including the effective loss of operational and
financial control of Semen Padang, and until recently, the inability to prepare
consolidated financial statements that include Semen Padang's operations and
the inability of its independent auditors to provide an unqualified audit
opinion on such financial statements. In April 2006, after making several
adjustments suggested by its independent auditors, unqualified audited
financial statements for 2004 and 2005 were finally presented by Semen Gresik.
In December 2003, we filed a request for arbitration against the Republic of
Indonesia and the Indonesian government before the International Centre for
Settlement of Investment Disputes, or ICSID, based in Washington D.C. seeking,
among other things, rescission of the purchase agreement entered into with the
Republic of Indonesia in 1998, plus repayment of all costs and expenses, and
compensatory damages. In 2004, an Arbitral Tribunal was established by the
ICSID to hear the dispute and held its first hearings, at which the Indonesian
government objected to the Arbitral Tribunal's jurisdiction. As of the date of
this annual report, the Arbitral Tribunal had not yet rendered its
jurisdictional decision. We cannot predict what effect, if any, this action
will have on our investment in Gresik, how the Arbitral
7
Tribunal will rule on the Indonesian government's jurisdictional objections or
the merits of the dispute, or the time-frame in which the Arbitral Tribunal will
rule. See Item 4 -- "Information on the Company -- Asia -- Our Indonesian Equity
Investment" and "-- Regulatory Matters and Legal Proceedings -- Other Legal
Proceedings."
On May 3, 2006, we agreed to sell 24.9% of Gresik to Indonesia-based
Rajawali Group for approximately U.S.$337 million. The purchaser's obligations
under our sales contract are subject to obtaining the approval of the
Indonesian government and the fulfillment of other conditions. In the event
this sale is consummated, our remaining interest in Gresik will be 0.6%.
On May 17, 2006, we received a letter from the Indonesian government
purporting to exercise its right to repurchase, under the 1998 purchase
agreement, pursuant to which we acquired our interest in Gresik, the Gresik
shares we have agreed to sell to the Rajawali Group. However, we believe that
the Indonesian government's purported exercise of this right did not comply
with the requirements set forth in the 1998 purchase agreement, and we are in
correspondence and in discussions with the Indonesian government concerning
this issue. No assurance can be given either that the sale to the Rajawali
Group will be consummated, or that the Indonesian government will purchase the
Gresik shares, on the terms outlined above, or that a sale transaction on
similar or different terms may be consummated with any other purchaser.
YOU MAY BE UNABLE TO ENFORCE JUDGMENTS AGAINST US.
You may be unable to enforce judgments against us. We are a stock
corporation with variable capital (sociedad anonima de capital variable),
organized under the laws of Mexico. Substantially all our directors and
officers and some of the experts named in this annual report reside in Mexico,
and all or a significant portion of the assets of those persons may be, and the
majority of our assets are, located outside the United States. As a result, it
may not be possible for investors to effect service of process within the
United States upon those persons or to enforce judgments against them or
against us in U.S. courts, including judgments predicated upon the civil
liability provisions of the U.S. federal securities laws. We have been advised
by Lic. Ramiro G. Villarreal, General Counsel of CEMEX, that it may not be
possible to enforce, in original actions in Mexican courts, liabilities
predicated solely on the U.S. federal securities laws and it may not be
possible to enforce, in Mexican courts, judgments of U.S. courts obtained in
actions predicated upon the civil liability provisions of the U.S. federal
securities laws.
PREEMPTIVE RIGHTS MAY BE UNAVAILABLE TO ADS HOLDERS.
ADS holders may be unable to exercise preemptive rights granted to our
shareholders, in which case ADS holders could be substantially diluted. Under
Mexican law, whenever we issue new shares for payment in cash or in kind, we
are generally required to grant preemptive rights to our shareholders. However,
ADS holders may not be able to exercise these preemptive rights to acquire new
shares unless both the rights and the new shares are registered in the United
States or an exemption from registration is available.
We cannot assure you that we would file a registration statement in
the United States at the time of any rights offering. In addition, while the
depositary is permitted, if lawful and feasible at that time, to sell those
rights and distribute the proceeds of that sale to ADS holders who are entitled
to those rights, current Mexican law does not permit sales of that kind.
8
MEXICAN PESO EXCHANGE RATES
Mexico has had no exchange control system in place since the dual
exchange control system was abolished on November 11, 1991. The Mexican Peso
has floated freely in foreign exchange markets since December 1994, when the
Mexican Central Bank (Banco de Mexico) abandoned its prior policy of having an
official devaluation band. Since then, the Peso has been subject to substantial
fluctuations in value. The Peso depreciated against the Dollar by approximately
13% and 8% in 2002 and 2003, respectively, and appreciated against the Dollar
by approximately 1% and 5% in 2004 and 2005, respectively. These percentages
are based on the exchange rate that we use for accounting purposes, or the
CEMEX accounting rate. The CEMEX accounting rate represents the average of
three different exchange rates that are provided to us by Banco Nacional de
Mexico, S.A., or Banamex. For any given date, the CEMEX accounting rate may
differ from the noon buying rate for Pesos in New York City published by the
U.S. Federal Reserve Bank of New York.
The following table sets forth, for the periods and dates indicated,
the end-of-period, average and high and low points of the CEMEX accounting rate
as well as the noon buying rate for Pesos, expressed in Pesos per U.S.$1.00.
CEMEX Accounting Rate Noon Buying Rate
---------------------------------------------- --------------------------------------------
End of End of
Year ended December 31, Period Average(1) High Low Period Average(1) High Low
---------- ----------- -------- ---------- ---------- ----------- --------- --------
2001..................... 9.17 9.33 9.99 8.95 9.16 9.34 9.97 8.95
2002..................... 10.38 9.76 10.35 9.02 10.43 9.66 10.43 9.00
2003..................... 11.24 10.84 11.39 10.10 11.24 10.85 11.41 10.11
2004..................... 11.14 11.29 11.67 10.81 11.15 11.29 11.64 10.81
2005..................... 10.62 10.85 11.38 10.42 10.63 10.89 11.41 10.41
Monthly (2005-2006)
November.............. 10.56 -- 10.77 10.56 10.58 -- 10.77 10.57
December.............. 10.62 -- 10.78 10.42 10.63 -- 10.77 10.41
January............... 10.46 -- 10.64 10.45 10.44 -- 10.64 10.44
February.............. 10.48 -- 10.56 10.44 10.45 -- 10.53 10.43
March................. 10.88 -- 11.02 10.48 10.90 -- 10.95 10.46
April................. 11.07 -- 11.15 10.93 11.09 -- 11.16 10.86
May................... 11.34 -- 11.35 10.86 11.29 -- 11.31 10.84
(1) The average of the CEMEX accounting rate or the noon buying rate for
Pesos, as applicable, on the last day of each full month during the
relevant period.
On May 31, 2006, the noon buying rate for Pesos was Ps11.29 to
U.S.$1.00 and the CEMEX accounting rate was Ps11.34 to U.S.$1.00.
For a discussion of the financial treatment of our operations
conducted in other currencies, see Item 3 -- "Key Information -- Selected
Consolidated Financial Information."
9
Selected Consolidated Financial Information
The financial data set forth below as of and for each of the five
years ended December 31, 2005 have been derived from our audited consolidated
financial statements. The financial data set forth below as of December 31,
2005 and 2004 and for each of the three years ended December 31, 2005, have
been derived from, and should be read in conjunction with, and are qualified in
their entirety by reference to, the consolidated financial statements and the
notes thereto included elsewhere in this annual report. These financial
statements were approved by our shareholders at the 2005 annual general
meeting, which took place on April 27, 2006.
The audited consolidated financial statements for the year ended
December 31, 2005 include RMC's results of operations for the ten-month period
ended December 31, 2005, while the audited consolidated financial statements
for each of the four years ended December 31, 2004 do not include RMC's results
of operations. As a result, the financial data for the year ended December 31,
2005 are not comparable to the prior periods.
Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Mexican GAAP, which differs
in significant respects from U.S. GAAP. We are required, pursuant to Mexican
GAAP, to present our financial statements in constant Pesos representing the
same purchasing power for each period presented. Accordingly, unless otherwise
indicated, all financial data presented below and elsewhere in this annual
report are stated in constant Pesos as of December 31, 2005. See note 25 to our
consolidated financial statements included elsewhere in this annual report for
a description of the principal differences between Mexican GAAP and U.S. GAAP
as they relate to us.
Non-Peso amounts included in the financial statements are first
translated into Dollar amounts, in each case at a commercially available or an
official government exchange rate for the relevant period or date, as
applicable, and those Dollar amounts are then translated into Peso amounts at
the CEMEX accounting rate, described under Item 3 -- "Key Information --
Mexican Peso Exchange Rates," as of the relevant period or date, as applicable.
Under Mexican GAAP, each time we report results for the most recently
completed period, the Pesos previously reported in prior periods should be
adjusted to Pesos of constant purchasing power as of the most recent balance
sheet by multiplying the previously reported Pesos by a weighted average
inflation index. This index is calculated based upon the inflation rates of the
countries in which we operate and the changes in the exchange rates of each of
these countries, weighted according to the proportion that our assets in each
country represent of our total assets. The following table reflects the factors
that have been used to restate the originally reported Pesos to Pesos of
constant purchasing power as of December 31, 2005:
Cumulative Weighted
Annual Weighted Average Factor to
Average Factor December 31, 2005
-------------------------- -----------------------
2001................ 1.0916 1.2287
2002................ 1.1049 1.1256
2003................ 1.0624 1.0188
2004................ 0.9590 0.9590
-----------------------------------------------------------------------
The Dollar amounts provided below and, unless otherwise indicated,
elsewhere in this annual report are translations of constant Peso amounts at an
exchange rate of Ps10.62 to U.S.$1.00, the CEMEX accounting rate as of December
31, 2005. However, in the case of transactions conducted in Dollars, we have
presented the Dollar amount of the transaction and the corresponding Peso
amount that is presented in our consolidated financial statements. These
translations have been prepared solely for the convenience of the reader and
should not be construed as representations that the Peso amounts actually
represent those Dollar amounts or could be converted into Dollars at the rate
indicated. The noon buying rate for Pesos on December 31, 2005 was Ps10.63 to
U.S.$1.00 and on May 31, 2006 was Ps11.29 to U.S.$1.00. From December 31, 2005
through May 31, 2006, the Peso depreciated by approximately 6.2% against the
Dollar, based on the noon buying rate for Pesos.
10
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Selected Consolidated Financial Information
As of and for the year ended December 31,
-----------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
-------- ----------- ---------- ----------- ------------ ---------------
(in millions of constant Pesos as of December 31, 2005 and
Dollars, except ratios and share and per share amounts)
Income Statement Information:
Net sales...................................... Ps 78,015 Ps 76,456 Ps 82,045 Ps 87,062 Ps 162,709 U.S.$15,321
Cost of sales(1)............................... (43,882) (42,715) (47,296) (48,997) (98,460) (9,271)
Gross profit................................... 34,133 33,741 34,749 38,065 64,249 6,050
Operating expenses............................. (15,503) (18,429) (18,084) (18,282) (37,840) (3,563)
Operating income............................... 18,630 15,312 16,665 19,783 26,409 2,487
Comprehensive financing income (cost), net(2).. 2,982 (3,848) (3,063) 1,424 2,600 245
Other income (expense), net.................... (4,697) (4,550) (5,230) (5,169) (3,372) (318)
Income before income tax, business assets tax,
employees' statutory profit sharing and
equity in income of affiliates............ 16,915 6,914 8,372 16,038 25,637 2,414
Minority interest.............................. 1,728 433 348 224 585 55
Majority interest net income................... 13,273 6,079 7,201 13,965 22,425 2,112
Basic earnings per share(3)(4)................. 1.55 0.68 0.76 1.40 2.16 0.20
Diluted earnings per share(3)(4)............... 1.56 0.68 0.74 1.39 2.15 0.20
Dividends per share(3)(5)(6)................... 0.39 0.41 0.39 0.83 0.50 0.04
Number of shares outstanding(3)(7)............. 8,758 9,124 9,722 10,186 10,572 10,572
Balance Sheet Information:
Cash and temporary investments................. 4,828 4,220 3,336 3,657 6,387 601
Net working capital investment(8).............. 10,510 8,174 6,593 5,610 13,463 1,268
Property, machinery and equipment, net......... 100,744 104,734 106,106 102,703 165,055 15,542
Total assets................................... 182,888 186,194 183,409 185,684 284,228 26,764
Short-term debt................................ 11,579 16,281 15,219 11,151 12,647 1,191
Long-term debt................................. 48,960 51,109 51,955 52,207 88,006 8,287
Minority interest(9)........................... 22,259 14,101 6,092 4,155 5,613 529
Stockholders' equity (excluding minority
interest)(10)............................. 69,601 67,122 71,393 83,657 104,344 9,825
Book value per share(3)(7)(11)................. 7.95 7.36 7.35 8.21 8.71 0.93
Other Financial Information:
Operating margin............................... 23.9% 20.0% 20.3% 22.7% 16.2% 16.2%
EBITDA(12)..................................... 25,418 22,401 24,141 27,117 37,778 3,557
Ratio of EBITDA to interest expense, capital
securities dividends and preferred equity
dividends................................. 4.39 5.23 5.27 6.82 6.76 6.76
Investment in property, machinery and equipment,
net....................................... 5,756 4,954 4,510 4,637 8,341 785
Depreciation and amortization.................. 8,932 8,942 9,445 9,159 11,591 1,091
Net resources provided by operating
activities(13)............................ 26,596 19,440 17,937 23,811 36,300 3,418
Basic earnings per CPO(3)(4)................... 4.65 2.04 2.28 4.20 6.48 0.60
As of and for the year ended December 31,
-----------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
-------- ----------- ---------- ----------- ------------ ---------------
(in millions of constant Pesos as of December 31, 2005 and Dollars, except
per share amounts)
US. GAAP (14):
Income Statement Information:
Majority net sales............................. Ps74,936 Ps 75,858 Ps 86,568 Ps 92,553 Ps 159,516 U.S.$15,020
Operating income............................... 11,978 12,261 14,770 17,007 24,706 2,326
Majority net income............................ 11,989 6,367 8,984 18,505 22,115 2,082
Basic earnings per share....................... 1.49 0.71 0.95 1.85 2.13 0.20
Diluted earnings per share..................... 1.48 0.71 0.93 1.84 2.12 0.20
Balance Sheet Information:
Total assets................................... 184,153 191,179 202,230 212,550 293,743 27,659
Total long-term debt........................... 44,381 46,479 48,620 44,949 82,610 7,779
Shares subject to mandatory redemption (15).... -- -- 805 -- -- --
Minority interest.............................. 9,046 5,860 5,882 4,672 5,729 539
Other mezzanine items (15)..................... 19,169 14,761 -- -- -- --
Total majority stockholders' equity............ 55,402 58,289 77,204 95,412 111,381 10,488
(footnotes on next page)
11
________________
(1) Cost of sales includes depreciation.
(2) Comprehensive financing income (cost), net, includes financial expenses,
financial income, results from valuation and liquidation of financial
instruments, including derivatives and marketable securities, foreign
exchange result, net and monetary position result. See Item 5 "--
"Operating and Financial Review and Prospects."
(3) Our capital stock consists of series A shares and series B shares. Each of
our CPOs represents two series A shares and one series B share. As of
December 31, 2005, approximately 96.8% of our outstanding share capital
was represented by CPOs. On April 28, 2005, our shareholders approved a
two-for-one stock split in our series A shares, series B shares and CPOs,
which became effective on July 1, 2005. The number of our outstanding ADSs
did not change as a result of the stock split; instead the ratio of CPOs
to ADSs was modified so that each ADS now represents ten CPOs. All share
and per share amounts set forth in the table above have been adjusted to
give retroactive effect to this stock split. On April 27, 2006, our
shareholders approved a new two-for-one stock split, which we expect to
occur in July 2006. In connection with the new stock split, each of our
existing series A shares will be surrendered in exchange for two new
series A shares, and each of our existing series B shares will be
surrendered in exchange for two new series B shares. Concurrently with
this new stock split, our shareholders authorized the amendment of the CPO
trust agreement pursuant to which our CPOs are issued to provide for the
substitution of two new CPOs for each of our existing CPOs, with each new
CPO representing two new series A shares and one new series B share. In
connection with the stock split and at our request, Citibank, N.A., as
depositary for the ADSs, will distribute one additional ADS for each ADS
outstanding as of the record date for the stock split. The ratio of CPOs
to ADSs will not change as a result of the new stock split; each ADS will
represent ten (10) new CPOs following the new stock split and the CPO
trust amendment. Although earnings per share, dividends per share, book
value per share, earnings per CPO and the number of shares outstanding for
the years ended December 31, 2001 through 2005 were not adjusted to give
retroactive effect to the stock split, the following table presents such
line items on a pro forma basis giving effect to the stock split.
As of and for the year ended December 31,
---------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
--------- ---------- ---------- --------- ---------- -----------
(in constant Pesos as of December 31, 2005 and Dollars, except share
amounts)
Pro forma per share information
under Mexican GAAP:
Basic earnings per share............. Ps 0.78 Ps 0.34 Ps 0.38 Ps 0.70 Ps 1.08 U.S.$ 0.10
Diluted earnings per share........... 0.78 0.34 0.37 0.70 1.08 0.10
Dividends per share.................. 0.20 0.21 0.20 0.42 0.25 0.02
Book value per share................. 3.98 3.68 3.68 4.11 4.93 0.47
Basic earnings per CPO.............. 2.33 1.02 1.14 2.10 3.24 0.31
Pro forma per share information
under U.S. GAAP:
Basic earnings per share............. 0.75 0.36 0.48 0.93 1.07 0.10
Diluted earnings per share........... 0.74 0.36 0.47 0.92 1.06 0.10
Pro forma number of shares:
Number of shares outstanding
(in millions)................... 17,516 18,248 19,444 20,372 21,144 21,144
(4) Earnings per share are calculated based upon the weighted average number
of shares outstanding during the year, as described in note 21 to the
consolidated financial statements included elsewhere in this annual
report. Basic earnings per CPO is determined by multiplying each year's
basic earnings per share by three (the number of shares underlying each
CPO). Basic earnings per CPO is presented solely for the convenience of
the reader and does not represent a measure under Mexican GAAP.
(5) Dividends declared at each year's annual shareholders' meeting are
reflected as dividends of the preceding year.
(6) In recent years, our board of directors has proposed, and our shareholders
have approved, dividend proposals, whereby our shareholders have had a
choice between stock dividends or cash dividends declared in respect of the
prior year's results, with the stock issuable to shareholders who elect the
stock dividend over the cash dividend being issued at a 20% discount from
then current market prices. The dividends declared per share or per CPO in
these years, expressed in constant Pesos as of December 31, 2005, were as
follows: 2002, Ps1.17 per CPO (or Ps0.39 per share); 2003, Ps1.23 per CPO
(or Ps0.41 per share); 2004, Ps1.17 per CPO (or Ps0.39 per share); and
2005, Ps2.49 per CPO (or Ps0.83 per share). As a result of dividend
elections made by shareholders, in 2002, Ps262 million in cash was paid and
approximately 128 million additional CPOs were issued in respect of
dividends declared for the 2001 fiscal year; in 2003, Ps68 million in cash
was paid and approximately 198 million additional CPOs were issued in
respect of dividends declared for the 2002 fiscal year; in 2004, Ps161
million in cash was paid and approximately 150 million additional CPOs were
issued in respect of dividends declared for the 2003 fiscal year; and in
2005, Ps380 million in cash was paid and approximately 133 million
additional CPOs were issued in respect of dividends declared for the 2004
fiscal year. All share and per share amounts set forth in this note 6 have
been adjusted to give retroactive effect to the stock split described
above, which became effective on July 1, 2005. At our 2005 annual
shareholders' meeting, which was held on April 27, 2006, our shareholders
approved a dividend for the 2005 fiscal year of the Peso equivalent of
U.S.$0.133 per CPO (U.S.$0.0443 per share) or Ps1.49 (Ps0.50 per share),
based on the Peso/Dollar exchange rate in effect for May 25, 2006 of
Ps11.1935 to U.S.$1.00, as published by the Mexican Central Bank. Holders
of our series A shares, series B shares and CPOs will be entitled to
receive the dividend in either stock or cash consistent with our past
practices; however, under the terms of the deposit agreement pursuant to
which our ADSs are issued, we have instructed the depositary for the ADSs
not to extend the option to elect to receive cash in lieu of the stock
dividend to the holders of ADSs, unlike our practice in connection with
previous dividends when ADS holders were extended this option. As a result
of dividend elections made by shareholders, in June 2006, approximately
Ps144 million in cash will be paid and approximately 106 million additional
CPOs will be issued in respect of dividends declared for the 2005 fiscal
year.
(7) Based upon the total number of shares outstanding at the end of each
period, expressed in millions of shares, and includes shares subject to
financial derivative transactions, but does not include shares held by our
subsidiaries.
(8) Net working capital investment equals trade receivables plus inventories
less trade payables.
12
(9) In connection with a preferred equity transaction relating to the
financing of our acquisition of Southdown, Inc., now named CEMEX, Inc.,
the balance sheet item minority interest at December 31, 2001 and 2002
includes a notional amount of U.S.$900 million (Ps9.6 billion) and
U.S.$650 million (Ps6.9 billion), respectively, of preferred equity issued
in November 2000 by our Dutch subsidiary. In October 2003, we redeemed all
the U.S.$650 million of preferred equity outstanding. The balance sheet
item minority interest at December 31, 2003 includes an aggregate
liquidation amount of U.S.$66 million (Ps705 million) of 9.66% Putable
Capital Securities, which were initially issued by one of our subsidiaries
in May 1998 in an aggregate liquidation amount of U.S.$250 million. In
April 2002, approximately U.S.$184 million in aggregate liquidation amount
of these capital securities were tendered to, and accepted by, us in a
tender offer. In November 2004, we exercised a purchase option and
redeemed all the outstanding capital securities. Until January 1, 2004,
for accounting purposes under Mexican GAAP, this transaction was recorded
as minority interest in our balance sheet, and dividends paid on the
capital securities were recorded as minority interest net income in our
income statement. Accordingly, minority interest net income includes
capital securities dividends in the amount of approximately U.S.$76.1
million (Ps876 million) in 2001, U.S.$23.2 million (Ps265 million) in 2002
and U.S.$12.5 million (Ps147 million) in 2003. As of January 1, 2004, as a
result of new accounting pronouncements under Mexican GAAP, this
transaction was recorded as debt in our balance sheet, and dividends paid
on the capital securities during 2004, which amounted to approximately
U.S.$5.6 million (Ps64 million), were recorded as part of financial
expenses in our income statement.
(10) In December 1999, we entered into forward contracts with a number of banks
covering 21,000,000 ADSs. In December 2002, we agreed with the banks to
settle those forward contracts for cash and simultaneously entered into
new forward contracts with the same banks on similar terms to the original
forward transactions. Under the new forward contracts the banks retained
the ADSs underlying the original forward contracts, which had increased to
25,457,378 ADSs as a result of stock dividends through June 2003. As a
result of this net settlement, we recognized in December 2002 a decrease
of approximately U.S.$98.3 million (Ps1,050 million) in our stockholders'
equity, arising from changes in the valuation of the ADSs. In October
2003, in connection with an offering of all the ADSs underlying those
forward contracts, we agreed with the banks to settle those forward
contracts for cash. As a result of the final settlement in October 2003,
we recognized an increase of approximately U.S.$18.1 million (Ps193
million) in our stockholders' equity, arising from changes in the
valuation of the ADSs from December 2002 through October 2003. During the
life of these forward contracts, the underlying ADSs were considered to
have been owned by the banks and the forward contracts were treated as
equity transactions, and, therefore, changes in the fair value of the ADSs
were not recorded until settlement of the forward contracts.
(11) Book value per share is calculated by dividing stockholders' equity
(excluding minority interest) by the number of shares outstanding.
(12) EBITDA equals operating income before amortization expense and
depreciation. Under Mexican GAAP, amortization of goodwill is not included
in operating income, but instead is recorded in other income (expense).
EBITDA and the ratio of EBITDA to interest expense, capital securities
dividends and preferred equity dividends are presented herein because we
believe that they are widely accepted as financial indicators of our
ability to internally fund capital expenditures and service or incur debt
and preferred equity. EBITDA and such ratios should not be considered as
indicators of our financial performance, as alternatives to cash flow, as
measures of liquidity or as being comparable to other similarly titled
measures of other companies. EBITDA is reconciled below to operating
income, which we consider to be the most comparable measure as determined
under Mexican GAAP. We are not required to prepare a statement of cash
flows under Mexican GAAP and therefore do not have such Mexican GAAP cash
flow measures to present as comparable to EBITDA.
For the year ended December 31,
-----------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
---------- ---------- ---------- ---------- ---------- -----------
(in millions of constant Pesos as of December 31, 2005 and Dollars)
Reconciliation of EBITDA to
operating income EBITDA.......... Ps 25,418 Ps 22,401 Ps 24,141 Ps 27,117 Ps 37,778 U.S.$3,557
Less:
Depreciation and
amortization expense 6,788 7,089 7,476 7,334 11,369 1,070
Operating income................... 18,630 15,312 16,665 19,783 26,409 2,487
========== ========== ========== ========== ========== ===========
(13) Net resources provided by operating activities equals majority interest
net income plus items not affecting cash flow plus investment in working
capital excluding effects from acquisitions.
(14) We have restated the information at and for the years ended December 31,
2001, 2002, 2003, and 2004 under U.S. GAAP using the inflation factor
derived from the national consumer price index, or NCPI, in Mexico, as
required by Regulation S-X under the Exchange Act, instead of using the
weighted average restatement factors used by us according to Mexican GAAP
and applied to the information presented under Mexican GAAP of prior
years. See note 25 to our consolidated financial statements included
elsewhere in this annual report for a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to CEMEX.
(15) For financial reporting under U.S. GAAP, until December 31, 2002, elements
that did not meet either the definition of equity, or the definition of
debt, were presented under a third group, commonly referred to as
"mezzanine items." As of December 31, 2002, these elements, as they
related to us, included our preferred equity and our putable capital
securities described in note 9 above and our obligation under the forward
contracts described in note 10 above. As of December 31, 2003, as a result
of the adoption of SFAS 150 "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity," these elements were
presented as a separate line item within liabilities. For a more detailed
description of these elements, as they related to us, see notes 15(E),
15(F) and 25(m) to our consolidated financial statements included
elsewhere in this annual report.
13
Item 4 - Information on the Company
--------------------------
Unless otherwise indicated, references in this annual report to our
sales and assets, including percentages, for a country or region are calculated
before eliminations resulting from consolidation, and thus include intercompany
balances between countries and regions. These intercompany balances are
eliminated when calculated on a consolidated basis.
Business Overview
We are a stock corporation with variable capital, or sociedad anonima
de capital variable, organized under the laws of the United Mexican States, or
Mexico, with our principal executive offices in Av. Ricardo Margain Zozaya
#325, Colonia Valle del Campestre, Garza Garcia, Nuevo Leon, Mexico 66265. Our
main phone number is (011-5281) 8888-8888. CEMEX's agent for service,
exclusively for actions brought by the Securities and Exchange Commission
pursuant to the requirements of the United States Federal securities laws, is
CEMEX, Inc., located at 840 Gessner Road, Suite 1400, Houston, Texas 77024.
CEMEX was founded in 1906 and was registered with the Mercantile
Section of the Public Register of Property and Commerce in Monterrey, N.L.,
Mexico, on June 11, 1920 for a period of 99 years. At our 2002 annual
shareholders' meeting, this period was extended to the year 2100. CEMEX's full
legal and commercial name is CEMEX, Sociedad Anonima de Capital Variable. At
our 2005 annual shareholders' meeting held on April 27, 2006, our shareholders
authorized the change of CEMEX's legal and commercial name to CEMEX, Sociedad
Anonima Bursatil de Capital Variable, or CEMEX, S.A.B. de C.V., effective as of
July 3, 2006. The change in our corporate name, which means that we will now be
called a Publicly Held Company (Sociedad Anonima Bursatil), was made to comply
with the requirements of the new Mexican Securities Law enacted on December 28,
2005, which will become effective on June 28, 2006.
CEMEX is the third largest cement company in the world, based on
installed capacity as of December 31, 2005 of approximately 98.2 million tons,
including approximately 17 million tons of installed capacity we acquired in
our acquisition of RMC in March 2005. We are the largest ready-mix concrete
company in the world with annual sales volumes of approximately 70 million
cubic meters, and one of the largest aggregates company in the world with
annual sales volumes of approximately 160 million tons, in each case based on
our annual sales volumes in 2005, including the sales volumes of the operations
we acquired from RMC since March 1, 2005. We are also one of the world's
largest traders of cement and clinker, having traded approximately 16 million
tons of cement and clinker in 2005, including the trading operations we
acquired from RMC since March 1, 2005. We are a holding company primarily
engaged, through our operating subsidiaries, in the production, distribution,
marketing and sale of cement, ready-mix concrete, aggregates and clinker. On
June 2, 2006, we had an equity market capitalization of approximately Ps241
billion (U.S.$21 billion).
We are a global cement manufacturer with operations in North America,
Europe, South America, Central America, the Caribbean, Africa, the Middle East
and Asia. As of December 31, 2005, we had worldwide assets of approximately
Ps284 billion (U.S.$27 billion).
As of December 31, 2005, our main cement production facilities were
located in Mexico, the United States, Spain, the United Kingdom, Germany,
Poland, Croatia, Latvia, Venezuela, Colombia, Costa Rica, the Dominican
Republic, Panama, Nicaragua, Puerto Rico, Egypt, the Philippines and Thailand.
As of December 31, 2005, our assets, cement plants and installed capacity, on
an unconsolidated basis by region, were as set forth below. Installed capacity,
which refers to theoretical annual production capacity, represents gray cement
equivalent capacity, which counts each ton of white cement capacity as
approximately two tons of gray cement capacity. The table below also includes
our proportional interest in the installed capacity of companies in which we
hold a minority interest.
14
As of December 31, 2005
------------------------------------------
Installed
Assets Number of Capacity
(in billions of Cement (millions of
constant Pesos) Plants tons per annum)
--------------- --------- --------------
North America
Mexico........................ Ps 72 15 27.2
United States................. 72 12 13.3
Europe
Spain......................... 28 8 11.0
United Kingdom................ 49 3 2.7
Rest of Europe................ 48 9 13.0
South America, Central
America and the Caribbean........ 33 13 15.4
Africa and the Middle East.......... 9 1 4.9
Asia................................ 12 4 10.7
Cement and Clinker Trading
Assets and Other Operations...... 89 -- --
In the above table, "Rest of Europe" includes our subsidiaries in
Germany, France, Ireland, Austria, Poland, Croatia, the Czech Republic,
Denmark, Hungary, Latvia and other assets in the European region, and, for
purposes of the columns labeled "Assets" and "Installed Capacity," includes our
34% interest, as of December 31, 2005, in a Lithuanian cement producer that
operated one cement plant with an installed capacity of 2.7 million tons as of
December 31, 2005. In the above table, "South America, Central America and the
Caribbean" includes our subsidiaries in Venezuela, Colombia, Costa Rica, the
Dominican Republic, Panama, Nicaragua, Puerto Rico, Argentina and other assets
in the Caribbean region. In the above table, "Africa and the Middle East"
includes our subsidiaries in Egypt, the United Arab Emirates and Israel. In the
above table, "Asia" includes our subsidiaries in the Philippines, Thailand,
Malaysia, Bangladesh and other assets in the Asian region, and, for purposes of
the columns labeled "Assets" and "Installed Capacity," includes our 25.5%
interest, as of December 31, 2005, in Gresik, an Indonesian cement producer. As
of December 31, 2005, in addition to the four cement plants owned by our Asian
subsidiaries, Gresik operated four cement plants with an installed capacity of
17.3 million tons. In the above table, "Cement and Clinker Trading Assets and
Other Operations" includes intercompany accounts receivable of CEMEX (the
parent company only) in the amount of approximately Ps21 billion as of December
31, 2005, which are eliminated in consolidation.
During the last two decades, we embarked on a major geographic
expansion program to diversify our cash flows and enter markets whose economic
cycles within the cement industry largely operate independently from that of
Mexico and which offer long-term growth potential. We have built an extensive
network of marine and land-based distribution centers and terminals that give
us marketing access around the world. The following have been our most
significant acquisitions over the last five years:
o On September 27, 2004, in connection with a public offer to
purchase RMC's outstanding shares, CEMEX UK Limited, our indirect
wholly-owned subsidiary, acquired 50 million shares of RMC for
approximately (pound)432 million (U.S.$786 million, based on a
Pound/Dollar exchange rate of (pound)0.5496 to U.S.$1.00 on
September 27, 2004), which represented approximately 18.8% of
RMC's outstanding shares. On March 1, 2005, following board and
shareholder approval and clearance from applicable regulators,
CEMEX UK Limited purchased the remaining 81.2% of RMC's
outstanding shares and completed our acquisition of RMC. The
transaction value of this acquisition, including our assumption
of approximately U.S.$2.2 billion of RMC's debt, was
approximately U.S.$6.5 billion.
o In August and September 2003, we acquired 100% of the outstanding
shares of Mineral Resource Technologies Inc., and the cement
assets of Dixon-Marquette Cement for a combined purchase price of
approximately U.S.$100 million. Located in Dixon, Illinois, the
single cement plant has an annual production capacity of 560,000
tons. This cement plant was sold on March 31, 2005 as part of the
U.S. asset sale described below.
15
o In July and August 2002, through a tender offer and subsequent
merger, we acquired 100% of the outstanding shares of Puerto
Rican Cement Company, Inc. The aggregate value of the transaction
was approximately U.S.$281.0 million, including approximately
U.S.$100.8 million of assumed net debt. In July, 2005, Puerto
Rican Cement Company, Inc., changed its legal name to CEMEX de
Puerto Rico, Inc.
o In July 2002, we increased our equity interest in CEMEX Asia
Holdings, Ltd., or CAH, a subsidiary originally created to
co-invest with institutional investors in Asian cement
operations, from 77.4% to 77.7%. At the same time, we entered
into agreements with other CAH investors to purchase their CAH
shares in exchange for CPOs through quarterly share exchanges in
2003 and 2004. For accounting purposes, these exchanges were
considered effective as of July 2002. With these exchanges, we
further increased our equity interest in CAH to 92.3%. In August
2004, we acquired an additional 6.83% interest in CAH for
approximately U.S.$70 million, and in December 2005, we acquired
the remaining 0.9% interest in CAH for approximately U.S.$8
million, thereby increasing our total equity interest in CAH to
100%.
o In July 2002, we purchased, through a wholly-owned indirect
subsidiary, the remaining 30% economic interest that was not
previously acquired by CAH in the Philippine cement company Solid
Cement Corporation, or Solid, for approximately U.S.$95 million.
o In May 2001, we acquired, through CAH, a 100% economic interest
in Saraburi Cement Company Ltd., a cement company based in
Thailand with an installed capacity of approximately 700,000
tons, for a total consideration of approximately U.S.$73 million.
In July 2002, Saraburi Cement Company changed its legal name to
CEMEX (Thailand) Co. Ltd., or CEMEX (Thailand).
As part of our strategy, we periodically review and reconfigure our
operations in implementing our post-merger integration process, and we
sometimes divest assets that we believe are less important to our strategic
objectives.
On March 31, 2005, we sold our Charlevoix, Michigan and Dixon,
Illinois cement plants and several distribution terminals located in the Great
Lakes region to Votorantim Participacoes S.A, a cement company in Brazil, for
an aggregate purchase price of approximately U.S.$389 million. The combined
capacity of the two cement plants sold was approximately two million tons per
year. On June 1, 2005, we sold a cement terminal adjacent to the Detroit river
to the City of Detroit for a purchase price of approximately U.S.$24 million.
The proceeds of these sales were used to reduce debt.
On April 26, 2005, we divested our 11.9% interest in Cementos Bio Bio,
S.A., a cement company in Chile, for approximately U.S.$65 million. The
proceeds of this sale were used to reduce debt.
As a condition to closing the RMC acquisition, we agreed with the U.S.
Federal Trade Commission, or FTC, to divest several ready-mix and related
assets in the Tucson, Arizona area. Following FTC approval, we sold RMC's
operations in the Tucson area to California Portland Cement Company for a
purchase price of approximately U.S.$16 million on August 29, 2005. The
proceeds of this sale were used to reduce debt.
On July 1, 2005, we and Ready Mix USA, Inc., a privately-owned
ready-mix concrete producer with operations in the southeastern United States,
established two jointly-owned limited liability companies, CEMEX Southeast, LLC,
a cement company, and Ready Mix USA, LLC, a ready-mix concrete company, to serve
the construction materials market in the southeast region of the United States.
Under the terms of the limited liability company agreements and related asset
contribution agreements, we contributed two cement plants (Demopolis, Alabama
and Clinchfield, Georgia) and eleven cement terminals to CEMEX Southeast, LLC,
representing approximately 98% of its contributed capital, while Ready Mix USA
contributed cash to CEMEX Southeast, LLC representing approximately 2% of its
contributed capital. In addition, we contributed our ready-mix concrete,
aggregates and concrete block assets in the Florida panhandle and southern
Georgia to Ready Mix USA, LLC, representing approximately 9% of its contributed
capital, while Ready Mix USA contributed all its ready-mix concrete and
aggregate operations in Alabama, Georgia, the Florida panhandle and Tennessee,
as well as its concrete block operations in Arkansas, Tennessee, Mississippi,
Florida and Alabama to Ready Mix USA, LLC, representing
16
approximately 91% of its contributed capital. We own a 50.01% interest, and
Ready Mix USA owns a 49.99% interest, in the profits and losses and voting
rights of CEMEX Southeast, LLC, while Ready Mix USA owns a 50.01% interest, and
we own a 49.99% interest, in the profits and losses and voting rights of Ready
Mix USA, LLC. CEMEX Southeast, LLC is managed by us, and Ready Mix USA, LLC is
managed by Ready Mix USA. In a separate transaction, on September 1, 2005, we
sold 27 ready-mix plants and four concrete block facilities located in the
Atlanta, Georgia metropolitan area to Ready Mix USA, LLC for approximately
U.S.$125 million. The proceeds of this sale were used to reduce debt.
On December 22, 2005, we terminated our 50/50 joint ventures with
Lafarge Asland in Spain and Portugal which we acquired in the RMC acquisition.
The Spanish joint venture operated 122 ready-mix concrete plants and 12
aggregates, and the Portuguese joint venture operated 31 ready-mix concrete
plants and five aggregate quarries. In connection with the termination, we
received 29 ready-mix concrete plants and six aggregates quarries in Spain, as
well as approximately (euro)50 million in cash, and Lafarge Asland acquired a
100% interest in both joint ventures.
On March 2, 2006, we sold 4K Beton A/S, our Danish subsidiary, which
operated 18 ready-mix concrete plants in Denmark, to Unicon A/S, a subsidiary
of Cementir Group, an Italian cement producer, for approximately (euro)22
million. As part of the transaction, we purchased from Unicon A/S two companies
engaged in the ready-mix concrete and aggregates business in Poland for
approximately (euro)12 million. These companies operate nine ready-mix concrete
plants and one aggregates quarry in Poland. We received net cash proceeds of
approximately (euro)6 million, after cash and debt adjustments, from this
transaction.
17
Geographic Breakdown of Our 2005 Net Sales
The following chart indicates the geographic breakdown of our net
sales, before eliminations resulting from consolidation, for the year ended
December 31, 2005:
[PIE CHART GRAPHIC OMITTED]
Mexico 19.0%
United States 25.0%
Spain 9.0%
United Kingdom 9.0%
Rest of Europe 16.0%
South America, Central America and the Caribbean 9.0%
Africa and the Middle East 3.0%
Asia 2.0%
Others 8.0%
For a description of a breakdown of total revenues by geographic
markets for each of the years ended December 31, 2003, 2004 and 2005, please
see Item 5 -- "Operating and Financial Review and Prospects."
Geographic Breakdown of Pro Forma 2005 Net Sales
The pro forma net sales data for the year ended December 31, 2005 set
forth below include RMC's net sales data for the two- month period ended
February 28, 2005, which are unaudited and have been obtained from RMC's
accounting records.
The following chart indicates the geographic breakdown of our net
sales on a pro forma basis giving effect to the RMC acquisition as though it
had been completed on January 1, 2005 and before eliminations resulting from
consolidation, for the year ended December 31, 2005:
[PIE CHART GRAPHIC OMITTED]
Mexico 18.0%
United States 25.0%
Spain 9.0%
United Kingdom 10.0%
Rest of Europe 17.0%
South America, Central America and the Caribbean 8.0%
Africa and the Middle East 3.0%
Asia 2.0%
Others 8.0%
18
Our Production Processes
Cement is a binding agent, which, when mixed with sand, stone or other
aggregates and water, produces either ready-mix concrete or mortar. Mortar is
the mixture of cement with finely ground limestone, and ready-mix concrete is
the mixture of cement with sand, gravel or other aggregates and water.
Aggregates are naturally occurring sand and gravel or crushed stone
such as granite, limestone and sandstone. Aggregates are used to produce
ready-mix concrete, roadstone, concrete products, lime, cement and mortar for
the construction industry, and are obtained from land based sources such as
sand and gravel pits and rock quarries or by dredging marine deposits.
Cement Production Process
We manufacture cement through a closely controlled chemical process,
which begins with the mining and crushing of limestone and clay, and, in some
instances, other raw materials. The clay and limestone are then
pre-homogenized, a process which consists of combining different types of clay
and limestone. The mix is typically dried, then fed into a grinder which grinds
the various materials in preparation for the kiln. The raw materials are
calcined, or processed, at a very high temperature in a kiln, to produce
clinker. Clinker is the intermediate product used in the manufacture of cement.
There are two primary processes used to manufacture cement, the dry
process and the wet process. The dry process is more fuel efficient. As of
December 31, 2005, 54 of our 65 operative production plants used the dry
process, nine used the wet process and two used both processes. Our production
plants that use the wet process are located in Venezuela, Colombia, Nicaragua,
the Philippines, the United Kingdom, Germany and Latvia. In the wet process,
the raw materials are mixed with water to form slurry which is fed into a kiln.
Fuel costs are greater in the wet process than in the dry process because the
water that is added to the raw materials to form slurry must be evaporated
during the clinker manufacturing process. In the dry process, the addition of
water and the formation of slurry are eliminated, and clinker is formed by
calcining the dry raw materials. In the most modern application of this dry
process technology, the raw materials are first blended in a homogenizing silo
and processed through a pre-heater tower that utilizes exhaust heat generated
by the kiln to pre-calcine the raw materials before they are calcined to
produce clinker.
Clinker and gypsum are fed in pre-established proportions into a
cement grinding mill where they are ground into an extremely fine powder to
produce finished cement.
Ready-Mix Concrete Production Process
Ready-mix concrete is a combination of cement, fine and coarse
aggregates, and admixtures (which control properties of the concrete including
plasticity, pumpability, freeze-thaw resistance, strength and setting time).
The concrete hardens due to the chemical reaction of hydration when water is
added to the mix, filling voids in the mixture and turning it into a solid
mass.
User Base
Cement is the primary building material in the industrial and
residential construction sectors of most of the markets in which we operate.
The lack of available cement substitutes further enhances the marketability of
our product. The primary end-users of cement in each region in which we operate
vary but usually include, among others, wholesalers, ready-mix concrete
producers, industrial customers and contractors in bulk. The end-users of
ready-mix concrete generally include homebuilders, commercial and industrial
building contractors and road builders. Major end-users of aggregates include
ready-mix concrete producers, mortar producers, general building contractors
and those engaged in roadbuilding activity, asphalt producers and concrete
product producers.
19
Our Business Strategy
We seek to continue to strengthen our global leadership by growing
profitably through our integrated positions along the cement value chain and
maximizing our overall performance by employing the following strategies:
Focus on and vertically integrate our core business of cement, ready-mix
concrete and aggregates
We plan to continue focusing on our core businesses, the production
and sale of cement, ready-mix concrete and aggregates, and the vertical
integration of these businesses. We believe that managing our cement, ready-mix
and aggregates operations as an integrated business can make them more
efficient and more profitable than if they were run separately. We believe that
this strategic focus has enabled us to grow our existing businesses and to
expand our operations internationally.
Geographically diversify our operations and allocate capital effectively by
expanding into selected new markets
Subject to economic conditions that may affect our ability to complete
acquisitions, we intend to continue adding assets to our existing portfolio.
We intend to continue to geographically diversify our cement,
ready-mix and aggregates operations and to vertically integrate in new and
existing markets by investing in, acquiring and developing complementary
operations along the cement value chain.
We believe that it is important to diversify selectively into markets
that have long-term growth potential, particularly in emerging market
countries, where the shortage of roads and other infrastructure and a low per
capita use of cement and other building materials is most likely to result in
significant increases in demand for our products.
By selectively participating in these markets, and by purchasing
operations that benefit from our management and turnaround expertise and assets
that further integrate into our existing portfolio, in most cases, we have been
able to increase our cash flow and return on capital employed.
We evaluate potential acquisitions in light of our three primary
investment principles:
o The potential for increasing the acquired entity's value should
be principally driven by factors that we can influence,
particularly the application of our management and turnaround
expertise;
o The acquisition should not compromise our financial strength; and
o The acquisition should offer a higher long-term return on our
investment than our cost of capital and should offer a minimum
return on capital employed of at least ten percent.
In order to minimize our capital commitments and maximize our return
on capital, we will continue to analyze potential capital raising sources
available in connection with acquisitions, including sources of local financing
and possible joint ventures. We normally consider opportunities for, and
routinely engage in preliminary discussions concerning acquisitions.
Implement platforms to achieve optimal operating standards and quickly integrate
acquisitions
By continuing to produce cement at a low cost, we believe that we will
continue to generate cash flows sufficient to support our present and future
growth. We strive to reduce our overall cement production related costs and
corporate overhead through strict cost management policies and through
improving efficiencies. We have implemented several worldwide standard
platforms as part of this process. These platforms were designed to develop
efficiencies and better practices, and we believe they will further reduce our
costs, streamline our processes and extract synergies from our global
operations. In addition, we have implemented centralized management
20
information systems throughout our operations, including administrative,
accounting, purchasing, customer management, budget preparation and control
systems, which are expected to assist us in lowering costs.
With each international acquisition, we have refined the
implementation of both the technological and managerial processes required to
rapidly integrate acquisitions into our existing corporate structure. The
implementation of the platforms described above has allowed us to integrate our
acquisitions more rapidly and efficiently.
In the case of the RMC acquisition, we expect to achieve significant
cost savings in the acquired operations by optimizing the production and
distribution of ready-mix concrete and aggregates, reducing costs in the cement
manufacturing facilities, partly by implementing CEMEX operating standards at
such facilities, reducing raw materials and energy costs by centralizing
procurement processes and reducing other operational costs by centralizing
technological and managerial processes. We have achieved a portion of these
cost savings in 2005, and we expect to gradually achieve the remainder of these
cost savings between 2006 and 2007.
We plan to continue to eliminate redundancies at all levels,
streamline corporate structures and centralize administrative functions to
increase our efficiency and lower costs. In addition, in the last few years, we
have implemented various procedures to improve the environmental impact of our
activities as well as our overall product quality.
Through a worldwide import and export strategy, we will continue to
optimize capacity utilization and maximize profitability by directing our
products from countries experiencing downturns in their respective economies to
target export markets where demand may be greater. Our global trading system
enables us to coordinate our export activities globally and to take advantage
of demand opportunities and price movements worldwide.
Provide the best value proposition to our customers
We believe that by pursuing our objective of integrating our business
along the cement value chain we can improve and broaden the value proposition
that we provide to our customers. We believe that by offering integrated
solutions we can provide our customers more reliable sourcing as well as higher
quality services and products.
We continue to focus on developing new competitive advantages that
will differentiate us from our competitors. In addition, we are strengthening
our commercial and corporate brands in an effort to further enhance the value
of our products and our services for our customers. Our lower cost combined
with our higher quality service has allowed us to make significant inroads in
these areas.
We believe our Construrama branding and our other marketing strategies
in Mexico have strengthened our distribution network, fostered greater loyalty
among distributors and further fortified our commercial network. With
Construrama, we have enhanced the operating and service standards of our
distributors, providing them with training, a standard image and national
publicity. We have recently begun utilizing our Construrama strategy in our
Venezuelan operations and may introduce this branding strategy in other
markets, depending on the market conditions and brand competition. Another
strategy we have implemented in Mexico, which we call "Multiproductos," helps
our distributors offer a wider array of construction materials and reinforces
the subjective value of our products in their customers.
In Spain, we have implemented several initiatives to increase the
value of our services to our clients such as mobile access to account
information, 24-hour bulk cement dispatch capability, night delivery of
ready-mix cement, and a customer loyalty incentive program.
Strengthen our financial structure
We believe our strategy of cost-cutting initiatives, increased value
proposition and geographic expansion will translate into growing operating cash
flows. Our objective is to strengthen our financial structure by:
o Optimizing our borrowing costs and debt maturities;
21
o Increasing our access to various capital sources; and
o Maintaining the financial flexibility needed to pursue future
growth opportunities.
We intend to continue monitoring our credit risk while maintaining the
flexibility to support our business strategy.
Focus on attracting, retaining and developing a diverse, experienced and
motivated management team
We will continue to focus on recruiting and retaining motivated and
knowledgeable professional managers. Our senior management encourages managers
to continually review our processes and practices, and to identify innovative
management and business approaches to improve our operations. By rotating our
managers from one country to another and from one area of our operations to
another, we increase their diversity of experience.
We provide our management with ongoing training throughout their
careers. In addition, through our stock-based compensation program, our senior
management has a stake in our financial success.
The implementation of our business strategy demands effective dynamics
within our organization. Our corporate infrastructure is based on internal
collaboration and global management platforms. We will continue to strengthen
and develop this infrastructure to effectively support our strategy.
22
Our Corporate Structure
We are a holding company, and operate our business through
subsidiaries that, in turn, hold interests in our cement and ready-mix concrete
operating companies, as well as other businesses. The following chart
summarizes our corporate structure as of December 31, 2005. The chart also
shows, for each company, our approximate direct or indirect percentage equity
or economic ownership interest. The chart has been simplified to show only our
major holding companies in the principal countries in which we operate and does
not include our intermediary holding companies and our operating company
subsidiaries.
[GRAPHIC OMITTED]
23
North America
For the year ended December 31, 2005, our business in North America,
which includes our operations in Mexico and the United States, represented
approximately 44% of our net sales. As of December 31, 2005, our business in
North America represented approximately 41% of our total installed capacity and
approximately 36% of our total assets.
Our Mexican Operations
Overview
Our Mexican operations represented approximately 19% of our net sales
for the year ended December 31, 2005.
As of December 31, 2005, we owned 100% of the outstanding capital
stock of CEMEX Mexico. CEMEX Mexico is a direct subsidiary of CEMEX and is both
a holding company for some of our operating companies in Mexico and an
operating company involved in the manufacturing and marketing of cement,
plaster, gypsum, groundstone and other construction materials and cement
by-products in Mexico. CEMEX Mexico, indirectly, is also the holding company
for our international operations.
As of December 31, 2005, CEMEX Mexico owned 100% of the outstanding
capital stock of Empresas Tolteca de Mexico. Empresas Tolteca de Mexico is a
holding company for some of our operating companies in Mexico. CEMEX Mexico and
Empresas Tolteca de Mexico, together with their subsidiaries, account for
substantially all the revenues and operating income of our Mexican operations.
In March 2006, we announced a plan to construct a new kiln at our
Yaqui cement plant in Sonora, Mexico in order to increase our cement production
capacity to support strong regional demand due to the continued growth of the
housing market in the Northwest region. The current production capacity of the
Yaqui cement plant is approximately 1.4 million tons per year. The construction
of the new kiln, which is designed to increase our total production capacity in
the Yaqui cement plant to approximately 3.2 million tons per year, is expected
to be completed in 2007. We expect our total capital investment in the
construction of this new kiln over the course of two years will be
approximately U.S.$210 million, including U.S.$30 million during 2006. We
expect that this investment will be fully funded with free cash flow generated
during the two-year construction period.
During the second quarter of 2002, the production operations at our
oldest cement plant (Hidalgo) were suspended. However, as a result of an
expected increase in regional demand, we resumed production operations at this
plant during May 2006.
In 2001, we launched the Construrama program, a registered brand name
for construction material stores. Through the Construrama program, we offer to
an exclusive group of our Mexican distributors the opportunity to sell a
variety of products under the Construrama brand name, a concept that includes
the standardization of stores, image, marketing, products and services. As of
December 31, 2005, more than 700 independent concessionaries with close to
2,100 stores were integrated into the Construrama program in more than 750
towns and cities throughout Mexico.
The Mexican Cement Industry
According to Instituto Nacional de Estadistica, Geografia e
Informatica, total construction output in Mexico grew 3.3% in 2005 compared to
2004. The increase in total construction output in 2005 was primarily driven by
the commercial and industrial housing and infrastructure segments, while the
retail (self-construction) market grew marginally.
24
Cement in Mexico is sold principally through distributors, with the
remaining balance sold through ready-mix concrete producers, manufacturers of
pre-cast concrete products and construction contractors. Cement sold through
distributors is mixed with aggregates and water by the end user at the
construction site to form concrete. Ready-mix concrete producers mix the
ingredients in plants and deliver it to local construction sites in mixer
trucks, which pour the concrete. Unlike more developed economies, where
purchases of cement are concentrated in the commercial and industrial sectors,
retail sales of cement through distributors in 2005 accounted for approximately
70% of Mexico's demand. Individuals who purchase bags of cement for
self-construction and other basic construction needs are a significant
component of the retail sector. We estimate that as much as 45% of total demand
in Mexico comes from individuals who address their own construction needs. We
believe that this large retail sales base is a factor that significantly
contributes to the overall performance of the Mexican cement market.
The retail nature of the Mexican cement market also enables us to
foster brand loyalty, which distinguishes us from other worldwide producers
selling primarily in bulk. We own the registered trademarks for our major
brands in Mexico, such as "Monterrey," "Tolteca" and "Anahuac." We believe that
these brand names are important in Mexico since cement is principally sold in
bags to retail customers who may develop brand loyalty based on differences in
quality and service. In addition, we own the registered trademark for the
"Construrama" brand name for construction material stores.
Competition
In the early 1970s, the Mexican cement industry was regionally
fragmented. However, over the last 30 years, cement producers in Mexico have
increased their production capacity and the Mexican cement industry has
consolidated into a national market, thus becoming increasingly competitive.
The major cement producers in Mexico are CEMEX; Holcim Apasco, an affiliate of
Holcim; Sociedad Cooperativa Cruz Azul, a Mexican operator; Cementos Moctezuma,
an associate of Ciments Molins; Grupo Cementos Chihuahua, a Mexican operator in
which we own a 49% interest; and Lafarge.
Potential entrants into the Mexican cement market face various
impediments to entry, including:
o the time-consuming and expensive process of establishing a retail
distribution network and developing the brand identification
necessary to succeed in the retail market, which represents the
bulk of the domestic market;
o the lack of port infrastructure and the high inland transportation
costs resulting from the low value-to-weight ratio of cement;
o the distance from ports to major consumption centers and the
presence of significant natural barriers, such as mountain ranges,
which border Mexico's east and west coasts;
o the extensive capital investment requirements; and
o the length of time required for construction of new plants, which
is approximately two years.
25
Our Mexican Operating Network
[MAP GRAPHIC OMITTED]
_____________________
(1) In 2002, production operations at the Hidalgo cement plant were suspended,
but were resumed during May 2006.
Currently, we operate 15 plants (including Hidalgo, which resumed
operations during May 2006) and 79 distribution centers (including eight marine
terminals) located throughout Mexico. We operate modern plants on Mexico's
Atlantic and Pacific coasts, allowing us to take advantage of low-cost maritime
transportation to the Asian, Caribbean, Central and South American and U.S.
markets.
Products and Distribution Channels
Cement. Our cement operations represented approximately 73% of our
Mexican operations' net sales in 2005. Our domestic cement sales represented
approximately 94% of our total Mexican cement sales in 2005. As a result of the
retail nature of the Mexican market, our Mexican operations are not dependent on
a limited number of large customers. In 2005, our Mexican operations sold
approximately 60% of their cement sales volume through more than 6,000
distributors throughout the country, most of whom work on a regional basis. The
five most important distributors in the aggregate accounted for approximately 4%
of our Mexican operations' total sales by volume for 2005.
Ready-Mix Concrete. Our ready-mix concrete operations represented
approximately 27% of our Mexican operations' net sales in 2005. Our ready-mix
concrete operations in Mexico purchase all of their cement requirements from our
Mexican cement operations. Ready-mix concrete is sold through our own internal
sales force, which is divided into national accounts that cater to large
construction companies and local representatives that support medium- and
small-sized construction companies.
Exports. Our Mexican operations export a portion of their cement
production. Exports of cement and clinker by our Mexican operations represented
approximately 4% of our Mexican operations' net sales in 2005. In 2005,
approximately 73% of our cement and clinker exports from Mexico were to the
United States, 26% to Central America and the Caribbean and 1% to South America.
Our Mexican operations' cement and clinker exports to the U.S. are
marketed through wholly-owned subsidiaries of CEMEX Corp., the holding company
of CEMEX, Inc. All transactions between CEMEX and the subsidiaries of CEMEX
Corp., which act as our U.S. importers, are conducted on an arm's-length basis.
Since 1990, exports of cement and clinker to the U.S. from Mexico
have been subject to U.S. anti-dumping duties. In March 2006, the Mexican and
U.S. governments entered into an agreement to eliminate U.S. anti-dumping
duties on Mexican cement imports following a three-year transition period
beginning in 2006. During the
26
transition period, Mexican cement imports into the U.S. will be subject to
volume limitations of three million tons per year, which amount may be increased
in response to market conditions during the second and third year of the
transition period, subject to a maximum increase per year of 4.5%. Quota
allocations to Mexican companies that import cement into the U.S. will be made
on a regional basis. The transitional anti-dumping duty during the three-year
transition period was lowered to U.S.$3.00 per ton, effective as of April 3,
2006, from the previous amount of approximately U.S.$26.00 per ton. For a more
detailed description of the terms of the agreement between the Mexican and U.S.
governments, please see "Regulatory Matters and Legal Proceedings --
Anti-Dumping."
Production Costs
Our Mexican operations' cement plants primarily utilize petcoke, but
several are designed to switch to fuel oil and natural gas with minimum
downtime. We have entered into two 20-year contracts, one in 2002 and the other
in 2003, with Petroleos Mexicanos, or PEMEX, pursuant to which PEMEX agreed to
supply us with a total of 1,750,000 tons of petcoke per year. Petcoke is
petroleum coke, a solid or fixed carbon substance that remains after the
distillation of hydrocarbons in petroleum and that may be used as fuel in the
production of cement. The PEMEX petcoke contracts have reduced the volatility of
our fuel costs. In addition, since 1992, our Mexican operations have begun to
use alternate fuels, to further reduce the consumption of residual fuel oil and
natural gas. These alternate fuels represented approximately 2.5% of the total
fuel consumption for our Mexican operations in 2005, and we expect to increase
this percentage to approximately 3.5% to 4% during 2006.
In 1999, we reached an agreement with ABB Alstom Power and Sithe
Energies, Inc. for the financing, construction and operation of "Termoelectrica
del Golfo," a 230 megawatt energy plant in Tamuin, San Luis Potosi, Mexico and
to supply electricity to us for a period of 20 years. We entered into this
agreement in order to reduce the volatility of our energy costs. The total cost
of the project was approximately U.S.$360 million. The power plant commenced
commercial operations on May 1, 2004. As of December 31, 2005, after 20 months
of operation, the power plant has supplied electricity to 10 of our cement
plants in Mexico covering approximately 73% of their needs for electricity and
has represented a decrease of approximately 28% in our cost of electricity at
these plants.
We have, from time to time, purchased hedges from third parties to
reduce the effect of volatility in energy prices in Mexico. See Item 5 -
"Operating and Financial Review and Prospects - Liquidity and Capital
Resources."
Description of Properties, Plants and Equipment
As of December 31, 2005, we had 15 wholly-owned cement plants located
throughout Mexico, with a total installed capacity of 27.2 million tons per
year. As described above, production operations at our Hidalgo cement plant have
been suspended since 2002, but were resumed during May 2006. Our Mexican
operations' most significant gray cement plants are the Huichapan, Tepeaca and
Barrientos plants, which serve the central region of Mexico, the Monterrey,
Valles and Torreon plants, which serve the northern region of Mexico, and the
Guadalajara and Yaqui plants, which serve the Pacific region of Mexico. We have
exclusive access to limestone quarries and clay reserves near each of our plant
sites in Mexico. We estimate that these limestone and clay reserves have an
average remaining life of more than 60 years, assuming 2005 production levels.
As of December 31, 2005, all our production plants in Mexico utilized the dry
process.
As of December 31, 2005, we had a network of 71 land distribution
centers in Mexico, which are supplied through a fleet of our own trucks and rail
cars, as well as leased trucks and rail facilities and eight marine terminals.
In addition, we had more than 250 ready-mix concrete plants throughout 79 cities
in Mexico and more than 1,950 ready-mix concrete delivery trucks.
Capital Investments
We made capital expenditures of approximately U.S.$109 million in 2003,
U.S.$90 million in 2004, and U.S.$102 million in 2005 in our Mexican operations.
We currently expect to make capital expenditures of approximately U.S.$222
million in our Mexican operations during 2006, including those related to the
expansion of the Yaqui cement plant described above.
27
Our U.S. Operations
Overview
Our U.S. operations represented approximately 25% of our net sales for
the year ended December 31, 2005.
As of December 31, 2005, we held 100% of CEMEX, Inc., our operating
subsidiary in the United States.
As of December 31, 2005, our U.S. operations included the operations we
acquired from RMC in March 2005. As of December 31, 2005, we had a cement
manufacturing capacity of approximately 13.3 million tons per year in our U.S.
operations, including nearly 0.7 million tons in proportional interests through
minority holdings. As of December 31, 2005, we operated a geographically diverse
base of 12 cement plants located in Alabama, California, Colorado, Florida,
Georgia, Kentucky, Ohio, Pennsylvania, Tennessee and Texas. As of that date, we
also had 49 rail or water served active cement distribution terminals in the
United States. As of December 31, 2005, we had 235 ready-mix plants located in
the Carolinas, Florida, Georgia, Texas, New Mexico, Nevada, Arizona and
California and aggregates facilities in the Carolinas, Arizona, California,
Florida, Georgia, New Mexico, Nevada and Texas, not including the assets we
contributed to Ready Mix USA, LLC, as described below. We believe that by
combining the acquired assets of RMC with our installed cement capacity in the
United States, we are currently the largest cement and ready-mix supplier in the
United States, based on volumes sold in 2005, and an important supplier of
aggregates.
In addition, with the acquisition of Mineral Resource Technologies,
Inc. in August 2003, we believe that we achieved a competitive position in the
growing fly ash market. Fly ash is a mineral residue resulting from the
combustion of powdered coal in electric generating plants. Fly ash has the
properties of cement and may be used in the production of more durable concrete.
Mineral Resource Technologies, Inc. is one of the four largest fly ash companies
in the United States, providing fly ash to customers in 25 states. We also own
regional pipe and precast businesses, along with concrete block and paver plants
in the Carolinas and Florida, which we acquired from RMC.
On March 31, 2005, we sold our Charlevoix, Michigan and Dixon, Illinois
cement plants and several distribution terminals located in the Great Lakes
region to Votorantim Participacoes S.A., or Votorantim, a cement company in
Brazil, for an aggregate purchase price of approximately U.S.$389 million. The
distribution terminals sold to Votorantim are located in Green Bay, Manitowoc
and Milwaukee, Wisconsin; Chicago, Illinois; Ferrysburg, Michigan; Cleveland and
Toledo, Ohio; and Owen Sound, Ontario, Canada. The combined capacity of the two
cement plants sold to Votorantim was approximately two million tons per year.
On June 1, 2005, we sold a cement terminal adjacent to the Detroit
river to the City of Detroit for a purchase price of approximately U.S.$24
million.
On July 1, 2005, we and Ready Mix USA, Inc., or Ready Mix USA, a
privately-owned ready-mix concrete producer with operations in the southeastern
United States, established two jointly-owned limited liability companies, CEMEX
Southeast, LLC, a cement company, and Ready Mix USA, LLC, a ready-mix concrete
company, to serve the construction materials market in the southeast region of
the United States. Under the terms of the limited liability company agreements
and related asset contribution agreements, we contributed two cement plants
(Demopolis, Alabama and Clinchfield, Georgia) and eleven cement terminals to
CEMEX Southeast, LLC, representing approximately 98% of its contributed capital,
while Ready Mix USA contributed cash to CEMEX Southeast, LLC representing
approximately 2% of its contributed capital. In addition, we contributed our
ready-mix concrete, aggregates and concrete block assets in the Florida
panhandle and southern Georgia to Ready Mix USA, LLC, representing approximately
9% of its contributed capital, while Ready Mix USA contributed all its ready-mix
concrete and aggregate operations in Alabama, Georgia, the Florida panhandle and
Tennessee, as well as its concrete block operations in Arkansas, Tennessee,
Mississippi, Florida and Alabama to Ready Mix USA, LLC, representing
approximately 91% of its contributed capital. We own a 50.01% interest, and
Ready Mix USA owns a 49.99% interest, in the profits and losses and voting
rights of CEMEX Southeast, LLC, while Ready Mix USA owns a 50.01% interest, and
we own a 49.99% interest, in the profits and losses and voting rights of Ready
Mix USA, LLC. CEMEX Southeast, LLC is managed by us, and Ready Mix USA, LLC is
managed by Ready Mix USA.
28
After the third anniversary of the formation of these companies, Ready
Mix USA will have the option, but not the obligation, to require us to purchase
Ready Mix USA's interest in the two companies at a purchase price equal to the
greater of the book value of the companies' assets or a formula based on the
companies' earnings. This option will expire on the twenty fifth anniversary of
the formation of these companies.
In a separate transaction, on September 1, 2005, we sold 27 ready-mix
plants and four concrete block facilities located in the Atlanta, Georgia
metropolitan area to Ready Mix USA, LLC for approximately U.S.$125 million.
As a condition to closing the RMC acquisition, we agreed with the U.S.
Federal Trade Commission, or FTC, to divest several ready-mix and related assets
in the Tucson, Arizona area. Following FTC approval, we sold RMC's operations in
the Tucson area to California Portland Cement Company for a purchase price of
approximately U.S.$16 million on August 29, 2005. We do not believe the
divestiture of these assets will have a material effect on our U.S. operations.
In February 2006, we announced a plan to construct a second kiln at our
Balcones cement plant in New Braunfels, Texas in order to increase our cement
production capacity to support strong demand amidst a shortfall in regional
supplies of cement. The current production capacity of the Balcones cement plant
is approximately 1.1 million tons per year. The construction of the new kiln,
which is designed to increase our total production capacity in the Balcones
cement plant to approximately 2.2 million tons per year, is expected to be
completed in 2008. We expect our total capital investment in the construction of
this new kiln over the course of three years will be approximately U.S.$220
million, including U.S.$57 million during 2006. We expect that this investment
will be fully funded with free cash flow generated during the three-year
construction period.
The Cement Industry in the United States
According to the U.S. Census Bureau, total construction spending in the
U.S. grew 8.9% in 2005 compared to 2004. The increase in total construction
spending in 2005 was primarily driven by strong demand from the residential
sector, increased demand from the public sector and a recovery in industrial and
commercial construction.
Demand for cement is derived from the demand for ready-mix concrete and
concrete products which, in turn, is dependent on the demand for construction.
The construction industry is composed of three major sectors, namely, the
residential sector, the industrial and commercial sector and the public sector.
The public sector is the most cement intensive sector, particularly for
infrastructure projects such as streets, highways and bridges.
Since the early 1990s, cement demand has become less vulnerable to
recessionary pressures than in previous cycles, due to the growing importance of
the generally counter-cyclical public sector. In 2005, according to our
estimates, public sector spending accounted for approximately 50% of the total
cement consumption in the U.S. Strong cement demand over the past decade has
driven industry capacity utilization up to maximum levels. According to the
Portland Cement Association, domestic capacity utilization has been close to 90%
in the last three years.
Competition
As a result of the lack of product differentiation and the commodity
nature of cement, the cement industry in the U.S. is highly competitive. We
compete with national and regional cement producers in the U.S. Our principal
competitors in the United States are Holcim, Lafarge, Buzzi-Unicem, Heidelberg
Cement and Ash Grove Cement.
The independent U.S. ready-mix concrete industry is highly fragmented,
and few producers other than vertically integrated producers have annual sales
in excess of U.S.$6 million or have a fleet of more than 20 mixers. Given that
the concrete industry has historically consumed approximately 75% of all cement
produced annually in the U.S., many cement companies choose to be vertically
integrated.
Aggregates are widely used throughout the U.S. for all types of
construction because they are the most basic materials for building activity.
The U.S. aggregates industry is highly fragmented and geographically dispersed.
29
According to the 2005 U.S. Geological Survey, approximately 4,000 companies
operated approximately 6,500 quarries and pits.
Our United States Cement Operating Network
[MAP GRAPHIC OMITTED]
The map above reflects our cement plants and cement
terminals as of December 31, 2005.
Products and Distribution Channels
Cement. Our cement operations represented approximately 43% of our U.S.
operations' net sales in 2005. We deliver a substantial portion of cement by
rail. Occasionally, these rail shipments go directly to customers. Otherwise,
shipments go to distribution terminals where customers pick up the product by
truck or we deliver the product by truck. The majority of our cement sales are
made directly to users of gray Portland and masonry cements, generally within a
radius of approximately 200 miles of each plant.
Ready-Mix Concrete. Our ready-mix concrete operations represented
approximately 46% of our U.S. operations' net sales in 2005. Our ready-mix
concrete operations in the U.S. purchase most of their cement requirements from
our U.S. cement operations and approximately 40% of their aggregates
requirements from our U.S. aggregates operations. In addition, Ready Mix USA,
LLC, an entity in which Ready Mix USA owns a 50.01% interest and we own a 49.99%
interest, purchases most of its cement requirements from our U.S. cement
operations. Our ready-mix products are mainly sold to residential, commercial
and public contractors and to building companies.
Aggregates. Our aggregates operations represented approximately 11% of
our U.S. operations' net sales in 2005. At 2005 production levels, it is
anticipated that over 71% of our construction aggregates reserves in the U.S.
will last for 10 years or more. Our aggregates are consumed mainly by our
internal operations and by our trade customers in the ready-mix, concrete
products and asphalt industries. Ready Mix USA, LLC purchases most of its
aggregates requirements from third parties.
30
Production Costs
The largest cost components of our plants are electricity and fuel,
which accounted for approximately 39% of our U.S. operations' total production
costs in 2005. We are currently implementing an alternative fuels program to
gradually replace coal with more economic fuels such as petcoke and tires, which
has resulted in reduced energy costs. By retrofitting our cement plants to
handle alternative energy fuels, we have gained more flexibility in supplying
our energy needs and have become less vulnerable to potential price spikes. In
2005, the use of alternative fuels offset the effect on our fuel costs of a
significant increase in coal prices. Power costs in 2005 represented
approximately 18% of our U.S. operations' cash manufacturing cost, which
represents production cost before depreciation. We have improved the efficiency
of our U.S. operations' electricity usage, concentrating our manufacturing
activities in off-peak hours and negotiating lower rates with electricity
suppliers.
Description of Properties, Plants and Equipment
As of December 31, 2005, we operated 12 cement manufacturing plants in
the U.S., with a total installed capacity of 13.3 million tons per year,
including nearly 0.7 million tons in proportional interests through minority
holdings. As of that date, we operated a distribution network of 49 cement
terminals, eight of which are deep-water terminals. All our cement production
facilities in 2005 were wholly-owned except for the Balcones, Texas plant, which
was leased as of December 31, 2005, the Louisville, Kentucky plant, which is
owned by Kosmos Cement Company, a joint venture in which we own a 75% interest
and a subsidiary of Dyckerhoff AG owns a 25% interest, and the Demopolis,
Alabama and Clinchfield, Georgia plants, which are owned by CEMEX Southeast,
LLC, an entity in which we own a 50.01% interest and Ready Mix USA owns a 49.99%
interest. On March 20, 2006, we agreed to terminate the lease on the Balcones
cement plant prior to expiration and purchased the Balcones cement plant for
approximately U.S.$61 million.
As of December 31, 2005, we had 235 ready-mix concrete plants and 47
aggregates quarries in the U.S., all of which are wholly-owned. As of December
31, 2005, we also have interests in 173 ready-mix concrete plants and 10
aggregates quarries in the Florida panhandle and southern Georgia, which are
owned by Ready Mix USA, LLC, an entity in which Ready Mix USA owns a 50.01%
interest and we own a 49.99% interest.
As of December 31, 2005, we distributed fly ash through 20 terminals
and 16 third-party-owned utility plants, which operate both as sources of fly
ash and distribution terminals. As of that date, we also owned 63 concrete
block, paver, pipe and precast facilities, and had interests in 7 concrete
block, paver, pipe and precast facilities, which are owned by Ready Mix USA,
LLC.
Capital Investments
We made capital expenditures of approximately U.S.$97 million in 2003,
U.S.$111 million in 2004, and U.S.$160 million in 2005 in our U.S. operations.
We currently expect to make capital expenditures of approximately U.S.$306
million in our U.S. operations during 2006, including those related to the
expansion of the Balcones cement plant described above. We do not expect to be
required to contribute any funds in respect of the assets of the companies
jointly-owned with Ready Mix USA as capital expenditures during 2006.
Europe
For the year ended December 31, 2005, our business in Europe, which
includes our operations in Spain, the United Kingdom and our Rest of Europe
segment, as described below, represented approximately 34% of our net sales. As
of December 31, 2005, our business in Europe represented approximately 27% of
our total installed capacity and approximately 31% of our total assets.
Our Spanish Operations
Overview
Our Spanish operations represented approximately 9% of our net sales
for the year ended December 31, 2005.
31
As of December 31, 2005, we held 99.7% of CEMEX Espana, S.A., or CEMEX
Espana, our operating subsidiary in Spain. Our cement activities in Spain are
conducted by CEMEX Espana itself and Cementos Especiales de las Islas, S.A., or
CEISA, a joint venture 50% owned by CEMEX Espana and 50% owned by a local cement
producer in the Canary Islands. Our ready-mix concrete activities in Spain are
conducted by Hormicemex, S.A., a subsidiary of CEMEX Espana, and our aggregates
activities in Spain are conducted by Aricemex S.A., a subsidiary of CEMEX
Espana. CEMEX Espana is also a holding company for most of our international
operations.
In connection with the RMC acquisition, we acquired RMC's Spanish
operations, which consisted of ready-mix concrete and aggregates operations in
Spain through Readymix Asland S.A., a joint-venture in which RMC owned 50% and
Lafarge-Asland, a Spanish cement producer, owned 50%. This joint venture
operated a network of 122 ready-mix concrete plants and 12 operating aggregates
quarries, which are predominantly located around Madrid, Barcelona, Valencia and
Alicante. On December 22, 2005, we and Lafarge Asland terminated this joint
venture and another 50/50 joint venture with Lafarge-Asland in Portugal, which
we acquired in the RMC acquisition and which operated 31 ready-mix concrete
plants and five aggregate quarries. Under the terms of the termination
agreement, Lafarge Asland received a 100% interest in both joint ventures and we
received approximately (euro)50 million in cash, as well as 29 ready-mix
concrete plants and six aggregates quarries in Spain (some of these assets were
acquired through the acquisition of 100% of Hormigones Ciudad Real, S.A.).
In March 2006, we announced a plan to invest approximately (euro)47
million in the construction of a new cement mill and dry mortar production plant
in the Port of Cartagena, Spain. The new facilities, which are designed to have
a production capacity of nearly one million tons of cement and 200,000 tons of
dry mortar per year, are expected to be completed in 2008. We expect that this
investment will be fully funded with free cash flow generated during the
construction period.
The Spanish Cement Industry
According to the Asociacion de Fabricantes de Cemento de Espana, or
OFICEMEN, the Spanish cement trade organization, in 2005, the construction
sector of the Spanish economy grew 6.0%, primarily as a result of the growth of
construction in the residential sector of the Spanish economy. According to
OFICEMEN, cement consumption in Spain increased 4.8% in 2003, 3.8% in 2004, and
5.1% in 2005.
During the past several years, the level of cement imports into Spain
has been influenced by the strength of domestic demand and fluctuations in the
value of the Euro against other currencies. Cement imports decreased 19.7% in
2003, 14.6% in 2004, and 1.4% in 2005. Clinker imports have been significant,
with increases of 26.4% in 2003, 6.3% in 2004 and 18.3% in 2005. In any case,
imports primarily had an impact on coastal zones, since transportation costs
make it less profitable to sell imported cement in inland markets.
In the past, Spain has traditionally been one of the leading exporters
of cement in the world exporting up to 6 million tons per year. Nevertheless,
exports of producers in Spain have been reduced in recent years to 1.4 million
tons in 2005 to meet strong domestic demand. Our Spanish operations' cement and
clinker export volumes decreased 21% in 2003, 23% in 2004, and 40% in 2005.
Competition
According to OFICEMEN, as of December 31, 2005, approximately 60% of
installed capacity for production of cement in Spain was owned by five
multinational groups, including CEMEX.
Competition in the ready-mix concrete industry is particularly intense
in large urban areas. Our subsidiary Hormicemex has achieved a sizable market
presence in areas such as Baleares, Canarias, Levante and Aragon. In other
areas, such as the central and Cataluna regions, our market share is smaller due
to greater competition in the relatively larger urban areas. The overall high
degree of competition in the Spanish ready-mix concrete industry has in the past
led to weak pricing. The distribution of ready-mix concrete remains a key
component of CEMEX Espana's business strategy.
32
Our Spanish Operating Network
[MAP GRAPHIC OMITTED]
Products and Distribution Channels
Cement. Our cement operations represented approximately 62% of our
Spanish operations' net sales in 2005. CEMEX Espana offers various types of
cement, targeting specific products to specific markets and users. In 2005,
approximately 15% of CEMEX Espana's domestic sales volumes consisted of bagged
cement through distributors, and the remainder of CEMEX Espana's domestic sales
volumes consisted of bulk cement, primarily to ready-mix concrete operators,
which include CEMEX Espana's own subsidiaries, as well as industrial customers
that use cement in their production processes and construction companies.
Ready-Mix Concrete. Our ready-mix concrete operations represented
approximately 32% of our Spanish operations' net sales in 2005. Our ready-mix
concrete operations in Spain in 2005 purchased almost all of their cement
requirements from our Spanish cement operations and approximately 49% of their
aggregates requirements from our Spanish aggregates operations. In addition, in
2005, we were a significant supplier of cement to the joint venture with Lafarge
Asland that we terminated in December 2005. Ready-mix concrete sales for public
works represented 87% of our total ready-mix concrete sales and sales for
residential and non-residential buildings represented 13% of our total ready-mix
concrete sales in 2005.
Aggregates. Our aggregates operations represented approximately 6% of
our Spanish operations' net sales in 2005.
Exports. Our Spanish operations export a portion of their cement
production. Exports of cement by our Spanish operations represented
approximately 1% of our Spanish operations' net sales in 2005. In general,
despite increases in domestic demand in recent years, we have been able to
export excess capacity through collaboration between CEMEX Espana and our
trading network. Export prices, however, are usually lower than domestic market
prices, and costs are usually higher for export sales. Of our total exports from
Spain in 2005, 86% consisted of white cement and 14% consisted of gray cement.
In 2005, 52% of our exports from Spain were to the United States, 29% to Africa
and 19% to Europe.
33
Production Costs
We have improved the profitability of our Spanish operations by
introducing technological improvements that have significantly reduced our
energy costs, including the use of alternative fuels, in accordance with our
cost reduction efforts. Additionally, the increased capacity in 2002 of the San
Vicente plant (approximately 400,000 tons) has allowed us to reduce the clinker
transportation costs between plants and the need for imported clinker. In 2005,
we burned meal flour, organic waste and tires as fuel, achieving in 2005 a 4.1%
substitution rate for petcoke. During 2006, we expect to increase the quantity
of those alternative fuels and initiate the burning of plastics.
Description of Properties, Plants and Equipment
As of December 31, 2005, our Spanish operations operated eight cement
plants located in Spain, with an installed cement capacity of 11.0 million tons,
including 1.4 tons of white cement. As of that date, we also owned three cement
mills, one of which is held through CEISA, 28 distribution centers, including 10
land and 18 marine terminals, and 12 mortar plants, one of which is held through
CEISA.
As of December 31, 2005, we owned 111 ready-mix concrete plants and 21
aggregate quarries, including the 29 ready-mix concrete plants and six
aggregates quarries we received in the termination of the joint venture we
acquired from RMC, as described above.
As of December 31, 2005, we owned nine limestone quarries located in
close proximity to our cement plants, which have useful lives ranging from 10 to
30 years, assuming 2005 production levels. Additionally, we have rights to
expand those reserves to 50 years of limestone reserves, assuming 2005
production levels.
Capital Investments
We made capital expenditures of approximately U.S.$54 million in 2003,
U.S.$55 million in 2004, and U.S.$66 million in 2005 in our Spanish operations.
We currently expect to make capital expenditures of approximately U.S.$149
million in our Spanish operations during 2006, including those related to the
construction of the new cement mill and dry mortar production plant in the Port
of Cartagena described above.
Our U.K. Operations
Overview
Our U.K. operations represented approximately 9% of our net sales for
the year ended December 31, 2005.
As of December 31, 2005, we held 100% of CEMEX Investments Limited
(formerly RMC Group Limited), our operating subsidiary in the United Kingdom. We
are a leading provider of building materials in the United Kingdom with
vertically integrated cement, ready-mix concrete, aggregates and asphalt
operations. We are also an important provider of concrete and pre-cast materials
solutions such as concrete blocks, concrete block paving, roof tiles, flooring
systems and sleepers for rail infrastructure.
The U.K. Cement Industry
According to Euroconstruct, a leading network for construction, finance
and business forecasting in Europe with member institutes in 19 European
countries, total construction output in the United Kingdom declined 1% in 2005.
The decrease was primarily the result of reductions in public spending in the
infrastructure and public housing, sectors. The increase of construction output
in the industrial, commercial and private housing sectors were not sufficient to
offset the reduction in public spending. According to Cembureau, the
representative organization of the cement industry in Europe, cement consumption
in the United Kingdom for 2005 remained flat at 12.2 million tons.
34
Competition
Our primary competitors in the United Kingdom are Lafarge, Heidelberg,
Hanson, Tarmac and Aggregate Industries (a subsidiary of Holcim), each with
varying regional and product strengths. The high-volume southeastern market is
well-served by our raw-material sources and manufacturing plants.
Our U.K. Operating Network
[MAP GRAPHIC OMITTED]
Products and Distribution Channels
Cement. Our cement operations represented approximately 11% of our U.K.
operations' net sales in 2005. About 90% of our sales were bulk cement while the
additional 10% were in bags. We imported 0.3 million tons of cement, a reduction
of 44% compared to 2004 imports. That was due to an increase in local production
in our three cement plants, which performed at historically high efficiency
levels. Our bulk cement is mainly sold to our ready-mix concrete customers, our
concrete block and pre-cast product customers and contractors. Our bagged cement
is primarily sold to national builders merchants and to "do-it-yourself"
superstores.
Ready-Mix Concrete. Our ready-mix concrete operations represented
approximately 39% of our U.K. operations' net sales in 2005. Our ready-mix
concrete operations in the U.K. in 2005 purchased approximately 50% of their
cement requirements from our U.K. cement operations and approximately 60% of
their aggregates requirements from our U.K. aggregates operations. Our ready-mix
concrete products are mainly sold to residential, commercial and public
contractors.
Aggregates. Our aggregates operations represented approximately 12% of
our U.K. operations' net sales in 2005. In 2005, approximately 40% of our U.K.
aggregates were consumed by our own ready-mix concrete operations as well as our
asphalt, concrete block and pre-cast operations. We also sell aggregates to main
contractors to build roads and other infrastructure projects.
Exports. During 2005, our U.K. operations exported approximately 2.6
million tons of aggregates from our marine aggregates operations. These exports
represented approximately 1% of our U.K. operations' net sales in 2005. The main
markets for our aggregates exports are France, Belgium and the Netherlands. Our
marine aggregates operations operate seven dredger vessels which extract
aggregates from our marine reserves along the U.K. coast.
Production Costs
Cement production costs in our U.K. operations during 2005 improved
dramatically as a result of key initiatives implemented during the integration
process of the operations to CEMEX standards. We increased the efficiency of the
kilns in our three cement plants in the U.K., reaching 87% capacity utilization.
Two of the three cement plants operated beyond 90% capacity utilization. In
addition, we reduced maintenance costs by 46% and reduced fuel consumption by
9%. We also increased the usage of alternative fuels and introduced pet-coke in
two of the three cement plants.
35
During 2005, we also increased the productivity of our U.K. ready-mix
concrete and aggregates operations by closing under-performing operations, and
we increased the utilization of our ready-mix concrete trucks, reducing the need
to hire costly third party trucks. In addition, we reduced our maintenance costs
in our ready-mix concrete and aggregates operations by 14% as a result of the
implementation of preventive maintenance practices across our operations.
Description of Properties, Plants and Equipment
As of December 31, 2005, we operated three cement plants in the United
Kingdom, with an installed cement capacity of 2.7 million tons per year. As of
that date, we also owned a grinding mill, one land terminal and six marine
import terminals and operated 288 ready-mix concrete plants and 103 aggregate
quarries in the United Kingdom. In addition, we have operating units dedicated
to the asphalt, concrete blocks, concrete block paving, roof tiles, sleepers,
flooring and other pre-cast businesses in the United Kingdom.
Capital Investments
We made capital expenditures of approximately U.S.$54 million in 2005
in our U.K. operations. We currently expect to make capital expenditures of
approximately U.S.$107 million in our U.K. operations during 2006.
Our Rest of Europe Operations
Our operations in the Rest of Europe, which, as of December 31, 2005,
consisted of our operations in Germany, France, Ireland, Austria, Poland,
Croatia, the Czech Republic, Denmark, Hungary and Latvia, as well as our
minority interest in Lithuania and our other European assets, represented
approximately 16% of our net sales for the year ended December 31, 2005.
Our German Operations
Overview
As of December 31, 2005, we held 100% of CEMEX Deutschland AG, our
operating subsidiary in Germany. We are a leading provider of building materials
in Germany, with vertically integrated cement, ready-mix concrete, aggregates
and concrete products operations (consisting mainly of prefabricated concrete
ceilings and walls). We maintain a nationwide network for ready-mix concrete and
aggregates in Germany.
The German Cement Industry
According to Euroconstruct, total construction in Germany declined 4.8%
in 2005. The decrease was primarily the result of a decrease of 6.4% in the
civil engineering sector, which includes infrastructure as well as commercial
and industrial construction. According to the German Cement Association, total
cement consumption in Germany declined to 26.9 million tons in 2005, a decrease
of 7%.
Competition
Our primary competitors in the German cement market are Heidelberg,
Dyckerhoff (a subsidiary of Buzzi-Unicem), Lafarge, Holcim and Schwenk, a local
German competitor. The ready-mix concrete and aggregates markets in Germany are
more fragmented, with more participation of local competitors.
36
Our German Operating Network
[MAP GRAPHIC OMITTED]
Description of Properties, Plants and Equipment
As of December 31, 2005, we operated three cement plants in Germany,
with an installed cement capacity of 6.0 million tons per year. As of that date,
we also operated three cement grinding mills, 177 ready-mix concrete plants, 39
aggregate quarries and one land terminal in Germany.
Capital Investments
We made capital expenditures of approximately U.S.$20 million in 2005
in our German operations, and we currently expect to make capital expenditures
of approximately U.S.$44 million in our German operations during 2006.
Our French Operations
Overview
As of December 31, 2005, we held 100% of RMC France SAS, our operating
subsidiary in France. We are a leading ready-mix concrete producer and a leading
aggregates producer in France. We transport a significant quantity of materials
by waterway.
The French Cement Industry
According to Euroconstruct, total construction output in France grew by
3.2% in 2005. The increase was primarily driven by an increase of 9.5% in the
residential construction sector. According to Cembureau, total cement
consumption in France reached 22.5 million tons in 2005, an increase of 2.6%.
Competition
Our main competitors in the ready-mix concrete market in France include
Lafarge, Holcim, Italcementi and Vicat. Our main competitors in the aggregates
market in France include Lafarge, Italcementi, Colas and Eurovia. Many of our
major competitors benefit from manufacturing their own supply of cement within
France, while we must rely on third party cement producers.
Description of Properties, Plants and Equipment
As of December 31, 2005, we operated 233 ready-mix concrete plants in
France, one maritime cement terminal located in LeHavre, on the northern coast
of France, and 41 aggregates quarries. As of that date, we also operated 15
aggregates quarries through joint ventures.
37
Capital Investments
We made capital expenditures of approximately U.S.$20 million in 2005
in our French operations, and we currently expect to make capital expenditures
of approximately U.S.$40 million in our French operations during 2006.
Our Irish Operations
As of December 31, 2005, we held 61.7% of Readymix Plc, our operating
subsidiary in the Republic of Ireland. Our operations in Ireland produce and
supply sand, stone and gravel as well as ready-mix concrete, aggregates, mortar
and concrete products. We are also involved in the production and distribution
of pre-cast, pre-stressed and architectural pre-cast products for distribution
throughout Ireland. As of December 31, 2005, we operated 42 ready-mix concrete
plants and 23 aggregate quarries in Ireland. As of that date, we also operated
three maritime terminals for cement importation for the Republic of Ireland,
Northern Ireland and the Isle of Man. We have a joint venture with Lafarge for
the importation and distribution of cement in the Isle of Man.
According to Euroconstruct, total construction output in Ireland grew
by 3.2% in 2005. The increase was primarily driven by an increase of 11% in the
non-residential construction sector. According to our estimates, total cement
consumption in the Republic of Ireland and Northern Ireland reached 5.1 million
tons in 2005, an increase of 1%.
Our main competitors in the ready-mix concrete and aggregates markets
in Ireland are CRH and Kilsaran.
We made capital expenditures of approximately U.S.$9 million in 2005 in
our Irish operations, and we currently expect to make capital expenditures of
approximately U.S.$20 million in our Irish operations during 2006.
Our Austrian Operations
As of December 31, 2005, we held 100% of CEMEX Austria plc, our
operating subsidiary in Austria. We are a leading participant in the concrete,
aggregates and pre-cast concrete markets in Austria and also produce ready-mix
concrete and admixtures. As of December 31, 2005, we operated 39 ready-mix
concrete plants and 26 aggregate quarries in Austria.
According to Euroconstruct, total construction output in Austria grew
by 1.5% in 2005. The increase was primarily driven by an increase of 2.4% in
non-residential construction in 2005, after a decline of 0.8% in 2004 .
According to Euroconstruct , total cement consumption in Austria reached 4.6
million tons in 2005, an increase of 1.5%.
Our main competitors in the ready-mix concrete and aggregates markets
in Austria are Asamer, Wopfinger and Lafarge.
We made capital expenditures of approximately U.S.$15 million in 2005
in our Austrian operations, and we currently expect to make capital expenditures
of approximately U.S.$7 million in our Austrian operations during 2006.
Our Polish Operations
As of December 31, 2005, we held 100% of CEMEX Polska sp. z.o.o., our
operating subsidiary in Poland. We are a leading provider of building materials
in Poland serving the cement, ready-mix concrete and aggregates markets. As of
December 31, 2005, we operated two cement plants in Poland, with a total
installed cement capacity of 3.1 million tons per year. As of that date, we also
operated two grinding mills, 28 ready-mix concrete plants and three aggregates
quarries in Poland, two wholly owned and one in which we have a 30% interest. As
of that date, we also operated three cement terminals in Poland.
According to Central Statistical Office in Poland, total construction
output in Poland grew by 5.0% in 2005. The increase was primarily driven by an
increase of 7.4% in the civil engineering sector according to the Polish
38
Cement Association. In addition, according to the Polish Cement Association,
total cement consumption in Poland reached 12.2 million tons in 2005, an
increase of 5.9%.
Our primary competitors in the Polish cement, ready-mix concrete and
aggregates markets are Heidelberg, Lafarge, CRH and Dyckerhoff.
On March 2, 2006, we acquired two companies engaged in the ready-mix
concrete and aggregates business in Poland from Unicon A/S, a subsidiary of
Cementir Group, an Italian cement producer, for approximately (euro)12 million.
These companies operate nine ready-mix concrete plants and one aggregates quarry
in Poland. As part of the transaction, we sold 4K Beton A/S, our Danish
subsidiary, which operated 18 ready-mix concrete plants in Denmark, to Unicon
A/S for approximately (euro)22 million. We received net cash proceeds of
approximately (euro)6 million, after cash and debt adjustments, from this
transaction.
We made capital expenditures of approximately U.S.$5 million in 2005 in
our Polish operations, and we currently expect to make capital expenditures of
approximately U.S.$12 million in our Polish operations during 2006.
Our Croatian Operations
As of December 31, 2005, we held 99.24% of Dalmacijacement d.d., our
operating subsidiary in Croatia. We are the largest cement producer in Croatia
based on installed capacity as of December 31, 2005, according to our estimates.
As of December 31, 2005, we operated three cement plants in Croatia, with an
installed capacity of 2.6 million tons per year. As of that date, we also
operated seven cement terminals, two ready-mix facilities and one aggregates
quarry in Croatia.
According to the Croatian Cement Association, total cement consumption
in Croatia reached 2.58 million tons in 2005, an increase of 3.4%.
Our primary competitors in the Croatian cement market are Nexe and
Holcim.
We made capital expenditures of approximately U.S.$5 million in 2005 in
our Croatian operations, and we currently expect to make capital expenditures of
approximately U.S.$8 million in our Croatian operations during 2006.
Our Czech Republic Operations
As of December 31, 2005, we held 100% of CEMEX Czech Republic, s.r.o.,
our operating subsidiary in the Czech Republic. We are a leading producer of
ready-mix concrete and aggregates in the Czech Republic. We also distribute
cement in the Czech Republic. As of December 31, 2005, we operated 46 ready-mix
concrete plants and seven aggregates quarries in the Czech Republic. As of that
date, we also operated one cement grinding mill and one cement terminal in the
Czech Republic.
According to Euroconstruct, total construction output in the Czech
Republic grew by 5.5% in 2005. The increase was primarily driven by growth in
the residential construction sector of around 7.9% in 2005. According to
Euroconstruct , total cement consumption in the Czech Republic reached 4.0
million tons in 2005, an increase of 4.2%.
Our main competitors in the cement, ready-mix concrete and aggregates
markets in the Czech Republic are Heidelberg, Dyckerhoff, Holcim and Lafarge.
We made capital expenditures of approximately U.S.$2 million in 2005 in
our Czech Republic operations, and we currently expect to make capital
expenditures of approximately U.S.$5 million in our Czech Republic operations
during 2006.
39
Our Danish Operations
As of December 31, 2005, we held 100% of 4K Beton A/S, our operating
subsidiary in Denmark. As of December 31, 2005, we operated 18 ready-mix
concrete plants in Denmark.
On March 2, 2006, we sold 4K Beton A/S to Unicon A/S, a subsidiary of
Cementir Group, an Italian cement producer, for approximately (euro)22 million.
As part of the transaction, we purchased from Unicon A/S two companies engaged
in the ready-mix concrete and aggregates business in Poland for approximately
(euro)12 million. These companies operate nine ready-mix concrete plants and one
aggregates quarry in Poland. We received net cash proceeds of approximately
(euro)6 million, after cash and debt adjustments, from this transaction.
We made capital expenditures of approximately U.S.$0.2 million in 2005
in our Danish operations.
Our Hungarian Operations
As of December 31, 2005, we held 100% of Danubiousbeton Betonkeszito
Kft, our operating subsidiary in Hungary. As of December 31, 2005, we operated
27 ready-mix concrete plants and six aggregate quarries in Hungary.
According to Hungarian Statistical Office, total construction output in
Hungary grew by 16.6% in 2005. The increase was primarily driven by the increase
in highway constructions. Total cement consumption in Hungary reached 4.1
million tons in 2005, an increase of 2.5%.
Our main competitors in the ready-mix concrete and aggregates markets
in Hungary are Heidelberg, Strabag and Lasselsberger.
We made capital expenditures of approximately U.S.$10 million in 2005
in our Hungarian operations, and we currently expect to make capital
expenditures of approximately U.S.$8 million in our Hungarian operations during
2006.
Our Latvian Operations
As of December 31, 2005, we held 100% of SIA CEMEX, our operating
subsidiary in Latvia. We are the only cement producer and a leading ready-mix
producer and supplier in Latvia. As of December 31, 2005, we operated one cement
plant in Latvia with an installed cement capacity of 0.4 million tons per year.
As of that date, we also operated three ready-mix concrete plants in Latvia.
In April 2006, we implemented a plan to expand our cement plant in
Latvia in order to increase our cement production capacity by one million tons
per year to support strong demand in the country. The construction is expected
to be completed in 2008. We expect our total capital investment in the capacity
expansion over the course of three years will be approximately U.S.$160 million,
including U.S.$19 million during 2006. We expect that this investment will be
fully funded with consolidated free cash flow generated by CEMEX's worldwide
operations during the three-year construction period.
We made capital expenditures of approximately U.S.$3 million in 2005 in
our Latvian operations, and we currently expect to make capital expenditures of
approximately U.S.$26 million in our Latvian operations during 2006.
Our Lithuanian Equity Investment
As of December 31, 2005, we owned a 34% interest in Akmenes Cementas
AB, a Lithuanian cement producer, which operates one cement plant in Lithuania
with an installed cement capacity of 2.7 million tons per year.
40
Our Italian Operations
As of December 31, 2005, we held 100% of Cementilce S.R.L., our
operating subsidiary in Italy. We are building three grinding mills in Italy,
one with an installed capacity of approximately 450 thousand tons and two others
with installed capacities of 750 thousand tons per year. The smaller mill
started operations at the end of the third quarter of 2005, one of the larger
mills is expected to start operations in the second quarter of 2006, and the
other one in the third quarter of 2007. Our operations in Italy enhance our
trading operations in the Mediterranean region.
We made capital investments of approximately U.S.$13 million during
2003, approximately U.S.$33 million during 2004, and approximately U.S.$33
million in 2005 in our Italian operations, and we currently expect to make
capital investments of approximately U.S.$29 million in our Italian operations
during 2006.
Our Other European Operations
As of December 31, 2005, we operated 11 marine cement terminals in
Finland, Norway and Sweden through Embra AS, a leading bulk-cement importer in
the Nordic region.
South America, Central America and the Caribbean
For the year ended December 31, 2005, our business in South America,
Central America and the Caribbean, which includes our operations in Venezuela,
Colombia, Argentina, Costa Rica, the Dominican Republic, Panama, Nicaragua,
Puerto Rico and Jamaica, as well as other assets in the Caribbean, represented
approximately 9% of our net sales. As of December 31, 2005, our business in
South America, Central America and the Caribbean represented approximately 16%
of our total installed capacity and approximately 7% of our total assets.
Our Venezuelan Operations
Overview
As of December 31, 2005, we held a 75.7% interest in CEMEX Venezuela,
S.A.C.A., or CEMEX Venezuela, our operating subsidiary in Venezuela, which is
listed on the Caracas Stock Exchange. CEMEX Venezuela also serves as the holding
company for our interests in the Dominican Republic, Panama and Trinidad. As of
December 31, 2005, CEMEX Venezuela was the largest cement producer in Venezuela,
based on an installed capacity of 4.6 million tons.
In March 2004, we launched the Construrama program in Venezuela. As
described above, Construrama is a registered brand name for construction
material stores which we have utilized as a marketing strategy in our Mexican
operations since 2001. Through the Construrama program, we offer to a group of
our Venezuelan distributors the opportunity to sell a variety of products under
the Construrama brand name, a concept that includes the standardization of
stores, image, marketing, products and services. As of December 31, 2005, 113
independent concessionaries with 79 stores were integrated into the Construrama
program in Venezuela. By the end of 2006, we expect to have approximately 156
stores under the Construrama program in Venezuela.
The Venezuelan Cement Industry
According to the Venezuelan Cement Producer Association, cement
consumption in Venezuela grew approximately 22.2% in 2005, as the Venezuelan
economy continued to recover from Venezuela's political and economic turmoil
during 2003. In February 2003, Venezuelan authorities imposed foreign exchange
controls and implemented price controls on many products, including cement. In
2005, average inflation in Venezuela was reduced to 14.4%, the Venezuelan
Bolivar depreciated 12% against the Dollar and gross domestic product increased
9.3%. In 2005, a major government housing plan began and is expected to continue
throughout 2006.
41
Competition
As of December 31, 2005, the Venezuelan cement industry included five
cement producers, with a total installed capacity of approximately 10.1 million
tons, according to our estimates. Our global competitors, Holcim and Lafarge,
own controlling interests in Venezuela's second and third largest cement
producers, respectively.
In 2005, the ready-mix concrete market accounted for only about 11% of
cement consumption in Venezuela, according to our estimates. We believe that
Venezuela's construction companies, which typically prefer to install their own
ready-mix concrete plants on-site, are the most significant barrier to
penetration of the ready-mix concrete sector, with the result that on-site
ready-mix concrete mixing represents a high percentage of total ready-mix
concrete production.
Other than CEMEX Venezuela, the ready-mix concrete market in Venezuela
is concentrated in two companies, Premezclado Caribe, which is owned by Holcim,
and Premex, which is owned by Lafarge. The rest of the ready-mix concrete sector
in Venezuela is highly fragmented.
As of December 31, 2005, CEMEX Venezuela was the leading Venezuelan
domestic supplier of cement, based on our estimates of sales of gray and white
cement in Venezuela. In addition, CEMEX Venezuela was the leading domestic
supplier of ready-mix concrete in 2005 with 33 ready-mix production plants
throughout Venezuela.
Our Venezuelan Operating Network
As shown below, CEMEX Venezuela's three cement plants and one grinding
facility are located near the major population centers and the coast of
Venezuela.
[MAP GRAPHIC OMITTED]
Distribution Channels
Transport by land is handled partially by CEMEX Venezuela. During 2005,
approximately 33% of CEMEX Venezuela's total domestic sales were transported
through its own fleet of trucks. CEMEX Venezuela also serves a significant
number of its retail customers directly through its wholly-owned distribution
centers. CEMEX Venezuela's cement is transported either in bulk or in bags.
42
Exports
During 2005, exports from Venezuela represented approximately 21% of
CEMEX Venezuela's net sales. CEMEX Venezuela's main export markets historically
have been the Caribbean and the east coast of the United States. In 2005, 76% of
our exports from Venezuela were to the United States, and 24% were to the
Caribbean.
Description of Properties, Plants and Equipment
As of December 31, 2005, CEMEX Venezuela operated three wholly-owned
cement plants, Lara, Mara and Pertigalete, with a combined installed cement
capacity of approximately 4.6 million tons. As of that date, CEMEX Venezuela
also operated the Guayana grinding facility with a cement capacity of 375,000
tons. As of December 31, 2005, CEMEX Venezuela owned 33 ready-mix concrete
production facilities, one mortar plant and 12 distribution centers. As of that
date, CEMEX Venezuela also owned six limestone quarries with reserves sufficient
for over 100 years at 2005 production levels. During 2005, CEMEX Venezuela
acquired a new limestone quarry in order to supply the Pertigalete plant for the
long term.
The Lara and Mara plants and one production line at the Pertigalete
plant use the wet process; the other production line at the Pertigalete plant
uses the dry process. All the plants use primarily natural gas as fuel, but a
small percentage of diesel fuel is also used at Lara Plant. CEMEX Venezuela has
its own electricity generating facilities, which are powered by natural gas and
diesel fuel.
As of December 31, 2005, CEMEX Venezuela owned and operated four port
facilities, three marine terminals and one river terminal. One port facility is
located at the Pertigalete plant, one at the Mara plant, one at the Catia La Mar
terminal on the Caribbean Sea near Caracas, and one at the Guayana Plant on the
Orinoco River in the Guayana Region.
Capital Investments
We made capital expenditures of approximately U.S.$11 million in 2003,
U.S.$14 million in 2004, and U.S.$23 million in 2005 in our Venezuelan
operations. We currently expect to make capital expenditures of approximately
U.S.$30 million in our Venezuelan operations during 2006.
Our Colombian Operations
Overview
As of December 31, 2005, we owned approximately 99.7% of CEMEX
Colombia, S.A., or CEMEX Colombia, our operating subsidiary in Colombia. As of
December 31, 2005, CEMEX Colombia was the second-largest cement producer in
Colombia, based on installed capacity of 4.8 million tons, according to the
Colombian Institute of Cement Producers.
CEMEX Colombia has a significant market share in the cement and
ready-mix concrete market in the "Urban Triangle" of Colombia comprising the
cities of Bogota, Medellin and Cali. During 2005, these three metropolitan areas
accounted for approximately 50% of Colombia's cement consumption. CEMEX
Colombia's Ibague plant, which uses the dry process and is strategically located
between Bogota, Cali and Medellin, is Colombia's largest and had an installed
capacity of 2.5 million tons as of December 31, 2005. CEMEX Colombia, through
its Bucaramanga and Cucuta plants, is also an active participant in Colombia's
northeastern market. CEMEX Colombia's strong position in the Bogota ready-mix
concrete market is largely due to its access to a ready supply of aggregate
deposits in the Bogota area.
The Colombian Cement Industry
According to the Colombian Institute of Cement Producers, the installed
capacity in Colombia for 2005 was 15.5 million tons. According to such
organization, total cement consumption in Colombia reached 7.8 millions tons
during 2005, an increase of 36.6%, while cement exports from Colombia remained
at 2.1 million tons. We estimate that close to 50% of cement in Colombia is
consumed by the self-construction sector, while the housing
43
sector accounts for 25% of total cement consumption and has been growing since
the 1999 crisis. The other construction segments in Colombia, including the
public works and commercial sectors, account for the balance of cement
consumption in Colombia.
Competition
The Sindicato Antioqueno, or Argos, owns or has interests in eight of
Colombia's eighteen cement plants. Argos has established a leading position in
the Colombian coastal markets through Cementos Caribe in Barranquilla, Compania
Colclinker in Cartagena and Tolcemento in Sincelejo. The other principal cement
producer is Cementos Boyaca, an affiliate of Holcim.
Our Colombian Operating Network
[MAP GRAPHIC OMITTED]
Description of Properties, Plants and Equipment
As of December 31, 2005, CEMEX Colombia owned five cement plants,
one clinker facility and one grinding mill, having a total installed capacity
of 4.8 million tons per year. Two of these plants and the clinker facility
utilize the wet process and three plants utilize the dry process. CEMEX
Colombia also has an internal electricity generating capacity of 24.7
megawatts through a leased facility. As of December 31, 2005, CEMEX Colombia
owned six land distribution centers, one mortar plant, 26 ready-mix concrete
plants, one concrete products plant, and six aggregates operations. As of
that date, CEMEX Colombia also owned eight limestone quarries with minimum
reserves sufficient for over 60 years at 2005 production levels.
Capital Investments
We made capital expenditures of approximately U.S.$6 million in
2003, U.S.$9 million in 2004 and U.S.$7 million in 2005 in our Colombian
operations. We currently expect to make capital investments of approximately
U.S.$15 million in our Colombian operations during 2006.
Our Costa Rican Operations
As of December 31, 2005, we owned a 99.1% interest in CEMEX (Costa
Rica), S.A., or CEMEX (Costa Rica), our operating subsidiary in Costa Rica
and a leading cement producer in the country. As of December 31, 2005, CEMEX
(Costa Rica) operated one cement plant in Costa Rica, with an installed
capacity of 0.9 million tons. As of that date, CEMEX (Costa Rica) also
operated one grinding mill in northwest Costa Rica, with a grinding capacity
of 670,000 tons, and a second grinding mill in the capital San Jose, with a
grinding capacity of 168,000
44
tons. As of December 31, 2005, CEMEX Costa Rica operated six ready-mix plants,
one aggregates quarry, and one land distribution center.
During 2005, exports of cement by our Costa Rican operations
represented approximately 21% of our total cement production in Costa Rica.
In 2005, 15% of our exports from Costa Rica were to Nicaragua, 45% to El
Salvador and 23% to Guatemala, and 17% to other countries in South America
and the Caribbean.
Approximately 1.2 million tons of cement were sold in Costa Rica
during 2005, according to Camara de la Construccion de Costa Rica, the Costa
Rican construction industry association. The Costa Rican cement market is a
predominantly retail market, and we estimate that over three quarters of
cement sold is bagged cement.
The Costa Rican cement industry includes two producers, CEMEX (Costa
Rica) and Holcim Costa Rica.
We made capital expenditures of approximately U.S.$7 million in
2003, U.S.$3 million in 2004 and U.S.$5 million in 2005 in our Costa Rican
operations. We currently expect to make capital expenditures of approximately
U.S.$6 million in our Costa Rican operations during 2006.
Our Dominican Republic Operations
As of December 31, 2005, we held, through CEMEX Venezuela, 99.9% of
CEMEX Dominicana, S.A. (formerly Cementos Nacionales, S.A.), or CEMEX
Dominicana, our operating subsidiary in the Dominican Republic and a leading
cement producer in the country. CEMEX Dominicana's sales network covers the
country's main consumption areas, which are Santo Domingo, Santiago de los
Caballeros, La Vega, San Pedro de Macoris, Azua and Bavaro. CEMEX Dominicana
also has a 25 year lease arrangement with the Dominican Republic government
related to the mining of gypsum, which enables CEMEX Dominicana to supply all
local and regional gypsum requirements.
In June 2003, CEMEX Dominicana announced a U.S.$130 million investment
plan to install a new kiln for producing clinker with an annual capacity of 1.6
million tons of clinker. This new kiln, which increased our total clinker
production capacity in the Dominican Republic to 2.2 million tons per year,
began operations at the end of 2005.
In 2005, Dominican Republic cement consumption reached 3.1 million
tons. Our principal competitors in the Dominican Republic are Domicen, an
Italian cement producer that started cement production in 2005, Cementos Cibao,
a local competitor, Cemento Colon, an affiliate of Holcim and Cementos Andinos,
a Colombian cement producer.
As of December 31, 2005, CEMEX Dominicana operated one cement plant in
the Dominican Republic, with an installed capacity of 2.6 million tons per year
of, and three grinding mills. As of that date, CEMEX Dominicana also operated
seven ready-mix concrete plants, seven distribution centers located throughout
the country and two marine terminals.
We made capital expenditures of approximately U.S.$13 million in 2003,
U.S.$56 million in 2004, and U.S.$87 million in 2005 in our Dominican Republic
operations. We currently expect to make capital investments of approximately
U.S.$22 million in our Dominican Republic operations during 2006.
Our Panamanian Operations
As of December 31, 2005, we held, through CEMEX Venezuela, a 99.3%
interest in Cemento Bayano, S.A., or Cemento Bayano, our operating subsidiary
in Panama and a leading cement producer in the country. As of December 31,
2005, Cemento Bayano operated one cement plant in Panama, with an installed
capacity of 0.5 million tons per year. As of that date, Cemento Bayano also
owned and operated 11 ready-mix concrete plants.
Approximately one million cubic meters of ready-mix concrete were
sold in Panama during 2005, according to the General Comptroller of the
Republic of Panama (Contraloria General de la Republica de Panama). Panamanian
cement consumption decreased 1.3% in 2005, according to our estimates. The
Panamanian cement
45
industry includes two cement producers, Cemento Bayano and Cemento Panama, an
affiliate of Holcim and Cementos del Caribe.
We made capital expenditures of approximately U.S.$8 million in 2003,
U.S.$6 million in 2004, and U.S.$5 million in 2005 in our Panamanian operations.
We currently expect to make capital expenditures of approximately U.S.$6 million
in our Panamanian operations during 2006.
Our Nicaraguan Operations
As of December 31, 2005, we owned 100% of CEMEX Nicaragua, S.A., or
CEMEX Nicaragua, our operating subsidiary in Nicaragua. As of that date, CEMEX
Nicaragua leased and operated one cement plant with an installed capacity of 0.5
million tons. Since March 2003, CEMEX Nicaragua has also leased a 100,000 ton
milling plant in Managua, which has been used exclusively for petcoke milling.
According to our estimates, approximately 600,000 tons of cement were
sold in Nicaragua during 2005. Two market participants compete in the Nicaraguan
cement industry: CEMEX Nicaragua and Holcim.
We made capital expenditures of approximately U.S.$5 million in 2003,
U.S.$3 million in 2004 and U.S.$7 million in 2005 in our Nicaraguan operations.
We currently expect to make capital expenditures of approximately U.S.$5 million
in our Nicaraguan operations during 2006.
Our Puerto Rican Operations
As of December 31, 2005, we owned 100% of CEMEX de Puerto Rico, Inc.
(formerly Puerto Rican Cement Company, Inc.), or CEMEX Puerto Rico, our
operating subsidiary in Puerto Rico. As of December 31, 2005, CEMEX Puerto Rico
operated one cement plant, with an installed cement capacity of approximately
1.1 million tons per year. As of that date, CEMEX Puerto Rico also owned and
operated 26 ready-mix concrete plants, including the 15 ready-mix concrete
plants CEMEX Puerto Rico acquired with its acquisition of Concretera Mayaguezana
in July 2005 for approximately U.S.$26 million.
In 2005, Puerto Rican cement consumption reached 1.8 million tons. The
Puerto Rican cement industry in 2005 was comprised of two cement producers,
CEMEX Puerto Rico, and San Juan Cement Co., an affiliate of Italcementi.
We made capital expenditures of approximately U.S.$26 million in 2003,
U.S.$8 million in 2004, and U.S.$10 million in 2005 in our Puerto Rican
operations. We currently expect to make capital investments of approximately
U.S.$24 million in our Puerto Rican operations during 2006.
Our Argentine Operations
As of December 31, 2005, we held 100% of Readymix Argentina S.A., our
operating subsidiary in Argentina. As of December 31, 2005, we operated four
ready-mix concrete plants in Argentina.
Our Other Operations in the Region
We believe that the Caribbean region holds considerable strategic
importance because of its geographic location. As of December 31, 2005, we
operated a network of eight marine terminals in the Caribbean region, which
facilitated exports from our operations in several countries, including Mexico,
Venezuela, Costa Rica, Puerto Rico, Spain, Colombia and Panama. Three of our
marine terminals are located in the main cities of Haiti, two are in the
Bahamas, one is in Bermuda, one is in Manaus, Brazil and one is in the Cayman
Islands. As of December 31, 2005, we had minority positions in Trinidad Cement
Limited, with cement operations in Trinidad and Tobago, Barbados and Jamaica, as
well as a minority position in Caribbean Cement Company Limited in Jamaica.
In addition, in January 2006, we acquired a grinding mill with a
grinding capacity of 400,000 tons per year in Guatemala for approximately
U.S.$17.4 million.
46
Africa and the Middle East
For the year ended December 31, 2005, our business in Africa and the
Middle East, which includes our operations in Egypt, the United Arab Emirates
and Israel, represented approximately 3% of our net sales. As of December 31,
2005, our business in Africa and the Middle East represented approximately 5% of
our total installed capacity and approximately 2% of our total assets.
Our Egyptian Operations
As of December 31, 2005, we had a 95.8% interest in Assiut Cement
Company, or Assiut, our operating subsidiary in Egypt. As of December 31, 2005,
we operated one cement plant in Egypt, with an installed capacity of
approximately 4.9 million tons. This plant is located approximately 200 miles
south of Cairo and serves the upper Nile region of Egypt, as well as Cairo and
the delta region, Egypt's main cement market. In addition, as of that date we
operated three ready-mix concrete plants in Egypt.
According to our estimates, the Egyptian market consumed approximately
28.1 million tons of cement during 2005. Cement consumption increased by 19.6%
in 2005, due to an economic recovery in Egypt and the positive effect of
Government reforms.
As of December 31, 2005, the Egyptian cement industry had a total of
nine cement producers, with an aggregate annual installed cement capacity of
approximately 40 million tons. According to the Egyptian Cement Council, during
2005, Holcim (minority shareholder in Egyptian Cement Company), Lafarge
(Alexandria Portland Cement and Beni Suef Cement), CEMEX (Assiut) and
Italcementi (Suez Cement, Tourah Cement and Helwan Portland Cement), the four
largest cement producers in the world, represented approximately 72% of the
total installed capacity in Egypt. Other significant competitors in the Egyptian
market are Ameriyah (Cimpor), National, Sinai, Misr Beni Suef and Misr Quena
Cement Companies.
We made capital expenditures of approximately U.S.$14 million in 2003,
U.S.$9 million in 2004, and U.S.$9 million in 2005 in our Egyptian operations.
We currently expect to make capital expenditures of approximately U.S.$15
million in our Egyptian operations during 2006.
Our United Arab Emirates (UAE) Operations
As of December 31, 2005, we held a 49% equity interest in four UAE
companies: RMC Topmix LLC and RMC Supermix LLC, two ready-mix holding companies,
Gulf Quarries Company, an aggregates company, and Falcon Cement LLC, which
specializes in trading. We are not allowed to have a majority interest in these
companies since UAE law requires 51% ownership by UAE nationals. However,
through agreements with other shareholders in these companies, we have purchased
the remaining 51% of the economic benefits in each of the companies. As a
result, we own a 100% economic interest in all four companies. As of December
31, 2005, we operated 13 ready-mix concrete plants in the UAE, serving the
markets of Dubai, Abu Dhabi, Ras Al Khaimah and Sharjah. As of that date, we
also operated an aggregates quarry in the UAE.
In March 2006, we announced a plan to invest approximately U.S.$50
million in the construction of a new grinding facility for cement and slag in
Dubai. The new facility, which is designed to increase our total cement
production capacity in the region to approximately 1.6 million tons per year, is
expected to be completed in 2007. We expect that this investment will be fully
funded with free cash flow generated by CEMEX's worldwide operations during the
construction period.
We made capital expenditures of approximately U.S.$4 million in 2005 in
our UAE operations, and we currently expect to make capital expenditures of
approximately U.S.$44 million in our UAE operations during 2006, including those
related to the construction of the new grinding facility in Dubai described
above.
Our Israeli Operations
As of December 31, 2005, we held 100% of CEMEX Holdings (Israel) Ltd.,
our operating subsidiary in Israel. We are a leading producer and supplier of
raw materials for the construction industry in Israel. In addition to ready-mix
47
concrete products, we produce a diverse range of building materials and
infrastructure products in Israel. As of December 31, 2005, we operated 59
ready-mix concrete plants, one concrete products plant, and one admixtures
plant in Israel.
As of December 31, 2005, we also held 50% of Lime&Stone (L&S) Ltd., a
leading aggregates producer in Israel and an important supplier of lime, asphalt
and marble. As of December 31, 2005, this joint venture operated 11 aggregate
quarries, two asphalt plants, one lime factory and one marble facility.
We made capital expenditures of approximately U.S.$3 million in 2005 in
our Israeli operations, and we currently expect to make capital expenditures of
approximately U.S.$4 million in our Israeli operations during 2006.
Asia
For the year ended December 31, 2005, our business in Asia, which
includes our operations in the Philippines, Thailand and Malaysia, as well as
our minority interest in Indonesia and other assets in Asia, represented
approximately 2% of our net sales. As of December 31, 2005, our business in Asia
represented approximately 11% of our total installed capacity and approximately
3% of our total assets.
Our Philippine Operations
As of December 31, 2005, we held through CAH, 100% of the economic
benefits of our two operating subsidiaries in the Philippines, Solid, and APO
Cement Corporation, or APO.
According to Cement Manufacturers' Association of the Philippines
(CEMAP), cement consumption in the Philippine market, which is primarily retail,
totaled 11.8 million tons during 2005. Although the Philippines has largely
recovered from the 1997 Asian economic recession, Philippine demand for cement
decreased by approximately 5% in 2005.
As of December 31, 2005, the Philippine cement industry had a total of
20 cement plants and three cement grinding mills. Annual installed capacity is
26.8 million tons, according to CEMAP. Major global cement producers own
approximately 88% of this capacity. Our major competitors in the Philippine
cement market are Holcim, which has interests in five local cement plants, and
Lafarge, which has interests in eight local cement plants.
Our Philippine operations include three plants with a total capacity of
5.6 million tons per year and three marine distribution terminals. Our cement
plants include five wet process production lines and three dry process
production lines with an installed cement capacity of 4.1 million tons.
We made capital expenditures of approximately U.S.$2 million in 2003,
U.S.$2 million in 2004, and U.S.$4 million in 2005 in our Philippine operations.
We currently expect to make capital expenditures of approximately U.S.$14
million in our Philippine operations during 2006.
Our Indonesian Equity Investment
As of December 31, 2005, our proportionate economic interest through
CAH in Gresik, Indonesia's largest cement producer, was approximately 25.5%. The
Republic of Indonesia has a 51% interest in Gresik. Currently, we hold two seats
on both the board of directors and the board of commissioners of Gresik, as well
as the right to approve Gresik's business plan jointly with the Indonesian
government.
In October 2001, certain individuals purporting to represent the people
of the Indonesian province of West Sumatra, in which the Padang plant of Gresik
is located, issued a declaration which stated that PT Semen Padang, or Semen
Padang, the 99.99%-owned subsidiary of Gresik that owns and operates the Padang
plant, was placed under the temporary control of the people of West Sumatra. The
declaration ordered the management of Semen Padang to report to the local
government of the West Sumatra Province, under the supervision of the People's
Representative Assembly of West Sumatra, pending a "spin-off" of the Semen
Padang subsidiary. In November 2001, the People's Representative Assembly of
West Sumatra issued a decision approving this declaration on the grounds that
48
the original sale of Semen Padang by the Indonesian government to Gresik in 1995
was invalid, since several necessary approvals were not obtained. We believe the
provincial administration lacks legal authority to direct or interfere with the
affairs of Semen Padang. The former management of Semen Padang refused to
relinquish control until September 2003 when the newly-appointed management was
finally permitted to enter the Padang Facility and assume control of Semen
Padang. However, we believe that the newly-appointed management was admitted on
condition that it encourage a spin-off of Semen Padang, and in October 2003, it
explicitly agreed to do so.
Gresik has experienced other ongoing difficulties at Semen Padang,
including the effective loss of operational and financial control of Semen
Padang, and, until recently, the inability to prepare consolidated financial
statements that include Semen Padang's operations and the inability of its
independent auditors to provide an unqualified audit opinion on such financial
statements. In April 2006, after making several adjustments suggested by its
independent auditors, unqualified audited financial statements for 2004 and 2005
were finally presented by Semen Gresik. As a result of these difficulties, as of
the date of this annual report, we have not been able to independently verify
certain information with respect to Semen Padang's facilities and operations and
thus, the overall description of Gresik's facilities and operations below
assumes the validity and accuracy of the information provided by Semen Padang's
management.
On May 3, 2006, we agreed to sell 24.9% of Gresik to Indonesia-based
Rajawali Group for approximately U.S.$337 million. The purchaser's obligations
under our sales contract are subject to obtaining the approval of the Indonesian
government and the fulfillment of other conditions. In the event this sale is
consummated, our remaining interest in Gresik will be 0.6%.
On May 17, 2006, we received a letter from the Indonesian government
purporting to exercise its right to repurchase, under the 1998 purchase
agreement, pursuant to which we acquired our interest in Gresik, the Gresik
shares we have agreed to sell to the Rajawali Group. However, we believe that
the Indonesian government's purported exercise of this right did not comply with
the requirements set forth in the 1998 purchase agreement, and we are in
correspondence and in discussions with the Indonesian government concerning this
issue. No assurance can be given either that the sale to the Rajawali Group will
be consummated, or that the Indonesian government will purchase the Gresik
shares, on the terms outlined above, or that a sale transaction on similar or
different terms may be consummated with any other purchaser.
For a description of legal proceedings relating to Gresik, please see
"Regulatory Matters and Legal Proceedings -- Other Legal Proceedings."
According to our estimates, Indonesian domestic cement demand increased
approximately 1.0% in 2003, 9.8% in 2004, and 4.2% in 2005. As of December 31,
2005, the Indonesian cement industry had 13 cement plants, including the four
plants owned by Gresik, with a combined installed capacity of approximately 47.5
million tons. Gresik, with an installed capacity of 17.3 million tons, is
Indonesia's largest cement producer.
As of December 31, 2005, Gresik had four cement plants, 25 land
distribution centers and 10 marine terminals. Gresik's cement plants include the
Padang plant, with one production line that utilizes the wet process and four
production lines that utilize the dry process and an installed capacity of 5.6
million tons; the Gresik plant, which has two production lines that utilize the
dry process and an installed capacity of 1.3 million tons; the Tuban plant,
which has three production lines that utilize the dry process and an installed
capacity of 6.9 million tons; and the Tonasa plant, which has three production
lines that utilize the dry process and an installed capacity of 3.5 million
tons. As of December 31, 2005, Gresik was operating at approximately 95%
capacity utilization, including export sales. During 2005, Gresik exported
approximately 13% of its total sales volume, mainly through its own efforts and,
to a lesser extent, through CEMEX's trading operations. Gresik exports mainly to
Sri Lanka and Bangladesh.
Our Thai Operations
As of December 31, 2005, we had a 100% interest in CEMEX (Thailand) Co.
Ltd., or CEMEX (Thailand), our operating subsidiary in Thailand. As of December
31, 2005, we owned one cement plant in Thailand, with an installed capacity of
approximately 0.7 million tons.
49
According to our estimates, at December 31, 2005, the cement industry
in Thailand had a total of 14 cement plants, with an aggregate annual installed
capacity of approximately 55.6 million tons. We estimate that there are five
major cement producers in Thailand, four of which represent 96% of installed
capacity and 97% of the market. Our major competitors in the Thai market, which
have a significantly larger presence than CEMEX (Thailand), are Siam Cement,
Holcim, TPI Polene and Italcementi.
We made capital expenditures of approximately U.S.$2 million in 2003,
U.S.$3 million in 2004, and U.S.$4 million in 2005 in our Thai operations. We
currently expect to make capital expenditures of approximately U.S.$5 million in
our Thai operations during 2006.
Our Malaysian Operations
As of December 31, 2005, we held 100% of RMC Industries (Malaysia) Sdn
Bkd, our operating subsidiary in Malaysia. We are a leading ready-mix concrete
producer in Malaysia, with a significant share in the country's major urban
centers. As of December 31, 2005, we operated 22 ready-mix concrete plants, five
asphalt plants and three aggregate quarries in Malaysia.
Our main competitors in the ready-mix concrete and aggregates markets
in Malaysia are YTL, Lafarge and Hanson.
We made capital expenditures of approximately U.S.$1 million in 2005 in
our Malaysian operations, and we currently expect to make capital expenditures
of approximately U.S.$2 million in our Malaysian operations during 2006.
Other Asian Investments
Since April 2001, we have been operating a grinding mill with cement
milling production capacity of 520,000 tons per year near Dhaka, Bangladesh. A
majority of the supply of clinker for the mill is produced by our operations in
the region. In addition, since June 2001, we have also operated a cement
terminal in the port of Taichung located on the west coast of Taiwan.
Our Trading Operations
We traded approximately 16 million tons of cement and clinker in 2005.
Approximately 51% of the volume we traded in 2005 consisted of exports from our
operations in Costa Rica, Croatia, Egypt, Germany, Mexico, Philippines, Poland,
Puerto Rico, Spain and Venezuela. Approximately 49% was purchased from third
parties in countries such as Belgium, China, Egypt, France, Indonesia, Israel,
Japan, Lithuania, South Korea, Taiwan, Thailand and Turkey. In 2005, we expanded
our trading activities to 97 countries from 76 countries in 2004. This broadened
geographic coverage allows us to serve new markets in Northern Europe, the
Middle East and Australia through an enhanced trading network. In 2005, we also
gained an important presence in slag cement trading markets, particularly in
Europe and the Middle East, having traded approximately 1.5 million tons of slag
cement in 2005. Slag cement (also called ground granulated blast furnace slag)
is a hydraulic cement produced during the reduction of iron ore to iron in a
blast furnace.
Our trading network enables us to maximize the capacity utilization of
our facilities worldwide while reducing our exposure to the inherent cyclicality
of the cement industry. We are able to distribute excess capacity to regions
around the world where there is demand. In addition, our worldwide network of
strategically located marine terminals allows us to coordinate maritime
logistics on a global basis and minimize transportation expenses. Our trading
operations also enable us to explore new markets without significant initial
capital investment.
Regulatory Matters and Legal Proceedings
A description of material regulatory and legal matters affecting us is
provided below.
50
Tariffs
The following is a discussion of tariffs on imported cement in our
major markets.
Mexico
Mexican tariffs on imported goods vary by product and have been as
high as 100%. In recent years, import tariffs have been substantially reduced
and currently range from none at all for raw materials to over 20% for finished
products, with an average weighted tariff of approximately 3.7%. As a result of
the North American Free Trade Agreement, or NAFTA, as of January 1, 1998, the
tariff on cement imported into Mexico from the United States or Canada was
eliminated. However, a tariff in the range of 13% ad valorem will continue to
be imposed on cement produced in all other countries unless tariff reduction
treaties are implemented or the Mexican government unilaterally reduces that
tariff. While the reduction in tariffs could lead to increased competition from
imports in our Mexican markets, we anticipate that the cost of transportation
from most producers outside Mexico to central Mexico, the region of highest
demand, will remain an effective barrier to entry.
United States
There are no tariffs on cement imported into the United States from
any country, except Cuba and North Korea.
Europe
Member countries of the European Union are subject to the uniform
European Union commercial policy. There is no tariff on cement imported into a
country that is a member of the European Union from another member country or
on cement exported from a European Union country to another member country. For
cement imported into a member country from a non-member country, the tariff is
currently 1.7% of the customs value. Any country with preferential treatment
with the European Union is subject to the same tariffs as members of the
European Union. Most Eastern European producers who export cement into European
Union countries currently pay no tariff.
Environmental Matters
We are subject to a broad range of environmental laws and regulations
in each of the jurisdictions in which we operate. These laws and regulations
impose increasingly stringent environmental protection standards regarding,
among other things, air emissions, wastewater discharges, the use and handling
of hazardous waste or materials, waste disposal practices and the remediation
of environmental damage or contamination. These standards expose us to the risk
of substantial environmental costs and liabilities, including liabilities
associated with divested assets and past activities, even where conducted by
prior owners or operators and, in some jurisdictions, without regard to fault
or the lawfulness of the original activity.
To prevent, control and remediate environmental problems and maintain
compliance with regulatory requirements, we maintain an environmental policy
designed to monitor and control environmental matters. Our environmental policy
requires each subsidiary to respect local laws and meet our own internal
standards to minimize the use of non-renewable resources and the generation of
hazardous and other wastes. We use processes that are designed to reduce the
impact of our operations on the environment throughout all the production
stages in all our operations worldwide. We believe that we are in substantial
compliance with all material environmental laws applicable to us.
We regularly incur capital expenditures that have an environmental
component or that are impacted by environmental regulations. However, we do not
keep separate accounts for such mixed capital and environmental expenditures.
Environmental expenditures that extend the life, increase the capacity, improve
the safety or efficiency of assets or are incurred to mitigate or prevent
future environmental contamination may be capitalized. Other environmental
costs are expensed when incurred. For the years ended December 31, 2003, 2004
and 2005, environmental capital expenditures and remediation expenses were not
material. However, our environmental expenditures may increase in the future.
51
The following is a discussion of the environmental regulation and
matters in our major markets.
Mexico
We were one of the first industrial groups in Mexico to sign an
agreement with the Secretaria del Medio Ambiente y Recursos Naturales, or
SEMARNAT, the Mexican government's environmental ministry, to carry out
voluntary environmental audits in our 15 Mexican cement plants under a
government-run program. In 2001, the Mexican environmental protection agency in
charge of the voluntary environmental auditing program, the Procuraduria Federal
de Proteccion al Ambiente, or PROFEPA, which is part of SEMARNAT, completed
auditing our 15 cement plants and awarded all our plants, including our Hidalgo
plant, a Certificado de Industria Limpia, Clean Industry Certificate, certifying
that our plants are in full compliance with environmental laws. The Clean
Industry Certificates are strictly renewed every two years. As of the date of
this annual report, 14 of the cement plants have a Clean Industry Certificate.
The Certificates for Atotonilco, Huichapan, Merida, Yaqui, Hermosillo, Tamuin,
Valles, Zapotiltic and Torreon are expected to be renewed at the end of 2006;
the Certificates for Barrientos, Tepeaca and Guadalajara are valid until 2007;
and the Certificates for Monterrey and Ensenada are valid until 2008. The
Certificate for the Hildalgo plant has expired since operations were halted in
2002, but operations resumed during May 2006. Now that operations at the Hidalgo
plant have resumed, we will request that PROFEPA audit the plant and grant it a
Clean Industry Certificate.
For over a decade, the technology for recycling used tires into an
energy source has been employed in our Ensenada and Huichapan plants. Our
Monterrey and Hermosillo plants started using tires as an energy source in
September 2002 and November 2003, respectively. In 2004, our Yaqui, Tamuin,
Guadalajara and Barrientos plants also started using tires as an energy source,
and as of the end of 2005, all our cement plants in Mexico use tires as an
alternative fuel. Municipal collection centers in Tijuana, Mexicali, Ensenada,
Mexico City, Reynosa, Nuevo Laredo and Guadalajara currently enable us to
recycle an estimated 10,000 tons of tires per year. Overall, approximately 2.39%
of the total fuel used in our 14 operating cement plants in Mexico during 2005
was comprised of alternative substituted fuels.
Between 1999 and 2005, our Mexican operations have invested
approximately US $35.3 million in the acquisition of environmental protection
equipment and the implementation of the ISO 14001 environmental management
standards of the International Organization for Standardization, or ISO.
Currently, our 14 operating cement plants in Mexico and an aggregates plant in
Monterrey have the ISO 14001 certification for environmental management systems.
The audit to obtain the renewal of the ISO 14001 certification took place during
first week of April 2006, and we believe the renewal will be obtained soon
during the second half of 2006.
United States
CEMEX, Inc. is subject to a wide range of U.S. Federal, state and local
laws, regulations and ordinances dealing with the protection of human health and
the environment. These laws are strictly enforced and can lead to significant
monetary penalties for noncompliance. These laws regulate water discharges,
noise, and air emissions, including dust, as well as the handling, use and
disposal of hazardous and non-hazardous waste materials. These laws also create
a shared liability by responsible parties for the cost of cleaning up or
correcting releases to the environment of designated hazardous substances. We
therefore may have to remove or mitigate the environmental effects of the
disposal or release of these substances at CEMEX, Inc.'s various operating
facilities or elsewhere. We believe that our current procedures and practices
for handling and managing materials are generally consistent with the industry
standards and legal and regulatory requirements and that we take appropriate
precautions to protect employees and others from harmful exposure to hazardous
materials.
Several of CEMEX, Inc.'s previously owned and currently owned
facilities have become the subject of various local, state or Federal
environmental proceedings and inquiries in the past. While some of these matters
have been settled, others are in their preliminary stages and may not be
resolved for years. The information developed to date on these matters is not
complete. CEMEX, Inc. does not believe it will be required to spend
significantly more on these matters than the amounts already recorded in our
consolidated financial statements included elsewhere in this annual report.
However, it is impossible for CEMEX, Inc. to determine the ultimate cost that it
might incur in connection with such environmental matters until all
environmental studies and investigations, remediation work, negotiations with
other parties that may be responsible, and litigation against other potential
52
sources of recovery have been completed. With respect to known environmental
contingencies, CEMEX, Inc. has recorded provisions for estimated probable
liabilities and does not believe that the ultimate resolution of such matters
will have a material adverse effect on our financial results.
Europe
In 2003, the European Union adopted a directive implementing the Kyoto
Protocol on climate change and establishing a greenhouse gas emissions allowance
trading scheme within the European Union. The directive requires Member States
to impose binding caps on carbon dioxide emissions from installations involved
in energy activities, the production and processing of ferrous metals, the
mineral industry (including cement production) and the pulp, paper or board
production business. Under this scheme, companies with operations in these
sectors receive from the relevant Member States allowances that set limitations
on the levels of greenhouse gas emissions from their installations. These
allowances are tradable so as to enable companies that manage to reduce their
emissions to sell their excess allowances to companies that are not reaching
their emissions objectives. Companies can also use credits issued from the use
of the flexibility mechanisms under the Kyoto protocol to fulfill their European
obligations. These flexibility mechanisms provide that credits (equivalent to
allowances) can be obtained by companies for projects that reduce greenhouse gas
emissions in emerging markets. These projects are referred to as Clean
Development Mechanism (CDM) or joint implementation projects depending on the
countries where they take place. Failure to meet the emissions caps is subject
to heavy penalties.
As required by the directive, each of the Member States established a
national allocation plan setting out the allowance allocations for each
industrial facility for the initial period of three years, from 2005 to 2007. As
of March 31, 2006, the European Commission has approved the national allocation
plan of most Member States, including all the European countries in which we
have operations, except Poland.
We have received the carbon dioxide allowance allocation from the
environmental agencies of the different Member States where we have operations
for the 2005 to 2007 period. Based on our production forecasts, on a
consolidated basis after trading allowances between our operations in countries
with a deficit of allowances and our operations in countries with an excess of
allowances, we expect to have a surplus of allowances averaging approximately
600 thousand tons of carbon dioxide per year for that period. For the next
allocation period comprising 2008 through 2012, however, we expect a reduction
in the allowances granted by the environmental agencies in substantially all the
Member States, which may result in a consolidated deficit in our carbon dioxide
allowances during that period. We believe we may be able to reduce the impact of
any deficit by either reducing carbon dioxide emissions in our facilities or by
implementing CDM projects in emerging markets authorized by the United Nations.
If we are not successful in implementing emission reductions in our facilities
or obtaining credits from CDM projects, we may have to purchase a significant
amount of allowances in the market, the cost of which may have an impact on our
operating results. As of March 31, 2006, the market value of carbon dioxide
allowances was approximately (euro)30 per ton.
Anti-Dumping
U.S. Anti-Dumping Rulings--Mexico
Our exports of Mexican gray cement from Mexico to the United States
are subject to an anti-dumping order that was imposed by the Commerce
Department on August 30, 1990. Pursuant to this order, firms that import gray
Portland cement from our Mexican operations in the United States must make cash
deposits with the U.S. Customs Service to guarantee the eventual payment of
anti-dumping duties. As a result, since that year and until April 3, 2006, we
have paid anti-dumping duties for cement and clinker exports to the United
States at rates that have fluctuated between 37.49% and 80.75% over the
transaction amount. Beginning in August 2003, we paid anti-dumping duties at a
fixed rate of approximately U.S.$52.41 per ton, which decreased to U.S.$32.85
per ton starting December 2004 and to U.S.$26.28 per ton in January 2006. Over
the past decade, we have used all available legal resources to petition the
Commerce Department to revoke the anti-dumping order, including the petitions
for "changed circumstances" reviews from the International Trade Commission, or
ITC, and the appeals to NAFTA described below. As described below, during the
first quarter of 2006, the U.S. and Mexican governments entered into an
agreement pursuant to which restrictions imposed by the United States on
Mexican cement imports will be eased during a three-year transition period and
completely eliminated following the transition period.
53
U.S. Anti-Dumping Sunset Reviews
Under the U.S. anti-dumping and countervailing duty laws, the Commerce
Department and the ITC are required to conduct "sunset reviews" of outstanding
anti-dumping orders, countervailing duty orders and suspension agreements every
five years. At the conclusion of these reviews, the Commerce Department is
required to terminate the order or suspension agreement unless the agencies have
found that termination is likely to lead to continuation or recurrence of
dumping, or a subsidy in the case of countervailing duty orders, and material
injury.
In July 2000, following a "sunset review," the Commerce Department
determined not to revoke the anti-dumping order on imports from Mexico. On
October 5, 2000, the ITC found likelihood of injury to the U.S. industry and
determined not to revoke this anti-dumping order. On September 19, 2001, CEMEX
filed a petition for a "changed circumstances" review. The ITC decided in
December 2001 not to initiate such a review. CEMEX appealed the ITC's decision
in the "sunset review" and the "changed circumstances" review to NAFTA. On
April 7, 2005, a NAFTA panel heard oral arguments and on June 24, 2005,
remanded the matter to the ITC with instructions to reconsider its likelihood
of injury determination. On September 22, 2005, the ITC reported back to the
NAFTA panel, recommending by a three-to-two vote not to revoke the anti-dumping
order on imports from Mexico. We believe the ITC's determination on remand did
not comply with the guidelines set by the NAFTA panel for such determination,
and we presented our arguments before the NAFTA panel on November 9, 2005.
However, as a result of the settlement between the U.S. and Mexican governments
described below, this matter was settled in March 2006.
U.S./Mexico Anti-Dumping Settlement Agreement
On January 19, 2006, officials from the Mexican and the United States
governments announced that they had reached an agreement in principle that will
bring to an end the long-standing dispute over anti-dumping duties on Mexican
cement exports to the United States. According to the agreement, restrictions
imposed by the United States will first be eased during a three-year transition
period and completely eliminated in early 2009 if Mexican cement producers abide
by its terms during the transition period, allowing cement from Mexico to enter
the U.S. without duties or other limits on volumes. During the transition
period, Mexican cement imports into the U.S. will be subject to volume
limitations of three million tons per year, which amount may be increased in
response to market conditions during the second and third year of the transition
period, subject to a maximum increase per year of 4.5%. Quota allocations to
companies that import Mexican cement into the United States will be made on a
regional basis. The anti-dumping duty during the three-year transition period
was lowered to U.S.$3.00 per ton, effective as of April 3, 2006, from the
previous amount of U.S.$26.28 per ton.
On March 6, 2006, the Office of the United States Trade Representative
and the Commerce Department entered into an agreement with the Secretaria de
Economia of Mexico providing for the settlement of all administrative reviews
and all litigation pending before NAFTA and World Trade Organization panels
challenging various anti-dumping determinations involving Mexican cement. As
part of the settlement the Commerce Department agreed to compromise its claims
for duties with respect to imports of Mexican cement. The Commerce Department
and the Secretaria de Economia will monitor the regional export limits through
export and import licensing systems. The agreement provides that upon the
effective date of the agreement, on April 3, 2006, the Commerce Department will
order the U.S. Customs Service to liquidate all entries covered by all the
completed administrative reviews for the periods from August 1, 1995 through
July 31, 2005, plus the unreviewed entries made between August 1, 2005 and April
2, 2006, and refund the cash deposits in excess of 10 cents per metric ton. As a
result of this agreement, refunds from the U.S. government associated with the
historic anti-dumping duties will be shared among the various Mexican and
American cement industry participants. We expect to receive approximately
U.S.$100 million in refunds under the agreement during 2006.
As of December 31, 2005, CEMEX Corp., the parent company of our U.S.
subsidiaries that import Mexican cement into the United States, had accrued
liabilities of approximately U.S.$68 million, including accrued interest, for
the difference between the amount of anti-dumping duties paid on imports and the
latest findings by the Commerce Department in its administrative reviews. As a
result of the settlement between the U.S. and Mexican governments described
above, substantially all the liabilities accrued for past anti-dumping duties
were eliminated in March 2006.
54
Anti-Dumping in Taiwan
Five Taiwanese cement producers -- Asia Cement Corporation, Taiwan
Cement Corporation, Lucky Cement Corporation, Hsing Ta Cement Corporation and
China Rebar -- filed before the Tariff Commission under the Ministry of Finance
(MOF) of Taiwan an anti-dumping case involving imported gray Portland cement and
clinker from the Philippines and Korea.
In July 2001, the MOF informed the petitioners and the respondent
producers in exporting countries that a formal investigation had been initiated.
Among the respondents in the petition are APO, Rizal and Solid, indirect
subsidiaries of CEMEX.
In June 2002, the International Trade Commission under the Ministry of
Economic Affairs (ITC-MOEA) notified respondent producers that its final injury
investigation concluded that the imports from South Korea and the Philippines
caused material injury to the domestic industry in Taiwan.
In July 2002, the MOF notified the respondent producers that a dumping
duty would be imposed on Portland cement and clinker imports from the
Philippines and South Korea commencing from July 19, 2002. The duty rate imposed
on imports from APO, Rizal and Solid was fixed at 42%.
In September 2002, APO, Rizal and Solid filed before the Taipei High
Administrative Court an appeal in opposition to the anti-dumping duty imposed
by the MOF. In August 2004, we received a copy of the decision of the Taipei
Administrative High Court, which was adverse to our appeal. The decision has
since become final. This anti-dumping duty is subject to review by the
government after five years following its imposition. If following that review
the government determines that the circumstances giving rise to the
anti-dumping order have changed and that the elimination of the duty would not
harm the domestic industry, the government may decide to revoke the
anti-dumping duty.
Tax Matters
As of December 31, 2005, we and some of our Mexican subsidiaries have
been notified of several tax assessments determined by the Mexican tax office
with respect to the tax years from 1992 through 1996 in a total amount of
approximately Ps742 million (U.S.$70 million). The tax assessments are based
primarily on: (i) recalculations of the inflationary tax deduction, since the
tax authorities claim that "Advance Payments to Suppliers" and "Guaranty
Deposits" are not by their nature credits, (ii) disallowed restatement of tax
loss carryforwards in the same period in which they occurred, (iii) disallowed
determination of tax loss carryforwards, and (iv) disallowed amounts of business
asset tax, commonly referred to as BAT, creditable against the controlling
entity's income tax liability on the grounds that the creditable amount should
be in proportion to the equity interest that the controlling entity has in its
relevant controlled entities. We have filed an appeal for each of these tax
claims before the Mexican federal tax court, and the appeals are pending
resolution.
In addition, during May 2006, we and some of our Mexican subsidiaries
were notified by the Mexican tax office of several tax assessments with respect
to tax years 1992 and 2002 in a total amount of approximately Ps3,793 million
(U.S.$335 million). The tax assessments are based primarily on: (i) disallowed
restatement of consolidated tax loss carryforwards in the same period in which
they occurred and (ii) investments made in entities incorporated in foreign
countries with preferential tax regimes (Regimenes Fiscales Preferentes). We
plan to contest these tax claims, and we are in the process of filing an appeal
for each of these tax claims before the Mexican federal tax court. If we fail to
obtain favorable rulings on appeal, these tax claims may have a material impact
on us.
Pursuant to amendments to the Mexican income tax law (ley del
impuesto sobre la renta), which became effective on January 1, 2005, Mexican
companies with direct or indirect investments in entities incorporated in
foreign countries whose income tax liability in those countries is less than
75% of the income tax that would be payable in Mexico will be required to pay
taxes in Mexico on passive income such as dividends, royalties, interests,
capital gains and rental fees obtained by such foreign entities, provided that
the income is not derived from entrepreneurial activities in such countries
(income derived from entrepreneurial activities is not subject to tax under
these amendments). The tax payable by Mexican companies in respect of the 2005
tax year pursuant to these amendments was due upon filing their annual tax
returns in March 2006. We believe these amendments are contrary
55
to Mexican constitutional principles, and on August 8, 2005, we filed a motion
in the Mexican federal courts challenging the constitutionality of the
amendments. On December 23, 2005, we obtained a favorable ruling from the
Mexican federal court that the amendments were unconstitutional; however, the
Mexican tax authority has appealed this ruling. If the final ruling is not
favorable to us, these amendments may have a material impact on us.
As of December 31, 2005, the Philippine Bureau of Internal Revenue, or
BIR, assessed APO and Solid, our operating subsidiaries in Philippines, for
deficiencies in the amount of income tax paid in prior tax years amounting to a
total of approximately PhP3,119 million (approximately U.S.$59 million as of
December 31, 2005, based on an exchange rate of PhP53.09 to U.S.$1.00, which
was the Philippine Peso/Dollar exchange rate on December 31, 2005 as published
by the Bangko Sentral ng Pilipinas, the central bank of the Republic of the
Philippines). The tax assessments result primarily from: (i) the disallowance
of APO's income tax holiday related income from 1998 to 2001; and (ii)
deficiencies in national taxes paid by APO for the 1999 tax year and by Solid
for the 2000 tax year. In the first case, we have contested the BIR's
assessment with the Court of Tax Appeal, or CTA. In the second case, both APO
and Solid continue to submit relevant evidence to the BIR to contest these
assessments and intend to contest these assessments with the CTA in case the
BIR issues a final collection letter. In addition, Solid's 1998 and 2002
through to 2004 tax years, and APO's 2000 through 2004 tax years are under
preliminary review by the BIR for deficiency in the payment of taxes. As of the
date of this annual report, the finalization of these assessments was held in
abeyance by the BIR as APO and Solid continue to present evidence to dispute
its findings. We believe that these assessments will not have a material
adverse effect on us. However, an adverse resolution of these assessments could
have a material adverse effect on our results of operations in the Philippines.
Other Legal Proceedings
In May 1999, several companies filed a civil liability suit in the
civil court of the circuit of Ibague, Colombia, against two of our Colombian
subsidiaries, alleging that these subsidiaries were responsible for
deterioration of the rice production capacity of the land of the plaintiffs
caused by pollution from our cement plants located in Ibague, Colombia. On
January 13, 2004, CEMEX Colombia was notified of the judgment the court entered
against CEMEX Colombia which awarded damages to the plaintiffs in the amount of
CoP21,114 million (approximately U.S.$8 million as of December 31, 2005, based
on an exchange rate of CoP2,284.22 to U.S.$1.00, which was the Colombian
Peso/Dollar exchange rate on December 31, 2005 as published by the Banco de la
Republica de Colombia, the central bank of Colombia). On January 15, 2004,
CEMEX Colombia appealed the judgment. The appeal was admitted and the case was
sent to the Tribunal Superior de Ibague, where CEMEX Colombia filed, on March
23, 2004, a statement of the arguments supporting its appeal. The case is
currently under review by the appellate court. We expect this proceeding to
continue for several years before final resolution.
In March 2001, 42 transporters filed a civil liability suit in the
civil court of Ibague, Colombia, against three of our Colombian subsidiaries.
The plaintiffs content that these subsidiaries are responsible for alleged
damages caused by breach of raw material transportation contracts. The
plaintiffs asked for relief in the amount of CoP130,201 million (approximately
U.S.$57 million as of December 31, 2005). On February 23, 2006, CEMEX was
notified of the judgment of the court dismissing the claims of the plaintiffs.
The case is currently under review by the appellate court.
On August 5, 2005, a lawsuit was filed against a subsidiary of CEMEX
Colombia, claiming that it was liable along with the other members of the
Asociacion Colombiana de Productores de Concreto, or ASOCRETO, a union formed
by all the ready-mix producers in Colombia, for the premature distress of the
roads built for the mass public transportation system of Bogota using ready-mix
concrete supplied by CEMEX Colombia and other ASOCRETO members. The plaintiffs
allege that the base material supplied for the road construction failed to meet
the quality standards offered by CEMEX Colombia and the other ASOCRETO members
and/or that they provided insufficient or inaccurate information in connection
with the product. The plaintiffs seek the repair of the roads in a manner which
guarantees their service during the 20-year period for which they were
originally designed and estimate that the cost of such repair will be
approximately U.S.$45 million. The court completed the evidentiary stage, and
its decision is pending. We are not able to assess the likelihood of an adverse
result in this lawsuit or the potential damages which could be borne by CEMEX
Colombia.
In March 2003, a lawsuit was filed in the Indonesian province of West
Sumatra in the Padang District Court against (i) Gresik, an Indonesian cement
producer in which we own a 25.5% interest through CAH and the
56
Republic of Indonesia owns a 51% interest, (ii) Semen Padang, a 99.9%-owned
subsidiary of Gresik that owns and operates Gresik's Padang cement plant, and
(iii) several Indonesian government agencies. The lawsuit, which was filed by
a foundation purporting to act in the interest of the people of West Sumatra,
challenged the validity of the sale of Semen Padang by the Indonesian
government to Gresik in 1995 on the grounds that the Indonesian government did
not obtain the necessary approvals for such sale. On May 9, 2003, the Padang
District Court issued an interim decision suspending Gresik's rights as a
shareholder in Semen Padang on the grounds that ownership of Semen Padang was
an issue in dispute. The District Court further announced its final decision
in favor of the foundation on March 31, 2004. Gresik appealed the decision to
the High Court of West Sumatra which subsequently ruled in favor of Gresik and
annulled the March 31, 2004 decision of the District Court. According to the
High Court, the foundation did not have legal standing to file the claim based
on the Indonesian laws on environment, consumer protection and forestry. The
case is currently at the annulment stage pending final decision by the Supreme
Court.
In addition to the case outlined in the preceding paragraph, there are
two other formal legal proceedings relating to the change of management at
Semen Padang as resolved during its Extraordinary General Meeting of
Shareholders (EGMS) on May 12, 2003. In one case, filed by the Employees'
Cooperative of Semen Padang, the District Court of Padang on January 29, 2004
ruled that the replacement of management at Semen Padang based on the EGMS was
legally valid. An appeal of that decision by the former presidents of the board
of directors and board of commissioners of Semen Padang was then filed with the
High Court of West Sumatra, which appeal was rejected on June 2, 2005 on the
grounds that the former presidents lacked standing to act for and on behalf of
the boards. The case is now pending final decision at the annulment stage by
the Supreme Court. In the other proceeding, certain members of the former
management of PT Semen Padang have filed a request for consideration with the
Supreme Court with regard to its decision in March 2003 to permit the holding
of the EGMS of PT Semen Padang which led to the replacement of the former
management. This request is still pending with the Supreme Court.
After the failure of several attempts to reach a negotiated or
mediated solution to these problems involving Gresik, on December 10, 2003,
CEMEX Asia Holdings, Ltd., or CAH, our subsidiary through which we hold our
interest in Gresik, filed a request for arbitration against the Republic of
Indonesia and the Indonesian government before the International Centre for
Settlement of Investment Disputes, or ICSID, based in Washington D.C. CAH is
seeking, among other things, rescission of the purchase agreement entered into
with the Republic of Indonesia in 1998, plus repayment of all costs and
expenses, and compensatory damages. The ICSID accepted and registered CAH's
request for arbitration and issued a formal notice of registration on January
27, 2004. On May 10, 2004, an Arbitral Tribunal was established to hear the
dispute. The Indonesian government objected to the Arbitral Tribunal's
jurisdiction over the claims asserted in CAH's request for arbitration, and on
July 28-29, 2005, the Arbitral Tribunal conducted an oral hearing to resolve
these jurisdictional objections. As of the date of this annual report, the
Arbitral Tribunal had not yet rendered its jurisdictional decision. We cannot
predict what effect, if any, this action will have on our investment in Gresik,
how the Arbitral Tribunal will rule on the Indonesian government's
jurisdictional objections or the merits of the dispute, or the time-frame in
which the Arbitral Tribunal will rule. For a more detailed description of our
investment in Gresik and the ongoing difficulties with Semen Padang, please see
"Asia -- Our Indonesian Equity Investment" above.
On August 5, 2005, Cartel Damages Claims, SA, or CDC, filed a lawsuit
in the District Court in Dusseldorf Germany against CEMEX Deutschland AG and
other German cement companies. CDC is seeking (euro)102 million in respect of
damage claims by 28 entities relating to alleged price and quota fixing by
German cement companies between 1993 and 2002, which entities had assigned
their claims to CDC. CDC is a Belgian company established by two lawyers in the
aftermath of the German cement cartel investigation that took place from July
2002 to April 2003 by Germany's Federal Cartel Office with the express purpose
of purchasing potential damages claims from cement consumers and pursuing those
claims against the cartel participants. In January 2006, another entity
assigned alleged claims to CDC and the amount of damages being sought by CDC
increased to (euro)113.5 million plus interest. The District Court in
Dusseldorf has scheduled a preliminary hearing for December 6, 2006. As of
December 31, 2005, we had accrued liabilities relating this matter for a total
amount of approximately (euro)34 million (U.S.$40 million ).
As of the date of this annual report, we are involved in various
legal proceedings involving product warranty claims, environmental claims,
indemnification claims relating to acquisitions and similar types of claims
that have arisen in the ordinary course of business. We believe we have made
adequate provisions to cover both
57
current and contemplated general and specific litigation risks, and we believe
these matters will be resolved without any significant effect on our
operations, financial position or results of operations.
As of December 31, 2005, CEMEX, Inc. had accrued liabilities
specifically relating to environmental matters in the aggregate amount of
approximately U.S.$50 million. The environmental matters relate to (i) the
disposal of various materials in accordance with past industry practice, which
might be categorized as hazardous substances or wastes, and (ii) the cleanup of
sites used or operated by CEMEX, Inc., including discontinued operations, in
regard to the disposal of hazardous substances or wastes, either individually
or jointly with other parties. Most of the proceedings are in the preliminary
stage, and a final resolution might take several years. For purposes of
recording the provision, CEMEX, Inc. considers that it is probable that a
liability has been incurred and the amount of the liability is reasonably
estimable, whether or not claims have been asserted, and without giving effect
to any possible future recoveries. Based on information developed to date,
CEMEX, Inc. does not believe it will be required to spend significant sums on
these matters in excess of the amounts previously recorded. Until all
environmental studies, investigations, remediation work, and negotiations with
or litigation against potential sources of recovery have been completed, the
ultimate cost that might be incurred to resolve these environmental issues
cannot be assured.
Recent Developments
Acquisition of Guatemalan Operations
In January 2006, we acquired a grinding mill with a grinding capacity
of 400,000 tons per year in Guatemala for approximately U.S.$17.4 million. We
entered into an agreement to purchase these operations in September 2005 and
completed the acquisition on January 1, 2006.
Divestiture of Danish Operations; Acquisition of Additional Polish Operations
On March 2, 2006, we sold 4K Beton A/S, our Danish subsidiary, which
operated 18 ready-mix concrete plants in Denmark, to Unicon A/S, a subsidiary
of Cementir Group, an Italian cement producer, for approximately (euro)22
million. As part of the transaction, we purchased from Unicon A/S two companies
engaged in the ready-mix concrete and aggregates business in Poland for
approximately (euro)12 million. These companies operate nine ready-mix concrete
plants and one aggregates quarry in Poland. We received net cash proceeds of
approximately (euro)6 million, after cash and debt adjustments, from this
transaction.
Termination of Lease Agreement and Purchase of Balcones Plant.
On March 20, 2006, we agreed to terminate our lease on the Balcones
cement plant located in New Braunfels, Texas prior to expiration, and purchased
the Balcones cement plant for approximately U.S.$61 million.
Agreement to Sale Stake in PT Semen Gresik
On May 3, 2006, we agreed to sell 24.9% of Gresik to Indonesia-based
Rajawali Group for approximately U.S.$337 million. The purchaser's obligations
under our sales contract are subject to obtaining the approval of the
Indonesian government and the fulfillment of other conditions. In the event
this sale is consummated, our remaining interest in Gresik will be 0.6%.
On May 17, 2006, we received a letter from the Indonesian government
purporting to exercise its right to repurchase, under the 1998 purchase
agreement, pursuant to which we acquired our interest in Gresik, the Gresik
shares we have agreed to sell to the Rajawali Group. However, we believe that
the Indonesian government's purported exercise of this right did not comply
with the requirements set forth in the 1998 purchase agreement, and we are in
correspondence and in discussions with the Indonesian government concerning
this issue. No assurance can be given either that the sale to the Rajawali
Group will be consummated, or that the Indonesian government will purchase the
Gresik shares, on the terms outlined above, or that a sale transaction on
similar or different terms may be consummated with any other purchaser.
58
2006 Capital Expansion Program
In February 2006, we announced a U.S.$500 million worldwide capital
expansion program for 2006 to invest in the expansion of our operations in
select countries where we believe such expansion is necessary to meet growing
demand. We expect that this program will fund the initial phases of the
expansion of our Balcones cement plant in New Braunfels, Texas, the expansion
of our Yaqui cement plant in Sonora, Mexico, the construction of a new cement
mill and dry mortar production plant in the Port of Cartagena, Spain, the
expansion of our cement plant in Latvia and the construction of a new grinding
facility for cement and slag in Dubai, United Arab Emirates, as described
above, as well as investments in our operations in other countries, including
the United Kingdom and France. We expect that this program will be fully funded
with free cash flow generated during the year.
Recent Mexican Tax Assessments
During May 2006, we and some of our Mexican subsidiaries were notified
by the Mexican tax office of several tax assessments with respect to tax years
1992 and 2002 in a total amount of approximately Ps3,793 million (U.S.$335
million). The tax assessments are based primarily on: (i) disallowed
restatement of consolidated tax loss carryforwards in the same period in which
they occurred and (ii) investments made in entities incorporated in foreign
countries with preferential tax regimes (Regimenes Fiscales Preferentes). We
plan to contest these tax claims, and we are in the process of filing an appeal
for each of these tax claims before the Mexican federal tax court. If we fail
to obtain favorable rulings on appeal, these tax claims may have a material
impact on us.
Other Recent Developments
For a description of recent developments relating to our indebtedness,
please see Item 5 -- "Operating and Financial Review and Prospects -- Liquidity
and Capital Resources -- Recent Developments."
Item 4A - Unresolved Staff Comments
-------------------------
Not applicable.
59
Item 5 - Operating and Financial Review and Prospects
--------------------------------------------
Cautionary Statement Regarding Forward Looking Statements
This annual report contains forward-looking statements that reflect
our current expectations and projections about future events based on our
knowledge of present facts and circumstances and assumptions about future
events. In this annual report, the words "expects," "believes," "anticipates,"
"estimates," "intends," "plans," "probable" and variations of such words and
similar expressions are intended to identify forward-looking statements. Such
statements necessarily involve risks and uncertainties that could cause actual
results to differ materially from those anticipated. Some of the risks,
uncertainties and other important factors that could cause results to differ,
or that otherwise could impact us or our subsidiaries, include:
o the cyclical activity of the construction sector;
o competition;
o general political, economic and business conditions;
o weather and climatic conditions;
o national disasters and other unforeseen events; and
o the other risks and uncertainties described under Item 3 "-- Key
Information -- Risk Factors" and elsewhere in this annual report.
Readers are urged to read this entire annual report and carefully
consider the risks, uncertainties and other factors that affect our business.
The information contained in this annual report is subject to change without
notice, and we are not obligated to publicly update or revise forward-looking
statements. Readers should review future reports filed by us with the U.S.
Securities and Exchange Commission.
This annual report also includes statistical data regarding the
production, distribution, marketing and sale of cement, ready-mix concrete,
clinker and aggregates. We generated some of these data internally, and some
were obtained from independent industry publications and reports that we believe
to be reliable sources. We have not independently verified these data nor sought
the consent of any organizations to refer to their reports in this annual
report.
Overview
The following discussion should be read in conjunction with our
consolidated financial statements included elsewhere in this annual report. Our
financial statements have been prepared in accordance with Mexican GAAP, which
differ in significant respects from U.S. GAAP. See note 25 to our consolidated
financial statements, included elsewhere in this annual report, for a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to us.
Mexico experienced annual inflation rates of 3.9% in 2003, 5.4% in
2004, and 3.0% in 2005. Mexican GAAP requires that our consolidated financial
statements recognize the effects of inflation. Consequently, financial data for
all periods in our consolidated financial statements and throughout this annual
report, except as otherwise noted, have been restated in constant Mexican Pesos
as of December 31, 2005. They have been restated using the CEMEX weighted
average inflation factors, as explained in note 3B to our consolidated financial
statements included elsewhere in this annual report.
The percentage changes in cement sales volumes described in this annual
report for our operations in a particular country or region include the number
of tons of cement and/or the number of cubic meters of ready-mix concrete sold
to our operations in other countries and regions. Likewise, unless otherwise
indicated, the net sales financial information presented in this annual report
for our operations in each country or region includes the
60
Mexican Peso amount of sales derived from sales of cement and ready-mix concrete
to our operations in other countries and regions, which have been eliminated in
the preparation of our consolidated financial statements included elsewhere in
this annual report.
The following table sets forth selected financial information as of and
for each of the three years ended December 31, 2003, 2004 and 2005 by principal
geographic segment expressed as an approximate percentage of our total
consolidated group before eliminations resulting from consolidation. Through the
RMC acquisition, we acquired new operations in the United States, Spain, Africa
and the Middle East and Asia, which had a significant impact on our operations
in those segments, and we acquired operations in the United Kingdom and the Rest
of Europe, in which segments we did not have operations prior to the RMC
acquisition. The financial information as of and for the year ended December 31,
2005 in the table below includes the consolidation of RMC's operations for the
ten-month period ended December 31, 2005. We operate in countries and regions
with economies in different stages of development and structural reform, with
different levels of fluctuation in exchange rates, inflation and interest rates.
These economic factors may affect our results of operations and financial
condition depending upon the depreciation or appreciation of the exchange rate
of each country and region in which we operate compared to the Mexican Peso and
the rate of inflation of each of these countries and regions. The variations in
(1) the exchange rates used in the translation of the local currency to Mexican
Pesos, and (2) the rates of inflation used for the restatement of our financial
information to constant Mexican Pesos, as of the latest balance sheet presented,
may affect the comparability of our results of operations and consolidated
financial position from period to period.
%
South
America, %
Central Africa
% % % America and the
% United % United Rest of and the Middle % % Elimina- Consoli-
Mexico States Spain Kingdom Europe Caribbean East Asia Others Combined tions dated
(in millions of constant Mexican Pesos as of December 31, 2005, except percentages)
Net Sales For the
Period Ended:
December 31, 2003 34% 22% 16% N/A N/A 15% 2% 2% 9% Ps 89,504 Ps(7,459) Ps 82,045
December 31, 2004 33% 22% 16% N/A N/A 15% 2% 2% 10% 94,985 (7,923) 87,062
December 31, 2005 19% 25% 9% 9% 16% 9% 3% 2% 8% 175,655 (12,946) 162,709
Operating Income
For the Period
Ended:
December 31, 2003 70% 14% 18% N/A N/A 20% 2% -- (24)% 16,665 -- 16,665
December 31, 2004 60% 16% 18% N/A N/A 21% 3% 1% (19)% 19,783 -- 19,783
December 31, 2005 41% 27% 14% 2% 7% 9% 4% 2% (6)% 26,409 -- 26,409
Total Assets at:
December 31, 2003 22% 18% 14% N/A N/A 11% 2% 3% 30% 261,274 (77,865) 183,409
December 31, 2004 23% 16% 12% N/A N/A 11% 2% 3% 33% 263,703 (78,019) 185,684
December 31, 2005 18% 18% 7% 12% 12% 7% 2% 3% 21% 411,812 (127,584) 284,228
Critical Accounting Policies
We have identified below the accounting policies we have applied under
Mexican GAAP that are critical to understanding our overall financial
reporting.
Income Taxes
Our operations are subject to taxation in many different jurisdictions
throughout the world. Under Mexican GAAP, we recognize deferred tax assets
and liabilities using a balance sheet methodology, which requires a
determination of the permanent and temporary differences between the
financial statements carrying amounts and the tax basis of assets and
liabilities. Our worldwide tax position is highly complex and subject to
numerous laws that require interpretation and application and that are not
consistent among the countries in which we operate. Significant judgment is
required to appropriately assess the amounts of tax assets and liabilities.
We record tax assets when we believe that the recoverability of the asset is
determined to be more likely than not in accordance
61
with established accounting principles. If this determination cannot be made, a
valuation allowance is established to reduce the carrying value of the asset.
Our overall strategy is to structure our worldwide operations to
minimize or defer the payment of income taxes on a consolidated basis. Many of
the activities we undertake in pursuing this tax reduction strategy are highly
complex and involve interpretations of tax laws and regulations in multiple
jurisdictions and are subject to review by the relevant taxing authorities. It
is possible that the taxing authorities could challenge our application of
these regulations to our operations and transactions. The taxing authorities
have in the past challenged interpretations that we have made and have assessed
additional taxes. Although we have from time to time paid some of these
additional assessments, in general we believe that these assessments have not
been material and that we have been successful in sustaining our positions. No
assurance can be given, however, that we will continue to be as successful as
we have been in the past or that pending appeals of current tax assessments
will be judged in our favor.
Recognition of the effects of inflation
Under Mexican GAAP, the financial statements of each subsidiary are
restated to reflect the loss of purchasing power (inflation) of its functional
currency. The inflation effects arising from holding monetary assets and
liabilities are reflected in the income statements as monetary position result.
Inventories, fixed assets and deferred charges, with the exception of fixed
assets of foreign origin and the equity accounts, are restated to account for
inflation using the consumer price index applicable in each country. Fixed
assets of foreign origin are restated using the inflation index of the assets'
origin country and the variation in the foreign exchange rate between the
country of origin currency and the functional currency. The result is reflected
as an increase or decrease in the carrying value of each item, and is presented
in consolidated stockholders' equity in the line item Effects from Holding
Non-Monetary Assets. Income statement accounts are also restated for inflation
into constant Mexican Pesos as of the reporting date.
In the event of a sudden increase in the rate of inflation in Mexico,
the adjustment that the market makes in the exchange rate of the Mexican Peso
against other currencies resulting from such inflation is not immediate and may
take several months, if it occurs at all. In this situation, the value
expressed in the consolidated financial statements for fixed assets of foreign
origin will be understated in terms of Mexican inflation, given that the
restatement factor arising from the inflation of the assets' origin country and
the variation in the foreign exchange rate between the country of origin
currency and the Mexican Peso will not offset the Mexican inflation.
A sudden increase in inflation could also occur in other countries in
which we operate.
Foreign currency translation
As mentioned above, the financial statements of consolidated foreign
subsidiaries are restated for inflation in their functional currency based on
the subsidiary country's inflation rate. Subsequently, the restated financial
statements are translated into Mexican Pesos using the foreign exchange rate at
the end of the corresponding reporting period for balance sheet and income
statement accounts.
In the event of an abrupt and deep depreciation of the Mexican Peso
against the U.S. Dollar, which would not be aligned with a corresponding
inflation of the same magnitude, the carrying amounts of the Mexican assets,
when presented in convenience translation into U.S. Dollars, will show a
decrease in value, in terms of Dollars, by the difference between the rate of
depreciation against the U.S. Dollar and the Mexican inflation rate.
Derivative financial instruments
As mentioned in note 3L to our consolidated financial statements
included elsewhere in this annual report, in compliance with the guidelines
established by our risk management committee, we use derivative financial
instruments such as interest rate and currency swaps, currency and stock
forward contracts, options and futures, in order to change the risk profile
associated with changes in interest rates and foreign exchange rates of debt
agreements, as a vehicle to reduce financing costs, as an alternative source
of financing, and as hedges of: (i) forecasted transactions, (ii) net assets
in foreign subsidiaries and (iii) future exercises of options under our
executive stock option programs. These instruments have been negotiated with
institutions with significant financial capacity;
62
therefore, we consider the risk of non-compliance with the obligations agreed
to by such counterparties to be minimal.
Derivative financial instruments are recognized as assets or
liabilities in the balance sheet at their estimated fair value and the changes
in such values in the income statement for the period in which they occur,
unless such instruments have been designated as accounting hedges of debt or
equity instruments. Until December 31, 2004,no specific rules existed in Mexico
for hedging transactions. Beginning January 1, 2005, Bulletin C-10, "Derivative
Financial Instruments and Hedging Activities", establishes accounting standards
for hedging instruments. Some of our instruments have been designated as
accounting hedges of debt or equity instruments (see note 3L to our
consolidated financial statements included elsewhere in this annual report).
Interest accruals generated by interest rate swaps and cross currency
swaps are recognized as financial expense, adjusting the effective interest
rate of the related debt. Interest accruals from other hedging derivative
instruments are recorded within the same item when the effects of the primary
instrument subject to the hedging relation are recognized. Transaction costs
are deferred and amortized in earnings over the life of the instrument or
immediately upon settlement. See notes 12 and 17 to our consolidated financial
statements included elsewhere in this annual report.
Pursuant to the accounting principles established by Mexican GAAP, our
balance sheets and income statements are subject to volatility arising from
variations in interest rates, exchange rates, share prices and other conditions
established in our derivative instruments. The estimated fair value represents
the amount at which a financial asset could be bought or sold, or a financial
liability could be extinguished at the reporting date, between willing parties
in an arm's length transaction. Occasionally, there is a reference market that
provides the estimated fair value; in the absence of a market, such value is
determined by the net present value of projected cash flows or through
mathematical valuation models. The estimated fair values of derivative
instruments determined by us and used by us for recognition and disclosure
purposes in the financial statements and their notes, are supported by the
confirmations of these values received from the counterparties to these
financial instruments; nonetheless, significant judgment is required to account
appropriately for the effects of derivative financial instruments in the
financial statements.
The estimated fair values of derivative financial instruments may
fluctuate over time, and are based on estimated settlement costs or quoted
market prices. These values should be viewed in relation to the fair values of
the underlying instruments or transactions, and as part of our overall exposure
to fluctuations in foreign exchange rates, interest rates and prices of shares.
The notional amounts of derivative instruments do not necessarily represent
amounts exchanged by the parties and, therefore, are not a direct measure of
our exposure through our use of derivatives. The amounts exchanged are
determined on the basis of the notional amounts and other items included in the
derivative instruments.
Impairment of long-lived assets
Our balance sheet reflects significant amounts of long-lived assets
(mainly fixed assets and goodwill) associated with our operations throughout
the world. Many of these amounts have resulted from past acquisitions, which
have required us to reflect these assets at their fair market values at the
dates of acquisition. According to their characteristics and the specific
accounting rules related to them, we assess the recoverability of our
long-lived assets periodically or whenever events or circumstances arise that
we believe trigger a requirement to review such carrying values. This
determination requires substantial judgment and is highly complex when
considering the myriad of countries in which we operate, each of which has
its own economic circumstances that have to be monitored. Additionally, we
monitor the lives assigned to these long-lived assets for purposes of
depreciation and amortization, when applicable. This determination is
subjective and is integral to the determination of whether an impairment has
occurred.
Valuation reserves on accounts receivable and inventories
On a periodic basis, we analyze the recoverability of our accounts
receivable and our inventories (supplies, raw materials, work-in-process and
finished goods), in order to determine if due to credit risk or other factors
in the case of our receivables and due to weather or other conditions in the
case of our inventories, some receivables may
63
not be recovered or certain materials in our inventories may not be utilizable
in the production process or for sale purposes. If we determine such a
situation exists, book values related to the non-recoverable assets are
adjusted and charged to the income statement through an increase in the
doubtful accounts reserve or the inventory obsolescence reserve, as
appropriate. These determinations require substantial management judgment and
are highly complex when considering the various countries in which we have
operations, each having its own economic circumstances that require continuous
monitoring, and our numerous plants, deposits, warehouses and quarries. As a
result, final losses from doubtful accounts or inventory obsolescence could
differ from our estimated reserves.
Asset retirement obligations
Beginning in 2003, we recognize unavoidable obligations, legal or
assumed, to restore the site or the environment when removing operating assets
at the end of their useful lives. These obligations represent the net present
value of expected cash flows to be incurred in the restoration process, and are
initially recognized against the related assets' book value. The additional
asset is depreciated during its remaining useful life. The increase of the
liability, by the passage of time, is charged to results of the period.
Adjustments to the obligation for changes in the estimated cash flows or the
estimated disbursement period are made against fixed assets, and depreciation
is modified prospectively.
In our case, asset retirement obligations are related mainly to future
costs of demolition, cleaning and reforestation, derived from commitments, both
legal or assumed, so that at the end of the operation, the sites where raw
material is extracted, the maritime terminals and other production sites, are
left in acceptable conditions. We record provisions for situations that have
been identified and quantified, which requires significant judgment in
assessing the estimated cash outflows that will be disbursed upon retirement of
the related assets. See notes 3M and 13 to our consolidated financial
statements included elsewhere in this annual report.
Transactions in our own stock
From time to time we have entered into various transactions involving
our own stock. These transactions have been designed to achieve various
financial goals but were primarily executed to give us a means of satisfying
future transactions that may require us to deliver significant numbers of shares
of our own stock. These transactions are described in detail in the notes to our
consolidated financial statements included elsewhere in this annual report. We
have viewed these transactions as hedges against future exposure even though
they do not meet the definition of hedges under accounting principles. There is
significant judgment necessary to properly account for these transactions, as
the obligations underlying the related transactions are required to be reflected
at market value, with the changes in such value reflected in our income
statement. These transactions raise the possibility that we could be required to
reflect losses on the transactions in our own shares without having a converse
reflection of gains on the transactions under which we would deliver such shares
to others. In October 2005, in connection with our non-dilutive equity offering,
we settled substantially all our obligations related to transactions in our own
stock. See notes 2, 16E and 17A to our consolidated financial statements
included elsewhere in this annual report.
Results of Operations
Consolidation of Our Results of Operations
Our consolidated financial statements, included elsewhere in this
annual report, include those subsidiaries in which we hold a majority interest
or which we otherwise control. All significant intercompany balances and
transactions have been eliminated in consolidation.
For the periods ended December 31, 2003, 2004, and 2005 our
consolidated results reflect the following transactions:
o On December 22, 2005, we terminated our 50/50 joint ventures with
Lafarge Asland in Spain and Portugal, which we acquired in the RMC
acquisition. Under the terms of the termination agreement, Lafarge
Asland received a 100% interest in both joint ventures and we
received (euro)50 million in cash, as well as 29 ready-mix
concrete plants and six aggregates quarries in Spain. Our
consolidated financial statements for the year ended December 31,
2005 include our 50% interest in the results of operations
64
relating to these joint venture assets through the proportionate
consolidation method for the period from March 1, 2005 through
December 22, 2005 only.
o On August 29, 2005, we sold RMC's operations in the Tucson,
Arizona area, consisting of several ready-mix and related assets,
to California Portland Cement Company for a purchase price of
approximately U.S.$16 million. Our consolidated financial
statements for the year ended December 31, 2005 include the
results of operations relating to these assets for the period from
March 1, 2005 through August 29, 2005 only.
o On July 1, 2005, we and Ready Mix USA established two
jointly-owned limited liability companies, CEMEX Southeast, LLC, a
cement company, and Ready Mix USA, LLC, a ready-mix concrete
company, to serve the construction materials market in the
southeast region of the United States. Under the terms of the
limited liability company agreements and related asset
contribution agreements, we contributed two cement plants
(Demopolis, Alabama and Clinchfield, Georgia) and eleven cement
terminals to CEMEX Southeast, LLC, representing approximately 98%
of its contributed capital, while Ready Mix USA contributed cash
to CEMEX Southeast, LLC representing approximately 2% of its
contributed capital. In addition, we contributed our ready-mix
concrete, aggregates and concrete block assets in the Florida
panhandle and southern Georgia to Ready Mix USA, LLC, representing
approximately 9% of its contributed capital, while Ready Mix USA
contributed all its ready-mix concrete and aggregate operations in
Alabama, Georgia, the Florida panhandle and Tennessee, as well as
its concrete block operations in Arkansas, Tennessee, Mississippi,
Florida and Alabama to Ready Mix USA, LLC, representing
approximately 91% of its contributed capital. We own a 50.01%
interest, and Ready Mix USA owns a 49.99% interest, in the profits
and losses and voting rights of CEMEX Southeast, LLC, while Ready
Mix USA owns a 50.01% interest, and we own a 49.99% interest, in
the profits and losses and voting rights of Ready Mix USA, LLC. In
a separate transaction, on September 1, 2005, we sold 27 ready-mix
plants and four concrete block facilities located in the Atlanta,
Georgia metropolitan area to Ready Mix USA, LLC for approximately
U.S.$125 million. As of December 31, 2005, we had control of, and
consolidated, CEMEX Southeast, LLC, while our interest in Ready
Mix USA, LLC was accounted for by the equity method since it was
controlled by Ready Mix USA as of that date. The value of our
assets relating to these companies was calculated based on the
relative values of the assets contributed by us to each company.
Our consolidated financial statements for the year ended December
31, 2005 include the results of operations relating to the assets
we contributed to Ready Mix USA, LLC for the period from January
1, 2005 through July 1, 2005 only and the results of operations
relating to the assets we sold to Ready Mix USA, LLC for the
period from March 1, 2005 through September 1, 2005 only since we
acquired those assets in the RMC acquisition.
o On June 1, 2005, we sold a cement terminal adjacent to the Detroit
river to the City of Detroit for a purchase price of approximately
U.S.$24 million. Our consolidated financial statements for the
year ended December 31, 2005 include the results of operations
relating to this cement terminal for the five-month period ended
May 31, 2005 only.
o On March 31, 2005, we sold our Charlevoix, Michigan and Dixon,
Illinois cement plants and several distribution terminals located
in the Great Lakes region to Votorantim Participacoes S.A., a
cement company in Brazil, for an aggregate purchase price of
approximately U.S.$389 million. The combined capacity of the two
cement plants sold was approximately two million tons per year,
and the operations of these plants represented approximately 9% of
our U.S. operations' operating cash flow for the year ended
December 31, 2004. Our consolidated financial statements for the
year ended December 31, 2005 include the results of operations
relating to these assets for the three-month period ended March
31, 2005 only.
o On March 1, 2005, we completed our acquisition of RMC for a total
purchase price of approximately U.S.$6.5 billion, which included
approximately U.S.$2.2 billion of assumed debt. We accounted for
the acquisition as a purchase under Mexican GAAP, which means that
our consolidated financial statements only include RMC from the
date of the acquisition. Our consolidated financial statements for
the year ended December 31, 2005 include RMC's results of
operations for the ten-month period ended December 31, 2005. Our
consolidated financial statements for each of the years ended
65
December 31, 2003 and 2004 do not include RMC's results of
operations. As a result, the financial information for the year
ended December 31, 2005 is not comparable to the prior periods.
o In August and September 2003, we acquired 100% of the outstanding
shares of Mineral Resource Technologies Inc., and the cement
assets of Dixon-Marquette Cement for a combined purchase price of
approximately U.S.$100 million. The single cement plant, which had
an annual production capacity of 560,000 tons, was sold on March
31, 2005 as part of the U.S. asset sale described elsewhere in
this annual report.
o In July 2002, we entered into agreements with other CAH investors
to purchase their CAH shares in exchange for CPOs through
quarterly share exchanges in 2003 and 2004. In 2003, 84,763 CAH
shares were exchanged for 1,683,822 CPOs, with an approximate
value of U.S.$7.8 million. In 2004, 1,398,602 CAH shares were
exchanged for 27,850,713 CPOs with an approximate value of
U.S.$172 million. For accounting purposes, these exchanges were
considered effective as of July 2002. With these exchanges, we
increased our equity interest in CAH to 92.3%. In August 2004, we
acquired an additional 6.8% equity interest in CAH (695,065 CAH
shares) for approximately U.S.$70 million, and in December 2005,
we acquired the remaining 0.9% interest in CAH (93,241 CAH shares)
for approximately U.S.$8 million, thereby increasing our total
equity interest in CAH to 100%.
Selected Consolidated Income Statement Data
The following table sets forth selected consolidated income statement
data for CEMEX for each of the three years ended December 31, 2003, 2004, and
2005 expressed as a percentage of net sales.
Year Ended December 31,
-----------------------------------------
2003 2004 2005
------------- -------------- -----------
Net sales............................................................ 100.0 100.0 100.0
Cost of sales........................................................ (57.6) (56.3) (60.5)
------------- -------------- -----------
Gross profit.................................................... 42.4 43.7 39.5
Operating expenses:..................................................
Administrative.................................................... (11.1) (10.2) (9.4)
Selling........................................................... (11.0) (10.8) (13.9)
------------- -------------- -----------
Total operating expenses....................................... (22.1) (21.0) (23.3)
------------- -------------- -----------
Operating income................................................. 20.3 22.7 16.2
Net comprehensive financing income (cost):
Financial expense................................................. (5.3) (4.6) (3.4)
Financial income.................................................. 0.2 0.3 0.3
Foreign exchange gain (loss), net................................. (2.4) (0.3) (0.5)
Gain (loss) on valuation of marketable securities and other
investments.................................................... (0.8) 1.5 2.5
Monetary position gain............................................ 4.6 4.7 2.8
------------- -------------- -----------
Net comprehensive financing income (cost)......................... (3.7) 1.6 1.7
------------- -------------- -----------
Other expenses, net.................................................. (6.4) (5.9) (2.1)
Income before income tax, business assets tax, employees'
statutory profit sharing and equity in income of affiliates..... 10.2 18.4 15.8
------------- -------------- -----------
Income tax and business assets tax, net.............................. (1.3) (2.3) (2.2)
Employees' statutory profit sharing.................................. (0.2) (0.4) --
------------- -------------- -----------
Total income taxes, business assets tax and employees' statutory
profit sharing.................................................. (1.5) (2.7) (2.2)
Income before equity in income of affiliates...................... 8.7 15.7 13.6
Equity in income of affiliates....................................... 0.5 0.6 0.6
------------- -------------- -----------
Consolidated net income.............................................. 9.2 16.3 14.2
------------- -------------- -----------
Minority interest net income......................................... 0.4 0.3 0.4
------------- -------------- -----------
Majority interest net income......................................... 8.8 16.0 13.8
------------- -------------- -----------
66
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Overview
Summarized in the table below are the percentage (%) increases (+) and
decreases (-) for the year ended December 31, 2005 compared to the year ended
December 31, 2004 in our sales volumes and average prices for each of our
geographic segments.
--------------------------------- ----------------------------- --------------- ------------------------------
Export Sales Average Domestic Prices in
Domestic Sales Volumes Volumes Local Currency (1)
Geographic Segment Cement Ready-Mix Cement Cement Ready-Mix
--------------------------------- -------------- -------------- --------------- -------------- ---------------
North America
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Mexico +1% +15% +54% -2% -3%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
United States (2) +6% +177% N/A +18% +25%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Europe
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Spain (3) +4% +57% -40% +6% +5%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
UK (4) N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Rest of Europe (5) N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- ---------------
South/Central America and the
Caribbean (6)
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Venezuela +38% +27% -21% +9% +23%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Colombia +33% +17% N/A -42% -14%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Rest of South/Central America
and the Caribbean (7) +5% +49% +34% -3% +4%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Africa and the Middle East (8)
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Egypt +23% +41% -53% +13% +18%
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Rest of Africa and the Middle
East (9) N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Asia (10)
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Philippines -1% N/A +116% +13% N/A
--------------------------------- -------------- -------------- --------------- -------------- ---------------
Rest of Asia (11) +9% N/A N/A -1% N/A
--------------------------------- -------------- -------------- --------------- -------------- ---------------
N/A = Not Applicable
(1) Represents the average change in domestic cement and ready-mix prices in
local currency terms. For purposes of a geographic segment consisting of a
region, the average prices in local currency terms for each individual
country within the region are first translated into Dollar terms at the
exchange rates in effect as of the end of the reporting period. Variations
for a region represent the weighted average change of prices in Dollar
terms based on total sales volumes in the region.
(2) Our cement and ready-mix concrete sales volumes and average prices in the
United States for the year ended December 31, 2005 include the sales
volumes and average prices of the cement and ready-mix concrete operations
in the United States we acquired as a result of the RMC acquisition for
the ten-month period ended December 31, 2005, except that the sales
volumes and average prices relating to the assets we contributed on July
1, 2005, and the assets we sold on September 1, 2005, to Ready Mix USA,
LLC, an entity in which Ready Mix USA owns a 50.01% interest and we own a
49.99% interest, are included only for the periods from March 1, 2005
through July 1, 2005 and from March 1, 2005 through September 1, 2005,
respectively.
(3) Our ready-mix concrete sales volumes and average prices in Spain for the
year ended December 31, 2005 include the sales volumes and average prices
of the joint venture ready-mix concrete operations in Spain we acquired as
a result of the RMC acquisition, which operations we divested on December
22, 2005 in connection with the termination of the joint venture with
Lafarge Asland through which such operations were conducted, for the
period from March 1, 2005 through December 22, 2005.
(4) Our United Kingdom segment includes the operations in the United Kingdom
we acquired as a result of the RMC acquisition for the ten-month period
ended December 31, 2005.
(5) Our Rest of Europe segment includes the operations in Germany, France,
Republic of Ireland, Czech Republic, Austria, Poland, Croatia, Hungary,
Latvia and Denmark we acquired as a result of the RMC acquisition for the
ten-month period ended December 31, 2005.
(6) Our South America, Central America and the Caribbean segment includes our
operations in Venezuela, Colombia and the operations listed in note 7
below; however, in above table, our operations in Venezuela and Colombia
are presented separately from our other operations in the segment for
purposes of comparison with our 2004 presentation of our operations in the
region.
(7) Rest of South/Central America and the Caribbean includes our operations in
Costa Rica, Panama, the Dominican Republic, Nicaragua, Puerto Rico and our
trading activities in the Caribbean, as well as the operations in Jamaica
and Argentina we acquired as a result of the RMC acquisition for the
ten-month period ended December 31, 2005.
(8) Our Africa and the Middle East segment includes our operations in Egypt
and the operations listed in note 9 below; however, in the above table,
our operations in Egypt are presented separately from our other operations
in the segment for purposes of comparison with our 2004 presentation of
our operations in the region.
(9) Rest of Africa and the Middle East includes the operations in the United
Arab Emirates and Israel we acquired as a result of the RMC acquisition
for the ten-month period ended December 31, 2005.
67
(10) Our Asia segment includes our operations in the Philippines and the
operations listed in note 11 below; however, for in the above table, our
operations in the Philippines are presented separately from our other
operations in the segment for purposes of comparison with our 2004
presentation of our operations in the region.
(11) Rest of Asia includes our operations in Thailand, Bangladesh and other
assets in the Asian region, as well as the operations in Malaysia we
acquired as a result of the RMC acquisition for the ten-month period ended
December 31, 2005.
On a consolidated basis, our cement sales volumes increased
approximately 23%, from 65.8 million tons in 2004 to 80.6 million tons in 2005,
and our ready-mix concrete sales volumes increased approximately 191%, from
23.9 million cubic meters in 2004 to 69.5 million cubic meters in 2005. Our net
sales increased approximately 87% from Ps87,062 million in 2004 to Ps162,709
million in 2005, and our operating income increased approximately 33% from
Ps19,783 million in 2004 to Ps26,409 million in 2005.
Excluding the effect of the consolidation of RMC's operations, from
2004 to 2005, our consolidated cement sales volumes increased approximately 4%,
our consolidated ready-mix concrete sales volumes increased approximately 16%,
our consolidated net sales increased approximately 13%, and our consolidated
operating income increased approximately 14%.
The following tables present selected condensed financial information
of net sales and operating income for each of our geographic segments for the
years ended December 31, 2004 and 2005. Variations in net sales determined on
the basis of constant Mexican Pesos include the appreciation or depreciation
which occurred during the period between the local currencies of the countries
in the regions vis-a-vis the Mexican Peso, as well as the effects of inflation
as applied to the Mexican Peso amounts using our weighted average inflation
factor; therefore, such variations differ substantially from those based solely
on the countries' local currencies:
-----------------------------------------------------------------------------------------------------------
Net Sales
-----------------------------------------------------------------------------------------------------------
Approximate For the Year
Currency Ended December 31,
Fluctuations, ---------------------------
Net of Variations
Variations in Inflation in Constant
Geographic Segment Local Currency(1) Effects Mexican Pesos 2004 2005
-----------------------------------------------------------------------------------------------------------
(In millions of constant
Mexican Pesos as of
December 31, 2005)
---------------------------
North America
Mexico............................. +0.7% +7.4% +8.1% 31,196 33,732
United States (2).................. +105.4% +0.5% +105.9% 21,097 43,441
Europe
Spain (3).......................... +10.3% -1.1% +9.2% 14,741 16,098
United Kingdom (4)................. N/A N/A N/A N/A 16,299
Rest of Europe (5)................. N/A N/A N/A N/A 28,837
South/Central America and the
Caribbean
Venezuela.......................... +15.8% +1.8% +17.6% 3,742 4,399
Colombia........................... -16.7% +18.4% +1.7% 2,620 2,664
Rest of South / Central America
and the Caribbean (6)........... +11.7% -13.9% -2.2% 7,357 7,195
Africa and Middle East
Egypt.............................. +27.1% +11.3% +38.4% 2,028 2,806
Rest of Africa and the Middle East
(7)............................. N/A N/A N/A N/A 2,981
Asia
Philippines........................ +18.3% +7.8% +26.1% 1,617 2,039
Rest of Asia (8)................... N/A N/A N/A N/A 1,019
Others (9)......................... +33.1% +0.5% +33.6% 10,587 14,145
---------------------------
+84.9% 94,985 175,655
Eliminations from consolidation.... (7,923) (12,946)
---------------------------
Consolidated net sales............. +86.9% 87,062 162,709
===========================
68
-----------------------------------------------------------------------------------------------------------
Operating Income
-----------------------------------------------------------------------------------------------------------
Approximate For the Year
Currency Ended December 31,
Fluctuations, ---------------------------
Net of Variations
Variations in Inflation in Constant
Geographic Segment Local Currency(1) Effects Mexican Pesos 2004 2005
-----------------------------------------------------------------------------------------------------------
(In millions of constant
Mexican Pesos as of
December 31, 2005)
---------------------------
North America
Mexico............................. -14.6% +6.3% -8.3% 11,707 10,734
United States (2).................. +156.7% +0.7% +157.4% 2,776 7,145
Europe
Spain (3).......................... +16.8% -10.2% +6.6% 3,582 3,819
United Kingdom (4)................. N/A N/A N/A N/A 567
Rest of Europe (5)................. N/A N/A N/A N/A 1,795
South/Central America and the
Caribbean (6)
Venezuela.......................... +20.7% +1.8% +22.5% 1,169 1,432
Colombia........................... -73.5% +3.8% -69.7% 1,194 362
Rest of South/Central America and
the Caribbean (7)............... -53.7% -5.6% -59.3% 1,685 685
Africa and Middle East (8)
Egypt.............................. +56.6% +13.9% +70.5% 613 1,045
Rest of Africa and the Middle East
(9)............................. N/A N/A N/A N/A 100
Asia (10)
Philippines........................ +41.7% +9.5% +51.2% 289 437
Rest of Asia (11).................. N/A N/A N/A N/A (18)
Others (12)........................ +48.6% -1.0% +47.6% (3,232) (1,694)
---------------------------
Consolidated operating income...... +33.5% s 19,783 26,409
===========================
__________________________
N/A = Not Applicable
(1) For purposes of a geographic segment consisting of a region, the net sales
and operating income data in local currency terms for each individual
country within the region are first translated into Dollar terms at the
exchange rates in effect as of the end of the reporting period. Variations
for a region represent the weighted average change in Dollar terms based
on net sales and operating income for the region.
(2) Our net sales and operating income in the United States for the year ended
December 31, 2005 include the results of the cement and ready-mix concrete
operations in the United States we acquired as a result of the RMC
acquisition for the ten-month period ended December 31, 2005, except that
the results of the assets we contributed on July 1, 2005, and the assets
we sold on September 1, 2005, to Ready Mix USA, LLC, an entity in which
Ready Mix USA owns a 50.01% interest and we own a 49.99% interest, are
included only for the periods from March 1, 2005 through July 1, 2005 and
from March 1, 2005 through September 1, 2005, respectively.
(3) Our net sales and operating income in Spain for the year ended December
31, 2005 include the proportionally consolidated results of the joint
venture ready-mix concrete operations in Spain we acquired as a result of
the RMC acquisition, which operations we divested on December 22, 2005 in
connection with the termination of the joint venture with Lafarge Asland
through which such operations were conducted, for the period from March 1,
2005 through December 22, 2005.
(4) Our United Kingdom segment includes the operations in the United Kingdom
we acquired as a result of the RMC acquisition for the ten-month period
ended December 31, 2005.
(5) Our Rest of Europe segment includes the operations in Germany, France,
Republic of Ireland, Czech Republic, Austria, Poland, Croatia, Hungary,
Latvia and Denmark we acquired as a result of the RMC acquisition for the
ten-month period ended December 31, 2005.
(6) Our South America, Central America and the Caribbean segment includes our
operations in Venezuela, Colombia and the operations listed in note 7
below; however, in the above table, our operations in Venezuela and
Colombia are presented separately from our other operations in the segment
for purposes of comparison with our 2004 presentation of our operations in
the region.
(7) Rest of South/Central America and the Caribbean includes our operations in
Costa Rica, Panama, the Dominican Republic, Nicaragua, Puerto Rico and our
trading activities in the Caribbean, as well as the operations in Jamaica
and Argentina we acquired as a result of the RMC acquisition for the
ten-month period ended December 31, 2005.
(8) Our Africa and the Middle East segment includes our operations in Egypt
and the operations listed in note 9 below; however, in the above table,
our operations in Egypt are presented separately from our other operations
in the segment for purposes of comparison with our 2004 presentation of
our operations in the region.
(9) Rest of Africa and the Middle East includes the operations in the United
Arab Emirates and Israel we acquired as a result of the RMC acquisition
for the ten-month period ended December 31, 2005.
69
(10) Our Asia segment includes our operations in the Philippines and the
operations listed in note 11 below; however, for in the above table, our
operations in the Philippines are presented separately from our other
operations in the segment for purposes of comparison with our 2004
presentation of our operations in the region.
(11) Rest of Asia includes our operations in Thailand, Bangladesh and other
assets in the Asian region, as well as the operations in Malaysia we
acquired as a result of the RMC acquisition for the ten-month period ended
December 31, 2005.
(12) Our Others segment includes our worldwide trade maritime operations, our
information solutions company and other minor subsidiaries.
Net Sales
Our net sales increased approximately 87% from Ps87,062 million in 2004
to Ps162,709 million in 2005 in constant Peso terms. The increase in net sales
was primarily attributable to the consolidation of RMC's operations for ten
months in 2005 and higher sales volumes and prices in our operations in most of
our markets, which were partially offset by lower domestic cement prices in
South America, Central America and the Caribbean and by our divestiture in March
2005 of two cement plants and other assets in the United States, and our
contribution in July 2005 and sale in September 2005 of ready-mix concrete,
aggregates and concrete block assets in the United States to an entity in which
we own a 49.99% interest. Excluding the effect of the consolidation of RMC's
operations, our net sales increased approximately 6% during 2005 compared to
2004. Of our consolidated net sales in 2004 and 2005, approximately 71% and 70%,
respectively, were derived from sales of cement, approximately 24% and 26%,
respectively, from sales of ready-mix concrete and approximately 5% and 4%,
respectively, from sales of other construction materials, including aggregates,
and services.
Through the RMC acquisition, we acquired additional operations in the
United States, Spain, Africa and the Middle East and Asia, which had a
significant impact on our operations in those segments, and we acquired
operations in the United Kingdom and the Rest of Europe, in which segments we
did not have operations prior to the RMC acquisition. The operating data set
forth below in the discussion of our United Kingdom, France and Germany
operations for 2004 and for January and February of 2005 represent operating
data for those operations prior to our acquisition of RMC.
Set forth below is a quantitative and qualitative analysis of the
effects of the various factors affecting our net sales on a geographic segment
basis.
Mexico
Our Mexican operations' domestic cement sales volumes increased
approximately 1% in 2005 compared to 2004, and ready-mix concrete sales volumes
increased approximately 15% during the same period. The increases in sales
volumes were primarily due to increased government spending on infrastructure
projects and increased demand in the residential construction sector, which were
partially offset by a weak self-construction sector. Our Mexican operations'
cement export volumes, which represented approximately 10% of our Mexican cement
sales volumes in 2005, increased approximately 54% in 2005 compared to 2004,
primarily as a result of increased cement demand in the United States. Of our
Mexican operations' total cement export volumes during 2005, 73% was shipped to
the United States, 26% to Central America and the Caribbean and 1% to South
America. Our Mexican operations' average domestic sales price of cement
decreased approximately 2% in constant Peso terms in 2005 compared to 2004
(increased approximately 3% in nominal Peso terms). Our Mexican operations'
average sales price of ready-mix concrete decreased approximately 3% in constant
Peso terms (increased approximately 1% in nominal Peso terms) over the same
period. For the year ended December 31, 2005, sales of ready-mix concrete in
Mexico represented approximately 28% of our Mexican operations' net sales.
As a result of the increases in domestic cement and ready-mix concrete
sales volumes and cement export volumes, net sales in Mexico, in constant Peso
terms, increased approximately 8% in 2005 compared to 2004, despite the
decreases in the average domestic sales prices of cement and ready-mix concrete.
United States
Our U.S. operations' cement sales volumes, which include cement
purchased from our other operations, increased approximately 6% in 2005
compared to 2004, and ready-mix concrete sales volumes increased
approximately 177% during the same period. The increases in sales volumes
resulted primarily from the consolidation of RMC's U.S. operations for ten
months in 2005 (representing approximately 7% of our U.S. cement
70
sales volumes and approximately 60% of our U.S. ready-mix concrete sales
volumes), as well as increased demand in the public sector, particularly in
streets and highway construction, increased demand in the residential sector and
the industrial and commercial sector, which were partially offset by our
divestiture in March 2005 of two cement plants and other assets in the Great
Lakes region, and our contributions in July 2005 and sale in September 2005 of
ready-mix concrete, aggregates and concrete block assets in the Florida
panhandle and southern Georgia to Ready Mix USA, LLC, an entity in which we own
a 49.99% interest. Our U.S. operations' average sales price of cement increased
approximately 18% in Dollar terms in 2005 compared to 2004, and the average
sales price of ready-mix concrete increased approximately 25% in Dollar terms
over the same period. The increases in average prices were primarily due to
continued strength in demand for, and limited supply of, cement and ready-mix
concrete. For the year ended December 31, 2005, sales of ready-mix concrete in
the United States represented approximately 46% of our U.S. operations' net
sales.
As a result of the increases in cement and ready-mix concrete sales
volumes and the increases in the average sales prices of cement and ready-mix
concrete, net sales in the United States, in Dollar terms, increased
approximately 105% in 2005 compared to 2004.
Spain
Our Spanish operations' domestic cement sales volumes increased
approximately 4% in 2005 compared to 2004, and ready-mix concrete sales volumes
increased approximately 57% during the same period. The increases in sales
volumes resulted primarily from the proportional consolidation of RMC's Spanish
joint venture operations for nearly ten months in 2005 (representing
approximately 29% of our Spanish ready-mix concrete sales volumes), as well as
strong residential construction activity and increased spending in the
public-works sector, particularly on infrastructure projects. Our Spanish
operations' cement export volumes, which represented approximately 1% of our
Spanish cement sales volumes in 2005, decreased approximately 40% in 2005
compared to 2004 primarily due to increased domestic demand. Of our Spanish
operations' total cement export volumes in 2005, 19% was shipped to Europe and
the Middle East, 29% to Africa, and 52% to the United States. Our Spanish
operations' average domestic sales price of cement increased approximately 18%
in Euro terms in 2005 compared to 2004, and the average price of ready-mix
cement increased approximately 25% in Euro terms over the same period. The
increases in average prices were primarily due to increased demand for cement
and ready-mix concrete. For the year ended December 31, 2005, sales of ready-mix
concrete in Spain represented approximately 32% of our Spanish operations' net
sales.
As a result of the increases in domestic cement and ready-mix concrete
sales volumes and the increases in the average domestic sales prices of cement
and ready-mix concrete, net sales in Spain, in Euro terms, increased
approximately 10% in 2005 compared to 2004, despite the decline in cement export
volumes.
United Kingdom
Our United Kingdom operations consist of the United Kingdom operations
we acquired from RMC, which are consolidated in our results of operations for
ten months in 2005. Cement sales volumes in these United Kingdom operations
decreased approximately 2% in 2005 compared to 2004, and ready-mix concrete
sales volumes decreased approximately 1% during the same period. The decreases
in sales volumes were primarily due to slower than expected growth in the U.K.
economy resulting in decreased construction activity in the repair, maintenance
and improvement sector and the public-works sector, which were partially offset
by moderate increases in demand in the residential sector and the industrial
sector. Our United Kingdom operations' net sales for the ten-month period ended
December 31, 2005 represented approximately 9% our net sales in constant Peso
terms, before eliminations resulting from consolidation, for 2005.
Rest of Europe
Our operations in our Rest of Europe segment in 2005 consisted of the
operations we acquired from RMC in Germany, France, Croatia, Poland, Latvia, the
Czech Republic, Ireland, Austria, Hungary, Portugal, Denmark, Finland, Norway
and Sweden, which are consolidated in our results of operations for ten months
in 2005. Our Rest of Europe operations' net sales for the ten-month period ended
December 31, 2005 represented approximately 16% our net sales in constant Peso
terms, before eliminations resulting from consolidation, for 2005, and our Rest
71
of Europe operations' operating income for the ten-month period ended December
31, 2005 represented approximately 7% of our consolidated operating income, in
constant Peso terms, for 2005. Set forth below is a discussion of sales volumes
in Germany and France, the most significant countries in our Rest of Europe
segment, based on net sales.
In Germany, cement sales volumes in the operations we acquired from RMC
decreased approximately 8% in 2005 compared to 2004, and ready-mix concrete
sales volumes in those operations decreased approximately 12% during the same
period. These decreases are primarily due to a weak German economy, a high
unemployment rate, the slow growth of disposable income and political
uncertainty, resulting in decreased construction activity.
In France, ready-mix concrete sales volumes in the operations we
acquired from RMC increased approximately 6% in 2005 compared to 2004, primarily
as a result of strong demand from the housing sector due to tax incentives to
promote housing construction and the launch of a new social housing program.
South America, Central America and the Caribbean
Our operations in South America, Central America and the Caribbean in
2005 consisted of our operations in Venezuela and Colombia, the operations we
acquired from RMC in Argentina, which are consolidated in our results of
operations for ten months in 2005, and our Central American and Caribbean
operations, which included our operations in Costa Rica, the Dominican Republic,
Panama, Nicaragua, Puerto Rico and the operations we acquired from RMC in
Jamaica, which are consolidated in our results of operations for ten months in
2005, as well as several cement terminals and other assets in other Caribbean
countries and our trading operations in the Caribbean region. Most of these
trading operations consist of the resale in the Caribbean region of cement
produced by our operations in Venezuela and Mexico.
Our South America, Central America and the Caribbean operations'
domestic cement sales volumes increased 19% in 2005 compared to 2004, and
ready-mix concrete sales volumes increased 31% over the same period. The
increases in sales volumes are primarily attributable to the increased sales
volumes in our Venezuelan and Colombian operations described below, as well as
increased demand in the Dominican Republic due to new tourist development, new
infrastructure projects in Panama and the commencement of ready-mix operations
in Nicaragua and Costa Rica. Our South America, Central American and Caribbean
operations' average domestic sales price of cement decreased approximately 11%
in Dollar terms in 2005 compared to 2004 due to competitive pressures in the
Colombian market, while the average sales price of ready-mix concrete increased
approximately 4% in Dollar terms over the same period. For the year ended
December 31, 2005, sales of ready-mix concrete in South America, Central America
and the Caribbean represented approximately 27% of our South America, Central
America and the Caribbean operations' net sales. Set forth below is a discussion
of sales volumes in Venezuela and Colombia, the most significant countries in
our South America, Central American and Caribbean segment, based on net sales.
Our Venezuelan operations' domestic cement sales volumes increased
approximately 38% in 2005 compared to 2004, and ready-mix concrete sales volumes
increased approximately 27% during the same period. The increases in volumes
resulted primarily from increased government spending in the public sector due
to higher oil revenues and increased demand in the self-construction sector. Our
Venezuelan operations' cement export volumes, which represented approximately
42% of our Venezuelan cement sales volumes in 2005, decreased approximately 21%
in 2005 compared to 2004 primarily due to increased domestic demand. Of our
Venezuelan operations' total cement export volumes during 2005, 76% was shipped
to North America and 24% to South America and the Caribbean.
Our Colombian operations' cement volumes increased approximately 33% in
2005 compared to 2004, and ready-mix concrete sales volumes increased
approximately 17% during the same period. The increases in sales volumes
resulted primarily from increased demand in the self-construction sector due to
lower unemployment and higher wages and increased spending in the public works
sectors.
As a result of the increases in domestic cement sales volumes,
ready-mix concrete sales volumes and the average sales prices of ready-mix
concrete, net sales in our South America, Central America and the Caribbean
operations, in constant Peso terms, increased approximately 4% in 2005 compared
to 2004, despite the decrease in the average domestic sales prices of cement in
Colombia and the decline in Venezuelan cement export volumes.
72
Africa and the Middle East
Our operations in Africa and the Middle East consist of our operations
in Egypt and the operations we acquired from RMC in the United Arab Emirates
(UAE) and Israel, which are consolidated in our results of operations for ten
months in 2005.
Our Africa and the Middle East operations' domestic cement sales
volumes increased approximately 23% in 2005 compared to 2004, primarily as a
result of increased demand in the housing sector and increased government
spending on infrastructure in Egypt due to higher oil revenues. Our Africa and
the Middle East operations' average domestic sales price of cement increased
approximately 13% in Egyptian pound terms and approximately 21% in Dollar terms
in 2005 compared to 2004, primarily due to better overall market conditions in
Egypt. Our Africa and the Middle East operations' cement export volumes, which
represented approximately 14% of our Africa and the Middle East operations'
cement sales volumes in 2005, decreased approximately 53% in 2005 compared to
2004 primarily due to increased domestic demand in Egypt. Of our Africa and the
Middle East operations' total cement export volumes during 2005, 95% was shipped
to Europe and 5% was shipped to Africa. Our Africa and the Middle East
operations' ready-mix concrete sales volumes increased significantly in 2005
compared to 2004 primarily as a result of the consolidation of RMC's UAE and
Israeli operations for ten months in 2005 (representing approximately 92% of our
ready-mix concrete sales volumes in the region). For the year ended December 31,
2005, sales of ready-mix concrete in Africa and the Middle East represented
approximately 51% of our Africa and the Middle East operations' net sales.
As a result of the consolidation of RMC's UAE and Israeli operations
and the increases in domestic cement sales volumes and the average domestic
sales prices of cement in our Egyptian operations, net sales in our Africa and
the Middle East operations, in constant Peso terms, increased approximately 185%
in 2005 compared to 2004, despite the decline in cement export volumes.
Asia
Our operations in Asia consist of our operations in the Philippines,
Thailand, Bangladesh, Taiwan and the operations we acquired from RMC in
Malaysia, which are consolidated in our results of operations for ten months in
2005. Our Asian operations' domestic cement sales volumes increased
approximately 2% in 2005 compared to 2004, primarily due to strong cement demand
in the housing sector in Thailand and greater market coverage in Bangladesh,
which were partially offset by decreased demand in the Philippines as a result
of political uncertainty, while the average sales price of cement in the region
increased approximately 10%, in Dollar terms, during the same period. Our Asian
operations' cement export volumes, which represented approximately 18% of our
Asian operations' cement sales volumes in 2005, increased approximately 116% in
2005 compared to 2004 primarily due to expansion into other markets in the
Middle East and Southeast Asia. Of our Asian operations' total cement export
volumes during 2005, 58% was shipped to the Middle East and 42% to the Southeast
Asia region. Our Asian operations' ready-mix concrete sales volumes increased
significantly in 2005 compared to 2004, primarily due to the consolidation of
RMC's Malaysian operations for ten months in 2005 (representing nearly all of
our ready-mix concrete sales volumes in the region). For the year ended December
31, 2005, sales of ready-mix concrete in Asia represented approximately 15% of
our Asian operations' net sales.
Primarily as a result of the increases in domestic cement sales
volumes, cement export volumes and the average sales price of cement, but also
as a result of the consolidation of RMC's Malaysian ready-mix concrete
operations, net sales in our Asian operations, in constant Peso terms, increased
approximately 89% in 2005 compared to 2004.
Others
Our Others segment includes our worldwide cement, clinker and slag
trading operations, our information solutions company and other minor
subsidiaries. Net sales in our Others segment increased approximately 34% in
2005 compared to 2004 in constant Peso terms, primarily as a result of a 74%
increase in our trading operations' net sales in 2005 compared to 2004 due to
increased trading activity resulting from the consolidation of RMC's trading
operations for ten months in 2005. For the year ended December 31, 2005, our
trading operations' net sales represented approximately 69% of our Others
segment's net sales.
73
Cost of Sales
Our cost of sales, including depreciation, increased approximately 101%
from Ps48,997 million in 2004 to Ps98,460 million in 2005 in constant Peso
terms, primarily due to the consolidation of RMC's operations for ten months
during 2005. Excluding the effect of the consolidation of RMC's operations, our
cost of sales, including depreciation, increased approximately 7% during the
same period, primarily as a result of higher energy costs. As a percentage of
net sales, cost of sales increased from 56% in 2004 to 61% in 2005 (57%,
excluding the effect of the consolidation of RMC).
Gross Profit
Our gross profit increased approximately 69% from Ps38,065 million in
2004 to Ps64,249 million in 2005 in constant Peso terms. Excluding the effect of
the consolidation of RMC's operations, our gross profit increased approximately
4% during the same period. Our gross margin decreased from 44% in 2004 to 40% in
2005, primarily due to higher energy costs and the consolidation of RMC's
operations for ten months during 2005, which resulted in a change in our product
mix as we had a higher percentage of sales of ready-mix concrete, aggregates and
other products having a higher cost of sales and a lower profit margin as
compared to cement. Excluding the effect of the consolidation of RMC's
operations, our gross margin decreased to 43% due to higher energy costs
partially offset by higher sales volumes and average sales prices in most of our
markets. The increase in our gross profit is primarily attributable to the 87%
increase in our net sales in 2005 compared to 2004 (6%, excluding the effect of
the consolidation of RMC), partially offset by the 101% increase in our cost of
sales in 2005 compared to 2004 (7%, excluding the effect of the consolidation of
RMC).
Operating Expenses
Our operating expenses increased approximately 107% from Ps18,282
million in 2004 to Ps37,840 million in 2005 in constant Peso terms, primarily
due to the consolidation of RMC's operations for ten months during 2005.
Excluding the effect of the consolidation of RMC's operations, our operating
expenses increased approximately 1% during the same period, primarily as a
result of increased transportation costs due to higher worldwide energy costs,
which were partially offset by our continuing cost-reduction efforts, including
reductions in corporate overhead and travel expenses. As a percentage of net
sales, our operating expenses increased from 21% in 2004 to 23% in 2005
(remained flat, excluding the effect of the consolidation of RMC).
Operating Income
For the reasons mentioned above, our operating income increased
approximately 34% from Ps19,783 million in 2004 to Ps26,409 million in 2005 in
constant Peso terms. Excluding the effect of the consolidation of RMC's
operations, our operating income increased approximately 6% as compared to 2004.
Additionally, set forth below is a quantitative and qualitative analysis of the
effects of the various factors affecting our operating income on a geographic
segment basis.
Mexico
Our Mexican operations' operating income decreased approximately 8%
from Ps11,707 million in 2004 to Ps10,734 million in 2005 in constant Peso
terms. The decrease in operating income was primarily due to decreases in the
average prices of domestic cement and ready-mix concrete and higher energy
costs. The price decreases and higher costs were partially offset by increases
in domestic cement and ready-mix concrete sales volumes and cement export
volumes.
United States
Our U.S. operations' operating income increased approximately 157%
from Ps2,776 million in 2004 to Ps7,145 million in 2005 in constant Peso
terms. The increase in operating income resulted primarily from the
consolidation of RMC's U.S. operations for ten months in 2005 (representing
approximately 28% of our U.S. operations' operating income) and increases in
domestic cement and ready-mix concrete sales volumes and average
74
prices. These increases were partially offset by higher energy and material
costs, the divestiture of assets in March 2005 and the contribution in July 2005
and sale in September 2005 of assets to Ready Mix USA, LLC, as described above
under "Net Sales -- United States," and the depreciation of the Dollar against
the Peso.
Spain
Our Spanish operations' operating income increased approximately 7%
from Ps3,582 million in 2004 to Ps3,819 million in 2005 in constant Peso terms.
The increase in operating income resulted primarily from the proportional
consolidation of RMC's Spanish joint venture operations for nearly ten months in
2005 (representing approximately 4% of our Spanish operations' operating income)
and increases in domestic cement and ready-mix concrete sales volumes and
average prices. These increases were partially offset by a decline in cement
export volumes, higher energy costs and the depreciation of the Euro against the
Peso and the Dollar.
United Kingdom
Our United Kingdom operations consist of the United Kingdom operations
we acquired from RMC, which were consolidated in our results of operations for
ten months in 2005. Our United Kingdom operations' operating income for the
ten-month period ended December 31, 2005 represented approximately 2% of our
consolidated operating income, in constant Peso terms, for 2005.
Rest of Europe
Our operations in our Rest of Europe segment in 2005 consisted of the
operations we acquired from RMC in Germany, France, Croatia, Poland, Latvia, the
Czech Republic, Ireland, Austria, Hungary, Portugal, Denmark, Finland, Norway
and Sweden, which are consolidated in our results of operations for ten months
in 2005. Our Rest of Europe operations' operating income for the ten-month
period ended December 31, 2005 represented approximately 7% of our consolidated
operating income, in constant Peso terms, for 2005.
South America, Central America and the Caribbean
Our South America, Central America and the Caribbean operations'
operating income decreased approximately 39% from Ps4,048 million in 2004 to
Ps2,479 million in 2005 in constant Peso terms. The decrease in operating income
was primarily attributable to the decrease in the average domestic sales prices
of cement in Colombia, the decline in Venezuelan cement export volumes and
higher energy costs. The cement price and export volume decreases and higher
costs were partially offset by increases in domestic cement and ready-mix
concrete sales volumes and the average price of ready-mix concrete.
Africa and the Middle East
Our Africa and the Middle East operations' operating income increased
approximately 87% from Ps613 million in 2004 to Ps1,145 million in 2005 in
constant Peso terms. The increase in operating income resulted primarily from
the consolidation of RMC's UAE and Israeli operations for ten months in 2005
(representing approximately 9% of our operating income in the region) and
increases in cement sales volumes and the average domestic sales price of cement
in Egypt. These increases were partially offset by a decline in cement export
volumes and higher energy costs.
Asia
Our Asian operations' operating income increased approximately 45% from
Ps289 million in 2004 to Ps419 million in 2005 in constant Peso terms. The
increase in operating income resulted primarily from increases in cement export
volumes and the average domestic sales price of cement in the region. These
increases were partially offset by higher energy costs.
75
Others
Operating income (loss) in our Others segment improved approximately
48% from a loss of Ps3,232 million in 2004 to a loss of Ps1,694 million in 2005
in constant Peso terms. The improvement in operating loss was primarily
attributable to a 37.6% increase in our trading operations' operating income in
2005 compared to 2004 due to increased trading activity resulting from the
consolidation of RMC's trading operations for ten months in 2005, and a 16.3%
improvement in our information solutions company's operating loss in 2005
compared to 2004.
Comprehensive Financing Income (Expense)
Pursuant to Mexican GAAP, the comprehensive financing result should
measure the real cost (gain) of an entity's financing, net of the foreign
currency fluctuations and the inflationary effects on monetary assets and
liabilities. In periods of high inflation or currency depreciation, significant
volatility may arise and is reflected under this caption. For presentation
purposes, comprehensive financing income (expense) includes:
o financial or interest expense on borrowed funds;
o financial income on cash and temporary investments;
o appreciation or depreciation resulting from the valuation of
financial instruments, including derivative instruments and
marketable securities, as well as the realized gain or loss from
the sale or liquidation of such instruments or securities;
o foreign exchange gains or losses associated with monetary assets
and liabilities denominated in foreign currencies; and
o gains and losses resulting from having monetary liabilities or
assets exposed to inflation (monetary position result).
Year Ended December 31,
-------------------------------
2004 2005
-------------- -------------
(in millions of constant Pesos)
Net comprehensive financing income (expense):
Financial expense ............................... Ps (3,977) Ps (5,588)
Financial income ................................ 250 417
Results from valuation and liquidation
of financial instruments ..................... 1,280 4,101
Foreign exchange loss, net ...................... (252) (837)
Monetary position gain .......................... 4,123 4,507
-------------- -------------
Net comprehensive financing income (expense).. Ps 1,424 Ps 2,600
============== =============
Our net comprehensive financing income increased approximately 82% from
Ps1,424 million in 2004 to Ps2,600 million in 2005 (Ps3,146 million, excluding
the effect of the consolidation of RMC). The components of the change are shown
above. Our financial expense was Ps5,588 million for 2005, an increase of
approximately 41% from Ps3,977 million in 2004. The increase was primarily
attributable to higher average levels of debt outstanding during 2005 compared
to 2004 as a result of borrowings related to the RMC acquisition. Our financial
income increased approximately 67% from Ps250 million in 2004 to Ps417 million
in 2005 as a result of increases in interest rates. Our results from valuation
and liquidation of financial instruments improved significantly from a gain of
Ps1,280 million in 2004 to a gain of Ps4,101 million in 2005, primarily
attributable to significant valuation improvements from our derivative financial
instruments portfolio (discussed below) during 2005. Our net foreign exchange
results declined from a loss of Ps252 million in 2004 to a loss of Ps837 million
in 2005, mainly due to the depreciation of the Euro against the Dollar. Our
monetary position gain (generated by the recognition of inflation effects over
monetary assets and liabilities) increased from Ps4,123 million during 2004 to
Ps4,507 million during 2005, as a result of an increase in the weighted average
inflation index used in the determination of the monetary position result in
2005 compared to 2004.
76
Derivative Financial Instruments
For the years ended December 31, 2004 and 2005, our derivative
financial instruments that have a potential impact on our comprehensive
financing result consisted of equity forward contracts entered into to hedge our
obligations under our executive stock option programs, foreign exchange
derivative instruments (excluding our foreign exchange forward contracts
designated as hedges of our net investment in foreign subsidiaries), interest
rate swaps, cross currency swaps and interest rate derivatives related to energy
projects. We recognized a gain of Ps4,101 million in 2005 in the item "Results
from valuation and liquidation of financial instruments," of which a net
valuation gain of approximately Ps482 million is attributable to changes in the
fair value of our equity forward contracts that hedge our stock option programs,
net of the costs generated by such programs, a valuation gain of approximately
Ps2,831 million is attributable to changes in the fair value of our foreign
currency derivatives, a valuation gain of approximately Ps33 million is
attributable to changes in the fair value of our marketable securities and a
valuation gain of approximately Ps755 million is attributable to changes in the
fair value of our interest rate derivatives. The estimated fair value gain of
our equity forward contracts and the costs associated with the stock options
both are attributable to the increase, during 2005, in the market price of our
listed securities (ADSs and CPOs) as compared to 2004. The estimated fair value
gain of our foreign currency derivatives is primarily attributable to changes in
the estimated fair value of the contracts we entered into in September 2004 that
were designated as accounting hedges of the foreign exchange risk associated
with our commitment to purchase the remaining outstanding shares of RMC
following the necessary corporate and regulatory approvals at a fixed price in
Pounds (representing a gain of approximately Ps1,411 million), and changes in
the estimated fair value of our cross currency swap contracts relating to our
debt portfolio (representing a gain of approximately Ps1,422 million). The
estimated fair value gain of our interest rate derivatives is primarily
attributable to an increase in five-year interest rates.
Other Expenses, Net
Our other expenses, net decreased approximately 35% from Ps5,169
million in 2004 to Ps3,372 million in 2005 in constant Peso terms, primarily as
a result of new accounting pronouncements under Mexican GAAP, effective as of
January 1, 2005, pursuant to which the amortization of goodwill was eliminated,
although goodwill remains subject to periodic impairment evaluations, which was
partially offset by a one-time charge of Ps976 million related to the change in
pension fund plans from defined benefit to defined contribution. The decrease
was also due to the sale of our 11.9% interest in Cementos Bio Bio, S.A. in
April 2005, which resulted in a net profit of approximately U.S.$19.5 million
(Ps207 million), partially offset by the sale of our Charlevoix, Michigan and
Dixon, Illinois cement plants and several distribution terminals located in the
Great Lakes region in March 2005, which resulted in a net loss of approximately
U.S.$10.5 million (Ps112 million). Excluding the effect of the consolidation of
RMC's operations, our other expenses, net decreased approximately 50% during the
same period.
Income Taxes, Business Assets Tax and Employees' Statutory Profit Sharing
Our effective tax rate was 13.9% in 2005 compared to 12.2% in 2004. Our
tax expense, which primarily consists of income taxes and business assets tax,
increased from Ps1,960 million in 2004 to Ps3,564 million in 2005. The increase
was attributable to higher taxable income in 2005 as compared to 2004. Our
average statutory income tax rate was approximately 30% in 2005 and
approximately 33% in 2004.
Employees' statutory profit sharing improved from an expense of Ps317
million during 2004 to an income of Ps9 million during 2005 due to lower taxable
income for profit sharing purposes in Mexico and Venezuela.
Majority Interest Net Income
Majority interest net income represents the difference between our
consolidated net income and minority interest net income, which is the portion
of our consolidated net income attributable to those of our subsidiaries in
which non-affiliated third parties hold interests. Changes in minority interest
net income in any period reflect changes in the percentage of the stock of our
subsidiaries held by non-affiliated third parties as of the end of each month
during the relevant period and consolidated net income attributable to those
subsidiaries.
77
For the reasons described above, our consolidated net income (before
deducting the portion allocable to minority interest) for 2005 increased
approximately 62% from Ps14,189 million in 2004 to Ps23,010 million in 2005 in
constant Peso terms. Excluding the effect of the consolidation of RMC's
operations, our consolidated net income (before deducting the portion allocable
to minority interest) increased approximately 37% during the same period. The
percentage of our consolidated net income allocable to minority interests
increased from 1.6% in 2004 to 2.5% in 2005 (2.0%, excluding the effect of the
consolidation of RMC), as a result of our contributions in July 2005 and sale in
September 2005 of ready-mix concrete, aggregates and concrete block assets in
the Florida panhandle and southern Georgia to Ready Mix USA, LLC, an entity in
which we own a 49.99% interest. Majority interest net income increased by
approximately 61% from Ps13,965 million in 2004 to Ps22,425 million in 2005 in
constant Peso terms, mainly as a result of our increase in net sales, our
valuation gains on derivative financial instruments, and the decrease in other
expenses, net, partially offset by higher financial expenses and income taxes.
Excluding the effect of the consolidation of RMC's operations, our majority
interest net income increased by approximately 37% during the same period. As a
percentage of net sales, majority interest net income decreased from 16% in 2004
to 14% in 2005. Excluding the effect of the consolidation of RMC's operations,
as a percentage of net sales, majority interest net income increased from 16% in
2004 to 21% in 2005.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Overview
Summarized in the table below are the percentage (%) increases (+) and
decreases (-) for the year ended December 31, 2004 compared to the year ended
December 31, 2003 in our sales volumes and average prices for each of our
geographic segments.
--------------------------------- ----------------------------- --------------- -----------------------------
Export Sales Average Domestic Prices in
Domestic Sales Volumes Volumes Local Currency (1)
Cement Ready-Mix Cement Cement Ready-Mix
--------------------------------- -------------- -------------- --------------- -------------- --------------
North America
--------------------------------- -------------- -------------- --------------- -------------- --------------
Mexico +2% +16% +37% -3% -1%
--------------------------------- -------------- -------------- --------------- -------------- --------------
United States +9% +8% N/A +5% +11%
--------------------------------- -------------- -------------- --------------- -------------- --------------
Europe
--------------------------------- -------------- -------------- --------------- -------------- --------------
Spain +3% +2% -23% +3% +5%
--------------------------------- -------------- -------------- --------------- -------------- --------------
UK N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- --------------
Rest of Europe N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- --------------
South/Central America and the
Caribbean
--------------------------------- -------------- -------------- --------------- -------------- --------------
Venezuela +20% +13% +26% -12% -2%
--------------------------------- -------------- -------------- --------------- -------------- --------------
Colombia +8% +13% N/A -8% +8%
--------------------------------- -------------- -------------- --------------- -------------- --------------
Rest of South/Central America Flat -1% N/A +7% +5%
and the Caribbean (2)
--------------------------------- -------------- -------------- --------------- -------------- --------------
Africa and Middle East
--------------------------------- -------------- -------------- --------------- -------------- --------------
Egypt -6% +86% +173% +32% +13%
--------------------------------- -------------- -------------- --------------- -------------- --------------
Rest of Africa and Middle East N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- --------------
Asia
--------------------------------- -------------- -------------- --------------- -------------- --------------
Philippines -2% -95% -49% +35% -14%
--------------------------------- -------------- -------------- --------------- -------------- --------------
Rest of Asia (3) N/A N/A N/A N/A N/A
--------------------------------- -------------- -------------- --------------- -------------- --------------
N/A = Not Applicable
(1) Represents the average change in domestic cement and ready-mix prices in
local currency terms. For purposes of a geographic segment consisting of a
region, the average prices in local currency terms for each individual
country within the region are first translated into Dollar terms at the
exchange rates in effect as of the end of the reporting period. Variations
for a region represent the weighted average change of prices in Dollar
terms based on total sales volumes in the region.
(2) Rest of South/Central America and the Caribbean includes our operations in
Costa Rica, Panama, the Dominican Republic, Nicaragua, Puerto Rico and our
trading activities in the Caribbean.
(3) Rest of Asia includes our operations in Thailand, Bangladesh and other
assets in the Asian region.
On a consolidated basis, our cement sales volumes increased
approximately 2%, from 64.7 million tons in 2003 to 65.8 million tons in
2004, and our ready-mix concrete sales volumes increased approximately 10%,
from 21.7 million cubic meters in 2003 to 23.9 million cubic meters in 2004.
Our net sales increased approximately 6%
78
from Ps82,045 million in 2003 to Ps87,062 million in 2004, and our operating
income increased approximately 19% from Ps16,665 million in 2003 to Ps19,783
million in 2004.
The following tables present selected condensed financial information
of net sales and operating income for each of our geographic segments for the
years ended December 31, 2003 and 2004. Variations in net sales determined on
the basis of constant Mexican Pesos include the appreciation or depreciation
which occurred during the period between the local currencies of the countries
in the regions vis-a-vis the Mexican Peso, as well as the effects of inflation
as applied to the Mexican Peso amounts using our weighted average inflation
factor; therefore, such variations differ substantially from those based
solely on the countries' local currencies:
-----------------------------------------------------------------------------------------------------------
Net Sales
-----------------------------------------------------------------------------------------------------------
Approximate For the Year
Currency Ended December 31,
Fluctuations, ---------------------------
Net of Variations
Variations in Inflation in Constant
Geographic Segment Local Currency(1) Effects Mexican Pesos 2003 2004
-----------------------------------------------------------------------------------------------------------
(In millions of constant
Mexican Pesos as of
December 31, 2005)
---------------------------
North America
Mexico............................. +4.5% -0.9% +3.6% 30,102 31,196
United States ..................... +14.0% -7.6% +6.4% 19,836 21,097
Europe
Spain ............................. +5.6% +0.4% +6.0% 13,910 14,741
United Kingdom..................... N/A N/A N/A N/A N/A
Rest of Europe .................... N/A N/A N/A N/A N/A
South/Central America and the
Caribbean
Venezuela.......................... +10.6% -8.1% +2.5% 3,652 3,742
Colombia........................... +11.7% -8.1% +3.6% 2,530 2,620
Rest of South/Central America and
the Caribbean (2)............... +4.7% +3.6% +8.3% 6,794 7,357
Africa and Middle East
Egypt.............................. +42.3% -10.8% +31.5% 1,542 2,028
Rest of Africa and Middle East .... N/A N/A N/A N/A N/A
Asia
Philippines........................ +19.8% -14.5% +5.3% 1,536 1,617
Rest of Asia (3)................... N/A N/A N/A N/A N/A
Others (4)......................... +18.8% -8.5% +10.3% 9,602 10,587
-------------------------------
+6.1% 89,504 94,985
Eliminations from consolidation.... (7,459) (7,923)
-------------------------------
Consolidated net sales............. 82,045 87,062
===============================
79
-----------------------------------------------------------------------------------------------------------
Operating Income
-----------------------------------------------------------------------------------------------------------
Approximate For the Year
Currency Ended December 31,
Fluctuations, ---------------------------
Net of Variations
Variations in Inflation in Constant
Geographic Segment Local Currency(1) Effects Mexican Pesos 2003 2004
-----------------------------------------------------------------------------------------------------------
(In millions of constant
Mexican Pesos as of
December 31, 2005)
---------------------------
North America
Mexico............................. +7.3% -6.3% +1.0% 11,593 11,707
United States ..................... +27.0% -8.6% +18.4% 2,344 2,776
Europe
Spain ............................. +17.5% +0.4% +17.9% 3,037 3,582
United Kingdom .................... N/A N/A N/A N/A N/A
Rest of Europe..................... N/A N/A N/A N/A N/A
South/Central America and the
Caribbean
Venezuela.......................... +23.4% -27.4% -4.0% 1,218 1,169
Colombia........................... +14.2% -0.7% +13.5% 1,052 1,194
Rest of South/Central America and
the Caribbean (2)............... +32.8% +7.4% +40.2% 1,202 1,685
Africa and Middle East
Egypt.............................. +93.7% -13.9% +79.8% 341 613
Rest of Africa and Middle East .... N/A N/A N/A N/A N/A
Asia
Philippines........................ +318.7% -19.4% +299.3% (145) 289
Rest of Asia (3).................. N/A N/A N/A N/A N/A
Others (4)......................... +12.6% +6.1% +18.7% (3,977) (3,232)
---------------------------
Consolidated operating income...... 16,665 19,783
===========================
----------------------------
N/A = Not Applicable
(1) For purposes of a geographic segment consisting of a region, the net sales
and operating income data in local currency terms for each individual
country within the region are first translated into Dollar terms at the
exchange rates in effect as of the end of the reporting period. Variations
for a region represent the weighted average change in Dollar terms based
on net sales and operating income for the region.
(2) Rest of South/Central America and the Caribbean includes our operations in
Costa Rica, Panama, the Dominican Republic, Nicaragua, Puerto Rico and our
trading activities in the Caribbean.
(3) Rest of Asia includes our operations in Thailand, Bangladesh and other
assets in the Asian region.
(4) Our Others segment includes our worldwide trade maritime operations, our
information solutions company and other minor subsidiaries.
Net Sales
Our net sales increase of 6% during 2004 was primarily attributable to
higher sales volumes in most of our markets, which were partially offset by a
decrease in domestic cement sales volumes in Africa and the Middle East and
Asia and lower domestic cement prices in Mexico and South America, Central
America and the Caribbean. Of our consolidated net sales in 2003 and 2004,
approximately 73% and 71%, respectively, were derived from sales of cement,
approximately 22% and 24%, respectively, from sales of ready-mix concrete and
approximately 5% and 5%, respectively, from sales of other construction
materials and services.
Set forth below is a quantitative and qualitative analysis of the
effects of the various factors affecting our net sales on a geographic segment
basis.
80
Mexico
Our Mexican operations' domestic gray cement sales volumes increased
approximately 2% in 2004 compared to 2003, and ready-mix concrete sales volumes
increased approximately 16% during the same period. The increases in sales
volumes resulted primarily from increased demand in the public sector,
particularly from infrastructure projects and low- and middle-income housing,
as compared to flat self-construction sector volumes during the year. Our
Mexican operations' cement export volumes, which represented 7% of our Mexican
cement sales volumes in 2004, increased approximately 37% in 2004 compared to
2003, due mainly to an increase in public sector spending abroad. Of our
Mexican operations' cement export volumes during 2004, 79% was shipped to the
United States, 20% to Central America and the Caribbean and 1% to South
America. The average cement price in Mexico decreased approximately 3% in
constant Peso terms in 2004 compared to 2003, and the average ready-mix
concrete price decreased approximately 1% in constant Peso terms over the same
period (these prices increased 2% and 4%, respectively, in nominal Peso terms).
For the year ended December 31, 2004, sales of ready-mix concrete in Mexico
represented approximately 25% of our Mexican operations' net sales.
As a result of the increases in cement and ready-mix concrete sales
volumes and the increase in cement export volumes, partially offset by
decreases in average cement and ready-mix prices, net sales in Mexico, in
constant Peso terms, increased approximately 4% in 2004 compared to 2003.
United States
Our United States operations' cement sales volumes, which include
cement purchased from our other operations, increased approximately 9% in 2004
compared to 2003, and ready-mix concrete sales volumes increased approximately
8% over the same period. The increases in sales volumes are primarily
attributable to strong demand from the residential sector due to a low interest
rate environment and from the cement-intensive public works sector, as well as
favorable weather conditions during December 2004. The industrial and
commercial sectors, which declined in 2003, made a strong recovery and grew in
2004. The average sales price of cement increased approximately 5% in Dollar
terms during 2004 compared to 2003, and the average price of ready-mix concrete
increased approximately 11% during the same period. For the year ended December
31, 2004, sales of ready-mix concrete in the U.S. represented approximately 27%
of our U.S. operations' net sales.
As a result of the increases in cement and ready-mix concrete sales
volumes and the increases in average cement and ready-mix prices, net sales in
the United States, in U.S. Dollar terms, increased approximately 14% in 2004
compared to 2003.
Spain
Our Spanish operations' domestic cement sales volumes increased
approximately 3% in 2004 compared to 2003, and ready-mix concrete sales volumes
increased approximately 2% during the same period. The increases in sales
volumes were primarily driven by strong residential construction activity due
to a favorable mortgage environment and by increased spending in public works
due to Spain's infrastructure program, as well as favorable weather conditions
during November and December. Our Spanish operations' cement export volumes,
which represented 2% of our Spanish cement sales volumes in 2004, decreased
approximately 23% in 2004 compared to 2003 primarily due to increased domestic
demand. Of our Spanish operations' total cement export volumes during 2004, 71%
was shipped to the United States, 15% to Europe and 14% to Africa. The average
sales price of cement increased approximately 3% in Euro terms during 2004
compared to 2003, and the average price of ready-mix concrete increased
approximately 5% in Euro terms over the same period. For the year ended
December 31, 2004, sales of ready-mix concrete in Spain represented
approximately 25% of our Spanish operations' net sales.
As a result of the increases in cement and ready-mix concrete sales
volumes and the increases in average cement and ready-mix prices, net sales in
Spain, in Euro terms, increased approximately 6% in 2004 compared to 2003,
despite the decline in cement export volumes.
81
South America, Central America and the Caribbean
As of December 31, 2004, our operations in South America, Central
America and the Caribbean consisted of our operations in Venezuela and Colombia
and our Central American and Caribbean operations, which include our operations
in Costa Rica, the Dominican Republic, Panama, Nicaragua, Puerto Rico, as well
as several cement terminals and other assets in other Caribbean countries and
our trading operations in the Caribbean region. Most of these trading
operations consist of the resale in the Caribbean region of cement produced by
our operations in Venezuela and Mexico.
Our South America, Central America and the Caribbean operations'
domestic cement sales volumes increased approximately 8% in 2004 compared to
2003, and ready-mix concrete sales volumes increased approximately 7% over the
same period. The increases in sales volumes were primarily attributable to the
increased sales volumes in our Venezuelan and Colombian operations described
below. Our South America, Central American and Caribbean operations' average
domestic sales price of cement increased approximately 6% in Dollar terms in
2004 compared to 2003 due to increased demand in the region, which was
partially offset by competitive pressures in the Colombian market and
government price controls over bagged cement in Venezuela, while the average
sales price of ready-mix concrete increased approximately 13% in Dollar terms
over the same period. For the year ended December 31, 2004, sales of ready-mix
concrete in South America, Central America and the Caribbean represented
approximately 17% of our South America, Central America and the Caribbean
operations' net sales. Set forth below is a discussion of sales volumes in
Venezuela and Colombia, the most significant countries in our South America,
Central American and Caribbean segment, based on net sales.
Our Venezuelan operations' domestic cement sales volumes increased
approximately 20% in 2004 compared to 2003, while ready-mix concrete sales
volumes also increased approximately 13% during the same period. The increases
in sales volumes and ready-mix concrete sales volumes were mainly driven by the
self-construction and commercial sectors, while government spending remained
stable. Construction in the private sector increased due to increased
confidence in the economy. Our Venezuelan operations' cement export volumes,
which represented 56% of our Venezuelan cement sales volumes in 2004, increased
approximately 26% in 2004 compared to 2003. The increase in cement export
volumes was due to increases in sales to the United States, Guadalupe, Haiti,
Martinique and Panama. Of our Venezuelan operations' total cement export
volumes during 2004, 75% was shipped to the United States and 25% to the
Caribbean and South America.
Our Colombian operations' domestic cement sales volumes increased
approximately 8% in 2004 compared to 2003, and ready-mix concrete sales volumes
increased approximately 13% during the same period. The increases in sales
volumes were primarily a result of increased demand from the commercial sector
and, to a lesser extent, from the residential sector.
Africa and the Middle East
As of December 31, 2004, our operations in Africa and the Middle East
consisted of our operations in Egypt. Our Africa and the Middle East
operations' domestic cement sales volumes decreased approximately 6% in 2004
compared to 2003, primarily as a result of the decrease in cement volume
resulting from a slowdown in infrastructure spending by the Egyptian
government. However, the lower domestic volumes were partially offset by a more
than 173% increase in cement export volumes compared to 2003. Our Africa and
the Middle East operations' average domestic sales price of cement increased
approximately 32% in Egyptian pound terms and approximately 28% in U.S. dollar
terms in 2004 compared to 2003, primarily due to better overall market
conditions in Egypt. Our Africa and the Middle East operations' cement export
volumes represented approximately 30% of our Africa and the Middle East
operations' total cement sales volumes in 2004. During 2004, 23% of our Africa
and the Middle East operations' cement export volumes were shipped to Africa
while 77% were shipped to Europe. Our Africa and the Middle East operations'
ready-mix concrete sales volumes increased 86% in 2004 compared to 2003,
primarily due to increases in market share achieved by our ready-mix operations
in the local Egyptian market. For the year ended December 31, 2004, sales of
ready-mix concrete in Africa and the Middle East represented approximately 5%
of our Africa and the Middle East operations' net sales.
82
As a result of the increases in the average domestic sales prices of
cement, ready-mix concrete sales volumes and cement export volumes, net sales
in our Africa and the Middle East operations, in constant Peso terms, increased
approximately 32% in 2004 compared to 2003, despite the decrease in domestic
cement sales volumes.
Asia
As of December 31, 2004, our operations in Asia consisted of our
operations in the Philippines, Thailand and Bangladesh. Our Asian operations'
cement sales volumes decreased approximately 9% in 2004 compared to 2003,
primarily as a result of decreased demand in the Philippines public works
sector due to reductions in government spending on infrastructure, while the
average sales price of cement in the region increased approximately 21%, in
Dollar terms, during the same period. Our Asian operations' ready-mix concrete
sales volumes decreased approximately 95% in 2004 compared to 2003 primarily
due to a decrease in public sector spending in the Philippines. For the year
ended December 31, 2004, sales of ready-mix concrete in Asia represented less
than 1% of our Asian operations' net sales.
As a result of the increase in the average cement sales prices, net
sales in our Asian operations, in constant Peso terms, increased approximately
5% in 2004 compared to 2003, despite the decreases in domestic cement and
ready-mix concrete sales volumes.
Others
Our Others segment includes our worldwide cement and clinker trading
operations, our information solutions company and other minor subsidiaries. Net
sales in our Others segment increased approximately 19% in 2004 compared to
2003 in constant Peso terms, primarily as a result of a 35% increase in our
trading operations' net sales in 2004 compared to 2003 due to increased trading
activity. For the year ended December 31, 2004, our trading operations' net
sales represented approximately 67% of our Others segment's net sales.
Cost of Sales
Our cost of sales, including depreciation, increased 4% from Ps47,296
million in 2003 to Ps48,997 million in 2004 in constant Peso terms, primarily
as a result of the increase in our net sales, primarily attributable to higher
average prices in most of our markets, which more than offset higher worldwide
energy costs. As a percentage of sales, cost of sales decreased 1.3% from 57.6%
in 2003 to 56.3% in 2004.
Gross Profit
Our gross profit increased by 10% from Ps34,748 million in 2003 to
Ps38,065 million in 2004 in constant Peso terms. Our gross margin increased
from 42% in 2003 to 44% in 2004, as a result of higher average prices in most
of our markets. The increase in our gross profit was primarily attributable to
the 6% increase in our net sales in 2004 compared to 2003 and the increase of
only 4% in our cost of sales in 2004 compared to 2003.
Operating Expenses
Our operating expenses increased 1% from Ps18,083 million in 2003 to
Ps18,282 million in 2004 in constant Peso terms, primarily as a result of
increased transportation costs due to higher worldwide energy costs, partially
offset by our continuing cost-reduction efforts, including reductions in
corporate overhead and travel expenses. As a percentage of sales, our operating
expenses decreased from 22% in 2003 to 21% in 2004.
Operating Income
For the reasons mentioned above, our operating income increased 19%
from Ps16,665 million in 2003 to Ps19,783 million in 2004. Additionally, set
forth below is a quantitative and qualitative analysis of the effects of the
various factors affecting our operating income on a geographic segment basis.
83
Mexico
Our Mexican operations' operating income increased approximately 1%
from Ps11,593 million in 2003 to Ps11,707 million in 2004 in constant Peso
terms. The increase in operating income was primarily due to increases in
domestic cement and ready-mix concrete sales volumes and cement export volumes.
These increases were partially offset by decreases in the average prices of
domestic cement and ready-mix concrete and higher energy costs.
United States
Our U.S. operations' operating income increased approximately 18% from
Ps2,344 million in 2003 to Ps2,776 million in 2004 in constant Peso terms. The
increase in operating income resulted primarily from increases in domestic
cement and ready-mix concrete sales volumes and average prices. These increases
were partially offset by higher energy and material costs and the depreciation
of the Dollar against the Peso.
Spain
Our Spanish operations' operating income increased approximately 18%
from Ps3,037 million in 2003 to Ps3,582 million in 2004 in constant Peso terms.
The increase in operating income resulted primarily from increases in domestic
cement and ready-mix concrete sales volumes and average prices and the
appreciation of the Euro against the Peso and the Dollar. These increases and
the currency appreciation were partially offset by a decline in cement export
volumes and higher energy costs.
South America, Central America and the Caribbean
Our South America, Central America and the Caribbean operations'
operating income increased approximately 17% from Ps3,472 million in 2003 to
Ps4,048 million in 2004 in constant Peso terms. The increase in operating
income was primarily attributable to increases in domestic cement and ready-mix
concrete sales volumes in Venezuela and Colombia. These increases were
partially offset by the decreases in the average domestic sales prices of
cement in Venezuela and Colombia, the decline in Venezuelan cement export
volumes and higher energy costs.
Africa and the Middle East
Our Africa and the Middle East operations' operating income increased
approximately 80% from Ps341 million in 2003 to Ps613 million in 2004 in
constant Peso terms. The increase in operating income resulted primarily from
increases in the average domestic sales price of cement, cement export volumes
and ready-mix concrete sales volumes in Egypt. These increases were partially
offset by a decline in domestic cement sales volumes in Egypt and higher energy
costs.
Asia
Our Asian operations' operating income (loss) improved approximately
299% from a loss of Ps145 million in 2003 to income of Ps289 million in 2004 in
constant Peso terms. The improvement in operating income (loss) was primarily
attributable to increases in the average domestic sales price of cement in the
Philippines. These increases were partially offset by a decline in domestic
cement sales volumes in the Philippines and higher energy costs.
Others
Operating income (loss) in our Others segment improved approximately
19% from a loss of Ps3,977 million in 2003 to a loss of Ps3,232 million in 2004
in constant Peso terms. The improvement in operating loss was primarily
attributable to an 11.3% increase in our trading operations' operating income
in 2004 compared to 2003 due to increased trading activity, and a 39%
improvement in our information solutions company's operating loss in 2004
compared to 2003.
84
Comprehensive Financing Income (Expense)
Pursuant to Mexican GAAP, the comprehensive financing result should
measure the real cost (gain) of an entity's financing, net of the foreign
currency fluctuations and the inflationary effects on monetary assets and
liabilities. In periods of high inflation or currency depreciation, significant
volatility may arise and is reflected under this caption. For presentation
purposes, comprehensive financing income (expense) includes:
o financial or interest expense on borrowed funds;
o financial income on cash and temporary investments;
o appreciation or depreciation resulting from the valuation of
financial instruments, including derivative instruments and
marketable securities, as well as the realized gain or loss from
the sale or liquidation of such instruments or securities;
o foreign exchange gains or losses associated with monetary assets
and liabilities denominated in foreign currencies; and
o gains and losses resulting from having monetary liabilities or
assets exposed to inflation (monetary position result).
Year Ended December 31,
--------------------------
2003 2004
----------- ----------
(in millions of constant Pesos)
Net comprehensive financing income (expense):
Financial expense................................. Ps (4,359) Ps (3,977)
Financial income.................................. 191 250
Results from valuation and liquidation
of financial instruments ....................... (682) 1,280
Foreign exchange loss, net ....................... (1,965) (252)
Monetary position gain............................ 3,752 4,123
----------- ----------
Net comprehensive financing income (expense)... Ps (3,063) Ps 1,424
=========== ==========
Our net comprehensive financing result improved from an expense of
Ps3,063 million in 2003 to an income of Ps1,424 million in 2004. The components
of the change are shown above. Our financial expense was Ps4,359 million for
2003 compared to Ps3,977 million for 2004, a decrease of 9%. The decrease was
primarily attributable to lower average levels of debt outstanding during 2004,
since the majority of the borrowings related to the RMC acquisition were
incurred in the first quarter of 2005. Our financial income increased 31% from
Ps191 million in 2003 to Ps250 million in 2004 primarily as a result of an
increase in interest rates. Our results from valuation and liquidation of
financial instruments improved from a loss of Ps682 million in 2003 to a gain
of Ps1,280 million in 2004, primarily attributable to valuation improvements
from our derivative financial instruments portfolio (discussed below) during
2004. Our net foreign exchange results improved from a loss of Ps1,965 million
in 2003 to a loss of Ps252 million in 2004. The foreign exchange loss in 2004
was primarily attributable to the appreciation of the Japanese Yen against the
Dollar, which was partially offset by the appreciation of the Peso against the
Dollar, as compared to the foreign exchange loss in 2003, which was primarily
attributable to the depreciation of the Peso against the Dollar and the
appreciation of the Japanese Yen against the Dollar. See notes 12 and 17 to our
consolidated financial statements included elsewhere in this annual report. Our
monetary position gain (generated by the recognition of inflation effects over
monetary assets and liabilities) increased from a gain of Ps3,752 million
during 2003 to a gain of Ps4,123 million during 2004, mainly as a result of an
increase in the weighted average inflation index used in the determination of
the monetary position result in 2004 compared to 2003.
Derivative Financial Instruments
For the years ended December 31, 2003 and 2004, our derivative financial
instruments that have a potential impact on our comprehensive financing result
consisted of equity forward contracts entered into to hedge potential
85
exercises under our executive stock option programs (see notes 16 and 17 to our
consolidated financial statements included elsewhere in this annual report),
foreign exchange derivative instruments, excluding our foreign exchange forward
contracts designated as hedges of our net investment in foreign subsidiaries,
interest rate swaps, cross currency swaps, interest rate swap options
(swaptions), and interest rate derivatives related to energy projects. Of the
gain of Ps1,280 million in 2004 recognized in the item results from valuation
and liquidation of financial instruments, a net valuation loss of approximately
Ps561 million was attributable to changes in the fair value of our equity
forward contracts that hedge our stock option programs, net of the costs
generated by such programs, and an approximate valuation gain of Ps124 million
was attributable to changes in the fair value of our marketable securities.
These losses were offset by an approximate gain of Ps645 million resulting from
changes in the fair value of our interest rate derivatives, and an approximate
gain of Ps1,072 million resulting from changes in the fair value of our foreign
currency derivatives. These valuation effects accounted for substantially all
the gain recorded in 2004 under the line item results from valuation and
liquidation of financial instruments presented above. We experienced valuation
improvements in most of these financial derivatives in 2004 compared to 2003.
See "-- Qualitative and Quantitative Market Disclosure -- Our Derivative
Financial Instruments" and "-- Qualitative and Quantitative Market Disclosure --
Interest Rate Risk, Foreign Currency Risk and Equity Risk." See also notes 12
and 17 to our consolidated financial statements included elsewhere in this
annual report. The estimated net gain mentioned above, determined by the excess
between the fair value gain of our equity forward contracts that hedge the
potential exercise of our executive stock option programs over the costs
associated with the intrinsic value of our executives' options, was primarily
attributable to slight differences in the strike price established in the
forward contracts as compared to those of the options. The fair value gain of
our equity forward contracts and the costs associated with the stock options
both were attributable to the increase, during 2004, in the market price of our
listed securities (ADSs and CPOs) as compared to 2003. The estimated fair value
gain of our foreign currency derivatives was primarily attributable to the
contracts that were designated as accounting hedges of the foreign exchange risk
associated with the firm commitment agreed to on November 17, 2004. On this
date, RMC's shareholders committed to sell their RMC shares at a fixed price.
Changes in the estimated fair value of these contracts from the designation
date, which represented a gain of approximately U.S.$132 million (Ps1,411
million), were recognized in stockholders' equity. See note 17B to our
consolidated financial statements included elsewhere in this annual report.
Other Expenses, Net
Our other expenses, net for 2004 were Ps5,169 million compared to
Ps5,230 million in 2003, a decrease of 1%. The decrease was primarily
attributable to the recognition of gains on the sale of fixed assets during
2004 of approximately Ps617 million compared with Ps147 million in 2003. See
notes 7, 10 and 11 to our consolidated financial statements included elsewhere
in this annual report.
Income Taxes, Business Assets Tax and Employees' Statutory Profit Sharing
Our effective tax rate was 12.2% in 2004 compared to 12.3% in 2003.
Our tax expense, which primarily consists of income taxes and business assets
tax, increased 91% from Ps1,026 million in 2003 to Ps1,960 million in 2004. The
increase was attributable to higher taxable income in 2004 as compared to 2003.
Our average statutory income tax rate was approximately 33% in 2004 and
approximately 34% in 2003.
Employees' statutory profit sharing increased from Ps195 million
during 2003 to Ps317 million during 2004 due to higher taxable income for
profit sharing purposes in Mexico. See note 18B to our consolidated financial
statements included elsewhere in this annual report.
Majority Interest Net Income
Majority interest net income represents the difference between our
consolidated net income and minority interest net income, which is the portion
of our consolidated net income attributable to those of our subsidiaries in
which non-affiliated third parties hold interests. Changes in minority interest
net income in any period reflect changes in the percentage of the stock of our
subsidiaries held by non-affiliated third parties as of the end of each month
during the relevant period and consolidated net income attributable to those
subsidiaries.
86
For the reasons described above, our consolidated net income (before
deducting the portion allocable to minority interest) for 2004 increased 88%,
from Ps7,549 million in 2003 to Ps14,189 million in 2004. The percentage of our
consolidated net income allocable to minority interests decreased from 4.6% in
2003 to 1.6% in 2004, as a result of the 6.83% (695,065 shares) of CAH equity
we acquired for approximately U.S.$70 million. Majority interest net income
increased by 94%, from Ps7,201 million in 2003 to Ps13,965 million in 2004,
mainly as a result of our increase in net sales, our valuation gains on
derivative financial instruments, the decrease in our foreign exchange loss and
a lower portion of consolidated net income allocable to minority interests,
partially offset by higher income taxes. As a percentage of net sales, majority
interest net income increased from 8.8% in 2003 to 16.0% in 2004.
Liquidity and Capital Resources
Operating Activities
We have satisfied our operating liquidity needs primarily through
operations of our subsidiaries and expect to continue to do so for both the
short-term and long-term. Although cash flow from our operations has
historically overall met our liquidity needs for operations, servicing debt and
funding acquisitions, our subsidiaries are exposed to risks from changes in
foreign currency exchange rates, price and currency controls, interest rates,
inflation, governmental spending, social instability and other political,
economic or social developments in the countries in which they operate, any one
of which may materially reduce our net income and cash from operations.
Consequently, we also rely on cost-cutting and continual operating improvements
to optimize capacity utilization and maximize profitability as well as to
offset the risks associated with having worldwide operations. Our consolidated
net resources provided by operating activities were Ps17.9 billion in 2003,
Ps23.8 billion in 2004, and Ps36.3 billion in 2005. See our Statement of
Changes in the Financial Position included elsewhere in this annual report.
Our Indebtedness
As of December 31, 2005, we had approximately U.S.$9.5 billion (Ps101
billion) of total debt, of which approximately 13% was short-term and 87% was
long-term. Approximately 6% of our long-term debt at December 31, 2005, or
U.S.$0.6 billion (Ps6 billion), is to be paid in 2006, unless extended. As of
December 31, 2005, after giving effect to our cross currency swap arrangements
discussed elsewhere in this annual report, 72% of our consolidated debt was
Dollar-denominated, 21% was Euro-denominated, 5% was Yen-denominated, 2% was
Pound-denominated, and immaterial amounts were denominated in other currencies.
The weighted average interest rates paid by us in 2005 in our main currencies
were 5.2% on our Dollar-denominated debt, 2.9% on our Euro-denominated debt,
1.1% on our Yen-denominated debt and 5.5% on our Pound-denominated debt.
From time to time, as part of our financing activities, we and our
subsidiaries have entered into various financing agreements, including bank
loans, credit facilities, sale-leaseback transactions, forward contracts,
forward lending facilities and equity swap transactions. Additionally, we and
our subsidiaries have issued notes, commercial paper, bonds, preferred equity
and putable capital securities.
Most of our outstanding indebtedness has been incurred to finance our
acquisitions and to finance our capital investment programs. CEMEX Mexico and
Empresas Tolteca de Mexico, two of our principal Mexican subsidiaries, have
provided guarantees of our indebtedness in the amount of approximately U.S.$3.8
billion (Ps40 billion), as of December 31, 2005. See Item 3 -- "Key Information
-- Risk Factors -- Our ability to pay dividends and repay debt depends on our
subsidiaries' ability to transfer income and dividends to us," and Item 3 --
"Key Information -- Risk Factors. -- We have incurred and will continue to
incur debt, which could have an adverse effect on the price of our CPOs and
ADSs, result in us incurring increased interest costs and limit our ability to
distribute dividends, finance acquisitions and expansions and maintain
flexibility in managing our business activities," and note 25(x) to our
consolidated financial statements included elsewhere in this annual report.
Some of the debt instruments in respect of our and our subsidiaries'
indebtedness contain various covenants, which, among other things, require us
and them to maintain specific financial ratios, restrict asset sales and
dictate the use of proceeds from the sale of assets. These restrictions may
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities, such as acquisitions, which may be in
87
our interest. From time to time, we have sought and obtained waivers and
amendments to some of our and our subsidiaries' debt agreements, principally in
connection with acquisitions. Our failure to obtain any required waivers may
result in the acceleration of the affected indebtedness and could trigger our
obligations to make payments of principal, interest and other amounts under our
other indebtedness, which could have a material adverse effect on our financial
condition. We believe that we have good relations with our lenders and the
lenders to our subsidiaries, and nothing has come to our attention that would
lead us to believe that any future waivers, if required, would not be
forthcoming. However, we cannot assure you that future waivers would be
forthcoming, if requested. As of December 31, 2005, we were in compliance with
all the financial covenants in our own and our subsidiaries' debt instruments.
Under Rule 5-04(c) of Regulation S-X under the Exchange Act, companies
with restricted net assets exceeding 25% of their consolidated net assets are
required to include Schedule 1 (parent company-only financial statements).
Under Rule 4-08(e)(3) of Regulation S-X, loan provisions prohibiting dividend
payments, loans or advances to the parent by a subsidiary, are considered
restrictions for purposes of computing restricted net assets.
As of December 31, 2005, the financing agreements entered by us and
our subsidiaries do not include covenants or agreements that by their specific
terms restrict the transfer of funds from our subsidiaries to us in the form of
dividends, loans or advances. However, the financing agreements include some
restrictive covenants that would be considered transfer restrictions under Rule
4-08(e)(3) of Regulation S-X. These restrictive covenants are as follows:
o A restriction on asset dispositions that limits the use of
proceeds of funds obtained from assets sales. The restriction
requires us to reinvest such proceeds in cement-related assets or
repay senior debt. As of December 31, 2005, we had senior debt in
subsidiaries of approximately U.S.$6,040 million (equivalent to
approximately 61.5% of our consolidated net assets); and
o A financial covenant limiting the amount of total debt maintained
in New Sunward Holdings (a Dutch holding company subsidiary)
relative to the stockholder's equity of CEMEX Espana (our
operating company in Spain and the direct parent of New Sunward
Holdings) to be not higher than 0.35 times. As of December 31,
2005, New Sunward Holdings had outstanding debt of approximately
(euro) 574 million (U.S.$680 million) (equivalent to approximately
6.9% of our consolidated net assets).
In light of these restrictions, as of December 31, 2005, we had more
than 25% of our consolidated net assets subject to restrictions under Rule
4-08(e)(3) of Regulation S-X, and as a result we have included the required
Schedule 1 (parent company-only financial statements) elsewhere in this annual
report.
As of December 31, 2005, after the completion of our acquisition of
RMC and the refinancing of the acquisition credit facilities, we had
approximately U.S.$9.5 billion of outstanding indebtedness, including
indebtedness assumed from RMC. The following is a description of the material
indebtedness assumed from RMC and which was repaid following the acquisition.
o On October 18, 2002, RMC entered into a (pound)1 billion Term and
Revolving Credit Agreement relating to a multi-currency five-year
(pound)600 million revolving credit facility and a multi-currency
five-year (pound)400 million term loan facility. On March 16,
2005, CEMEX Espana and RMC entered into an amended and restated
agreement relating to these facilities. Simultaneous with the
execution of the amended and restated agreement, the total amount
of the facilities was reduced to (pound)604,354,196; the revolving
credit facility was reduced to (pound)425,558,038 and the term
loan facility was reduced to (pound)178,796,154. This facility was
fully prepaid and cancelled on November 7, 2005.
o On November 30, 2000, RMC and several institutional purchasers
entered in a Note Purchase Agreement in connection with a private
placement by RMC. Pursuant to this agreement, RMC issued U.S.$120
million aggregate principal amount of 8.40% Senior Notes due 2010,
U.S.$90 million aggregate principal amount of 8.50% Senior Notes
due 2012 and U.S.$45 million aggregate principal amount of 8.72%
Senior Notes due 2020. As described below under "--Recent
Developments," in May 2006, these notes were fully prepaid.
88
On April 5, 2005, we entered into a U.S.$1 billion 180-day term credit
agreement guaranteed by CEMEX Mexico and Empresas Tolteca de Mexico. The
proceeds of this credit facility were used to fund the repayment of amounts
outstanding under a U.S.$1.25 billion multi-currency term loan facility of New
Sunward Holding B.V., dated September 24, 2004, entered into to finance the RMC
acquisition. This credit facility was fully prepaid on June 7, 2005.
On May 17, 2005, we completed a cash tender offer, pursuant to which we
purchased a portion of the outstanding notes originally issued by RMC in private
placements. The total amount paid in the cash tender offer was approximately
U.S.$315 million, which was repaid through a private placement by a wholly-owned
subsidiary of CEMEX Espana during June 2005 of new five- and ten-year notes in
an aggregate principal amount of U.S.$325 million.
On May 31, 2005, we entered into a five-year U.S.$1.2 billion
revolving credit facility guaranteed by CEMEX Mexico and Empresas Tolteca de
Mexico. The proceeds of this credit facility were used to repay amounts
outstanding under the U.S.$1 billion multi-currency 180-day term credit
agreement we entered into on April 5, 2005, to repay other existing
indebtedness and for general corporate purposes.
On June 6, 2005, we amended our U.S.$800 million revolving credit
facility dated June 23, 2004. The amended facility is a U.S.$700 million
revolving credit facility guaranteed by CEMEX Mexico and Empresas Tolteca de
Mexico and matures in 2009.
On June 27, 2005, New Sunward Holding B.V. entered into a two-year
U.S.$350 million term loan facility and a four-year U.S.$350 million
multi-currency revolving credit facility, guaranteed by CEMEX, CEMEX Mexico and
Empresas Tolteca de Mexico. The proceeds of these facilities were used to repay
existing indebtedness not related to the RMC acquisition.
On July 7, 2005, CEMEX Espana amended the second and third tranches of
a U.S.$3.8 billion multi-currency term loan facility, dated September 24, 2004,
totaling U.S.$2.3 billion. The amended facility consists of a two-year U.S.$575
million term loan, a five-year U.S.$575 million term loan and a U.S.$1.15
billion amortizing loan with an average maturity of 3.5 years.
With this transaction we completed the refinancing process of the debt
incurred in connection with the RMC acquisition.
Our Prior Preferred Equity Arrangements
In November 2000, we formed a Dutch subsidiary which issued preferred
equity for an amount of U.S.$1.5 billion (Ps16.0 billion) to provide funds for
our acquisition of CEMEX, Inc., formerly Southdown, Inc. This preferred equity
has since been redeemed. The preferred equity granted its holders 10% of the
subsidiary's voting rights, as well as the right to receive a preferred
dividend. Under the terms of the preferred equity financing arrangements,
Sunward Acquisitions N.V., or Sunward Acquisitions, our indirect Dutch
subsidiary, contributed its 85.2% interest in CEMEX Espana to New Sunward
Holding B.V., or New Sunward Holding, in exchange for all its ordinary shares.
A special purpose entity, which was neither owned nor controlled by us,
borrowed U.S.$1.5 billion from a syndicate of banks and New Sunward Holding
issued preferred equity to the special purpose entity in exchange for the
U.S.$1.5 billion, which was used to subscribe for further shares in CEMEX
Espana. During 2001, we redeemed a portion of the then-outstanding preferred
equity in the amount of U.S.$600 million, and at year-end 2001, the balance
outstanding was U.S.$900 million. In February 2002, we refinanced this
preferred equity transaction, pursuant to which we redeemed U.S.$250 million of
the outstanding preferred equity and extended the termination dates on the
remaining U.S.$650 million. In October 2003, we redeemed before maturity all
the U.S.$650 million (Ps7,444 million) of preferred equity outstanding.
For accounting purposes under Mexican GAAP, the preferred equity was
recorded as a minority interest on our balance sheet until its liquidation.
Dividends paid on the preferred equity were recorded as a minority interest on
our income statement. For the year ended December 31, 2003 preferred equity
dividends amounted to approximately U.S.$12.5 million.
89
In October 2004, we liquidated the remaining 9.66% Putable Capital
Securities for approximately U.S.$66 million (Ps705 million). These capital
securities were issued in 1998 by one of our Spanish subsidiaries in an
aggregate liquidation amount of U.S.$250 million, with an annual dividend rate
of 9.66%. In April 2002, through a tender offer, U.S.$184 million of the
capital securities were redeemed. The amount paid to holders in excess of the
nominal amount of the capital securities pursuant to the early redemption of
approximately U.S$20 million (Ps229 million) was recognized against
stockholders' equity. The balance outstanding as of December 31, 2003 was
U.S.$66 million (Ps756 million). Until January 1, 2004, for accounting purposes
under Mexican GAAP, this transaction was recorded as minority interest in our
balance sheet and dividends paid on the capital securities were recorded as
minority interest net income in our income statement. For the year ended
December 31, 2003, capital securities dividends amounted to approximately
U.S.$6.4 million. As of January 1, 2004, as a result of new accounting
pronouncements under Mexican GAAP, this transaction was recorded as debt in our
balance sheet and dividends paid on the capital securities during 2004, which
amounted to approximately U.S.$6 million (Ps75 million), were recorded as part
of financial expenses in our income statement.
Our Prior Equity Arrangements
In December 1995, we entered into a financing transaction pursuant to
which one of our Mexican subsidiaries transferred shares of stock of one of its
cement companies to a trust, and a third party purchased a beneficial interest
in the trust for approximately U.S.$124 million in exchange for notes issued by
the trust. We had the right to reacquire these assets on various dates until
2007. During the course of the transaction, we were committed to make annual
repurchases of the shares underlying the trust, as well as annual fee payments,
which represented the cost of retaining the repurchase option. In December
2003, we acquired the remaining assets for approximately U.S.$76 million.
From inception of the transaction until repurchase of the assets, the
assets related to this transaction were considered as owned by third parties;
therefore, for accounting purposes under Mexican GAAP, this transaction was
included as minority interest in our balance sheet. For the year ended December
31, 2003, the expense generated by retaining the option to re-acquire the
assets amounted to approximately U.S.$15 million and was included as financial
expense in our income statement.
In December 1999, by means of a public offer on the Mexican Stock
Exchange, or MSE, and the New York Stock Exchange, or NYSE, we issued to our
shareholders, members of our board of directors and other executives 105
million appreciation warrants ("warrants") maturing on December 13, 2002, at a
subscription price in pesos of Ps3.2808 per appreciation warrant. A portion of
the appreciation warrants was subscribed as American Depositary Warrants, or
ADWs, each ADW representing five warrants.
In November 2001, we launched a voluntary public exchange offer of new
warrants and new ADWs maturing on December 21, 2004, for our existing warrants
and our existing ADWs on a one-for-one basis. Of the total 105 million warrants
originally issued, 103,790,945, or 98.9%, were tendered in exchange for the new
warrants. Both the old warrants and the new warrants were designed to allow the
holder to benefit from future increases in the market price of our CPOs, with
any appreciation value to be received in the form of our CPOs or ADSs, as
applicable. The old warrants expired on December 13, 2002 in accordance with
their terms without any payments to the holders. Until September 2003, the CPOs
and ADSs required to cover potential exercises of warrants were held through
equity forward contracts with financial institutions. These forward contracts
were settled in October 2003 through simultaneous secondary equity offerings on
the MSE and the NYSE made by us and the banks holding the shares. See note 17A
to our consolidated financial statements included elsewhere in this annual
report and "-- Our Equity Derivative Forward Arrangements."
In November and December 2003, we announced a simultaneous public offer
in the MSE and the NYSE that was concluded during January 2004 by means of which
we repurchased for cash 90,018,042 warrants, or 86.7%, of the then outstanding
warrants and warrants represented by ADWs, which included approximately 34.9
million warrants owned by or controlled by us and our subsidiaries. The price at
which the warrants were purchased was Ps8.10 per warrant (Ps40.50 per ADW). In
addition, in December 2004, the remaining outstanding 13,772,903 warrants were
automatically exercised upon expiration of the warrants in accordance with their
terms. Considering the results of the purchase of warrants in January 2004, the
exercise in December 2004 and the direct expenses related to these transactions,
approximately Ps1,010 million was paid. This amount was recognized against
90
stockholders' equity within additional paid-in-capital. See note 15F to our
consolidated financial statements included elsewhere in this annual report and
"-- Our Equity Derivative Forward Arrangements."
Our Prior Equity Derivative Forward Arrangements
As of December 31, 2004, we had forward contracts covering a total of
30,644,267 ADSs with different maturities until October 2006 and an aggregate
notional amount of U.S.$1,112 million. These forward contracts were entered into
to hedge the future exercise of the options granted under our executive stock
option programs. Changes in the estimated fair value of these contracts were
recognized in the income statement as a component of the costs generated by the
option programs. As of December 31, 2004, the estimated fair value of these
contracts was a gain of approximately U.S.$45 million (Ps479 million). In
October 2005, in connection with a non-dilutive equity offering of all the
shares underlying those forward contracts, we agreed with the forward banks to
settle those forward contracts for cash. From the offering proceeds of
approximately U.S.$1.5 billion, after expenses, approximately U.S.$1.3 billion
was used to settle our obligations under those forward contracts.
In addition, as of December 31, 2004, we had forward contracts covering
a total of 1,364,061 ADSs with different maturities until January 2006 and an
aggregate notional amount of U.S.$45 million. Until December 31, 2004, these
contracts were treated as equity instruments; therefore, changes in their fair
value were recognized in stockholders' equity when settled. Starting in 2005,
changes in the fair value of these contracts were recognized in earnings. As of
December 31, 2004, the estimated fair value of these contracts was a gain of
U.S.$6.0 million (Ps64 million). During 2004, contracts representing 2,509,524
CPOs that were held to meet our obligations to deliver shares under the warrants
program were settled, resulting in a gain of U.S.$3 million (Ps28 million) which
was recognized in stockholders' equity. See note 16E to our consolidated
financial statements included elsewhere in this annual report. These forward
contracts were settled for cash in October 2005 together with the forward
contracts described in the preceding paragraph in connection with a non-dilutive
equity offering of all the shares underlying the forward contracts. See note 17A
to our consolidated financial statements included elsewhere in this annual
report
Our Receivables Financing Arrangements
We have established sales of trade accounts receivable programs with
financial institutions, referred to as securitization programs. These programs
were negotiated by our subsidiaries in Mexico during 2002, our subsidiary in the
United States during 2001 and our subsidiary in Spain during 2000. Through the
securitization programs, our subsidiaries effectively surrender control, risks
and the benefits associated to the accounts receivable sold; therefore, the
amount of receivables sold is recorded as a sale of financial assets and the
balances are removed from the balance sheet at the moment of sale, except for
the amounts that the counterparties have not paid, which are reclassified to
other accounts receivable. See notes 5 and 6 to our consolidated financial
statements included elsewhere in this annual report. The balances of receivables
sold pursuant these securitization programs as of December 31, 2004 and 2005
were Ps6,822 million (U.S.$642 million) and Ps7,334 million (U.S.$691 million),
respectively. The accounts receivable qualifying for sale do not include amounts
over specified days past due or concentrations over specified limits to any one
customer, according to the terms of the programs. Expenses incurred under these
programs, originated by the discount granted to the acquirers of the accounts
receivable, are recognized in the income statements and were approximately Ps109
million (U.S.$10 million) in 2003, Ps121 million (U.S.$11 million) in 2004 and
Ps210 million (U.S.$20 million) in 2005. The proceeds obtained through these
programs have been used primarily to reduce net debt.
Stock Repurchase Program
Under Mexican law, our shareholders may authorize a stock repurchase
program at our annual shareholders' meeting. Unless otherwise instructed by our
shareholders, we are not required to purchase any minimum number of shares
pursuant to such program.
In connection with our 2004 annual shareholders' meeting held on April
28, 2005, our shareholders approved a stock repurchase program in an amount of
up to Ps6 billion (approximately U.S.$565 million) to be implemented between
April 2005 and April 2006. See note 15A to our consolidated financial statements
included elsewhere in this annual report. This program expired in April 2006 and
no CPOs were repurchased under this program.
91
In connection with our 2005 annual shareholders' meeting held on April
27, 2006, our shareholders approved a stock repurchase program in an amount of
up to Ps6 billion (approximately U.S.$540 million) to be implemented between
April 2006 and April 2007.
Recent Developments
On March 31, 2006, we issued a prepayment notice to the holders of the
8.40% Series A Senior Notes due 2010, 8.50% Series B Senior Notes due 2012, and
8.72% Series C Senior Notes due 2020 issued by RMC on November 30, 2000 for a
then aggregate principal amount of U.S.$255 million, as described above. At the
same time, we issued a prepayment notice to the holders of other outstanding
notes originally issued by RMC in private placements for an aggregate principal
amount of U.S.$122 million. These prepayments, which amounted to a total of
approximately U.S.$377 million, were made on May 5, 2006.
Research and Development, Patents and Licenses, etc.
Our research and development, or R&D, efforts help us in achieving our
goal of increasing market share in the markets in which we operate. The
department of the Vice President of Technology is responsible for developing new
products for our cement and ready-mix businesses that respond to our clients'
needs. The department of the Vice President of Energy has the responsibility for
developing new processes, equipment and methods to optimize operational
efficiencies and reduce our costs. For example, we have developed processes and
products that allow us to reduce heat consumption in our kilns, which in turn
reduces energy costs. Other products have also been developed to provide our
customers a better and broader offering of products in a sustainable manner. We
believe this has helped us to keep or increase our market share in many of the
markets in which we operate.
We have ten laboratories dedicated to our R&D efforts. Nine of these
laboratories are strategically located in close proximity to our plants to
assist our operating subsidiaries with troubleshooting, optimization techniques
and quality assurance methods. One of our laboratories is located in Switzerland
where we are continually improving and consolidating our research and
development efforts in the areas of cement, concrete, aggregates, admixtures,
mortar and asphalt technology, as well as in information technology and energy
management. We have several patent registrations and pending applications in
many of the countries in which we operate. These patent registrations and
applications relate primarily to different materials used in the construction
industry and the production processes related to them, as well as processes to
improve our use of alternative fuels and raw materials.
Our Information Technology divisions have developed information
management systems and software relating to cement and ready-mix operational
practices, automation and maintenance. These systems have helped us to better
serve our clients with respect to purchasing, delivery and payment.
R&D activities comprise part of the daily routine of the departments
and divisions mentioned above; therefore, the costs associated with such
activities are expensed as incurred. However, the costs incurred in the
development of software for internal use are capitalized and amortized in
operating results over the estimated useful life of the software, which is
approximately 4 years.
In 2004 and 2005, the combined total expense of the departments of the
Vice President of Energy and the Vice President of Technology, which includes
R&D activities, amounted to approximately U.S.$35 million and U.S.$38 million,
respectively. In addition, in 2004 and 2005, we capitalized approximately
U.S.$10 million and U.S.$17 million, respectively, related to internal use
software development. See note 11 to our consolidated financial statements
included elsewhere in this annual report.
Trend Information
The following discussion contains forward-looking statements that
reflect our current expectations and projections about future events based on
our knowledge of present facts and circumstances and assumptions about future
events. In this annual report, the words "expects," "believes,"
"anticipates," "estimates," "intends," "plans," "probable" and variations of
such words and similar expressions are intended to identify forward-looking
statements. Such statements necessarily involve risks and uncertainties that
could cause actual results to differ
92
materially from those anticipated. The information set forth below is subject
to change without notice, and we are not obligated to publicly update or revise
forward-looking statements.
Overview
During 2005 we achieved two very important milestones. First, we posted
our strongest financial results ever. This achievement comes primarily from the
consolidation of the RMC operations for the ten-month period ending December 31,
2005 and the related synergies, as well as from higher domestic volumes and
prices in most of the markets in our portfolio.
Our second major milestone of the year was the undertaking and
completion of the acquisition of the RMC group on March 1, 2005. This has been
not only the largest but also our most complex acquisition to date, involving
personnel from all of our operations in a multi-country and multi-disciplinary
effort. The integration of this acquisition and the continuous improvement
efforts is an ongoing process. As of December 31, 2005, we had identified
approximately U.S.$360 million of annual savings that we expect to achieve by
2007 through cost-saving synergies, including approximately U.S.$240 million
during 2006. As of December 31, 2005, more than 80% of the post-merger
integration initiatives required to achieve the expected synergies have been
put in place.
Outlook for Our Major Markets
The following is a discussion of our outlook for our four major
markets, the United States, Mexico, Spain and the United Kingdom, which together
generated approximately 62% of our net sales in 2005.
United States
In the United States, all segments of demand experienced strong growth
throughout 2005. Spending in the public sector spending grew significantly
during 2005, especially spending on streets and highways. We expect that streets
and highways spending will continue to be a primary driver of demand in this
sector in 2006 with the recently approved, U.S.$287 billion six-year
surface-transportation program known as SAFETEA-LU, coupled with the generally
improving economic environment and fiscal condition of the states. Consequently,
we expect volumes in the public-works and street-and-highway sectors to increase
in 2006.
The residential sector growth during 2005 was driven mainly by
attractive financial terms, better employment, positive household formation,
tight inventories, and continued migration flows stemming from northern baby
boomers. However, due to higher home prices and higher mortgage rates we are
cautiously expecting a moderate decline in this sector for 2006.
We expect that the industrial-and-commercial sector will continue its
growth trend during 2006 due to continued economic expansion.
Overall, we expect cement volumes in the U.S. to grow in line with, or
slightly in excess of, U.S. gross domestic product (GDP) growth and we expect
ready-mix concrete volumes to grow at a pace slightly below U.S. GDP growth
during 2006. We believe the probability of realizing most of our announced price
increases in the United States is being enhanced by the continuing favorable
supply demand dynamics.
Mexico
In Mexico we expect GDP growth, driven in part by increased government
spending, increases in mortgages and to a lesser extent, a strong self
construction sector as a result of relatively stable real wages and employment.
For 2006, foreign direct investment and remittances from workers abroad should
remain at the same levels as 2005 and contribute to strong economic activity.
We expect that demand in the public sector in 2006 will be driven by
government spending on streets and highways, public buildings, hurricane
reconstruction efforts and other infrastructure projects. We also expect demand
in this sector to be supported by strong government finances as a result of
continued fiscal discipline, and supported by higher prices for Mexican oil
exports. In addition, in February 2006, the government began making
93
distributions from the oil surplus fund from 2005, which was approximately
U.S.$1 billion. As a result, we expect volumes in the public sector to increase
in 2006.
In the residential sector, we expect that cement demand in 2006 will
be driven by low- and middle-income housing growth as mortgage awards sponsored
by Infonavit and other institutions continue to increase at an accelerated pace
and mortgages granted by commercial banks are expected to double in 2006. We
expect a slight increase in volumes in this sector in 2006.
We expect volumes in the self-construction sector to increase
moderately in 2006, as a result of relatively stable real wages and employment.
We believe this sector is growing at a slower pace than GDP because the higher
availability of mortgage financing has enabled the residential construction
sector to satisfy some of the housing demand.
Overall, we expect that cement consumption from government and other
ready-mix-intensive projects will translate into an increase in our ready-mix
concrete volumes in 2006.
Although we are optimistic about the trend in cement consumption,
given the potential uncertainties resulting from our electoral cycle, we are
cautiously estimating moderate growth in cement volumes for 2006.
Spain
In Spain, all segments of demand remained strong during 2005, driven
by a robust construction sector. For 2006, we expect moderate GDP growth in
Spain.
In 2005, the residential sector had its strongest year ever, with
housing starts exceeding the 700 thousand mark. For 2006, we expect volumes in
the residential sector to decline slightly, although housing starts are
expected to remain at high levels with robust cement consumption.
We expect volumes in the public-works sector to remain flat in 2006.
At the national level, we expect this sector to improve after a transitional
period in which some projects were put on hold as the new government settled
in. On the other hand, we expect local municipalities to moderate their
public-works activity throughout the year. Construction activity is also
expected to be positively impacted by the electoral cycle, as several local
elections will take place in 2007. We also expect demand in the public-works
sector will be supported by the Spanish government's new infrastructure plan,
which is expected to run through 2020 and which represents an annual increase
of U.S.$4 billion, or more than 25% per annum, over the previous one.
We expect the industrial-and-commercial sector will remain stable
throughout 2006.
Overall, we expect moderate volume growth in Spain for 2006.
United Kingdom
In the United Kingdom, cement volumes fell by approximately 2% in
2005. The decrease in cement consumption was due mainly to a continued
deceleration of the economy, as GDP growth for 2005 is expected to have been
less than 2%, lower than the original forecast of between 3% and 3.5%. This
resulted in a contraction of the construction output of approximately 1%, the
first annual decline in the United Kingdom since 1994.
We expect GDP in the United Kingdom to grow slightly in 2006, with
moderate growth in construction spending.
We expect a continuation of the same trend we saw in the latter half of
2005, with activity levels slowly improving. We believe the anticipated return
to growth in the public sector and the industrial-and-commercial sector will
partially offset the subdued activity in the repair, maintenance, and
improvement sector and the residential sector. We expect the weak trend to turn
around during the second half of 2006.
94
We expect that the residential sector will not be very active in 2006
due to higher interest rates and housing prices. Improvement in the public-works
sector will depend upon the government returning to its previously announced
investments in infrastructure, highway, and other public building projects.
Overall, we expect volumes in the United Kingdom in 2006 to remain
roughly flat compared with those of last year.
Summary of Material Contractual Obligations and Commercial Commitments
As of December 31, 2005, our subsidiaries had future commitments for
the purchase of raw materials for an approximate amount of U.S.$169 million.
In March 1998, we entered into a 20-year contract with PEMEX providing
that PEMEX's refinery in Cadereyta would supply us with 900,000 tons of petcoke
per year, commencing in 2003. In July 1999, we entered into a second 20-year
contract with PEMEX providing that PEMEX's refinery in Madero would supply us
with 850,000 tons of petcoke per year, commencing in 2002. We expect the PEMEX
petcoke contracts to reduce the volatility of our fuel costs and provide us
with a consistent source of petcoke throughout their 20-year terms.
In 1999, we reached an agreement with ABB Alstom Power and Sithe
Energies, Inc. requiring Alstom and Sithe to finance, build and operate
"Termoelectrica del Golfo," a 230 megawatt energy plant in Tamuin, San Luis
Potosi, Mexico and to supply electricity to us for a period of 20 years.
Pursuant to the agreement, we are obligated to purchase the full electric
capacity generated by the power plant during the 20-year period. We are also
obligated to supply Alstom and Sithe with 1,200,000 tons of petcoke per year for
the 20-year period for the consumption of this power plant and another power
plant built and operated by Alstom and Sithe for Penoles, a Mexican mining
company. We expect to meet our petcoke delivery requirements to Alstom and Sithe
through several petcoke supply agreements, including our petcoke supply contract
with PEMEX. Pursuant to the agreement, we may be obligated to purchase the
Termoelectrica del Golfo plant upon the occurrence of specified material
defaults or events, such as failure to pay when due, bankruptcy or insolvency,
and revocation of permits necessary to operate the facility, and upon
termination of the 20-year period, we will have the right to purchase the assets
of the power plant. We expect this arrangement to reduce the volatility of our
energy costs and to provide approximately 80% of CEMEX Mexico's electricity
needs. The power plant commenced commercial operations on May 1, 2004. As of
December 31, 2005, after twenty months of operations, the power plant has
supplied electricity to 10 of our cement plants in Mexico covering approximately
73% of their needs for electricity and has represented a decrease of
approximately 28% in the cost of electricity at these plants.
For purposes of presenting the approximate cash flows that will be
required to meet our other material contractual obligations, the following
table presents a summary of those obligations, as of December 31, 2005:
Payments Due by Period
----------------------------------------------------------------
(In millions of U.S. Dollars)
Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
-------------------------------------------------- ------------ ----------- --------- ---------- --------------
Long-term bank loans and notes payable............ 8,745 534 2,794 4,501 916
Capital lease obligations......................... 106 30 41 31 4
Total debt (1).............................. 8,851 564 2,835 4,532 920
Operating leases (2).............................. 634 178 251 113 92
Interest payments on our indebtedness (3)......... 1,968 564 817 409 178
Estimated cash flows under interest rate
derivatives (4)............................... 330 106 114 79 31
Planned funding of pension plans and other
post-retirement benefits (5).................. 1,466 136 272 285 773
(1) Total long-term debt including current maturities is presented in note 12
to our consolidated financial statements included elsewhere in this annual
report. In addition, as of December 31, 2005, we had lines of credit
totaling approximately U.S.$9.9 billion, of which the available portion
amounted to approximately U.S.$2.9 billion. The scheduling of debt
payments does not consider the effect of any refinancing that
95
may occur on our debt during the following years. However, we have been
successful in the past in replacing our long-term obligations with others
of similar nature, and we intend to do so in the future.
(2) Operating leases have not been calculated on the basis of net present
value; instead they are presented in the basis of nominal future cash
flows. See note 22D to our consolidated financial statements included
elsewhere in this annual report. Our operating leases as of December 31,
2005 included the lease of the Balcones cement plant in New Braunfels,
Texas which was scheduled to expire on September 9, 2009. On March 20,
2006, we agreed to terminate this lease prior to expiration and purchased
the Balcones cement plant for approximately U.S.$61 million.
(3) In the determination of our future estimated interest payments on our
floating rate denominated debt, we used the interest rates in effect as of
December 31, 2005.
(4) Our estimated cash flows under interest rate derivatives, which include
the interest rate cash flows under our interest rate swaps and our cross
currency swap contracts, represent the net amount between the rate we pay
and the rate we receive under such contracts. In the determination of our
future estimated cash flows, we used the interest rates applicable under
such contracts as of December 31, 2005.
(5) Amounts relating to our planned funding to pensions and other
postretirement benefits presented in the table above represent our
estimated annual payments under these benefits for the next 10 years,
determined in local currency and translated into U.S. dollars at the
exchange rates as of December 31, 2005, and includes our estimate of the
number of new retirees during such future years.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably
likely to have a material effect on our financial condition, operating results,
liquidity or capital resources.
Qualitative and Quantitative Market Disclosure
Our Derivative Financial Instruments
In compliance with the procedures and controls established by our risk
management committee, we have entered into various derivative financial
instrument transactions in order to manage our exposure to market risks
resulting from changes in interest rates, foreign exchange rates and the price
of our common stock. We actively evaluate the creditworthiness of the financial
institutions and corporations that are counterparties to our derivative
financial instruments, and we believe that they have the financial capacity to
meet their obligations in relation to these instruments.
The fair value of derivative financial instruments is based on
estimated settlement costs or quoted market prices and supported by
confirmations of these values received from the counterparties to these
financial instruments. The notional amounts of derivative financial instrument
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss.
(U.S.$ millions)
------------------------------------------------------------------
At December 31, 2004 At December 31, 2005
------------------------ -----------------------
Notional Estimated Notional Estimated
Derivative Instruments amount fair value amount fair value Maturity Date
------------------------------ ----------- ------------- ----------- ----------- ---------------
Equity forward contracts...... 1,157 66 - - -
Foreign exchange forward
contracts..................... 4,898 63 3,200 173 Jan 06- Jul 07
Interest rates swaps.......... 1,950 (174) 2,725 52 Jun 09- Apr 10
Cross currency swaps.......... 1,118 209 2,290 212 Jun 06- Jun 11
Derivatives related to energy. 168 (6) 159 (4) May 2017
Our Equity Derivative Forward Contracts
A substantial portion of our equity derivative forward contracts held
as of December 31, 2004, with an aggregate notional amount of U.S.$1,112
million, were entered into to hedge the potential exercises of options under
our U.S. dollar denominated executive programs (see notes 16 and 17 to our
consolidated financial statements included elsewhere in this annual report).
Changes in the estimated fair value of these forwards were recognized in the
income statement as a component of the costs generated by the stock option
programs. The estimated fair value of these forward contracts represented a
gain of approximately U.S.$45 million as of December 31, 2004. In October 2005,
in connection with a non-dilutive equity offering of all the ADSs underlying
those forward contracts, we agreed with the forward banks to settle those
forward contracts for cash. From the offering proceeds of
96
approximately U.S.$1.5 billion, after expenses, approximately U.S.$1.3 billion
was used to settle our obligations under those forward contracts.
In addition, as of December 31, 2004, we held equity forward contracts
with an aggregate notional amount of U.S.$45 million. Until December 31, 2004,
these contracts were treated as equity instruments; therefore, changes in their
fair value were recognized in stockholders' equity upon settlement. As of
December 31, 2004, the estimated fair value of these contracts was a gain of
approximately U.S.$6.0 million (Ps64 million). As of January 1, 2005, changes in
the fair value of these forward contracts were recognized in the income
statement in the same manner as our other forward contracts described in the
preceding paragraph. These forward contracts were settled for cash in October
2005 together with the forward contracts described in the preceding paragraph in
connection with a non-dilutive equity offering of all the shares underlying the
forward contracts.
Our Foreign Exchange Forward Contracts
A portion of our foreign exchange forward contracts held as of December
31, 2004 and 2005, with notional amounts of U.S.$957 million and U.S.$3,137
million, respectively, are accounted for at their estimated market value as
hedge instruments for our net investments in foreign subsidiaries. Gains or
losses on these forward contracts are recognized as an adjustment to
stockholders' equity within the related foreign currency translation adjustment.
As of December 31, 2004, we held structured foreign exchange forward
contracts, collars and digital options for a notional amount of U.S.$3,453
million in connection with our commitment to purchase RMC. The derivatives were
entered into to hedge the variability in cash flows associated with exchange
fluctuations between the Dollar, the currency in which we obtained the funds to
purchase, and Pounds, the currency in which our firm commitment was denominated.
These contracts were designated as accounting hedges of the foreign exchange
risk associated with the firm commitment agreed to on November 17, 2004, the
date on which RMC's shareholders committed to sell their shares at a fixed
price. Changes in the estimated fair value of these contracts from the
designation date, which represented a gain of approximately U.S.$132 million
(Ps1,411 million), was recognized in stockholders' equity in 2004, and was
reclassified to earnings on March 2005, the month in which the final purchase
occurred. The change in the estimated fair value of these contracts from their
origination until their designation as hedges in 2004 was a gain of
approximately U.S.$102 million (Ps1,094 million) and was recognized in earnings
in 2004. See note 17 to our consolidated financial statements included elsewhere
in this annual report.
Our Interest Rate Swaps
As of December 31, 2004 and 2005, we held interest rate swaps for
notional amounts of U.S.$1,950 million and U.S.$2,725 million, respectively,
entered into in order to hedge contractual cash flows (interest payments) of
underlying debt negotiated at floating rates. Although these interest rate swap
contracts, are part of, and complement, our financial strategy, they generally
do not meet the accounting hedge criteria. Consequently, changes in the
estimated fair value of these instruments were recognized in earnings. However,
as of December 31, 2005, several of our interest rate swap contracts, with an
aggregate notional amount of U.S.$1,500 million, met the accounting hedge
criteria and were designated as accounting hedges of contractual cash flows
(interest payments) of a portion of our floating rate debt. Accordingly, changes
in the estimated fair value of these instruments that meet the accounting hedge
criteria are recognized as stockholders' equity, and will be reclassified to
earnings as the financial expense of the related debt is accrued. In addition,
periodic payments under these instruments that meet the accounting hedge
criteria are recognized in earnings as an adjustment of the effective interest
rate of the related debt. See note 12A to our consolidated financial statements
included elsewhere in this annual report.
Our Cross Currency Swaps
As of December 31, 2004 and 2005, we held cross currency swap
contracts related to our short-term and long-term financial debt portfolio.
Through these contracts, we carried out the exchange of the originally
contracted currencies and interest rates, over a determined amount of
underlying debt. During the life of these contracts, the cash flows originated
by the exchange of interest rates under the cross currency swap contracts
match the interest payment dates and conditions of the underlying debt.
Likewise, at maturity of the contracts and the underlying debt, we will
exchange with the counterparty notional amounts provided by the contracts so
that we will receive an amount of cash flow equal to cover our primary
obligation under the underlying debt. In exchange, we will pay the
97
notional amount in the exchanged currency. As a result, we have effectively
exchanged the risks related to interest rates and foreign exchange variations of
the underlying debt to the rates and currencies negotiated in the cross currency
swap contracts. See note 12B to our consolidated financial statements included
elsewhere in this annual report.
The periodic cash flows on the cross currency swap instruments arising
from the exchange of interest rates are recorded in the comprehensive financing
result as part of the effective interest rate of the related debt. We recognize
the estimated fair value of the cross currency swap contracts as assets or
liabilities in the balance sheet, with changes in the estimated fair value being
recognized through the income statement. All financial assets and liabilities
with the same maturity, for which our intention is to simultaneously realize or
settle, have been offset for presentation purposes, in order to reflect the cash
flows that we expect to receive or pay upon settlement of the financial
instruments.
In respect of the estimated fair value recognition of the cross
currency swap contracts, as of December 31, 2004 and 2005, we recognized net
assets of U.S.$209 million (Ps2,227 million) and U.S.$212 million (Ps2,250
million), respectively, related to the estimated fair value of the short-term
and long-term cross currency swap contracts, of which,
o A gain of approximately U.S.$301 million (Ps3,212 million) as of
December 31, 2004 relates to prepayments made of Yen- and
Dollar-denominated obligations under our cross currency swaps,
thereby decreasing the carrying amounts of the related debt (we
did not make any prepayments of Yen and Dollar-denominated
obligations during 2005), and
o A loss of approximately U.S.$92 million (Ps985 million) as of
December 31, 2004 and a gain of approximately U.S.$212 million
(Ps2,251 million) as of December 31, 2005 represented the
contracts' estimated fair value, before prepayment effects (with
respect to 2004 only), and includes:
o Losses of approximately U.S.$132 million (Ps1,408
million) as of December 31, 2004 and gains of
approximately U.S.$135 million (Ps1,434 million) as of
December 31, 2005, which are directly related to
variations in exchange rates between the inception of the
contracts and the balance sheet date, and which were
offset for presentation purposes during 2004 only as part
of the related debt carrying amount,
o Gains of approximately U.S.$11 million (Ps116 million) as
of December 31, 2004 and approximately U.S.$15 million
(Ps159 million) as of December 31, 2005, identified with
the periodic cash flows for the interest rate swaps, and
which were recognized as an adjustment of the related
financing interest payable, and
o Remaining net assets of approximately U.S.$29 million
(Ps307 million) as of December 31, 2004 and approximately
U.S.$69 million (Ps733 million) as of December 31, 2005,
which were recognized within other short-term and
long-term assets and liabilities, as applicable. See note
12B to our consolidated financial statements included
elsewhere in this annual report.
As of December 31, 2004, the effect on our balance sheet, arising from
the accounting assets and liabilities offset, was that the book value of the
financial liabilities directly related to the cross currency swap contracts was
presented as if such financial liabilities had been effectively negotiated in
the exchange currency instead of in the originally contracted currency. As of
December 31, 2005, as a result of new accounting pronouncements under Mexican
GAAP, which became effective as of January 1, 2005, the book value of the
financial liabilities directly related to the cross currency swap contracts are
presented in the originally contracted currency. For the years ended December
31, 2004 and 2005, the changes in the estimated fair value of our cross
currency swap contracts, excluding prepayment effects in 2004, resulted in a
loss of approximately U.S.$192 million (Ps2,246 million) and a gain of
approximately U.S.$304 million (Ps3,228 million), respectively, which were
recognized within the comprehensive financing result.
98
Our Derivatives Related to Energy Projects
As of December 31, 2004 and 2005, we had an interest rate swap
maturing in May 2017, for a notional amount of U.S.$159 million and U.S.$150
million, respectively, negotiated to exchange floating for fixed interest
rates, in connection with agreements we entered into for the acquisition of
electric energy for a 20-year period commencing in 2003. During the life of the
derivative contract and over its notional amount, we will pay LIBOR rates and
receive a 7.53% fixed rate until maturity in May 2017. In addition, during 2001
we sold a floor option for a notional amount of U.S.$168 million and U.S.$159
million as of December 31, 2004 and 2005, respectively, related to the interest
rate swap contract, pursuant to which, commencing in 2003 and until 2017, we
pay the difference between the 7.53% fixed rate and LIBOR rates. Through the
sale of this option, we received a premium of approximately U.S.$22 million
(Ps251.9 million) in 2001. As of December 31, 2004 and 2005, the combined
estimated fair value of the swap and floor contracts, amounting to approximate
losses of U.S.$6 million (Ps67 million) and U.S.$4 million (Ps44 million),
respectively, were recorded in the comprehensive financing result for each
period. As of December 31, 2004 and 2005, the notional amount of both contracts
is not aggregated, considering that there is only one notional amount with
exposure to changes in interest rates and the effects of one instrument are
proportionally inverse to the changes in the other one. See note 17C to our
consolidated financial statements included elsewhere in this annual report.
Interest Rate Risk, Foreign Currency Risk and Equity Risk
Interest Rate Risk
The table below presents tabular information of our fixed and
floating rate long-term foreign currency-denominated debt as of December 31,
2005. It includes the effects generated by the interest rate swaps and the
cross currency swap contracts that we have entered into, covering a portion of
our financial debt originally negotiated in Pesos and Dollars. See note 12 to
our consolidated financial statements included elsewhere in this annual report.
Average floating interest rates are calculated based on forward rates in the
yield curve as of December 31, 2005. Future cash flows represent contractual
principal payments. The fair value of our floating rate long-term debt is
determined by discounting future cash flows using borrowing rates available to
us as of December 31, 2005 and is summarized as follows:
Expected maturity dates as of December 31, 2005
-------------------------------------------------------------------------------------
After Fair
Debt 2006 2007 2008 2009 2010 2011 Total Value
------------------------------ --------- --------- -------- --------- -------- --------- -------- -----------
(Millions of Dollars equivalents of debt denominated in foreign currencies)
Variable rate................. 510 1,148 599 1,051 1,618 47 4,973 4,830
Average interest rate......... 5.24% 5.20% 5.15% 5.25% 5.25% 5.13%
Fixed rate.................... 54 194 895 1,387 476 872 3,878 3,918
Average interest rate......... 5.09% 4.99% 4.97% 5.06% 5.71% 5.34%
As of December 31, 2005, we were subject to the volatility of the
floating interest rates, which, if such rates were to increase, may adversely
affect our financing cost and our net income. As of December 31, 2005, 56% of
our foreign currency-denominated long-term debt bears floating rates at a
weighted average interest rate of LIBOR plus 43 basis points, after giving
effect to our interest rate swaps and cross currency swaps. As of December 31,
2005, we also held interest rate swaps for a notional amount of U.S.$2,725
million and with a fair value gain of approximately U.S.$52 million during 2005.
Pursuant to these interest rate swaps, we receive variable rates and deliver
fixed rates over the notional amount. These derivatives, even when they do not
meet the criteria to be considered hedging items for accounting purposes,
complement our financial strategy and mitigate our overall exposure to floating
rates. See "-- Our Derivative Financial Instruments -- Our Interest Rate Swaps."
The potential change in the fair value as of December 31, 2005 of these
contracts that would result from a hypothetical, instantaneous decrease of 50
basis points in the interest rates would be a loss of approximately U.S.$28
million (Ps300 million).
99
Foreign Currency Risk
Due to our geographic diversification, our revenues are generated in
various countries and settled in different currencies. However, some of our
production costs, including fuel and energy, and some of our cement prices, are
periodically adjusted to take into account fluctuations in the Dollar/Peso
exchange rate. For the year ended December 31, 2005, approximately 19% of our
net sales, before eliminations resulting from consolidation, were generated in
Mexico, 25% in the United States, 9% in Spain, 9% in the United Kingdom, 16% in
our Rest of Europe segment, 9% in South America, Central America and the
Caribbean, 3% in Africa and the Middle East, 2% in Asia and 8% from other
regions and our cement and clinker trading activities. As of December 31, 2005,
our debt amounted to Ps101 billion, of which approximately 51% was
Dollar-denominated, 21% was Euro-denominated, 21% was Peso-denominated, 5% was
Yen-denominated and 2% was Pound-denominated; therefore, we had a foreign
currency exposure arising from the Dollar-denominated debt, the Euro-denominated
debt, the Yen-denominated debt and the Pound-denominated debt, versus the
currencies in which our revenues are settled in most countries in which we
operate. See "-- Liquidity and Capital Resources -- Our Indebtedness," Item 10
-- "Additional Information -- Material Contracts" and "Risk Factors -- We have
to service our Dollar denominated debt with revenues generated in Pesos or other
currencies, as we do not generate sufficient revenue in Dollars from our
operations to service all our Dollar denominated debt. This could adversely
affect our ability to service our debt in the event of a devaluation or
depreciation in the value of the Peso, or any of the other currencies of the
countries in which we operate." Although we also have a small portion of our
debt in other currencies, we have generated enough cash flow in those currencies
to service that debt. Therefore, we believe there is no material foreign
currency risk exposure with respect to that debt.
As previously mentioned, we have entered into cross currency swap
contracts, designed to change the original profile of interest rates and
currencies over a portion of our financial debt. See "-- Our Derivative
Financial Instruments." As of December 31, 2005, the estimated fair value of
these instruments was a gain of approximately U.S.$212 million (Ps2,251
million). The potential change in the fair value of these contracts as of
December 31, 2005 that would result from a hypothetical, instantaneous
depreciation of 10% in the exchange rate of the Peso against the Dollar, would
be a loss of approximately U.S.$189 million (Ps2,007 million).
Additionally, as previously mentioned, we have entered into foreign
exchange forward contracts designed to hedge our net investment in foreign
subsidiaries, our firm commitments, as well as other currency derivative
instruments. See "-- Our Derivative Financial Instruments." The combined
estimated fair value of our foreign exchange forwards that hedge our net
investment in foreign subsidiaries and our other currency derivatives as of
December 31, 2005 was a gain of approximately U.S.$173 million (Ps1,837
million). The potential change in the fair value of these derivatives as of
December 31, 2005 that would result from a hypothetical, instantaneous
depreciation of 10% in the exchange rate of the Peso combined with a
appreciation of 10% of the Euro against the Dollar would be a loss of
approximately U.S.$422 million (Ps4,482 million), which would be partially
offset by a corresponding foreign translation gain as a result of our net
investment in foreign subsidiaries.
Equity Risk
As described above, we have entered into equity forward contracts on
our own stock. Upon liquidation and at our option, the equity forward contracts
provide for physical settlement or net cash settlement of the estimated fair
value and the effects are recognized in the income statement. At maturity, if
these forward contracts are not settled or replaced, or if we default on these
agreements, our counterparties may sell the shares underlying the contracts.
Such sales may have an adverse effect on our stock market price.
Investments, Acquisitions and Divestitures
The transactions described below represent our principal investments,
acquisitions and divestitures completed during 2003, 2004, and 2005.
Investments and Acquisitions
On September 27, 2004, in connection with a public offer to purchase
RMC's outstanding shares, CEMEX UK Limited, our indirect wholly-owned
subsidiary, acquired 50 million shares of RMC for approximately (pound)432
100
million (U.S.$786 million, based on a Pound/Dollar exchange rate of
(pound)0.5496 to U.S.$1.00 on September 27, 2004), which represented
approximately 18.8% of RMC's outstanding shares. On March 1, 2005, following
board and shareholder approval and clearance from applicable regulators, CEMEX
UK Limited purchased the remaining 81.2% of RMC's outstanding shares and
completed our acquisition of RMC. The transaction value of this acquisition,
including our assumption of approximately U.S.$2.2 billion of RMC's debt, was
approximately U.S.$6.5 billion.
In August and September 2003, we acquired 100% of the outstanding
shares of Mineral Resource Technologies Inc., and the cement assets of
Dixon-Marquette Cement for a combined purchase price of approximately U.S.$100
million. Located in Dixon, Illinois, the single cement facility has an annual
production capacity of 560,000 tons. This cement plant was sold on March 31,
2005 in connection with our sale of U.S. assets in the Great Lakes region, as
described below.
In June 2003, CEMEX Dominicana, S.A. (formely known as Cementos
Nacionales, S.A.) announced a U.S.$130 million investment plan to install a new
kiln for producing clinker with an annual capacity of 1.6 million tons of
clinker. This new kiln, which increased our total clinker production capacity in
the Dominican Republic to 2.2 million tons per year, began operations at the end
of 2005.
In July 2002, we entered into agreements with other CAH investors to
purchase their CAH shares in exchange for CPOs through quarterly share exchanges
in 2003 and 2004. In 2003, 84,763 CAH shares were exchanged for 1,683,822 CPOs,
with an approximate value of U.S.$7.8 million. In 2004, 1,398,602 CAH shares
were exchanged for 27,850,713 CPOs with an approximate value of U.S.$172
million. For accounting purposes, these exchanges were considered effective as
of July 2002. With these exchanges, we increased our equity interest in CAH to
92.3%. In August 2004, we acquired an additional 6.8% equity interest in CAH
(695,065 CAH shares) for approximately U.S.$70 million, and in December 2005, we
acquired the remaining 0.9% interest in CAH (93,241 CAH shares) for
approximately U.S.$8 million, thereby increasing our total equity interest in
CAH to 100%.
In addition to the above-mentioned acquisitions, our net investment in
property, machinery and equipment, as reflected in our consolidated statements
of changes in financial position included elsewhere in this annual report,
excluding acquisitions of equity interests in subsidiaries and affiliates, was
approximately Ps4,510 million (U.S.$425 million) in 2003, Ps4,637 million
(U.S.$437 million) in 2004, and Ps8,341 million (U.S.$785 million) in 2005. This
net investment in property, machinery and equipment has been applied to the
construction and upgrade of plants and equipment, to the maintenance of plants
and equipment, including environmental controls and technology updates.
Divestitures
On March 31, 2005, we sold our Charlevoix, Michigan and Dixon, Illinois
cement plants and several distribution terminals located in the Great Lakes
region to Votorantim Participacoes S.A., a cement company in Brazil, for an
aggregate purchase price of approximately U.S.$389 million. The combined
capacity of the two cement plants sold was approximately two million tons per
year.
On April 26, 2005, we divested our 11.9% interest in Cementos Bio Bio,
S.A., a cement company in Chile, for approximately U.S.$65 million.
On June 1, 2005, we sold a cement terminal adjacent to the Detroit
river to the City of Detroit for a purchase price of approximately U.S.$24
million.
As a condition to closing the RMC acquisition, we agreed with the U.S.
Federal Trade Commission, or FTC, to divest several ready-mix and related assets
in the Tucson, Arizona area. Following FTC approval, we sold RMC's operations in
the Tucson area to California Portland Cement Company for a purchase price of
approximately U.S.$16 million on August 29, 2005.
On July 1, 2005, we and Ready Mix USA, Inc. established two
jointly-owned limited liability companies, CEMEX Southeast, LLC, a cement
company, and Ready Mix USA, LLC, a ready-mix concrete company, to serve the
construction materials market in the southeast region of the United States.
Under the terms of the limited liability
101
company agreements and related asset contribution agreements, we contributed two
cement plants (Demopolis, Alabama and Clinchfield, Georgia) and eleven cement
terminals to CEMEX Southeast, LLC, representing approximately 98% of its
contributed capital, while Ready Mix USA contributed cash to CEMEX Southeast,
LLC representing approximately 2% of its contributed capital. In addition, we
contributed our ready-mix concrete, aggregates and concrete block assets in the
Florida panhandle and southern Georgia to Ready Mix USA, LLC, representing
approximately 9% of its contributed capital, while Ready Mix USA contributed all
its ready-mix concrete and aggregate operations in Alabama, Georgia, the Florida
panhandle and Tennessee, as well as its concrete block operations in Arkansas,
Tennessee, Mississippi, Florida and Alabama to Ready Mix USA, LLC, representing
approximately 91% of its contributed capital. We own a 50.01% interest, and
Ready Mix USA owns a 49.99% interest, in the profits and losses and voting
rights of CEMEX Southeast, LLC, while Ready Mix USA owns a 50.01% interest, and
we own a 49.99% interest, in the profits and losses and voting rights of Ready
Mix USA, LLC. In a separate transaction, on September 1, 2005, we sold 27
ready-mix plants and four concrete block facilities located in the Atlanta,
Georgia metropolitan area to Ready Mix USA, LLC for approximately U.S.$125
million.
On December 22, 2005, we terminated our 50/50 joint ventures with
Lafarge Asland in Spain and Portugal which we acquired in the RMC acquisition.
The Spanish joint venture operated 122 ready-mix concrete plants and 12
aggregates, and the Portuguese joint venture operated 31 ready-mix concrete
plants and five aggregate quarries. In connection with the termination, we
received 29 ready-mix concrete plants and six aggregates quarries in Spain, as
well as (euro)50 million in cash, and Lafarge Asland acquired a 100% interest in
both joint ventures.
See note 9A to our consolidated financial statements included elsewhere
in this annual report.
U.S. GAAP Reconciliation
Our consolidated financial statements included elsewhere in this annual
report have been prepared in accordance with Mexican GAAP, which differ in some
significant respects from U.S. GAAP. The Mexican GAAP consolidated financial
statements include the effects of inflation as provided for under Bulletin B-10
and Bulletin B-15 and are presented in constant Pesos representing the same
purchasing power for each period presented, whereas financial statements
prepared under U.S. GAAP are presented on a historical cost basis. The
reconciliation to U.S. GAAP included as note 25 to our consolidated financial
statements presented elsewhere in this annual report includes (i) a reconciling
item for the reversal of the effect of applying the CEMEX weighted average
inflation factor instead of the Mexican inflation-only factor for the
restatement to constant pesos for the years ended December 31, 2002 and 2003,
and (ii) a reconciling item to reflect the difference in the carrying value of
machinery and equipment of foreign origin and related depreciation, between (a)
the methodology set forth by Mexican GAAP in which fixed assets are restated
using the inflation index of the assets' origin country and the variation in the
foreign exchange rate between the country of origin currency and the functional
currency, and (b) the amounts that would be determined by using the historical
cost/constant currency method in which fixed assets are restated using the
inflation index of the country that holds the asset. As described below, these
provisions of inflation accounting under Mexican GAAP do not meet the
requirements of Rule 3-20 of Regulation S-X of the Securities and Exchange
Commission. Our reconciliation does not include the reversal of other Mexican
GAAP inflation accounting adjustments as these adjustments represent a
comprehensive measure of the effects of price level changes in the inflationary
Mexican economy and, as such, is considered a more meaningful presentation than
historical cost-based financial reporting for both Mexican and U.S. accounting
purposes.
Majority net income under U.S. GAAP for the years ended December 31,
2003, 2004, and 2005 amounted to Ps8,984 million, Ps18,505 million and Ps22,115
million, respectively, compared to majority net income under Mexican GAAP for
the years ended December 31, 2003, 2004, and 2005 of approximately Ps7,201
million, Ps13,965 million and Ps22,425 million, respectively. See note 25 to our
consolidated financial statements included elsewhere in this annual report for a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to us and the effects that newly issued accounting pronouncements
have had in our financial position.
Newly Issued Accounting Pronouncements Under U.S. GAAP
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 123R, Share-Based Payment, a revision of Statement 123, "Accounting
for Stock Issued to Employees", which establishes standards for
102
the accounting of all share-based payment transactions, with a primary focus on
schemes in which an entity obtains employee services in share-based payment
transactions, also clarifies and expands guidance in several areas, including
measuring fair value, classifying an award as equity or as a liability, and
attributing compensation cost to reporting periods. SFAS 123R requires enitities
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award and
eliminates the alternative to use APB Opinion 25's intrinsic value method of
accounting, permitted by Statement 123 as originally issued (see note 25(r) to
our financial statements included elsewhere in this annual report), under which,
upon compliance with certain rules, issuing stock options to employees resulted
in recognition of no compensation cost. The cost under SFAS 123R should be
recognized over the period during which an employee is required to provide
service in exchange for the award (usually the vesting period). The grant-date
fair value of employee share awards will be estimated using option-pricing
models, unless observable market prices for the same or similar instruments are
available.
The cost under SFAS 123R for equity awards should be recognized over
the period during which an employee is required to provide service in exchange
for the award (usually the vesting period). In addition, for liability awards,
the cost should be determined by the changes in the estimated fair value of the
awards at each reporting date. The grant-date fair value, and the fair value at
the reporting date, for employee equity and liability awards, respectively,
will be estimated using option-pricing models, unless observable market prices
for the same or similar instruments are available.
SFAS 123R is effective for CEMEX as of January 1, 2006 and applies to
all awards classified as equity awards granted after the effective date and to
awards modified, repurchased, or cancelled after that date, as well as to all
outstanding liability awards. The cumulative effect of initially applying this
statement, if any, will be recognized as of the effective date. As of the
effective date, entities that used the fair-value-based method for either
recognition or disclosure under Statement 123 (see note 25(r) to our financial
statements included elsewhere in this annual report) will apply SFAS 123R using
a modified version of prospective application. Under this transition method of
adoption, compensation cost is recognized for the portion of outstanding awards
for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under Statement 123 for either
recognition or pro forma disclosures. For periods before the effective date,
entities may elect to apply a modified version of retrospective application
under which financial statements for prior periods are adjusted on a basis
consistent with the pro forma disclosures required for those periods by
Statement 123.
In connection with the adoption of SFAS 123R in 2006, considering all
outstanding liability awards, SFAS 123R may have a material impact on our net
income under U.S. GAAP (see pro forma historical information in footnote 25(r)
to our financial statements included elsewhere in this annual report). As of
the effective date of SFAS 123R, we did not have any unvested equity awards;
therefore, we do not to expect to recognize any cost in respect of these
awards.
In December 2004, the FASB issued SFAS 151, Inventory Costs, which
clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Under this statement,
such items will be recognized as current-period charges. In addition, this
statement requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities.
This statement is effective for us for inventory costs incurred on or after
January 1, 2006. We do not expect any material impact on our financial
statements from the adoption of this statement.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, which eliminates an exception in APB 29 for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. The
exception provides that those exchanges should be measured based on the
recorded amount of the nonmonetary assets relinquished, rather than on the fair
values of the exchanged assets. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as
a result of the exchange. This statement is effective for us for nonmonetary
asset exchanges occurring on or after January 1, 2006. We do not expect any
material impact on our financial statements from the adoption of this
statement.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections, which establishes, unless impracticable, retrospective application
as the required method for reporting a change in accounting principle
103
in the absence of explicit transition requirements specific to a newly adopted
accounting principle. This statement is effective for us for all accounting
changes and any error corrections occurring after January 1, 2006. Except for
the effect from accounting changes related to the adoption of SFAS 123R
described above, we do not expect any material impact on our financial
statements from the adoption of this statement.
In September 2005, the FASB's Emerging Issues Task Force (EITF) issued
EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the
Same Counterparty, which provides guidance as to when purchases and sales of
inventory with the same counterparty should be accounted for as a single
exchange transaction. EITF 04-13 also provides guidance as to when a
nonmonetary exchange of inventory should be accounted for at fair value. EITF
04-13 will be applied to new arrangements entered into, and modifications or
renewals of existing arrangements occurring after January 1, 2007. We do not
expect the application of EITF 04-13 to have a material impact on our financial
statements.
104
Item 6 - Directors, Senior Management and Employees
------------------------------------------
Senior Management and Directors
Senior Management
Set forth below is the name and position of each of our executive
officers as of December 31, 2005. The terms of office of the executive officers
are indefinite.
Lorenzo H. Zambrano, Joined CEMEX in 1968. During his career with
Chief Executive Officer CEMEX, Mr. Zambrano has been involved in all
operational aspects of our business. He held
several positions in CEMEX prior to his
appointment as director of operations in
1981. In 1985, Mr. Zambrano was appointed
chief executive officer, and in 1995 he was
elected chairman of the board of directors.
Mr. Zambrano is a graduate of Instituto
Tecnologico y de Estudios Superiores de
Monterrey, A.C., or ITESM, with a degree in
mechanical engineering and administration
and holds an M.B.A. from Stanford
University.
Mr. Zambrano has been a member of our board
of directors since 1979 and chairman of our
board of directors since 1995. He is a
member of the board of directors of IBM and
the International Advisory Board of
Citigroup. He is also a member of the board
of directors of Fomento Economico Mexicano,
S.A. de C.V., Empresas ICA, S.A. de C.V.,
Alfa, S.A. de C.V., Grupo Financiero
Banamex, S.A. de C.V., Vitro, S.A. and Grupo
Televisa, S.A. Mr. Zambrano is chairman of
the board of directors of Consejo de
Ensenanza e Investigacion Superior, A.C.,
which manages ITESM. Until July 2005, Mr.
Zambrano participated in the Chairman's
Council of Daimler Chrysler AG and until
January 2006, Mr. Zambrano was a member of
the Stanford University's Graduate School of
Business Advisory Council.
In addition, he is member of the board of
directors of Museo de Arte Contemporaneo de
Monterrey A.C. (MARCO), Conservacion
Internacional, and the Americas Society,
Inc. Lorenzo H. Zambrano is a first cousin
of Lorenzo Milmo Zambrano and Rogelio
Zambrano Lozano, both members of our board
of directors, as well as of Rodrigo Trevino,
our chief financial officer. He is also a
second cousin of Roberto Zambrano Villarreal
and Mauricio Zambrano Villarreal, both
members of our board of directors.
Hector Medina, Joined CEMEX in 1988. He has held several
Executive Vice President of positions in CEMEX, including director of
Planning and Finance strategic planning from 1991 to 1994,
president of CEMEX Mexico from 1994 to 1996,
and has served as executive vice president
of planning and finance since 1996. He is a
graduate of ITESM with a degree in chemical
engineering and administration. He also
received a Masters of Science degree in
management studies from the management
Center of the University of Bradford in
England and a Masters of Science diploma in
Operations Research from the Escuela de
Organizacion Industrial in Spain in 1975.
Among the positions he previously held are
those of Project Director at Grupo Protexa,
S.A. de C.V., Administrative Director at
Grupo Xesa, S.A. de C.V., Commercial
Director at Direcplan, S.A. and Industrial
Relations Sub-Director at Hylsa, S.A. de
C.V. In March 2006, Mr. Medina was appointed
chairman of the board of Universidad
Regimontana, a private university located in
Monterrey, Mexico. Mr. Medina is a
105
member of the board of directors of Cementos
Chihuahua, Compania Minera Autlan,
Mexifrutas, S.A. de C.V. and Chocota
Productos del Mar, S.A. de C.V. and member
of the "consejo de vigilancia" of Ensenanza
e Investigacion Superior A.C. and ITESM. Mr.
Medina is also a member of the Advisory
Board of Nacional Monte de Piedad.
Armando J. Garcia Segovia, Initially joined CEMEX in 1975 and rejoined
Executive Vice President of CEMEX in 1985. He has served as director of
Development operational and strategic planning from 1985
to 1988, director of operations from 1988 to
1991, director of corporate services and
affiliate companies from 1991 to 1994,
director of development from 1994 to 1996,
general director of development from 1996 to
2000, and executive vice president of
development since 2000. He is a graduate of
ITESM with a degree in mechanical
engineering and administration and holds an
M.B.A. from the University of Texas. He was
employed at Cydsa, S.A. from 1979 to 1981
and at Conek, S.A. de C.V. from 1981 to
1985. He is a brother of Jorge Garcia
Segovia, an alternate member of our board of
directors, and a first cousin of Rodolfo
Garcia Muriel, a member of our board of
directors.
Mr. Garcia has been a member of our board of
directors since 1983. He also serves as a
member of the board of directors of
Materiales Industriales de Chihuahua, S.A.
de C.V., Calhidra y Mortero de Chihuahua,
S.A. de C.V., Grupo Cementos de Chihuahua,
S.A. de C.V., Construcentro de Chihuahua,
S.A. de C.V., Control Administrativo
Mexicano, S.A. de C.V., Compania Industrial
de Parras, S.A. de C.V., Fabrica La
Estrella, S.A. de C.V., Prendas Textiles,
S.A. de C.V., Telas de Parras, S.A. de C.V.,
Canacem, Confederacion Patronal de la
Republica Mexicana, Centro Patronal de Nuevo
Leon, and Instituto Mexicano del Cemento y
del Concreto. He is a member of the board
and former chairman of Centro de Estudios
del Sector Privado para el Desarrollo
Sostenible, and member of the board of the
World Environmental Center.
He is also founder and chairman of the board
of Comenzar de Nuevo, A.C.
Victor Romo, Joined CEMEX in 1985 and has served as
Executive Vice President of director of administration of CEMEX Espana
Administration from 1992 to 1994, general director of
administration and finance of CEMEX Espana
from 1994 to 1996, president of CEMEX
Venezuela from 1996 to 1998, president of
the South American and Caribbean region from
1998 to May 2003, and executive vice
president of administration since May 2003.
He is a graduate in public accounting and
holds a master's degree in administration
and finance from ITESM. Previously, he
worked for Grupo Industrial Alfa, S.A. de
C.V. from 1979 to 1985.
Francisco Garza, Joined CEMEX in 1988 and has served as
President of CEMEX director of trading from 1988 to 1992,
North America Region and president of CEMEX USA from 1992 to 1994,
Trading president of CEMEX Venezuela and Cemento
Bayano from 1994 to 1996, and president of
CEMEX Mexico and CEMEX USA from 1996 to
1998. In 1998, he was appointed president of
the North American region and trading. He is
a graduate in business administration from
ITESM and holds an M.B.A. from the Johnson
School of Management at Cornell University.
106
Fernando Gonzalez, Joined CEMEX in 1989 and has served as vice-
President of the president-human resources from 1992 to 1994,
European Region vice-president-strategic planning from 1994
to 1998, president of CEMEX Venezuela from
1998 to 2000, president of CEMEX Asia from
2000 to May 2003, and president of the South
American and Caribbean region from May 2003
to February 2005. In March 2005, he was
appointed president of the expanded European
Region, including the United Kingdom,
France, Germany, the Rest of Europe (other
than Spain and Italy), and Israel. He is a
graduate in business administration and
holds a master's degree in administration
from ITESM. Previously, he worked for Grupo
Industrial Alfa, S.A. de C.V. from 1976 to
1989.
Jose Luis Saenz de Miera, Joined CEMEX Espana in 1993 as general
President of the Iberia, manager of administration and finance, and
Middle East, Africa and Asia in 1994 he was appointed president of CEMEX
Region Espana. Mr. Saenz de Miera has served as
president of the Europe, Africa and Asia
region from October 1998 to February 2005.
Since March 1, 2005, Mr. Saenz de Miera has
been responsible for the Iberian Peninsula,
Italy, Africa, and Asia, including the
United Arab Emirates and Malaysia. He
studied economic sciences in Universidad
Complutense de Madrid and is a certified
public accountant from Instituto de Censores
Jurados de Cuentas in Spain. Previously, he
was employed from 1973 to 1993 at KPMG Peat
Marwick, since 1982 as partner and between
1988 and 1993 as deputy senior partner. Mr.
Saenz de Miera is a citizen of Spain.
Juan Romero, Joined CEMEX in 1992 and has occupied
President of CEMEX South several senior management positions,
America and the Caribbean including commercial director for CEMEX
Espana, president of CEMEX, Colombia,
commercial director for CEMEX Mexico, and
president of CEMEX Mexico. In March 2005,
Mr. Romero became president of the South
America and Caribbean Regions and Mexico.
Mr. Romero graduated from Universidad de
Comillas in Spain, where he studied Law and
Economics and Enterprise Sciences.
Previously, Mr. Romero worked for Cementos
Sanson and Cementos Portland Morata de
Jalon. Mr. Romero is a citizen of Spain.
Rodrigo Trevino, Joined CEMEX in 1997 and has served as chief
Chief Financial Officer financial officer since then. He holds both
bachelor and master of science degrees in
industrial engineering from Stanford
University. Prior to joining CEMEX, he
served as the country corporate officer for
Citicorp/Citibank Chile from 1995 to 1996,
and prior to that, he worked at Citibank,
N.A. from 1979 to 1994. Rodrigo Trevino is a
first cousin of Lorenzo H. Zambrano, our
chief executive officer and chairman of our
board of directors.
Ramiro G. Villarreal, Joined CEMEX in 1987 and has served as
General Counsel general counsel since then, and also has
served as secretary of our board of
directors since 1995. He is a graduate of
the Universidad Autonoma de Nuevo Leon with
a degree in law. He also received a masters
of science degree in finance from the
University of Wisconsin. Prior to joining
CEMEX, he served as assistant general
director of Grupo Financiero Banpais from
1985 to 1987.
107
Board of Directors
Set forth below are the names of the members of our board of
directors. The members of our board of directors serve for one-year terms. At
our 2005 annual shareholders' meeting held on April 27, 2006, our shareholders
re-elected all the members of our board of directors to serve until the next
annual shareholders' meeting.
Lorenzo H. Zambrano, See "-- Senior Management."
Chairman
Lorenzo Milmo Zambrano Has been a member of our board of directors
since 1977. He is also general director of
Inmobiliaria Ermiza, S.A. de C.V. He is a
first cousin of Lorenzo H. Zambrano,
chairman of our board of directors and our
chief executive officer, a first cousin of
Rogelio Zambrano Lozano, a member of our
board of directors, and an uncle of Tomas
Milmo Santos, an alternate member of our
board of directors.
Armando J. Garcia Segovia See "-- Senior Management."
Rodolfo Garcia Muriel Has been a member of our board of directors
since 1985. He is also the chief executive
officer of Compania Industrial de Parras,
S.A. de C.V. and Parras Cone de Mexico, S.A.
de C.V. He is member of the board of
directors of Parras Williamson, S.A. de
C.V., Telas de Parras, S.A. de C.V., Synkro,
S.A. de C.V., IUSA-GE, S. de R.L.,
Industrias Unidas, S.A., Apolo Operadora de
Sociedades de Inversion, S.A. de C.V., and
Cambridge Lee Industries, Inc. Mr. Garcia
Muriel is also vice president of Camara
Nacional de la Industria Textil. He is a
first cousin of Armando J. Garcia Segovia,
executive vice president of development of
CEMEX and a member of our board of
directors, and Jorge Garcia Segovia, an
alternate member of our board of directors.
Rogelio Zambrano Lozano Has been a member of our board of directors
since 1987. He is also a member of the
advisory board of Grupo Financiero Banamex,
S.A. de C.V. Zona Norte, director of Carza,
S.A. de C.V. and Parque Plaza Sesamo, S.A.
de C.V., and a member of the board of
directors of Hospital San Jose is a first
cousin of Lorenzo H. Zambrano, chairman of
our board of directors and our chief
executive officer, a first cousin of Lorenzo
Milmo Zambrano, a member of our board of
directors, and an uncle of Tomas Milmo
Santos, an alternate member of our board of
directors.
Roberto Zambrano Villarreal Has been a member of our board of directors
since 1987 and president of our audit
committee since 2002. He is also a member of
the board of directors of Cemex Mexico, S.A.
de C.V. He is chairman of the board of
directors of Desarrollo Integrado, S.A. de
C.V., Administracion Ficap, S.A. de C.V.,
Aero Zano, S.A. de C.V., Ciudad Villamonte,
S.A. de C.V., Focos, S.A. de C.V., C & I
Capital, S.A. de C.V., Industrias Diza, S.A.
de C.V., Inmobiliaria Sanni, S.A. de C.V.,
Inmuebles Trevisa, S.A. de C.V., Servicios
Tecnicos Hidraulicos, S.A. de C.V.,
Mantenimiento Integrado, S.A. de C.V., ,
Pilatus PC-12 Center de Mexico, S.A. de
C.V., and Pronatura, A.C. He is a member of
the board of directors of S.L.I. de Mexico,
S.A. de C.V., Compania de Vidrio Industrial,
S.A. de C.V., Comision de Cooperacion
Ecologica Fronteriza (COCEF) and Banco de
Desarrollo America del Norte (BDAN) He is a
brother of Mauricio Zambrano Villarreal, a
member of our board of directors.
108
Bernardo Quintana Isaac Has been a member of our board of directors
since 1990. He is chief executive officer
and chairman of the board of directors of
Empresas ICA Sociedad Controladora, S.A. de
C.V., and a member of the board of directors
of Telefonos de Mexico, S.A. de C.V., Grupo
Financiero Banamex, S.A. de C.V., Grupo
Carso, S.A. de C.V., and Grupo Maseca, S.A.
de C.V. He is also a member of Consejo
Mexicano de Hombres de Negocios, Fundacion
UNAM and, Fundacion ICA. He is a founding
associate of Fundacion Letras Mexicanas and
is currently president of Patronato UNAM.
Dionisio Garza Medina Has been a member of our board of directors
since 1995. He is also chairman of the board
and chief executive officer of Alfa, S.A. de
C.V. He is a member of the board of
directors of Vitro, S.A., Cydsa, S.A., and
ING Mexico. He is also chairman of the
executive board of the Universidad de
Monterrey and a member of Consejo Mexicano
de Hombres de Negocios, the advisory
committee of the David Rockefeller Center
for Latin American Studies of Harvard
University, the board of Harvard Business
School, and the advisory committee of the
New York Stock Exchange.
Alfonso Romo Garza Has been a member of our board of directors
since 1995. He is chairman of the board and
chief executive officer of Savia, S.A. de
C.V. and member of the board of Nacional de
Drogas, S.A. de C.V., Grupo Maseca, S.A. de
C.V., and Grupo Comercial Chedraui, S.A. de
C.V. He is an external advisor of the World
Bank Board for Latin America and the
Caribbean, and a member of the board of The
Donald Danforth Plant Science Center and
Synthetic Genomics.
Mauricio Zambrano Villarreal Has been a member of our board of directors
since 2001. Mr. Zambrano Villarreal served
as an alternate member of our board of
directors from 1995 to 2001. He is also
general vice-president of Desarrollo
Integrado, S.A. de C.V., chairman of the
board of directors of Empresas Falcon, S.A.
de C.V. and Trek Associates, Inc., secretary
of the board of directors of Administracion
Ficap, S.A. de C.V., Aero Zano, S.A. de
C.V., Ciudad Villamonte, S.A. de C.V.,
Focos, S.A. de C.V., Compania de Vidrio
Industrial, S.A. de C.V., C & I Capital,
S.A. de C.V., Industrias Diza, S.A. de C.V.,
Inmuebles Trevisa, S.A. de C.V., and
Servicios Tecnicos Hidraulicos, S.A. de
C.V., and a member of the board of directors
of Invercap, S.A. de C.V. He is a brother of
Roberto Zambrano Villarreal, a member of our
board of directors.
Tomas Brittingham Longoria Has been a member of our board of directors
since 2002. Previously served as an
alternate member of our board of directors
from 1987 until 2002. He is chief executive
officer of Laredo Autos, S.A. de C.V. He is
a son of Eduardo Brittingham Sumner, an
alternate member of our board of directors.
Jose Manuel Rincon Gallardo Has been a member of our board of directors
since 2003. He is also the board's
"financial expert" and a member of our Audit
Committee. He is president of the board of
directors of Sonoco de Mexico, S.A. de C.V.,
member of the board of directors and audit
committee of Grupo Financiero Banamex, S.A.
de C.V., and Grupo Herdez, S.A. de C.V., and
member of the board of directors of Grupo
Transportacion Ferroviaria Mexicana, S.A. de
C.V., Grupo Aeroportuario del Pacifico, S.A.
de C.V., Grupo Cuervo, S.A. de C.V.,
Laboratorio Sanfer-
109
Hormona, and Alexander Forbes Mexico. Mr.
Rincon Gallardo is a member of Pro-Dignidad,
A.C., Instituto Mexicano de Contadores
Publicos, A.C., and Instituto Mexicano de
Ejecutivos de Finanzas, A.C. Mr. Rincon
Gallardo was managing partner of KPMG
Mexico, and was a member of the board of
directors of KPMG United States and KPMG
International.
Alternate Directors
Set forth below are the names of the alternate members of our board of
directors. The alternate members of our board serve for one-year terms.
Eduardo Brittingham Sumner Has been an alternate member of our board of
directors since 2002. Previously served as a
regular member of our board of directors
from 1967 until 2002. He is also general
director of Laredo Autos, S.A. de C.V.,
Consorcio Industrial de Exportacion, S.A. de
C.V., and an alternate member of the board
of directors of Vitro, S.A. He is the father
of Tomas Brittingham Longoria, a member of
our board of directors.
Tomas Milmo Santos Has been an alternate member of our board of
directors since 2001. He is Chief Executive
Officer and president of the board of
directors of Axtel, S.A. de C.V., a
telecommunications company that operates in
the local, long distance and data transfer
market. He is also a member of the board of
directors of Coparmex, Cemex Mexico, HSBC
Mexico, and ITESM. Mr. Milmo Santos holds a
degree in economics from Stanford
University. Mr. Milmo Santos is a nephew of
Lorenzo H. Zambrano, our chief executive
officer and chairman of our board of
directors, and a nephew of Lorenzo Milmo
Zambrano and Rogelio Zambrano Lozano, both
members of our board of directors.
Jorge Garcia Segovia Has been an alternate member of our board of
directors since 1985. He is also a member of
the board of directors of Compania
Industrial de Parras, S.A. de C.V. He is a
brother of Armando J. Garcia Segovia and a
first cousin of Rodolfo Garcia Muriel, both
members of our board of directors.
Board Practices
In compliance with amendments to Mexican securities laws enacted in
2001, our shareholders approved, at a general extraordinary meeting of
shareholders held on April 25, 2002, a proposal to amend various articles of
CEMEX's by-laws, or estatutos sociales, in order to improve our standards of
corporate governance and transparency, among other matters. The amendments
require that at least 25% of our directors qualify as independent directors;
that our board of directors, at its first meeting after the adoption of the
amendments, establish an audit committee; and that shareholders representing at
least 10% of our shares have the right to designate an examiner and an
alternate examiner.
We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.
The Audit Committee
The audit committee is responsible for reviewing related party
transactions and is required to submit an annual report of its activities to our
board of directors. The audit committee is also responsible for the appointment,
compensation and oversight of our external auditors. The audit committee has
also adopted procedures for handling complaints regarding accounting and
auditing matters, including anonymous and confidential methods for
110
addressing concerns raised by employees. Under our by-laws, the majority of
the members of the audit committee, including its president, are required to be
independent directors. Effective July 3, 2006, under our by-laws and the
Mexican securities laws, all the members of the audit committee, including its
president, will be required to be independent directors.
Set forth below are the names of the members of our current audit
committee. The terms of the members of our audit committee are indefinite, and
they may only be removed by a resolution of the board of directors. Jose Manuel
Rincon Gallardo qualifies as an "audit committee financial expert." See "Item
16A--Audit Committee Financial Expert."
Roberto Zambrano Villarreal See "--Board of Directors."
President
Jose Manuel Rincon Gallardo See "--Board of Directors."
Lorenzo Milmo Zambrano See "--Board of Directors."
Alfonso Romo Garza See "--Board of Directors."
Tomas Brittingham Longoria See "--Board of Directors."
Effective July 3, 2006 the members of our audit committee will be as
set forth below.
Roberto Zambrano Villarreal See "--Board of Directors."
President
Jose Manuel Rincon Gallardo See "--Board of Directors."
Tomas Brittingham Longoria See "--Board of Directors."
Alfonso Romo Garza See "--Board of Directors."
Mauricio Zambrano Villarreal See "--Board of Directors."
The reason for the change in the composition of our Audit Committee is
to be in compliance with the new Mexican Securities Law that was enacted on
December 28, 2005 and will become effective on June 28, 2006. Also effective as
of July 3, 2006, we will have a Corporate Practices Committee that will be
comprised of the same board members as the Audit Committee.
Compensation of Our Directors and Members of Our Senior Management
For the year ended December 31, 2005, the aggregate amount of
compensation we paid, or our subsidiaries paid, to all members of our board of
directors, alternate members of our board of directors and senior managers, as
a group, was approximately Ps209.0 million. Approximately Ps38.7 million of
this amount was paid pursuant to the Restricted Stock Incentive Plan, or RSIP,
described below under "-- Restricted Stock Incentive Plan (RSIP)." During 2005,
as part of their compensation, the members of our board of directors, alternate
members of our board of directors and senior managers, as a group, were
allocated a total of approximately 2.6 million CPOs; under the terms of the
RSIP, 25% of those shares vested in 2005, and will remain restricted for one
year.
Certain key executives participate in a bonus plan that distributes to
such executives a bonus pool based on our operating performance. This bonus is
calculated and paid annually, 50% in cash and 50% in restricted CPOs under an
RSIP.
In addition, approximately Ps11.4 million was set aside or accrued to
provide pension, retirement or similar benefits.
111
Employee Stock Option Plan (ESOP)
In 1995, we adopted an employee stock option plan, or ESOP, under
which we were authorized to grant members of our board of directors, members of
our senior management and other eligible employees options to acquire our CPOs.
Our obligations under the plan are covered by shares held in a trust created
for such purpose (initially 216,300,000 shares). As of December 31, 2005, after
giving effect to the exchange program implemented in November 2001 described
below, and the exercise of options that has occurred through that date, options
to acquire 2,711,174 CPOs remain outstanding under this program, with a
weighted average exercise price of approximately Ps15 per CPO. As of December
31, 2005, the outstanding options under this program had a weighted average
remaining tenure of approximately 3 years.
In November 2001, starting with the 2001 voluntary exchange program
described below, we incorporated new features to our ESOP, including an
escalating strike price in dollars, increasing at an annual rate of 7%,
adjusted downward by dividends paid. Options under this amended ESOP were
hedged by non-dilutive equity forward contracts.
In February 2004, starting with the 2004 voluntary exchange program
described below, we further amended our ESOP. The amendments provide, among
other things, that the options will be automatically exercised at a
predetermined price of U.S.$7.50 per CPO if, at any time during the life of the
options, the CPO closing market price reaches or exceeds that predetermined
price. Any gains realized through exercise of the options, whether automatic or
voluntary, will be invested in restricted CPOs. The restricted CPOs received
upon exercise of the options will be held in a trust on behalf of each employee.
The restrictions will gradually lapse, at which time the CPOs will become freely
transferable and the employee may withdraw them from the trust. On January 17,
2005, the closing CPO market price reached U.S.$7.50, and, as a result, all
existing options were automatically exercised.
CEMEX, Inc. ESOP
As a result of the acquisition of CEMEX, Inc. (formerly Southdown,
Inc.) in November 2000, we established a stock option program for CEMEX, Inc.'s
executives for the purchase of our ADSs. The options granted under the program
have a fixed exercise price in U.S. Dollars equivalent to the average market
price of one ADS during a six month period before the grant date and have a
10-year term. Twenty-five percent of the options vest annually during the first
four years after their grant date. The options are covered using shares
currently owned by our subsidiaries, thus potentially increasing stockholders'
equity and the number of shares outstanding. As of December 31, 2005,
considering the options granted since 2001, and the exercise of options that has
occurred through that date, options to acquire 1,663,806 ADSs remain outstanding
under this program. These options have a weighted average exercise price of
approximately U.S.$ 2.40 per CPO or U.S.$ 23.98 per ADS as each ADS currently
represents 10 CPOs.
Stock options activity during 2004 and 2005, the balance of options
outstanding as of December 31, 2004 and 2005 and other general information
regarding our stock option programs, is presented in note 16 to our consolidated
financial statements included elsewhere in this annual report.
As of December 31, 2005, the following ESOP options to purchase our
securities were outstanding:
Number of CPOs Range of
or CPO exercise prices
Title of security equivalents per CPOs or
underlying options underlying options Expiration Date CPO equivalents
----------------------- ------------------- --------------- -----------------
CPOs (Pesos) 2,711,174 2006 - 2011 Ps10.39 - Ps18.27
CPOs (Dollars) (may be 5,779,005 2011 - 2013 U.S.$ 2.18 -
instantly cash-settled) U.S.$3.00
CPOs (Dollars)
(Unlimited upside;
receive restricted CPOs) 34,820,329 2012 U.S.$ 3.79
CEMEX, Inc. ESOP 16,638,060 2011 - 2015 U.S.$ 1.94 -
U.S.$ 3.82
112
As of December 31, 2005, our senior management and directors held the
following ESOP options to acquire our securities:
Number of CPOs Range of
or CPO exercise prices
Title of security equivalents per CPOs or
underlying options underlying options Expiration Date CPO equivalents
----------------------- ------------------- --------------- -----------------
CPOs (Dollars)
(Unlimited upside;
receive restricted CPOs) 12,807,371 2012 U.S.$3.79
As of December 31, 2005, our employees and former employees, other
than senior management and directors, held the following ESOP options to
acquire our securities:
Number of CPOs Range of
or CPO exercise prices
Title of security equivalents per CPOs or
underlying options underlying options Expiration Date CPO equivalents
---------------------- ------------------- --------------- -----------------
CPOs (Pesos) 2,711,174 2006-2011 Ps10.39 - 18.27
CPOs (Dollars) (may be
instantly cash-settled) 5,779,005 2011-2013 U.S.$2.18 - 3.00
CPOs (Dollars)
(Unlimited upside;
receive restricted
CPOs) 22,012,958 2012 U.S.$3.79
CEMEX, Inc. ESOP 16,638,060 2011-2015 U.S.$1.94 - 3.82
The November 2001 Voluntary Exchange Program
In November 2001, we implemented a voluntary exchange program to offer
participants in our ESOP new options in exchange for their existing options. The
new options have an escalating strike price in U.S. Dollars and are hedged by
our equity forward contracts, while the old options had a fixed strike price in
Pesos. The executives who participated in this program exchanged their options
to purchase CPOs at a weighted average strike price of Ps34.11 per CPO, for cash
equivalent to the intrinsic value on the exchange date and new options to
purchase CPOs with an escalating dollar strike price set at U.S.$4.93 per CPO as
of December 31, 2001, growing by 7% per annum less dividends paid on the CPOs.
Of the old options, 57,448,219 (approximately 90.1%) were exchanged for new
options in the voluntary exchange program and 8,695,396 were not exchanged. In
the context of the program, 81,630,766 new options were issued, in addition to
7,307,039 of the new options that were purchased by participants under a
voluntary purchase option that was also part of the exchange. As of December 31,
2005, considering the options granted under the program, the exercise of options
through that date, the result of the February 2004 exchange program described
below and the 2004 voluntary early exercise program, 1,554,150 options to
acquire 3,695,458 CPOs remained outstanding under this program, with an exercise
price of approximately U.S.$5.22 per CPO. As of December 31, 2005, the
outstanding options under this program had a remaining tenure of approximately
5.8 years.
The February 2004 Voluntary Exchange Program
In February 2004, we implemented a voluntary exchange program to
offer ESOP and voluntary employee stock option plan, or VESOP, pursuant to
which participants received new options in exchange for their existing
options. Under the terms of the exchange offer, participating employees
surrendered their options in exchange for new options with an initial strike
price of U.S.$5.05 per CPO and a life of 8.4 years, representing respectively
the weighted average strike price and maturity of existing options. The strike
price of the new options increased annually at a 7% rate, less dividends paid
on the CPOs. The new options were exercisable at any time at the
113
discretion of their holders, and would be automatically exercised if, at
any time during the life of the options, the closing CPO market price reaches
U.S.$7.50.
Any gain realized through the exercise of these options was required
to be invested in restricted CPOs at a 20% discount to market. Holders of these
options were entitled to receive an annual payment of US$0.10 net of taxes per
option outstanding as of the payment date until exercise or maturity of the
options, which was scheduled to grow annually at a 10% rate.
As a result of the voluntary exchange offer, 122,708,146 new options
were issued in exchange for 114,121,358 existing options, which were
subsequently cancelled. All options not exchanged in the offer maintained their
existing terms and conditions.
On January 17, 2005, the closing CPO market price reached U.S.$7.50
and, as a result, all existing options under this program were automatically
exercised. Holders of these options received the corresponding gain in
restricted CPOs, as described above.
The 2004 Voluntary Early Exercise Program
In December 2004, we offered ESOP and VESOP participants new options,
conditioned on the participants exercising and receiving the intrinsic value of
their existing options. As a result of this program, 120,827,370 options from
the February 2004 voluntary exchange program, 16,580,004 options from other
ESOPs, and 399,848 options from VESOP programs were exercised, and we granted a
total of 139,151,236 new options. The new options had an initial strike price
of US$7.4661, which was US$0.50 above the closing CPO market price on the date
on which the old options were exercised, and which increased at a rate of 5.5%
per annum. All gains from the exercise of these new options will be paid in
restricted CPOs. The restrictions will be removed gradually within a period of
between two and four years, depending on the exercise date.
The new options may be exercised at any time at the discretion of
their holders. Of the 139,151,236 new options, 120,827,370 would be
automatically exercised if the closing CPO market price reached U.S.$8.50,
while the remaining 18,323,866 options do not have an automatic exercise
threshold. Holders of these options were entitled to receive an annual payment
of US$0.10 net of taxes per option outstanding as of the payment date until
exercise or maturity of the options or until the closing CPO market price
reached U.S.$8.50, which payment was scheduled to grow annually at a 10% rate.
On June 17, 2005, the closing CPO market price reached U.S.$8.50, and,
as a result, all outstanding options subject to automatic exercise were
automatically exercised and the annual payment to which holders of the
remaining options were entitled was terminated.
For accounting purposes under Mexican and U.S. GAAP, as of December
31, 2005, we accounted for the options granted under the February 2004
voluntary exchange program by means of the fair value method through earnings.
See notes 3W and 16 to our consolidated financial statements included elsewhere
in this annual report.
Voluntary Employee Stock Option Plan (VESOP)
During 1998, 1999, 2002 and 2003, we established voluntary employee
stock option plans, or VESOPs, pursuant to which managers and senior executives
elected to purchase options to CPOs. As of December 31, 2005 there were 5,000
options to acquire 11,889 CPOs, with an exercise price of U.S.$3.05 and a
remaining life of approximately 2 years, outstanding from options sold to
executives under a VESOP in April 2002.
As of December 31, 2005, no member of our senior management or board
of directors held any VESOP options to acquire our securities.
Restricted Stock Incentive Plan (RSIP)
Since January 2005, we have been changing our long-term variable
compensation programs from stock option grants to restricted stock awards
under a Restricted Stock Incentive Plan, or RSIP. Under the terms of the
114
RSIP, eligible employees are allocated a specific number of restricted CPOs as
variable compensation to be vested over a four-year period. An amount in cash
sufficient to purchase twenty five percent (25%) of the allocated number of CPOs
will be distributed annually to a trust to purchase CPOs in the market on behalf
of each employee. The CPOs purchased by the trust will be held in a restricted
account by the trust on behalf of each employee for one year. At the end of the
one-year period the restrictions will lapse, at which time the CPOs will become
freely transferable and the employee may withdraw them from the trust.
During 2005, approximately 2.5 million CPOs were purchased by the
trust on behalf of eligible employees pursuant to the Restricted Stock
Incentive Plan, of which approximately 650 thousand were purchased for members
of our senior management and board of directors.
Employees
As of December 31, 2005, we had approximately 52,674 employees
worldwide, which represented an increase of 97% from year-end 2004. This
increase was mainly attributable to the RMC acquisition during 2005.
The following table sets forth the number of our full-time employees
and a breakdown of their geographic location at the end of each of the last
three fiscal years:
2003 2004 2005
North America
Mexico....................................... 11,155 11,689 13,044
United States................................ 4,709 5,010 9,657
Europe
Spain........................................ 2,963 2,851 2,838
United Kingdom............................... 6,237
Rest of Europe............................... 117 135 10,714
South America, Central America and the Caribbean... 5,099 5,108 6,309
Africa and the Middle East......................... 873 929 2,364
Asia............................................... 1,049 957 1,511
Employees in Mexico have collective bargaining agreements on a
plant-by-plant basis, which are renewable on an annual basis with respect to
salaries and on a biannual basis with respect to benefits. During 2005, more
than 270 contracts with different labor unions were renewed.
Approximately one-fifth of our employees in the United States are
represented by unions, with the largest number being members of the
International Brotherhood of Boilermakers and the International Brotherhood of
Teamsters. Collective bargaining agreements are in effect at all our U.S.
plants and have various expiration dates from 2006 through 2012.
Our Spanish union employees have contracts that are renewable every
two to three years on a company-by-company basis. Employees in the ready-mix
concrete, mortar, aggregates and transport sectors have collective bargaining
agreements by sector.
In the United Kingdom, our cement and logistics operations have
collective bargaining agreements with the Transport & General Workers Union
(TGWU) and Amicus. The rest of our operations in the United Kingdom are not
part of a collective bargaining agreement; however, there are local recognition
agreements for consultation and employee representation with the TGWU and the
GMB union, Britain's general labor union.
In Germany, all our operations have collective bargaining agreements
with the Industriegewerkschaft - BAUEN AGRAR UMWELT - IG B.A.U. union. In
addition to the collective bargaining agreements, there are internal company
agreements, negotiated between the workers council and the company itself.
115
In France, approximately 5% of our employees are members of one of the
five main unions. Each union is represented in the company mainly in Paris and
in Southern France. All agreements are negotiated with unions and non-union
representatives elected in the local workers council (Comite d'Entreprise).
In Venezuela, each of our subsidiary companies operating our cement
plants has its own union, and each company has separately negotiated three-year
labor contracts with the union employees of the relevant plants.
In Colombia, a single union represents the union employees of the
Bucaramanga and Cucuta cement plants. There are also collective agreements with
non-union workers at the Caracolito/Ibague cement plant, Santa Rosa cement
plant and all ready-mix concrete plants in Colombia.
Overall, we consider our relationships with labor unions representing
our employees to be satisfactory.
Share Ownership
As of March 31, 2006, our senior management and directors and their
immediate families owned, collectively, approximately 3.9% of our outstanding
shares, including shares underlying stock options and restricted CPOs under our
ESOPs. This percentage does not include shares held by the extended families of
members of our senior management and directors, since to the best of our
knowledge, no voting arrangements or other agreements exist with respect to
those shares. No individual director or member of our senior management
beneficially owned one percent or more of any class of our outstanding capital
stock.
Item 7 - Major Shareholders and Related Party Transactions
-------------------------------------------------
Major Shareholders
Based upon information contained in a statement on Schedule 13G filed
with the Securities and Exchange Commission on February 13, 2006, as of
December 31, 2005, Southeastern Asset Management, Inc., an investment adviser
registered under the U.S. Investment Advisers Act of 1940, as amended,
beneficially owned 36,279,092 ADSs and 26,061,948 CPOs, representing a total
388,852,868 CPOs or approximately 10.1% of our outstanding capital stock.
Southeastern Asset Management, Inc. does not have voting rights different from
our other shareholders.
Other than Southeastern Asset Management, Inc., the CPO trust and the
shares and CPOs owned by our subsidiaries, we are not aware of any person that
is the beneficial owner of five percent or more of any class of our voting
securities.
As of March 31, 2006, our outstanding capital stock consisted of
7,676,623,102 Series A shares and 3,838,311,551 Series B shares, in each case
including shares held by our subsidiaries.
As of March 31, 2006, a total of 7,429,174,874 Series A shares and
3,714,587,437 Series B shares were held by the CPO trust. Each CPO represents
two Series A shares and one Series B share. A portion of the CPOs is represented
by ADSs. Under the terms of the CPO trust agreement, non-Mexican holders of CPOs
and ADSs have no voting rights with respect to the A shares underlying those
CPOs and ADSs. All ADSs are deemed to be held by non-Mexican nationals. At every
shareholders' meeting, the A shares held in the CPO trust are voted in
accordance with the vote cast by holders of the majority of A shares held by
Mexican nationals and B shares voted at that meeting of shareholders.
As of March 31, 2006, through our subsidiaries, we owned approximately
313.5 million CPOs, representing approximately 8.4% of our outstanding CPOs and
8.2% of our outstanding voting stock. These CPOs are voted at the direction of
our management. From time to time, our subsidiaries are active participants in
the trading market for our capital stock; as a result, the levels of our CPO and
share ownership by those subsidiaries are likely to fluctuate. Our voting rights
over those CPOs are the same as those of any other CPO holder. As of the same
date, an additional 23.8 million CPOs, representing approximately 0.6% of our
outstanding CPOs and 0.6% of our outstanding voting stock, were held in a
derivative instrument hedging expected cash flows of stock options exercises in
the short and medium term.
116
Our by-laws, or estatutos sociales, provide that our board of directors
must authorize in advance any transfer of voting shares of our capital stock
that would result in any person, or group acting in concert, becoming a holder
of 2% or more of our voting shares.
Mexican securities regulations provide that our majority-owned
subsidiaries may neither directly or indirectly invest in our CPOs nor other
securities representing our capital stock. The Mexican securities authority
could require any disposition of the CPOs or of other securities representing
our capital stock so owned and/or impose fines on us if it were to determine
that the ownership of our CPOs or of other securities representing our capital
stock by our subsidiaries, in most cases, negatively affects the interests of
our shareholders. Notwithstanding the foregoing, the exercise of all rights
pertaining to our CPOs or to other securities representing our capital stock in
accordance with the instructions of our subsidiaries does not violate any
provisions of our bylaws or the bylaws of our subsidiaries. The holders of these
CPOs or of other securities representing our capital stock are entitled to
exercise the same rights relating to their CPOs or their other securities
representing our capital stock, including all voting rights, as any other holder
of the same series.
As of March 31, 2006, we had 429 ADS holders of record in the United
States, holding approximately 62% of our outstanding CPOs.
On April 27, 2006, our shareholders approved a new stock split, which
we expect to occur in July 2006. In connection with the stock split, each of our
existing series A shares will be surrendered in exchange for two new series A
shares, and each of our existing series B shares will be surrendered in exchange
for two new series B shares. Concurrent with this stock split, we authorized the
amendment of the CPO trust agreement pursuant to which our CPOs are issued to
provide for the substitution of two new CPOs for each of our existing CPOs, with
each new CPO representing two new series A shares and one new series B share. In
connection with the stock split and at our request, Citibank, N.A., as
depositary for the ADSs, will distribute one additional ADS for each ADS
outstanding as of the record date for the stock split. The ratio of CPOs to ADSs
will not change as a result of the stock split; each ADS will represent ten (10)
new CPOs following the stock split and the CPO trust amendment. The proportional
equity interest participation of existing shareholders will not change as a
result of the stock split. The financial data set forth in this annual report
have not been adjusted to give retroactive effect to the stock split.
Related Party Transactions
Mr. Bernardo Quintana Isaac, a member of our board of directors, is
chief executive officer and chairman of the board of directors of Grupo ICA,
S.A. de C.V., or Grupo ICA, a large Mexican construction company. In the
ordinary course of business, we extend financing to Grupo ICA for varying
amounts at market rates, as we do for our other customers.
In the past, we have extended loans of varying amounts and interest
rates to our directors and executives. During 2005, the largest aggregate amount
of loans we had outstanding to our directors and members of senior management
was Ps11,549,703. As of March 31, 2006, these loans had been fully repaid.
Item 8 - Financial Information
---------------------
Consolidated Financial Statements and Other Financial Information
See Item 18 -- "Financial Statements" and "Index to Consolidated
Financial Statements."
Legal Proceedings
See Item 4 -- "Information on the Company -- Regulatory Matters and
Legal Proceedings."
Dividends
A declaration of any dividend by us is made by our shareholders at a
general ordinary meeting. Any dividend declaration is usually based upon the
recommendation of our board of directors. However, the shareholders are not
obligated to approve the board's recommendation. We may only pay dividends
from retained
117
earnings included in financial statements that have been approved by
our shareholders and after all losses have been paid for, a legal reserve equal
to 5% of our paid-in capital has been created and our shareholders have approved
the relevant dividend payment. According to 1999 Mexican tax reforms, all
shareholders, excluding Mexican corporations, that receive a dividend in cash or
in any other form are subject to a withholding tax. See Item 10 -- "Additional
Information -- Taxation -- Mexican Tax Considerations." Since we conduct our
operations through our subsidiaries, we have no significant assets of our own
except for our investments in those subsidiaries. Consequently, our ability to
pay dividends to our shareholders is dependent upon our ability to receive funds
from our subsidiaries in the form of dividends, management fees, or otherwise.
Some of our credit agreements and debt instruments and some of those of our
subsidiaries contain provisions restricting our ability, and that of our
subsidiaries, as the case may be, to pay dividends if financial covenants are
not maintained. As of December 31, 2005, we and our subsidiaries were in
compliance with, or had obtained waivers in connection with, those covenants.
See Item 3 -- "Key Information -- Risk Factors -- We have incurred and will
continue to incur debt, which could have an adverse effect on the price of our
CPOs and ADSs, result in us incurring increased interest costs and limit our
ability to distribute dividends, finance acquisitions and expansions and
maintain flexibility in managing our business activities."
Although our board of directors currently intends to continue to
recommend an annual dividend on the common stock, the recommendation whether to
pay and the amount of those dividends will continue to be based upon, among
other things, earnings, cash flow, capital requirements and our financial
condition and other relevant factors.
Owners of ADSs on the applicable record date will be entitled to
receive any dividends payable in respect of the A shares and the B shares
underlying the CPOs represented by those ADSs; however, as permitted by the
deposit agreement pursuant to which our ADSs are issued, we may instruct the ADS
depositary not to extend the option to elect to receive cash in lieu of the
stock dividend to the holders of ADSs, as we did in connection with the dividend
for the 2005 fiscal year, as described below. The ADS depositary will fix a
record date for the holders of ADSs in respect of each dividend distribution.
Unless otherwise stated, the ADS depositary has agreed to convert cash dividends
received by it in respect of the A shares and the B shares underlying the CPOs
represented by ADSs from Pesos into Dollars and, after deduction or after
payment of expenses of the ADS depositary, to pay those dividends to holders of
ADSs in Dollars. We cannot assure holders of our ADSs that the ADS depositary
will be able to convert dividends received in Pesos into Dollars.
The following table sets forth the amounts of annual cash dividends
paid in Pesos, on a per share basis, and a convenience translation of those
amounts into Dollars based on the CEMEX accounting rate as of December 31, 2005:
Dividends Per Share
-------------------------------------
Constant Pesos Dollars
-------------------- ---------------
2001..................................... 0.37 0.03
2002..................................... 0.39 0.04
2003..................................... 0.41 0.04
2004..................................... 0.39 0.04
2005..................................... 0.83 0.08
Dividends declared at each year's annual shareholders' meeting are in
respect of dividends for the preceding year. In recent years, our board of
directors has proposed, and our shareholders have approved, dividend proposals,
whereby our shareholders have had a choice between stock dividends or cash
dividends declared in respect of the prior year's results, with the stock
issuable to shareholders who elect the stock dividend over the cash dividend
being issued at a 20% discount from then current market prices. The dividends
declared per share or per CPO in recent years, expressed in constant Pesos as
of December 31, 2005, were as follows: 2001, Ps1.11 per CPO (or Ps0.37 per
share); 2002, Ps1.17 per CPO (or Ps0.39 per share); 2003, Ps1.23 per CPO (or
Ps0.41 per share); 2004, Ps1.17 per CPO (or Ps0.39 per share); and 2005, Ps2.49
per CPO (or Ps0.83 per share). As a result of dividend elections made by
shareholders, in 2002, Ps262 million in cash was paid and 128 million
additional CPOs were issued in respect of dividends declared for the 2001
fiscal year; in 2003, Ps68 million in cash was paid and 198 million additional
CPOs were issued in respect of dividends declared for the 2002 fiscal year; in
2004, Ps161 million in cash was paid and 150 million additional CPOs were
issued in respect of dividends declared for the 2003 fiscal
118
year; and in 2005, Ps380 million in cash was paid and 133 million additional
CPOs were issued in respect of dividends declared for the 2004 fiscal year.
At our 2005 annual shareholders' meeting, which was held on April 27,
2006, our shareholders approved a dividend for the 2005 fiscal year of the Peso
equivalent of U.S.$0.133 per CPO (U.S.$0.0443 per share) or Ps1.49 (Ps0.50 per
share), based on the Peso/Dollar exchange rate in effect for May 25, 2006 of
Ps11.1935 to U.S.$1.00, as published by the Mexican Central Bank. Holders of our
series A shares, series B shares and CPOs will be entitled to receive the
dividend in either stock or cash consistent with our past practices; however,
under the terms of the deposit agreement pursuant to which our ADSs are issued,
we have instructed the ADS depositary not to extend the option to elect to
receive cash in lieu of the stock dividend to the holders of ADSs, unlike our
practice in connection with previous dividends when ADS holders were extended
this option. In order to have sufficient shares to issue to those shareholders
who receive the dividend in stock, our shareholders approved an increase in the
variable part of our capital stock through the capitalization of retained
earnings in an amount up to Ps6,718 milion, through the issuance of up to 480
million series A shares and 240 million series B shares, to be represented by
new CPOs. Our shareholders delegated to our board of directors the determination
of the final amount of the capital increase. As a result of dividend elections
made by shareholders, in June 2006, approximately Ps144 million in cash will be
paid and approximately 106 million additional CPOs will be issued in respect of
dividends declared for the 2005 fiscal year. The final amount of the increase in
the variable part of our capital stock, as determined by our board of directors,
was approximately Ps1,764 million.
Significant Changes
Except as described herein, no significant change has occurred since
the date of our consolidated financial statements included in this annual
report.
119
Item 9 - Offer and Listing
-----------------
Market Price Information
Our CPOs are listed on the Mexican Stock Exchange and trade under the
symbol "CEMEX.CPO." Our ADSs, each of which currently represents ten CPOs, are
listed on the New York Stock Exchange and trade under the symbol "CX." The
following table sets forth, for the periods indicated, the reported highest and
lowest market quotations in nominal Pesos for CPOs on the Mexican Stock
Exchange and the high and low sales prices in Dollars for ADSs on the NYSE. The
information below does not give effect to the two-for-one stock split in our
CPOs and ADSs approved by our shareholders on April 27, 2006, which we expect
will be effected in July 2006.
Calendar Period CPOs(1) ADSs
-------------------------- ----------------------- -------------------------
Yearly High Low High Low
---------- ---------- ----------- ------------
2001...................... Ps 25.83 Ps 17.25 U.S.$28.30 U.S.$17.63
2002...................... 30.91 19.55 33.00 19.25
2003...................... 29.75 17.83 26.64 16.31
2004...................... 41.00 29.15 36.56 25.97
2005...................... 66.50 37.75 61.98 34.13
Quarterly
2004
First quarter.......... 33.25 29.15 29.96 26.20
Second quarter......... 35.25 30.20 31.35 25.97
Third quarter.......... 35.63 31.11 31.31 26.95
Fourth quarter......... 41.00 31.20 36.56 27.14
2005
First quarter ......... 46.75 39.00 42.52 34.55
Second quarter......... 47.01 37.75 43.72 34.13
Third quarter.......... 57.30 44.90 53.80 41.87
Fourth quarter......... 66.50 51.20 61.98 46.78
2006
First quarter ......... 72.04 59.30 67.09 56.01
Monthly
2005-2006
November............... 61.39 55.80 57.75 51.68
December............... 66.50 59.84 61.98 56.81
January................ 70.23 63.10 67.09 59.90
February............... 69.40 59.30 66.38 56.01
March.................. 72.04 62.50 66.46 58.24
April.................. 76.55 71.00 68.95 65.03
May.................... 78.70 63.86 72.07 56.25
________________
Source: Based on data of the Mexican Stock Exchange and the NYSE.
(1) As of December 31, 2005, approximately 96.8% of our outstanding share
capital was represented by CPOs.
On May 31, 2006, the last reported closing price for CPOs on the
Mexican Stock Exchange was Ps64.53 per CPO, and the last reported closing price
for ADSs on the NYSE was U.S.$56.97 per ADS.
120
Item 10 - Additional Information
----------------------
Articles of Association and By-laws
General
Pursuant to the requirements of Mexican corporation law, our articles
of association and by-laws, or estatutos sociales, have been registered with the
Mercantile Section of the Public Register of Property and Commerce in Monterrey,
Mexico, under the entry number 21 since June 11, 1920. We are a holding company
engaged, through our operating subsidiaries, primarily in the production,
distribution, marketing and sale of cement, ready-mix concrete and clinker. Our
objectives and purposes can be found in article 2 of our by-laws. We are a
global cement manufacturer, with operations in North, Central and South America,
Europe, the Caribbean, Asia and Africa. We plan to continue focusing on the
production and sale of cement and ready-mix concrete, as we believe that this
strategic focus has enabled us to grow our existing businesses and to expand our
operations internationally.
We have two series of common stock, the series A common stock, with no
par value, or A shares, which can only be owned by Mexican nationals, and the
series B common stock, with no par value, or the B shares, which can be owned by
both Mexican and non-Mexican nationals. Our by-laws state that the A shares may
not be held by non-Mexican persons, groups, units or associations that are
foreign or have participation by foreign governments or their agencies. Our
by-laws also state that the A shares shall at all times account for a minimum of
64% of our total outstanding voting stock. Other than as described herein,
holders of the A shares and the B shares have the same rights and obligations.
In 1994, we changed from a fixed capital corporation to a variable
capital corporation in accordance with Mexican corporation law and effected a
three-for-one split of all our outstanding capital stock. As a result, we
changed our corporate name from CEMEX, S.A. to CEMEX, S.A. de C.V., established
a fixed capital account and a variable capital account and issued one share of
variable capital stock of the same series for each eight shares of fixed capital
stock held by any shareholder, after giving effect to the stock split.
Each of our fixed and variable capital accounts is comprised of A
shares and B shares. Under Mexican law and our by-laws, any holder of shares
representing variable capital is entitled to have those shares redeemed at that
holder's option for a price equal to the lower of:
o 95% of the market value of those shares based on the weighted
average trading price of our CPOs on the Mexican Stock Exchange
during the latest period of 30 trading days preceding the date on
which the exercise of the redemption option is effective, for a
period not to exceed six months; and
o the book value of those shares at the end of the fiscal year
immediately prior to the effective date of the redemption option
exercise by that shareholder as set forth in our annual financial
statements approved at the ordinary meeting of shareholders.
If the period used in calculating the quoted share price as described
above consists of less than 30 trading days, the number of days when shares were
actually traded will be used. If shares have not been traded during this period,
the redemption price will be the book value of those shares as described above.
If a shareholder exercises its redemption option during the first three quarters
of a fiscal year, that exercise is effective at the end of that fiscal year, but
if a shareholder exercises its redemption option during the fourth quarter, that
exercise is effective at the end of the next succeeding fiscal year. The
redemption price is payable as of the day following the annual ordinary meeting
of shareholders at which the relevant annual financial statements were approved.
Shareholder authorization is required to increase or decrease either
the fixed capital account or the variable capital account. Shareholder
authorization to increase or decrease the fixed capital account must be obtained
at an extraordinary meeting of shareholders. Shareholder authorization to
increase or decrease the variable capital account must be obtained at an
ordinary general meeting of shareholders.
On September 15, 1999, we effected a further stock split. For every one
of our shares of any series we issued two series A shares and one series B
share. Concurrently with this stock split, we also consummated an
121
exchange offer to exchange new CPOs and new ADSs representing the new CPOs for
our then existing A shares, B shares and ADSs and converted our then existing
CPOs into the new CPOs. As of December 31, 2005, approximately 96.8% of our
outstanding share capital was represented by CPOs, a portion of which is
represented by ADSs.
At a general extraordinary meeting of shareholders held on April 28,
2005, our shareholders approved a two-for-one stock split, which became
effective on July 1, 2005. In connection with this stock split, each of our
existing series A shares was surrendered in exchange for two new series A
shares, and each of our existing series B shares was surrendered in exchange for
two new series B shares. Concurrent with this stock split, we authorized the
amendment of the CPO trust agreement pursuant to which our CPOs are issued to
provide for the substitution of two new CPOs for each of our existing CPOs, with
each new CPO representing two new series A shares and one new series B share.
The number of our existing ADSs did not change as a result of the stock split;
instead the ratio of CPOs to ADSs was modified so that each existing ADS
represents ten new CPOs following the stock split and the CPO trust amendment.
As of December 31, 2005, our capital stock consisted of 12,154,784,604
issued shares. As of December 31, 2005, series A shares represented 64% of our
capital stock, or 8,103,189,736 shares, of which 7,676,571,754 shares were
subscribed and paid, 213,087,000 shares were treasury shares and 213,530,982
shares were issued pursuant to our employee stock option plans and subscribed to
by Banamex as trustee thereunder, but had not yet been paid. These shares have
been and will continue to be gradually paid upon exercise of the corresponding
stock options. As of December 31, 2005, series B shares represented 36% of our
capital stock, or 4,051,594,868 shares, of which 3,838,285,877 shares were
subscribed and paid, 106,543,500 shares were treasury shares and 106,765,491
shares were issued pursuant to our employee stock option plans and subscribed to
by Banamex as trustee thereunder, but had not yet been paid. These shares have
been and will continue to be gradually paid upon exercise of the corresponding
stock options. Of the total of our A shares and B shares outstanding as of
December 31, 2005, 6,534,000,000 shares corresponded to the fixed portion of our
capital stock and 5,620,784,604 shares corresponded to the variable portion of
our capital stock.
At the 2005 annual shareholders' meeting held on April 27, 2006, in
connection with their approval of a dividend for the 2005 fiscal year, our
shareholders approved an increase in the variable part of our capital stock
through the capitalization of retained earnings in an amount up to Ps6,718
million, through the issuance of up to 480 million series A shares and 240
million series B shares, to be represented by new CPOs. The final amount of the
increase in the variable part of our capital stock, as determined by our board
of directors, was approximately Ps1,764 million. See Item 8 -- "Financial
Information -- Dividends" above. In addition, at the 2005 annual shareholders'
meeting, our shareholders approved the cancellation of 213,087,000 series A
treasury shares and 106,543,500 series B treasury shares.
At the 2005 annual shareholders' meeting, our shareholders also
approved a new stock split, which we expect to occur in July 2006. In connection
with this new two-for-one stock split, each of our existing series A shares will
be surrendered in exchange for two new series A shares, and each of our existing
series B shares will be surrendered in exchange for two new series B shares.
Concurrent with this stock split, we authorized the amendment of the CPO trust
agreement pursuant to which our CPOs are issued to provide for the substitution
of two new CPOs for each of our existing CPOs, with each new CPO representing
two new series A shares and one new series B share. In connection with the stock
split and at our request, Citibank, N.A., as depositary for the ADSs, will
distribute one additional ADS for each ADS outstanding as of the record date for
the stock split. The ratio of CPOs to ADSs will not change as a result of the
stock split; each ADS will represent ten (10) new CPOs following the stock split
and the CPO trust amendment. The proportional equity interest participation of
existing shareholders will not change as a result of the stock split. The
financial data set forth in this annual report have not been adjusted to give
retroactive effect to this new stock split.
On June 1, 2001, the Mexican securities law (Ley de Mercado de Valores)
was amended to increase the protection granted to minority shareholders of
Mexican listed companies and to commence bringing corporate governance
procedures of Mexican listed companies in line with international standards.
On February 6, 2002, the Mexican securities authority (Comision
Nacional Bancaria y de Valores) issued an official communication authorizing the
amendment of our by-laws to incorporate additional provisions to comply
122
with the new provisions of the Mexican securities law. Following approval from
our shareholders at our 2002 annual shareholders' meeting, we amended and
restated our by-laws to incorporate these additional provisions, which consist
of, among other things, protective measures to prevent share acquisitions,
hostile takeovers, and direct or indirect changes of control. As a result of the
amendment and restatement of our by-laws, the expiration of our corporate term
of existence was extended from 2019 to 2100.
On March 19, 2003, the Mexican securities authority issued new
regulations designed to (i) further implement minority rights granted to
shareholders by the Mexican securities law and (ii) simplify and comprise in a
single document provisions relating to securities offerings and periodic reports
by Mexican listed companies.
On April 24, 2003, our shareholders approved changes to our by-laws,
incorporating additional provisions and removing some restrictions. The changes
were as follows:
o The restriction that prohibits our subsidiaries from acquiring
shares in companies that own our shares was amended to remove a
condition that our subsidiaries have knowledge of such ownership.
o The limitation on our variable capital was removed. Formerly, our
variable capital was limited to ten times our minimum fixed
capital, which is currently set at Ps39.5 million.
o Increases and decreases in our variable capital now require the
notarization of the minutes of the ordinary general shareholders'
meeting that authorize such increase or decrease, as well as the
filing of these minutes with the Mexican National Securities
Registry (Registro Nacional de Valores), except when such increase
or decrease results from (i) shareholders exercising their
redemption rights or (ii) stock repurchases.
o Amendments were made to the calculation of the redemption price
for our variable capital shares, which is described above.
o Approval by the board of directors is now required for
transactions by us or any of our subsidiaries involving: (i)
transactions not in the ordinary course of business with third
parties related to us or to any of our subsidiaries, (ii)
purchases or sales of assets having a value equal to or exceeding
10% or more of our total consolidated assets, (iii) the granting
of security interests in an amount exceeding 30% of our total
consolidated assets, and (iv) any other transaction that exceeds
1% of our total consolidated assets.
o The cancellation of registration of our shares in the Securities
Section of the Mexican National Securities Registry now involves
an amended procedure, which is described below under "Repurchase
Obligation." In addition, any amendments to the article containing
these provisions no longer require the consent of the Mexican
securities authority and 95% approval by shareholders entitled to
vote.
On December 30, 2005, a new Mexican securities law was published in an
attempt to continue bringing corporate governance procedures of Mexican listed
companies in line with international standards. This new law includes
provisions increasing disclosure information requirements, minority shareholder
rights and corporate governance.
Under the new Mexican securities law, we are required to adopt specific
amendments to our by-laws within 180 days of the effective date of the new law.
Following approval from our shareholders at our 2005 annual shareholders'
meeting held on April 27, 2006, we amended and restated our by-laws to
incorporate these amendments. The amendments to our by-laws will become
effective on July 3, 2006. The most significant of these amendments are as
follows:
o The change of our corporate name from CEMEX, S.A. de C.V. to
CEMEX, S.A.B. de C.V., which means that we will now be called a
Publicly Held Company (Sociedad Anonima Bursatil or S.A.B.).
123
o The creation of a corporate practices committee, which is a new
committee of our board of directors and which is comprised
exclusively of independent directors.
o The elimination of the figure of statutory examiner (Comisario)
and the assumption of its responsibilities by the board of
directors through the audit committee and the new corporate
practices committee, as well as by our external auditor.
o The imposition of new duties (such as the duty of loyalty and the
duty of care) and liabilities on the members of the board of
directors as well as on the relevant officers.
o The implementation of a mechanism for claims of a breach of a
director's or officer's duties to be brought by us or by holders
of 5% or more of our shares.
o An increase of the responsibilities of the audit committee.
o The chief executive officer is now the person in charge of
managing the company. before, this was the duty of the board of
directors. The board of directors will now supervise the chief
executive officer.
o Shareholders are given the right to enter into certain agreements
with other shareholders.
These amendments to our by-laws are subject to the new law becoming
effective on June 28, 2006. Therefore, the following summary does not give
effect to these amendments.
Changes in Capital Stock and Preemptive Rights
Our by-laws allow for a decrease or increase in our capital stock if it
is approved by our shareholders at a shareholders' meeting. Additional shares of
our capital stock, having no voting rights or limited voting rights, are
authorized by our by-laws and may be issued upon the approval of our
shareholders at a shareholders' meeting, with the prior approval of the Mexican
securities authority.
Our by-laws provide that shareholders have preemptive rights in
proportion to the number of shares of our capital stock they hold, before any
increase in the number of outstanding A shares, B shares, or any other existing
series of shares, as the case may be, except in the case of shares previously
acquired by us or if the shareholders waive their preemptive rights, in the
context of a public offer, as set forth in the Mexican securities law.
Preemptive rights give shareholders the right, upon any issuance of shares by
us, to purchase a sufficient number of shares to maintain their existing
ownership percentages. Preemptive rights must be exercised within the period and
under the conditions established for that purpose by the shareholders, and our
by-laws and applicable law provide that this period must be 15 days following
the publication of the notice of the capital increase in the Periodico Oficial
del Estado de Nuevo Leon. With the prior approval of the Mexican securities
authority, an extraordinary shareholders' meeting may approve the issuance of
our stock in connection with a public offering, without the application of the
preemptive rights described above. At that meeting, holders of our stock must
waive preemptive rights by the affirmative vote of 50% of the capital stock, and
the resolution duly adopted in this manner will be effective for all
shareholders. If holders of at least 25% of our capital stock vote against the
resolution, the issuance without the application of preemptive rights may not be
effected. The Mexican securities authority may only approve the issuance if we
maintain policies that protect the rights of minority shareholders. Any
shareholder voting against the relevant resolution will have the right to have
its shares placed in the public offering together with our shares and at the
same market price.
Pursuant to our by-laws, significant acquisitions of shares of our
capital stock and changes of control of CEMEX require prior approval from our
board of directors. Our board of directors must authorize in advance any
transfer of voting shares of our capital stock that would result in any person
or group becoming a holder of 2% of more of our shares. If our board of
directors denies that authorization, it must designate an alternative buyer
for those shares, at a price equal to the price quoted on the Mexican Stock
Exchange. Any acquisition of shares of our capital stock representing 20% or
more of our capital stock by a person or group of persons requires prior
approval from our board of directors and, in the event approval is granted,
the acquiror has an obligation to make a public
124
offer to purchase all of the outstanding shares of that class of capital stock
being purchased. In the event the requirements described above for significant
acquisitions of shares of our capital stock are not met, the persons acquiring
such shares will not be entitled to any corporate rights with respect to such
shares, such shares will not be taken into account for purposes of determining a
quorum for shareholders' meetings and we will not record such persons as holders
of such shares in our shareholder ledger.
Our by-laws require the stock certificates representing shares of our
capital stock to make reference to the provisions in our by-laws relating to the
prior approval of the board of directors for significant share transfers and the
requirements for recording share transfers in our shareholder ledger. In
addition, shareholders are responsible for informing us whenever their
shareholdings exceed 5%, 10%, 15% and 20% of the outstanding shares of a
particular class of our capital stock. We are required to maintain a shareholder
ledger that records the names, nationality and domicile of all significant
shareholders, and any shareholder that meets or exceeds these thresholds must be
recorded in this ledger if such shareholder is to be recognized or represented
at any shareholders' meeting. If a shareholder fails to inform us of its
shareholdings reaching a threshold as described above, we will not record the
transactions that cause such threshold to be met or exceeded in our shareholder
ledger, and such transaction will have no legal effect and will not be binding
on us.
Repurchase Obligation
In accordance with Mexican securities regulations, our majority
shareholders are obligated to make a public offer for the purchase of stock to
the minority shareholders if the listing of our stock with the Mexican Stock
Exchange is canceled, either by resolution of our shareholders or by an order of
the Mexican securities authority. The price at which the stock must be purchased
by the majority shareholders is the higher of:
o the weighted average price per share based on the weighted average
trading price of our CPOs on the Mexican Stock Exchange during the
latest period of 30 trading days preceding the date of the offer,
for a period not to exceed six months; or
o the book value per share, as reflected in the last quarterly
report filed with the Mexican securities authority and the Mexican
Stock Exchange.
Five business days prior to the commencement of the offering, our board
of directors must make a determination with respect to the fairness of the
offer, taking into account the interests of the minority shareholders and
disclose its opinion, which must refer to the justifications of the offer price;
if the board of directors is precluded from making such determination as a
result of a conflict of interest, the resolution of the board of directors must
be based upon a fairness opinion issued by an expert selected by the audit
committee in which emphasis must be placed on minority rights.
Following the expiration of this offer, if the majority shareholders do
not acquire 100% of the paid-in share capital, such shareholders must place in a
trust set up for that purpose for a six-month period an amount equal to that
required to repurchase the remaining shares held by investors who did not
participate in the offer. The majority shareholders are not obligated to make
the offer to purchase if shareholders representing 95% of our share capital
waive that right, and the amount offered for the shares is less than 300,000
UDIs (Unidades de Inversion), which are investment units in Mexico that reflect
inflation variations. If these conditions are met, we must create a trust as
described above and provide electronic notice to the Mexican Stock Exchange. For
purposes of these provisions, majority shareholders are shareholders that own a
majority of our shares, have voting power sufficient to control decisions at
general shareholders' meetings, or that may elect a majority of our board of
directors.
Shareholders' Meetings and Voting Rights
Shareholders' meetings may be called by:
o our board of directors or statutory auditors;
o shareholders representing at least 10% of the then outstanding
shares of our capital stock by requesting our board of directors
or the statutory auditors to call a meeting;
125
o any shareholder if no meeting has been held for two consecutive
years or when the matters referred to in Article 181 of the
General Law of Commercial Companies (Ley General de Sociedades
Mercantiles) have not been dealt with; or
o a Mexican court in the event our board of directors or the
statutory auditors do not comply with the valid request of the
shareholders indicated above.
Notice of shareholders' meetings must be published in the official
gazette for the State of Nuevo Leon, Mexico or any major newspaper published and
distributed in the City of Monterrey, Nuevo Leon, Mexico. The notice must be
published at least 15 days prior to the date of any shareholders' meeting.
Consistent with Mexican law, our by-laws further require that all information
and documents relating to the shareholders' meeting be available to shareholders
from the date the notice of the meeting is published.
General shareholders' meetings can be ordinary or extraordinary. At
every general shareholders' meeting, each holder of A shares and B shares is
entitled to one vote per share. Shareholders may vote by proxy duly appointed in
writing. Under the CPO trust agreement, holders of CPOs who are not Mexican
nationals cannot exercise voting rights corresponding to the A shares
represented by their CPOs.
An annual general ordinary shareholders' meeting must be held during
the first four months after the end of each of our fiscal years to consider the
approval of a report of our board of directors regarding our performance and our
financial statements for the preceding fiscal year and to determine the
allocation of the profits for the preceding year. At the annual general
shareholders' meeting, any shareholder or group of shareholders representing 10%
or more of our outstanding voting stock has the right to appoint one regular and
one alternate director in addition to the directors elected by the majority and
the right to appoint a statutory auditor. The alternate director appointed by
the minority holders may only substitute for the director appointed by that
minority.
A general extraordinary shareholders' meeting may be called at any time
to deal with any of the matters specified by Article 182 of the General Law of
Commercial Companies, which include, among other things:
o extending our corporate existence;
o our early dissolution;
o increasing or reducing our fixed capital stock;
o changing our corporate purpose;
o changing our country of incorporation;
o changing our form of organization;
o a proposed merger;
o issuing preferred shares;
o redeeming our own shares;
o any amendment to our by-laws; and
o any other matter for which a special quorum is required by law or
by our by-laws.
The above-mentioned matters may only be dealt with at extraordinary
shareholders' meetings.
In order to vote at a meeting of shareholders, shareholders must appear
on the list that Indeval, the Mexican securities depositary, and the Indeval
participants holding shares on behalf of the shareholders, prepare prior to the
126
meeting or must deposit prior to that meeting the certificates representing
their shares at our offices or in a Mexican credit institution or brokerage
house, or foreign bank approved by our board of directors to serve this
function. The certificate of deposit with respect to the share certificates must
be presented to our company secretary at least 48 hours before a meeting of
shareholders. Our company secretary verifies that the person in whose favor any
certificate of deposit was issued is named in our share registry and issues an
admission pass authorizing that person's attendance at the meeting of
shareholders.
Our by-laws provide that a shareholder may only be represented by proxy
in a shareholders' meeting with a duly completed form provided by us authorizing
the proxy's presence. In addition, our by-laws require that the secretary acting
at the shareholders' meeting publicly affirm the compliance by all proxies with
this requirement.
A shareholders' resolution is required to take action on any matter
presented at a shareholders' meeting. At an ordinary meeting of shareholders,
the affirmative vote of the holders of a majority of the shares present at the
meeting is required to adopt a shareholders' resolution. At an extraordinary
meeting of shareholders, the affirmative vote of at least 50% of the capital
stock is required to adopt a shareholders' resolution, except that when amending
Article 22 of our by-laws (which specifies the list of persons who are not
eligible to be appointed as a director or a statutory auditor) the affirmative
vote of at least 75% of the voting stock is needed. Our by-laws also require the
approval of 75% of the voting shares of our capital stock to amend provisions in
our by-laws relating to the prior approval of the board of directors for share
transfers and the requirements for recording share transfers in our corporate
ledger.
The quorum for a first ordinary meeting of shareholders is 50% of our
outstanding and fully paid shares, and for the second ordinary meeting of
shareholders is any number of our outstanding and fully paid shares. The quorum
for the first extraordinary shareholders' meeting is 75% of our outstanding and
fully paid shares, and for the second extraordinary shareholders' meeting the
quorum is 50% of our outstanding and fully paid shares.
Rights of Minority Shareholders
Our by-laws provide that holders of at least 10% of our capital stock
are entitled to demand the postponement of the voting on any resolution of
which they deem they have not been adequately informed.
Under Mexican law, holders of at least 20% of our outstanding capital
stock entitled to vote on a particular matter may seek to have any shareholder
action with respect to that matter set aside, by filing a complaint with a
court of law within 15 days after the close of the meeting at which that action
was taken and showing that the challenged action violates Mexican law or our
by-laws. Relief under these provisions is only available to holders who were
entitled to vote on, or whose rights as shareholders were adversely affected
by, the challenged shareholder action and whose shares were not represented
when the action was taken or, if represented, voted against it.
Under Mexican law, an action for civil liabilities against directors
may be initiated by a shareholders' resolution. In the event shareholders
decide to bring an action of this type, the persons against whom that action is
brought will immediately cease to be directors. Additionally, shareholders
representing not less than 15% of the outstanding shares may directly exercise
that action against the directors; provided that:
o those shareholders shall not have voted against exercising such
action at the relevant shareholders' meeting; and
o the claim covers all of the damage alleged to have been caused to
us and not merely the damage suffered by the plaintiffs.
Any recovery of damage with respect to these actions will be for our
benefit and not that of the shareholders bringing the action.
Registration and Transfer
Our common stock is evidenced by share certificates in registered form
with registered dividend coupons attached. Our shareholders may hold their
shares in the form of physical certificates or through institutions that have
127
accounts with Indeval. Accounts may be maintained at Indeval by brokers, banks
and other entities approved by the Mexican securities authority. We maintain a
stock registry, and, in accordance with Mexican law, only those holders listed
in the stock registry and those holding certificates issued by Indeval and by
Indeval participants indicating ownership are recognized as our shareholders.
Redemption
Our capital stock is subject to redemption upon approval of our
shareholders at an extraordinary shareholders' meeting.
Share Repurchases
If our shareholders decide at a general shareholders' meeting that we
should do so, we may purchase our outstanding shares for cancellation. We may
also repurchase our equity securities on the Mexican Stock Exchange at the then
prevailing market prices in accordance with the Mexican securities law. If we
intend to repurchase shares representing more than 1% of our outstanding shares
at a single trading session, we must inform the public of such intention at
least ten minutes before submitting our bid. If we intend to repurchase shares
representing 3% or more of our outstanding shares during a period of twenty
trading days, we would be required to conduct a public tender offer for such
shares. We must conduct share repurchases through the person or persons approved
by our board of directors, through a single broker dealer during the relevant
trading session without submitting bids during the first and the last 30 minutes
of each trading session and we must inform the Mexican Stock Exchange of the
results of any share repurchase no later than the business day following any
such share repurchase.
Directors' and Shareholders' Conflict of Interest
Under Mexican law, any shareholder that has a conflict of interest with
us with respect to any transaction is obligated to disclose such conflict and is
prohibited from voting on that transaction. A shareholder who violates this
prohibition may be liable for damages if the relevant transaction would not have
been approved without that shareholder's vote.
Under Mexican law, any director who has a conflict of interest with us
in any transaction must disclose that fact to the other directors and is
prohibited from voting on that transaction. Any director who violates this
prohibition will be liable for damages. Additionally, our directors and
statutory auditors may not represent shareholders in the shareholders' meetings.
Withdrawal Rights
Whenever our shareholders approve a change of corporate purpose, change
of nationality or transformation from one form of corporate organization to
another, Mexican law provides that any shareholder entitled to vote on that
change that has voted against it may withdraw from CEMEX and receive the amount
calculated as specified by Mexican law attributable to its shares, provided that
it exercises that right within 15 days following the adjournment of the meeting
at which the change was approved. For further details on the calculation of the
withdrawal right, see "- General."
Dividends
At the annual ordinary general meeting of shareholders, our board of
directors submits our financial statements together with a report on them by our
board of directors and the statutory auditors, to our shareholders for approval.
The holders of our shares, once they have approved the financial statements,
determine the allocation of our net income, after provision for income taxes,
legal reserve and statutory employee profit sharing payments, for the preceding
year. All shares of our capital stock outstanding and fully paid at the time a
dividend or other distribution is declared are entitled to share equally in that
dividend or other distribution.
128
Liquidation Rights
In the event we are liquidated, the surplus assets remaining after
payment of all our creditors will be divided among our shareholders in
proportion to the respective shares held by them. The liquidator may, with the
approval of our shareholders, distribute the surplus assets in kind among our
shareholders, sell the surplus assets and divide the proceeds among our
shareholders or put the surplus assets to any other uses agreed to by a
majority of our shareholders voting at an extraordinary shareholders' meeting.
Differences Between Our Corporate Governance Practices and NYSE Standards for
Domestic Companies
For a description of significant ways in which our corporate
governance practices differ from those required of domestic companies under
NYSE standards visit our website at www.cemex.com (under the heading "Investor
Center/Corporate Governance").
Material Contracts
On June 23, 2003, CEMEX Espana Finance LLC, as issuer, CEMEX Espana,
Sandworth Plaza Holding B.V., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments B.V. and Cemex Egyptian Investments
B.V., as guarantors, and several institutional purchasers, entered into a Note
Purchase Agreement in connection with a private placement by CEMEX Espana
Finance, LLC. CEMEX Espana Finance, LLC issued to the institutional purchasers
U.S.$103,000,000 aggregate principal amount of 4.77% Senior Notes due 2010,
U.S.$96,000,000 aggregate principal amount of 5.36% Senior Notes due 2013 and
U.S.$201,000,000 aggregate principal amount of 5.51% Senior Notes due 2015.
On October 15, 2003, New Sunward Holding B.V. entered into a U.S.$1.15
billion multi-tranche Term Loan Agreement. The indebtedness incurred under the
agreement was guaranteed by CEMEX, CEMEX Mexico and Empresas Tolteca de Mexico
and was composed of three different tranches. The first tranche was a two-year
Euro denominated loan in the amount of (euro)256,365,000. The second tranche
was a three-year Dollar denominated loan in the amount of U.S.$550,000,000. The
third tranche was a three-year Yen denominated loan in the amount of
(Y)32,688,000,000. The terms of the second and third tranches can be extended
for an additional period of six months, subject to certain conditions. The
proceeds were used to repurchase U.S.$650 million of preferred equity and to
refinance other outstanding debt. On July 7, 2004 the three-year Dollar
denominated loan in the amount of U.S.$550,000,000 was completely prepaid. On
July 12, 2004, the three-year Yen denominated loan in the amount of
(Y)32,688,000,000 was reduced to (Y)16,288,000,000. On June 30, 2005, all
outstanding amounts under this multi-tranche Term Loan Agreement were prepaid.
On March 30, 2004, CEMEX Espana, with Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V., Cemex Manila
Investments B.V. and Cemex Egyptian Investments, B.V., as guarantors, entered
into a Term and Revolving Facilities Agreement with Banco Bilbao Vizcaya
Argentaria, S.A. and Societe Generale, as mandated lead arrangers, relating to
three credit facilities with an aggregate amount of (euro)250,000,000 and
(Y)19,308,000,000. The first facility was a five-year multi-currency term loan
facility with a variable interest rate; the second facility was a 364-day
multi-currency revolving credit facility; and the third facility was a
five-year Yen denominated term loan facility with a fixed interest rate. The
proceeds of these facilities were used to prepay part of CEMEX Espana's
outstanding debt as of that date and for general corporate purposes. On March
18, 2005, the term of the 364-day multi-currency revolving credit facility (up
to an aggregate amount of (euro)100,000,000) was extended for an additional
year and on March 31, 2006, all outstanding amounts under the revolving credit
facility were paid and the revolving credit facility expired.
On April 15, 2004, CEMEX Espana Finance LLC, as issuer, CEMEX Espana,
Sandworth Plaza Holding B.V., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments B.V. and Cemex Egyptian Investments
B.V., as guarantors, and several institutional purchasers, entered into a Note
Purchase Agreement in connection with a private placement by CEMEX Espana
Finance, LLC. CEMEX Espana Finance, LLC issued to the institutional purchasers
(Y)4,980,600,000 aggregate principal amount of 1.79% Senior Notes due 2010,
(Y)6,087,400,000 aggregate principal amount of 1.99% Senior Notes due 2011. The
proceeds of the private placement were used to repay existing facilities and
for general corporate purposes.
129
On June 23, 2004, we entered into a three-year U.S.$800 million
revolving credit facility guaranteed by CEMEX Mexico and Empresas Tolteca de
Mexico. The facility consists of credit lines with two different sublimits. The
facility provides for swing line loan availability of U.S.$100 million and has a
sublimit for standby letters of credit of U.S.$200 million. The proceeds were
applied to refinance outstanding debt. On June 6, 2005, this revolving credit
facility was amended; the total facility was reduced to U.S. $700 million and
extended to a new four-year period. The sublimits of the swing line and standby
letters of credit were left unchanged.
On September 24, 2004, New Sunward Holding B.V., entered into a
U.S.$1.25 billion multi-currency term loan that was guaranteed by CEMEX, CEMEX
Mexico and Empresas Tolteca de Mexico and consisted of two tranches. The first
tranche was a multi-currency one-year U.S.$500 million term loan denominated in
Dollars, Euros or Pounds (or a combination thereof) with an optional six-month
extension. The second tranche was a multi-currency three-year U.S.$750 million
term loan denominated in Dollars, Euros, or Pounds (or a combination thereof).
The proceeds of the facility were used to finance the RMC acquisition. This
facility was fully repaid on April 13, 2005.
On September 24, 2004, CEMEX Espana entered into a U.S.$3.8 billion
multi-currency term loan that consisted of three tranches. The first tranche was
a multi-currency one-year U.S.$1.5 billion back-up term loan denominated in
Dollars, Euros or Pounds (or a combination thereof) with an optional twelve
month extension. The second tranche was a multi-currency three-year U.S.$1.15
billion term loan denominated in Dollars, Euros or Pounds (or a combination
thereof). The third tranche was a multi-currency five-year U.S.$1.15 billion
term loan denominated in Dollars, Euros or Pounds (or a combination thereof).
Proceeds from the first tranche of the CEMEX Espana facility were used to
refinance RMC debt. All other proceeds were used to finance the RMC acquisition.
On February 25, 2005 the facilities agreement was amended and on June 21, 2005,
the first tranche was cancelled. On July 4, 2005, the facilities agreement was
amended and restated. The amended and restated facility is a U.S. $2.3 billion
multi-currency revolving facilities agreement. The first tranche is a
multi-currency U.S. $575 million revolving loan maturing on September 2007. The
second tranche is a multi-currency U.S. $1.15 billion revolving loan maturing on
September 2009. The third tranche is a multi-currency five-year U.S. $575
million revolving facility with two optional one-year extensions. All borrowings
under the amended and restated facilities agreement can be denominated in
Dollars, Euros, or Pounds (or a combination thereof). This indebtedness is
guaranteed by Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V.,
Cemex American Holdings B.V., Cemex Shipping B.V., Cemex Egyptian Investments
B.V. and Cemex Asia B.V. (which became a guarantor on December 16, 2005).
On September 27, 2004, CEMEX UK Limited and RMC entered into an
Implementation Agreement, pursuant to which the parties agreed to implement a
scheme of arrangement under U.K. law for the acquisition of RMC by CEMEX UK
Limited. The agreement contained assurances and confirmations between the
parties regarding the implementation of the scheme of arrangement on a timely
basis and the conduct of RMC's business in the ordinary course. On the same
date, CEMEX UK Limited acquired 50 million shares of RMC for approximately
(pound)432 million (U.S.$786 million, based on a Pound/Dollar exchange rate of
(pound)0.5496 to U.S.$1.00 on September 27, 2004), which represented
approximately 18.8% of RMC's outstanding shares. On March 1, 2005, following
board and shareholder approval and clearance from the applicable regulators, the
scheme of arrangement became effective and CEMEX UK Limited purchased the
remaining 81.2% of RMC's outstanding shares completing our acquisition of RMC.
On February 4, 2005, CEMEX, Inc. and Votorantim Participacoes S.A., or
Votorantim, entered into an Asset Purchase Agreement (which was amended by
Amendment No. 1 thereto entered into by the parties on March 31, 2005), pursuant
to which CEMEX, Inc. sold its Charlevoix, Michigan and Dixon, Illinois cement
plants and several distribution terminals located in the Great Lakes region to
Votorantim for an aggregate purchase price of approximately U.S.$389 million.
The distribution terminals sold to Votorantim are located in Green Bay,
Manitowoc and Milwaukee, Wisconsin; Chicago, Illinois; Ferrysburg, Michigan;
Cleveland and Toledo, Ohio; and Owen Sound, Ontario, Canada.
On March 16, 2005, CEMEX Espana and RMC entered into an Amended and
Restated (pound)1,000,000,000 Term and Revolving Credit Agreement, which was
originally entered into by RMC on October 18, 2002, relating to a multi-currency
five-year (pound)600,000,000 revolving credit facility and a multi-currency
five-year (pound)400,000,000 term loan facility. The amendments to the original
agreement included a waiver of the provision requiring mandatory
130
prepayment in the event of a change of control, the inclusion of CEMEX Espana,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V., Cemex Manila
Investments B.V., Cemex Egyptian Investments B.V., Cemex American Holdings B.V.
and Cemex Shipping B.V, as guarantors, amendments to the financial covenants
applicable to CEMEX Espana on a consolidated basis and the extension of the
termination date of the revolving credit facility to six years from the date of
the amended and restated agreement. Simultaneous with the execution of the
amended and restated agreement, the total amount of the facilities was reduced
to (pound)604,354,196; the revolving credit facility was reduced to
(pound)425,558,038 and the term loan facility was reduced to (pound)178,796,154.
This Term and Revolving Credit Agreement was fully prepaid and cancelled on
November 7, 2005.
On April 5, 2005, we entered into a U.S.$1,000,000,000 180-day term
credit agreement guaranteed by CEMEX Mexico and Empresas Tolteca de Mexico. The
multi-currency credit facility was entered into to fund the repayment of amounts
outstanding under the credit agreement of New Sunward Holding B.V., dated
September 24, 2004. This credit agreement was fully prepaid on June 6, 2005.
On May 31, 2005, we entered into a multi-credit five-year U.S.$1.2
billion revolving credit agreement guaranteed by CEMEX Mexico and Empresas
Tolteca de Mexico. The multi-currency credit facility was entered into to fund
the repayment of amounts outstanding under the credit agreement of CEMEX, S.A.
de C.V. dated April 5, 2005.
On June 27, 2005, New Sunward Holding B.V. entered into a
U.S.$700,000,000 Term and Revolving Facilities Agreement with several lenders,
Banco Bilbao Vizcaya Argentaria, S.A., BNP Paribas and Citigroup Global Markets
as mandated lead arrangers and Citibank, N.A. as agent. This agreement is
guaranteed by CEMEX, CEMEX Mexico and Empresas Tolteca de Mexico. The proceeds
from this Term and Revolving Facilities Agreement was used to repay of all
amounts due and payable under the U.S.$1,150,000,000 term loan agreement dated
October 15, 2003 and to pay other debt of New Sunward Holding B.V.
On June 13, 2005, CEMEX Espana Finance LLC, as issuer, CEMEX Espana,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V., Cemex Manila
Investments B.V., Cemex Egyptian Investments B.V., Cemex American Holdings B.V.
and Cemex Shipping B.V., as guarantors, and several institutional purchasers,
entered into a Note Purchase Agreement in connection with a private placement
and issuance by CEMEX Espana Finance, LLC of U.S.$133,000,000 aggregate
principal amount of 5.18% Senior Notes due 2010, and U.S.$192,000,000 aggregate
principal amount of 5.62% Senior Notes due 2015. The proceeds of the private
placement were used to repay existing facilities and for general corporate
purposes. On December 16, 2005, Cemex Asia B.V. became a guarantor to the Notes
issued in connection with this Note Purchase Agreement. On December 31, 2005,
Cemex Manila Investments B.V. was merged with and into Cemex Asia B.V. The
surviving company was Cemex Asia B.V.
On July 1, 2005, we and Ready Mix USA entered into limited liability
company agreements and asset contribution agreements in connection with our
establishment of two jointly-owned limited liability companies, CEMEX Southeast,
LLC, a cement company, and Ready Mix USA, LLC, a ready-mix concrete company, to
serve the construction materials market in the southeast region of the United
States. Under the terms of the limited liability company agreements and related
asset contribution agreements, we contributed two cement plants (Demopolis,
Alabama and Clinchfield, Georgia) and eleven cement terminals to CEMEX
Southeast, LLC, representing approximately 98% of its contributed capital, while
Ready Mix USA contributed cash to CEMEX Southeast, LLC representing
approximately 2% of its contributed capital. In addition, we contributed our
ready-mix concrete, aggregates and concrete block assets in the Florida
panhandle and southern Georgia to Ready Mix USA, LLC, representing approximately
9% of its contributed capital, while Ready Mix USA contributed all its ready-mix
concrete and aggregate operations in Alabama, Georgia, the Florida panhandle and
Tennessee, as well as its concrete block operations in Arkansas, Tennessee,
Mississippi, Florida and Alabama to Ready Mix USA, LLC, representing
approximately 91% of its contributed capital. We own a 50.01% interest, and
Ready Mix USA owns a 49.99% interest, in the profits and losses and voting
rights of CEMEX Southeast, LLC, while Ready Mix USA owns a 50.01% interest, and
we own a 49.99% interest, in the profits and losses and voting rights of Ready
Mix USA, LLC. CEMEX Southeast, LLC is managed by us, and Ready Mix USA, LLC is
managed by Ready Mix USA. Under the terms of the limited liability company
agreements, after the third anniversary of the formation of these companies,
Ready Mix USA will have the option, but not the obligation, to require us to
purchase Ready Mix USA's interest in the two companies at a purchase price equal
to the greater of the book value of the companies' assets or a formula
131
based on the companies' earnings. This option will expire on the twenty fifth
anniversary of the formation of these companies.
On September 1, 2005, RMC Mid-Atlantic, LLC, our indirect wholly-owned
U.S. subsidiary, and Ready Mix USA entered into an asset purchase agreement
pursuant to which we sold 27 ready-mix plants and four concrete block facilities
located in the Atlanta, Georgia metropolitan area to Ready Mix USA, LLC for
approximately U.S.$125 million.
Exchange Controls
See Item 3 -- "Key Information -- Mexican Peso Exchange Rates."
Taxation
Mexican Tax Considerations
General
The following is a summary of certain Mexican federal income tax
considerations relating to the ownership and disposition of our CPOs or ADSs.
This summary is based on Mexican income tax law that is in effect on
the date of this annual report, which is subject to change. This summary is
limited to non-residents of Mexico, as defined below, who own our CPOs or ADSs.
This summary does not address all aspects of Mexican income tax law. Holders are
urged to consult their tax counsel as to the tax consequences that the purchase,
ownership and disposition of our CPOs or ADSs, may have.
For purposes of Mexican taxation, an individual is a resident of Mexico
if he or she has established his or her home in Mexico. If the individual also
has a home in another country, he or she will be considered a resident of Mexico
if his or her center of vital interests is in Mexico. Under Mexican law, an
individual's center of vital interests is in Mexico if, among other things:
o more than the 50% of the individual's total income in the relevant
year comes from Mexican sources; or
o the individual's main center of professional activities is in
Mexico.
A legal entity is a resident of Mexico if it is organized under the
laws of Mexico or if it maintains the principal administration of its business
or the effective location of its management in Mexico.
A Mexican citizen is presumed to be a resident of Mexico for tax
purposes unless such person or entity can demonstrate otherwise. If a legal
entity or an individual is deemed to have a permanent establishment in Mexico
for tax purposes, all income attributable to such permanent establishment will
be subject to Mexican taxes, in accordance with relevant tax provisions.
Individuals or legal entities that cease to be residents of Mexico must
notify the tax authorities within 15 business days before their change of
residency.
A non-resident of Mexico is a legal entity or individual that does not
satisfy the requirements to be considered a resident of Mexico for Mexican
federal income tax purposes. The term U.S. Shareholder shall have the same
meaning ascribed below under the section "-- U.S. Federal Income Tax
Considerations."
132
Taxation of Dividends
Dividends, either in cash or in any other form, paid to non-residents
of Mexico with respect to A shares or B shares represented by the CPOs (or in
the case of holders who hold CPOs represented by ADSs), will not be subject to
withholding tax in Mexico.
Disposition of CPOs or ADSs
Gains on the sale or disposition of ADSs by a holder who is a
non-resident of Mexico will not be subject to Mexican tax.
Gains on the sale or disposition of CPOs by a holder who is a
non-resident of Mexico will not be subject to any Mexican tax if the sale is
carried out through the Mexican Stock Exchange or other recognized securities
market, as determined by Mexican tax authorities. Gains realized on sales or
other dispositions of CPOs by non-residents of Mexico made in other
circumstances would be subject to Mexican income tax.
Under the terms of the Convention Between the United States and Mexico
for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect
to Income Taxes, and a Protocol thereto, the Tax Treaty, gains obtained by a
U.S. Shareholder eligible for benefits under the Tax Treaty on the disposition
of CPOs will not generally be subject to Mexican tax, provided that such gains
are not attributable to a permanent establishment of such U.S. Shareholder in
Mexico and that the eligible U.S. Shareholder did not own, directly or
indirectly, 25% or more of our outstanding stock during the 12-month period
preceding the disposition. In the case of non-residents of Mexico eligible for
the benefits of a tax treaty, gains derived from the disposition of ADSs or CPOs
may also be exempt, in whole or in part, from Mexican taxation under a treaty to
which Mexico is a party.
Deposits and withdrawals of ADSs will not give rise to any Mexican tax
or transfer duties.
Estate and Gift Taxes
There are no Mexican inheritance or succession taxes applicable to the
ownership, transfer or disposition of ADSs or CPOs by holders that are
non-residents of Mexico, although gratuitous transfers of CPOs may, in some
circumstances, cause a Mexican federal tax to be imposed upon a recipient.
There are no Mexican stamp, issue, registration or similar taxes or duties
payable by holders of ADSs or CPOs.
U.S. Federal Income Tax Considerations
General
The following is a summary of the material U.S. federal income tax
consequences relating to the ownership and disposition of our CPOs and ADSs.
This summary is based on provisions of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), U.S. Treasury regulations promulgated under
the Code, and administrative rulings, and judicial interpretations of the Code,
all as in effect on the date of this annual report and all of which are subject
to change, possibly retroactively. This summary is limited to U.S. Shareholders
(as defined below) who hold our ADSs or CPOs, as the case may be, as capital
assets. This summary does not discuss all aspects of U.S. federal income
taxation which may be important to an investor in light of its individual
circumstances, for example, an investor subject to special tax rules (e.g.,
banks, thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, expatriates,
tax-exempt investors, persons who own 10% or more of our voting stock, or
holders whose functional currency is not the Dollar or U.S. Shareholders who
hold a CPO or an ADS as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other integrated
investment, or as other than a capital asset). In addition, this summary does
not address any aspect of state, local or foreign taxation.
For purposes of this summary, a "U.S. Shareholder" means a beneficial
owner of CPOs or ADSs, who is for U.S. federal income tax purposes:
o an individual who is a citizen or resident of the United States
for U.S. federal income tax purposes;
133
o a corporation or other entity taxable as a corporation that is
created or organized in the United States or under the laws of the
United States or any state thereof (including the District of
Columbia);
o an estate the income of which is includible in gross income for
U.S. federal income tax purposes regardless of its source; or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one
or more United States persons have the authority to control all
substantial decisions of such trust.
If a partnership (including any entity treated as a partnership for
U.S. federal income tax purposes) is the beneficial owner of CPOs or ADSs, the
U.S. federal income tax treatment of a partner in such partnership will
generally depend upon the status of the partner and the activities of the
partnership. A partner in a partnership that is the beneficial owner of CPOs or
ADSs is urged to consult its own tax advisor regarding the associated tax
consequences.
U.S. Shareholders should consult their own tax advisors as to the
particular tax consequences to them under United States federal, state and
local, and foreign laws relating to the ownership and disposition of our CPOs
and ADSs.
Ownership of CPOs or ADSs in general
In general, for U.S. Federal income tax purposes, U.S. Shareholders
who own ADSs will be treated as the beneficial owners of the CPOs represented
by those ADSs, and each CPO will represent a beneficial interest in two A
shares and one B share.
Taxation of dividends with respect to CPOs and ADSs
Distributions of cash or property with respect to the A shares or B
shares represented by CPOs, including CPOs represented by ADSs, generally will
be includible in the gross income of a U.S. Shareholder as foreign source
"passive" or "financial services" income on the date the distributions are
received by the CPO trustee or successor thereof, to the extent paid out of our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Pursuant to changes in U.S. tax law applicable to tax
years beginning after December 31, 2006, payments that would have been treated
as "financial services" income for these purposes will be treated as "general
category" income. These dividends will not be eligible for the
dividends-received deduction allowed to corporate U.S. Shareholders. To the
extent, if any, that the amount of any distribution by us exceeds our current
and accumulated earnings and profits as determined under U.S. federal income
tax principles, it will be treated first as a tax-free return of the U.S.
Shareholder's adjusted tax basis in the CPOs or ADSs and thereafter as capital
gain.
The gross amount of any dividends paid in Pesos will be includible in
the income of a U.S. Shareholder in a Dollar amount calculated by reference to
the exchange rate in effect the day the Pesos are received by the CPO trustee
or successor thereof whether or not they are converted into Dollars on that
day. Generally, any gain or loss resulting from currency exchange fluctuations
during the period from the date the dividend payment is includible in income to
the date such payment is converted into U.S. Dollars will be treated as
ordinary income or loss. Such gain or loss will generally be income from
sources within the United States for foreign tax credit limitation purposes.
Dividend income is generally taxed as ordinary income. However, a
maximum United States federal income tax rate of 15 percent will apply to
"qualified dividend income" received by U.S. Shareholders that are individuals
(as well as certain trusts and estates) in taxable years beginning before
January 1, 2011, provided that certain holding period requirements are met.
"Qualified dividend income" includes dividends paid on shares of "qualified
foreign corporations" if, among other things: (i) the shares of the foreign
corporation are readily tradable on an established securities market in the
United States; or (ii) the foreign corporation is eligible with respect to
substantially all of its income for the benefits of a comprehensive income tax
treaty with the United States which contains an exchange of information
program.
We believe that we are a "qualified foreign corporation" because (i)
the ADSs trade on the New York Stock Exchange and (ii) we are eligible for the
benefits of the comprehensive income tax treaty between Mexico and
134
the United States which includes an exchange of information program.
Accordingly, we believe that any dividends we pay should constitute "qualified
dividend income" for United States federal income tax purposes. There can be no
assurance, however, that we will continue to be considered a "qualified foreign
corporation" and that our dividends will continue to be "qualified dividend
income."
Taxation of capital gains on disposition of CPOs or ADSs
The sale or exchange of CPOs or ADSs will result in the recognition of
gain or loss by a U.S. Shareholder for U.S. federal income tax purposes in an
amount equal to the difference between the amount realized and the U.S.
Shareholder's tax basis therein. That gain or loss recognized by a U.S.
Shareholder will be long-term capital gain or loss if the U.S. Shareholder's
holding period for the CPOs or ADSs exceeds one year at the time of disposition.
Long term capital gain realized by a U.S. Shareholder that is an individual (as
well as certain trusts and estates) upon the sale or exchange of CPOs or ADSs
before the end of a taxable year which begins before January 1, 2011, generally
will be subject to a maximum United States federal income tax rate of 15
percent. The deduction of capital losses is subject to limitations. Gain from
the sale or exchange of the CPOs or ADSs usually will be treated as U.S. source
for foreign tax credit purposes; losses will generally be allocated against U.S.
source income. Deposits and withdrawals of CPOs by U.S. Shareholders in exchange
for ADSs will not result in the realization of gain or loss for U.S. federal
income tax purposes.
United States Backup Withholding and Information Reporting
A U.S. Shareholder may, under certain circumstances, be subject to
information reporting with respect to some payments to that U.S. Shareholder
such as dividends or the proceeds of a sale or other disposition of the CPOs or
ADSs. Backup withholding at a 28 percent rate also may apply to amounts paid to
such holder unless such holder (i) is a corporation or comes within certain
exempt categories, and demonstrates this fact when so required, or (ii) provides
a correct taxpayer identification number and otherwise complies with applicable
requirements of the backup withholding rules. Backup withholding is not an
additional tax. Amounts withheld as backup withholding may be creditable against
the U.S. Shareholder's federal income tax liability, and the U.S. Shareholder
may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the Internal Revenue
Service and furnishing any required information.
Documents on Display
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance with these requirements, file reports
and information statements and other information with the Securities and
Exchange Commission. These reports and information statements and other
information filed by us with the Securities and Exchange Commission can be
inspected and copied at the Public Reference Section of the Securities and
Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
Item 11 - Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
See Item 5 -- "Operating and Financial Review and Prospects --
Derivatives and Other Hedging Instruments."
Item 12 - Description of Securities Other than Equity Securities
------------------------------------------------------
Not applicable.
135
PART II
Item 13 - Defaults, 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
-----------------------
CEMEX, S.A. de C.V.
-------------------
Disclosure Controls and Procedures. The Chief Executive Officer and
Executive Vice President of Planning and Finance of CEMEX, S.A. de C.V.
("CEMEX") have evaluated the effectiveness of CEMEX's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December
31, 2005. Based on such evaluation, such officers have concluded that CEMEX's
disclosure controls and procedures are effective as of December 31, 2005.
Internal Control Over Financial Reporting. There were no changes in
CEMEX's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during fiscal 2005 that
have materially affected, or are reasonably likely to materially affect, CEMEX's
internal control over financial reporting.
CEMEX Mexico, S.A. de C.V.
--------------------------
Disclosure Controls and Procedures. The Chief Executive Officer and
Executive Vice President of Planning and Finance of CEMEX Mexico, S.A. de C.V.
("CEMEX Mexico") have evaluated the effectiveness of CEMEX Mexico's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of December 31, 2005. Based on such
evaluation, such officers have concluded that CEMEX Mexico's disclosure controls
and procedures are effective as of December 31, 2005.
Internal Control Over Financial Reporting. There were no changes in
CEMEX Mexico's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during fiscal
2005 that have materially affected, or are reasonably likely to materially
affect, CEMEX Mexico's internal control over financial reporting.
Empresas Tolteca de Mexico, S.A. de C.V.
----------------------------------------
Disclosure Controls and Procedures. The Chief Executive Officer and
Executive Vice President of Planning and Finance of Empresas Tolteca de Mexico,
S.A. de C.V. ("Empresas Tolteca") have evaluated the effectiveness of Empresas
Tolteca's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2005. Based
on such evaluation, such officers have concluded that Empresas Tolteca's
disclosure controls and procedures are effective as of December 31, 2005.
Internal Control Over Financial Reporting. There were no changes in
Empresas Tolteca's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during fiscal
2005 that have materially affected, or are reasonably likely to materially
affect, Empresas Tolteca's internal control over financial reporting.
136
Item 16A - Audit Committee Financial Expert
--------------------------------
Our board of directors has determined that it has an "audit committee
financial expert" (as defined in Item 16A of Form 20-F) serving on its audit
committee. Mr. Jose Manuel Rincon Gallardo meets the requisite qualifications.
Item 16B - Code of Ethics
--------------
We have adopted a written code of ethics that applies to all our
senior executives, including our principal executive officer, principal
financial officer and principal accounting officer.
You may request a copy of our code of ethics, at no cost, by writing
to or telephoning us as follows:
CEMEX, S.A. de C.V.
Av. Ricardo Margain Zozaya #325
Colonia Valle del Campestre
Garza Garcia, Nuevo Leon, Mexico 66265.
Attn: Luis Hernandez or Javier Amaya
Telephone: (011-5281) 8888-8888
Item 16C - Principal Accountant Fees and Services
--------------------------------------
Audit Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide charged us approximately Ps126.7 million in fiscal year 2005 in
connection with the professional services rendered for the audit of our annual
financial statements and services normally provided by them relating to
statutory and regulatory filings or engagements. In fiscal year 2004, KPMG
Cardenas Dosal, S.C. in Mexico and KPMG firms worldwide billed us approximately
Ps46.3 million for these services.
Audit-Related Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide billed us approximately Ps5.1 million in fiscal year 2005 for
assurance and related services reasonably related to the performance of our
audit. In fiscal year 2004, KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide charged us approximately Ps4.6 million for audit-related services.
These fees relate mainly to technical accounting support and guidance provided
by KPMG in connection with the implementation of newly issued accounting
standards.
Tax Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms worldwide
charged us approximately Ps28.9 million in fiscal year 2005 for tax compliance,
tax advice and tax planning. KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide billed us approximately Ps33.5 million for tax-related services in
fiscal year 2004.
All Other Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide billed us Ps1.2 million in fiscal year 2005 for products and services
other than those comprising audit fees, audit-related fees and tax fees. In
fiscal year 2004, KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms worldwide
charged us Ps13.6 million for products and services in this category. These fees
relate mainly to services provided by KPMG to us with respect to our due
diligence activities around the world.
Audit Committee Pre-approval Policies and Procedures
Our audit committee is responsible, among other things, for the
appointment, compensation and oversight of our external auditors. To assure the
independence of our independent auditors, our audit committee pre-approves
annually a catalog of specific audit and non-audit services in the categories
Audit Services, Audit-Related Services, Tax-Related Services, and Other Services
that may be performed by our auditors, as well as the budgeted fee levels for
each of these categories. All other permitted services must receive a specific
approval from our audit committee. Our external auditor periodically provides a
report to our audit committee in order for our audit committee to review the
services that our external auditor is providing, as well as the status and cost
of those services.
137
During 2005, none of the services provided to us by our external
auditors were approved by our audit committee pursuant to the de minimis
exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X.
Item 16D - Exemptions from the Listing Standards for Audit Committees
----------------------------------------------------------
Not applicable.
Item 16E - Purchases of Equity Securities by the Issuer and Affiliated
-----------------------------------------------------------
Purchasers
----------
In connection with our 2004 annual shareholders' meeting held on April
28, 2005, our shareholders approved a stock repurchase program in an amount of
up to Ps6 billion (approximately U.S.$565 million) to be implemented between
April 2005 and April 2006. Although this program was in place, during 2005
neither we nor any of our subsidiaries purchased any of our shares. This
program expired in April 2006 and no shares were repurchased under this
program.
In connection with our 2005 annual shareholders' meeting held on April
27, 2006, our shareholders approved a stock repurchase program in an amount of
up to Ps6 billion (approximately U.S.$545 million) to be implemented between
April 2006 and April 2007. As of the date of this annual report, no shares were
repurchased under this program.
138
PART III
Item 17 - Financial Statements
--------------------
Not applicable.
Item 18 - Financial Statements
--------------------
See pages F-1 through F-74, incorporated herein by reference.
Item 19 - Exhibits
--------
1.1 Amended and Restated By-laws of CEMEX, S.A. de C.V. (a)
2.1 Form of Trust Agreement between CEMEX, S.A. de C.V., as founder of the
trust, and Banco Nacional de Mexico, S.A. regarding the CPOs. (b)
2.2 Amendment Agreement, dated as of November 21, 2002, amending the Trust
Agreement between CEMEX, S.A. de C.V., as founder of the trust, and
Banco Nacional de Mexico, S.A. regarding the CPOs. (c)
2.3 Form of CPO Certificate. (b)
2.4 Form of Second Amended and Restated Deposit Agreement (A and B share
CPOs), dated as of August 10, 1999, among CEMEX, S.A. de C.V.,
Citibank, N.A. and holders and beneficial owners of American Depositary
Shares. (b)
2.5 Form of American Depositary Receipt (included in Exhibit 2.4)
evidencing American Depositary Shares. (b)
2.6 Form of Certificate for shares of Series A Common Stock of CEMEX, S.A.
de C.V. (b)
2.7 Form of Certificate for shares of Series B Common Stock of CEMEX, S.A.
de C.V. (b)
4.1 Note Purchase Agreement dated June 23, 2003, by and among CEMEX Espana
Finance, LLC, as issuer, CEMEX Espana, Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V.,
Cemex Manila Investments B.V. and Cemex Egyptian Investments B.V., as
guarantors, and several institutional purchasers named therein, in
connection with the issuance by CEMEX Espana Finance, LLC of U.S.$103
million aggregate principal amount of Senior Notes due 2010, U.S.$96
million aggregate principal amount of Senior Notes due 2013, U.S.$201
million aggregate principal amount of Senior Notes due 2015. (d)
4.2 $1,150,000,000 Term Loan Agreement, dated October 15, 2003, by and
among New Sunward Holding B.V. as borrower, CEMEX, S.A. de C.V., CEMEX
Mexico, S.A. de C.V. and Empresas Tolteca de Mexico, S.A. de C.V. as
guarantors, and the several lenders named therein. (d)
4.3 Term and Revolving Facilities Agreement, dated as of March 30, 2004, by
and among CEMEX Espana, as borrower, Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V.,
Cemex Manila Investments B.V. and Cemex Egyptian Investments, B.V., as
guarantors, Banco Bilbao Vizcaya Argentaria, S.A. and Societe Generale,
as mandated lead arrangers, and the several banks and other financial
institutions named therein, as lenders, for an aggregate amount of
(euro)250,000,000 and (Y)19,308,000,000. (d)
4.4 (euro)250,000,000, (Y)19,308,000,000 Term and Revolving Facilities
Agreement, dated March 30, 2004, for CEMEX ESPANA, S.A., as Borrower,
CEMEX Caracas Investments B.V., CEMEX Caracas II Investments B.V.,
CEMEX Egyptian Investments B.V., CEMEX Manila Investments B.V. and
Sandworth Plaza Holding B.V., as Guarantors, arranged by Banco Bilbao
Vizcaya Argentaria, S.A. and Societe Generale, S.A., with Banco Bilbao
Vizcaya Argentaria, S.A. acting as Agent. (d)
4.5 CEMEX Espana Finance LLC Note Purchase Agreement, dated as of April 15,
2004 for (Y)4,980,600,000 1.79% Senior Notes, Series 2004, Tranche 1,
due 2010 and (Y)6,087,400,000 1.99% Senior Notes, Series 2004, Tranche
2, due 2011. (e)
4.6 U.S.$800,000,000 Credit Agreement, dated as of June 23, 2004, among
CEMEX, S.A. de C.V., as Borrower and CEMEX Mexico, S.A. de C.V. and
Empresas Tolteca de Mexico, S.A. de C.V., as Guarantors and Barclays
Bank PLC as Issuing Bank and Documentation Agent and ING Bank N.V. as
Issuing Bank and Barclays Capital, the Investment Banking division of
Barclays Bank Plc as Joint Bookrunner and ING Capital LLC as Joint
Bookrunner and Administrative Agent. (e)
139
4.7 U.S.$1,250,000,000 Term and Revolving Facilities Agreement, dated
September 24, 2004 for New Sunward Holding B.V., as Borrower, CEMEX,
S.A. de C.V., CEMEX Mexico, S.A. de C.V. and Empresas Tolteca De
Mexico, S.A. de C.V., as Guarantors, arranged by Citigroup Global
Markets Limited and Goldman Sachs International, with Citibank
International PLC acting as Agent. (e)
4.8 U.S.$3,800,000,000 Term and Revolving Facilities Agreement, dated
September 24, 2004 for CEMEX Espana, S.A., as Borrower, CEMEX Espana,
S.A., CEMEX Caracas Investments B.V., Cemex Caracas II Investments
B.V., Cemex Egyptian Investments B.V., CEMEX Manila Investments B.V.,
CEMEX American Holdings B.V., as Guarantors, arranged by Citigroup
Global Markets Limited and Goldman Sachs International with Citibank
International PLC acting as Agent. (e)
4.9 Implementation Agreement, dated September 27, 2004, by and between
CEMEX UK Limited and RMC Group p.l.c. (e) 4.10 Scheme of Arrangement,
dated October 25, 2004, pursuant to which CEMEX UK Limited acquired the
outstanding shares of RMC Group p.l.c. (e)
4.11 Asset Purchase Agreement by and between CEMEX, Inc. and Votorantim
Participacoes S.A., dated as of February 4, 2005. (e)
4.11.1 Amendment No. 1 to Asset Purchase Agreement, dated as of March 31,
2005, by and between CEMEX, Inc. and Votorantim Participacoes S.A. (e)
4.12 (pound)1,000,000,000 Amended and Restated Term and Revolving Credit
Agreement, dated March 16, 2005, by and among RMC Group Limited, CEMEX
Espana, S.A., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Egyptian Investments B.V., Cemex Manila
Investments B.V., Cemex American Holdings B.V. and Cemex Shipping B.V.,
as Original Guarantors, RMC Group Limited, as Original Borrower, Banc
of America Securities Limited, BNP Paribas, HSBC Investment Bank plc,
the Royal Bank of Scotland plc, West LB AG, London Branch, as Mandated
Lead Arrangers and the Royal Bank of Scotland plc, as Agent. (e)
4.13 U.S.$1,000,000,000 Term Credit Agreement, dated as of April 5, 2005,
among CEMEX, S.A. de C.V., as Borrower, CEMEX Mexico, S.A. de C.V., as
Guarantor, Empresas Tolteca de Mexico, S.A. de C.V., as Guarantor,
Barclays Bank PLC, as Administrative Agent, Barclays Capital, the
Investment Banking Division of Barclays Bank PLC, as Joint Lead
Arranger and Joint Bookrunner, Citigroup Global Markets Inc., as
Documentation Agent, Joint Lead Arranger and Joint Bookrunner, Barclays
Bank PLC, Citibank, N.A., and Citibank, N.A., Nassau, Bahamas Branch as
Lenders. (e)
4.14 U.S.$1,200,000,000 Term Credit Agreement, dated as of May 31, 2005,
among CEMEX, S.A. de C.V., as Borrower, CEMEX Mexico, S.A. de C.V., as
Guarantor, Empresas Tolteca de Mexico, S.A. de C.V., as Guarantor,
Barclays Bank PLC, as Administrative Agent, Barclays Capital, the
Investment Banking Division of Barclays Bank PLC, as Joint Lead
Arranger and Joint Bookrunner, and Citigroup Global Markets Inc., as
Documentation Agent, Joint Lead Arranger and Joint Bookrunner. (f)
4.15 U.S.$700,000,000 Term and Revolving Facilities Agreement, dated June
27, 2005, for New Sunward Holding B.V., as Borrower, CEMEX, S.A. de
C.V., CEMEX Mexico, S.A. de C.V. and Empresas Tolteca De Mexico, S.A.
de C.V., as Guarantors, arranged by Banco Bilbao Vizcaya Argentaria,
S.A., BNP Paribas and Citigroup Global Markets Limited, as Mandated
Lead Arrangers and Joint Bookrunners, the several financial
institutions named therein, as Lenders, and Citibank, N.A., as Agent.
(f)
4.16 Note Purchase Agreement, dated as of June 13, 2005, among CEMEX Espana
Finance LLC, as issuer, CEMEX Espana, Cemex Caracas Investments B.V.,
Cemex Caracas II Investments B.V., Cemex Manila Investments B.V., Cemex
Egyptian Investments B.V., Cemex American Holdings B.V. and Cemex
Shipping B.V., as guarantors, and several institutional purchasers,
relating to the private placement by CEMEX Espana Finance, LLC of
U.S.$133,000,000 aggregate principal amount of 5.18% Senior Notes due
2010, and U.S.$192,000,000 aggregate principal amount of 5.62% Senior
Notes due 2015. (f)
4.17 Amended and Restated Limited Liability Company Agreement of CEMEX
Southeast LLC, dated as of July 1, 2005, among CEMEX Southeast LLC,
CEMEX Southeast Holdings, LLC, Ready Mix USA, Inc. and CEMEX, Inc. (f)
4.17.1 Amendment No. 1 to Amended and Restated Limited Liability Company
Agreement of CEMEX Southeast LLC, dated as of September 1, 2005, among
CEMEX Southeast LLC, CEMEX Southeast Holdings, LLC, Ready Mix USA, Inc.
and CEMEX, Inc. (f)
4.18 Limited Liability Company Agreement of Ready Mix USA, LLC, dated as of
July 1, 2005, among Ready Mix USA, LLC, CEMEX Southeast Holdings, LLC,
Ready Mix USA, Inc. and CEMEX, Inc. (f)
4.18.1 Amendment No. 1 to Limited Liability Company Agreement of Ready Mix
USA, LLC, dated as of September 1, 2005, among Ready Mix USA, LLC,
CEMEX Southeast Holdings, LLC, Ready Mix USA, Inc. and CEMEX, Inc. (f)
140
4.19 Asset and Capital Contribution Agreement, dated as of July 1, 2005,
among Ready Mix USA, Inc., CEMEX Southeast Holdings, LLC, and CEMEX
Southeast LLC. (f)
4.20 Asset and Capital Contribution Agreement, dated as of July 1, 2005,
among Ready Mix USA, Inc., CEMEX Southeast Holdings, LLC, and Ready Mix
USA, LLC. (f)
4.21 Asset Purchase Agreement, dated as of September 1, 2005, between Ready
Mix USA, LLC and RMC Mid-Atlantic, LLC. (f)
8.1 List of subsidiaries of CEMEX, S.A. de C.V. (f)
12.1 Certification of the Principal Executive Officer of CEMEX, S.A. de C.V.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (f)
12.2 Certification of the Principal Financial Officer of CEMEX, S.A. de C.V.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (f)
12.3 Certification of the Principal Executive Officer of CEMEX Mexico, S.A.
de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (f)
12.4 Certification of the Principal Financial Officer of CEMEX Mexico, S.A.
de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (f)
12.5 Certification of the Principal Executive Officer of Empresas Tolteca de
Mexico, S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (f)
12.6 Certification of the Principal Financial Officer of Empresas Tolteca de
Mexico, S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (f)
13.1 Certification of the Principal Executive and Financial Officers of
CEMEX, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (f)
13.2 Certification of Principal Executive and Financial Officers of CEMEX
Mexico, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (f)
13.3 Certification of Principal Executive and Financial Officers of Empresas
Tolteca de Mexico, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (f)
14.1 Consent of KPMG Cardenas Dosal, S.C. to the incorporation by reference
into the effective registration statements of CEMEX, S.A. de C.V. under
the Securities Act of 1933 of their report with respect to the
consolidated financial statements of CEMEX, S.A. de C.V., which appears
in this Annual Report on Form 20-F. (f)
___________________
(a) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form F-3 of CEMEX, S.A. de C.V. (Registration
No. 333-11382), filed with the Securities and Exchange Commission on
August 27, 2003.
(b) Incorporated by reference to the Registration Statement on Form F-4 of
CEMEX, S.A. de C.V. (Registration No. 333-10682), filed with the
Securities and Exchange Commission on August 10, 1999.
(c) Incorporated by reference to the 2002 annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on April 8,
2003.
(d) Incorporated by reference to the 2003 annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on May 11,
2004.
(e) Incorporated by reference to the 2004 annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on May 27,
2005.
(f) Filed herewith.
141
SIGNATURES
CEMEX, S.A. de C.V. 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.
CEMEX, S.A. de C.V.
By: /s/ Lorenzo H. Zambrano
-------------------------------------
Name: Lorenzo H. Zambrano
Title: Chief Executive Officer
Date: June 7, 2006
SIGNATURES
CEMEX Mexico, S.A. de C.V. 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.
CEMEX Mexico, S.A. de C.V.
By: /s/ Lorenzo H. Zambrano
-------------------------------------
Name: Lorenzo H. Zambrano
Title Chief Executive Officer
Date: June 7, 2006
SIGNATURES
Empresas Tolteca de Mexico, S.A. de C.V. 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.
Empresas Tolteca de Mexico, S.A. de C.V.
By: /s/ Lorenzo H. Zambrano
-------------------------------------
Name: Lorenzo H. Zambrano
Title: Chief Executive Officer
Date: June 7, 2006
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
----------------------------------------------------------------
Page
-----
CEMEX, S.A. de C.V. and subsidiaries:
Independent Auditors' Report--KPMG Cardenas Dosal, S.C..................... F-2
Audited consolidated balance sheets as of December 31, 2004 and 2005....... F-3
Audited consolidated statements of income for the years ended
December 31, 2003, 2004 and 2005......................................... F-4
Audited statements of changes in stockholders' equity for the years
ended December 31, 2003, 2004 and 2005................................... F-5
Audited consolidated statements of changes in financial position for
the years ended December 31, 2003, 2004 and 2005........................ F-6
Notes to the audited consolidated financial statements..................... F-7
SCHEDULES
Independent Auditors' Report on Schedules - KPMG Cardenas Dosal, S.C....... S-1
Schedule I - Parent company financials only................................ S-2
Schedule II - Valuation and qualifying accounts............................ S-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CEMEX, S.A. de C.V.:
We have audited the consolidated balance sheets of CEMEX, S.A. de C.V. and
subsidiaries as of December 31, 2004 and 2005, and the related consolidated
statements of income, changes in stockholders' equity and changes in financial
position for each of the years ended December 31, 2003, 2004 and 2005. 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) and with auditing standards generally
accepted in Mexico. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatements and are prepared in accordance with accounting
principles generally accepted in Mexico. 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, based upon our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of CEMEX, S.A. de C.V. and subsidiaries at December 31, 2004 and 2005,
and the consolidated results of their operations, the changes in their
stockholders' equity and the changes in their financial position for each of the
years ended December 31, 2003, 2004 and 2005, in accordance with accounting
principles generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Application of accounting principles generally accepted in the United
States of America would have affected results of operations for each of the
years ended December 31, 2003, 2004 and 2005, and stockholders' equity as of
December 31, 2004 and 2005, to the extent summarized in note 25 to the
consolidated financial statements.
KPMG Cardenas Dosal, S.C.
/s/ Leandro Castillo Parada
Monterrey, N.L., Mexico
January 27, 2006, except for note 25,
which is as of May 25, 2006
F-2
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
(Millions of constant Mexican pesos as of December 31, 2005 and Dollars)
Years ended December 31, (unaudited)
2005
Assets Note 2004 2005 (Note 3A)
---------------- ---------------- ---------------
Current Assets
Cash and investments................................... 4 Ps 3,657 6,387 U.S.$ 601
Trade accounts receivable less allowance for doubtful 5
accounts............................................. 4,572 16,914 1,593
Other accounts receivable.............................. 6 4,857 8,236 776
Inventories............................................ 7 6,758 11,015 1,037
Other current assets................................... 8 1,006 1,697 160
---------------- ---------------- ---------------
Total current assets............................... 20,850 44,249 4,167
---------------- ---------------- ---------------
Investments and Noncurrent Receivables 9
Investments in affiliated companies.................... 15,973 8,923 840
Other noncurrent accounts receivable................... 3,732 7,635 719
---------------- ---------------- ---------------
Total investments and noncurrent receivables....... 19,705 16,558 1,559
---------------- ---------------- ---------------
Properties, Machinery and Equipment 10
Land and buildings .................................... 52,932 88,560 8,339
Machinery and equipment ............................... 149,010 181,340 17,076
Accumulated depreciation .............................. (102,668) (110,126) (10,370)
Construction in progress............................... 3,429 5,281 497
---------------- ---------------- ---------------
Net properties, machinery and equipment............ 102,703 165,055 15,542
---------------- ---------------- ---------------
Intangible Assets and Deferred Charges.................... 11 42,426 58,366 5,496
---------------- ---------------- ---------------
Total Assets....................................... Ps 185,684 284,228 U.S.$ 26,764
---------------- ---------------- ---------------
Liabilities and Stockholders' Equity
Current Liabilities
Bank loans............................................. 12 Ps 4,826 6,001 U.S.$ 565
Notes payable.......................................... 12 307 651 61
Current maturities of long-term debt .................. 12 6,018 5,995 565
Trade accounts payable................................. 5,720 14,466 1,362
Other accounts payable and accrued expenses............ 13 8,902 16,575 1,561
---------------- ---------------- ---------------
Total current liabilities ......................... 25,773 43,688 4,114
---------------- ---------------- ---------------
Long-Term Debt 12
Bank loans ............................................ 29,060 60,474 5,694
Notes payable ......................................... 29,165 33,527 3,157
Current maturities of long-term debt .................. (6,018) (5,995) (564)
---------------- ---------------- ---------------
Total long-term debt .............................. 52,207 88,006 8,287
---------------- ---------------- ---------------
Other Noncurrent Liabilities
Pension and other postretirement benefits.............. 14 630 6,390 602
Deferred income taxes.................................. 18B 12,302 25,889 2,438
Other noncurrent liabilities........................... 13 6,960 10,298 969
---------------- ---------------- ---------------
Total other noncurrent liabilities ................ 19,892 42,577 4,009
---------------- ---------------- ---------------
Total Liabilities.................................. 97,872 174,271 16,410
---------------- ---------------- ---------------
Stockholders' Equity 15
Majority interest:
Common stock-historical cost basis................... 62 64 6
Common stock-accumulated inflation adjustments ...... 3,735 3,735 351
Additional paid-in capital........................... 42,580 47,133 4,438
Deficit in equity restatement ....................... (73,900) (75,329) (7,093)
Cumulative initial deferred income tax effects....... 3S (5,850) (5,850) (551)
Retained earnings ................................... 103,065 112,166 10,562
Net income........................................... 13,965 22,425 2,112
---------------- ---------------- ---------------
Total majority interest ........................... 83,657 104,344 9,825
Minority interest...................................... 4,155 5,613 529
---------------- ---------------- ---------------
Total stockholders' equity ........................ 87,812 109,957 10,354
---------------- ---------------- ---------------
Total Liabilities and Stockholders' Equity......... Ps 185,684 284,228 U.S.$ 26,764
---------------- ---------------- ---------------
See accompanying notes to consolidated financial statements.
F-3
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Income
(Millions of constant Mexican pesos as of December 31, 2005, except for earnings per share)
Years ended December 31, (unaudited)
2005
Note 2003 2004 2005 (Note 3A)
------------------------------------------------------------- --------- --- --------- --------- --------- -----------
Net sales..................................................... Ps 82,045 87,062 162,709 U.S.$ 15,321
Cost of sales................................................. (47,296) (48,997) (98,460) (9,271)
--------- --------- --------- -----------
Gross profit............................................... 34,749 38,065 64,249 6,050
--------- --------- --------- -----------
Operating expenses:
Administrative........................................... (9,094) (8,847) (15,276) (1,438)
Selling.................................................. (8,990) (9,435) (22,564) (2,125)
--------- --------- --------- -----------
Total operating expenses............................... (18,084) (18,282) (37,840) (3,563)
--------- --------- --------- -----------
Operating Income........................................... 16,665 19,783 26,409 2,487
--------- --------- --------- -----------
Comprehensive financing result:
Financial expense........................................ (4,359) (3,977) (5,588) (526)
Financial income......................................... 191 250 417 39
Results from valuation and liquidation of financial
instruments............................................ (682) 1,280 4,101 386
Foreign exchange result, net............................. (1,965) (252) (837) (79)
Monetary position results................................ 3,752 4,123 4,507 425
--------- --------- --------- -----------
Net comprehensive financing result..................... (3,063) 1,424 2,600 245
--------- --------- --------- -----------
Other expense, net............................................ 3V (5,230) (5,169) (3,372) (318)
--------- --------- --------- -----------
Income before income taxes, employees' statutory profit
sharing and equity in income of affiliates............... 8,372 16,038 25,637 2,414
--------- --------- --------- -----------
Income tax and business assets tax, net....................... 18 (1,026) (1,960) (3,564) (336)
Employees' statutory profit sharing........................... 18 (195) (317) 9 1
--------- --------- --------- -----------
Total income tax, business assets tax and employees' (1,221) (2,277) (3,555) (335)
statutory profit sharing................................
--------- --------- --------- -----------
Income before equity in income of affiliates............... 7,151 13,761 22,082 2,079
--------- --------- --------- -----------
Equity in income of affiliates................................ 398 428 928 88
--------- --------- --------- -----------
Consolidated net income.................................... 7,549 14,189 23,010 2,167
Minority interest net income............................... 348 224 585 55
--------- --------- --------- -----------
Majority interest net income............................... Ps 7,201 13,965 22,425 U.S.$ 2,112
--------- --------- --------- -----------
Basic earnings per share.................................... 3A and 21 Ps 0.76 1.40 2.16 U.S.$ 0.20
Diluted earnings per share.................................. 3A and 21 Ps 0.74 1.39 2.15 U.S.$ 0.20
--------- --------- --------- -----------
See accompanying notes to consolidated financial statements.
F-4
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Statements of Changes in Stockholders' Equity
(Millions of constant Mexican pesos as of December 31, 2005)
Cumulative
initial
Additional Deficit in deferred
Common paid-in equity income tax
Note Stock capital restatement effects
----------------------------------------------------- -------- --------------- ------------- ------------- -------------
Balances at December 31, 2002........................ Ps 3,790 34,837 (69,700) (5,850)
Dividends (Ps0.41 pesos per share) .................. 15A 4 4,013 - -
Issuance of common stock............................. 16 - 47 - -
Share repurchase program............................. 15A - 420 - -
Restatement of investments and other transactions - - - -
relating to minority interest...................... .
Investment by subsidiaries........................... 9 - - (2,952) -
Comprehensive net income (loss)...................... 15G - - (424) -
------------- ------------- ------------- -------------
Balances at December 31, 2003........................ 3,794 39,317 (73,076) (5,850)
Dividends (Ps0.39 pesos per share) .................. 15A 3 4,279 - -
Issuance of common stock............................. 16 - 69 - -
Liquidation of optional instruments.................. 15F - (1,085) - -
Restatement of investments and other transactions - - - -
relating to minority interest......................
Investment by subsdiaries............................ 9 - - (3,372) -
Comprehensive net income (loss)...................... 15G - - 2,548 -
------------- ------------- ------------- -------------
Balances at December 31, 2004........................ 3,797 42,580 (73,900) (5,850)
Dividends (Ps0.83 pesos per share) .................. 15A 2 4,535 - -
Issuance of common stock ........................... 16 - 18 - -
Restatement of investments and other transactions - - - -
relating to minority interest......................
Investment by subsidiaries........................... 9 - - (7,866) -
Comprehensive net income (loss)...................... 15G - - 6,437 -
------------- ------------- ------------- -------------
Balances at December 31, 2005........................ Ps 3,799 47,133 (75,329) (5,850)
------------- ------------- ------------- -------------
Balances at December 31, 2005 (unaudited)............ US$ 358 4,438 (7,093) (551)
----------------------------------------------------- -------- ------------- ------------- ------------- -------------
[TABLE CONTINUED]
Total Total
Retained majority Minority stockholders'
earnings interest interest equity
------------------------------------------------------ ------------ ------------- ------------- -------------
Balances at December 31, 2002......................... 104,044 67,121 14,102 81,223
Dividends (Ps0.41 pesos per share) ................... (4,038) (21) - (21)
Issuance of common stock.............................. - 47 - 47
Share repurchase program.............................. - 420 - 420
Restatement of investments and other transactions
relating to minority interest....................... - - (8,358) (8,358)
Investment by subsidiaries............................ - (2,952) - (2,952)
Comprehensive net income (loss)....................... 7,201 6,777 348 7,125
------------ ------------- ------------- -------------
Balances at December 31, 2003......................... 107,207 71,392 6,092 77,484
Dividends (Ps0.39 pesos per share) ................... (4,142) 140 - 140
Issuance of common stock.............................. - 69 - 69
Liquidation of optional instruments................... - (1,085) - (1,085)
Restatement of investments and other transactions
relating to minority interest....................... - - (2,161) (2,161)
Investment by subsdiaries............................. - (3,372) - (3,372)
Comprehensive net income (loss)....................... 13,965 16,513 224 16,737
------------ ------------- ------------- -------------
Balances at December 31, 2004......................... 117,030 83,657 4,155 87,812
Dividends (Ps0.83 pesos per share) ................... (4,864) (327) - (327)
Issuance of common stock ............................ - 18 - 18
Restatement of investments and other transactions - - 874 874
relating to minority interest.......................
Investment by subsidiaries............................ - (7,866) - (7,866)
Comprehensive net income (loss)....................... 22,425 28,862 584 29,446
------------ ------------- ------------- -------------
Balances at December 31, 2005......................... 134,591 104,344 5,613 109,957
------------ ------------- ------------- -------------
Balances at December 31, 2005 (unaudited)............. 12,673 9,825 529 10,354
------------------------------------------------------ ------------ ------------- ------------- -------------
See accompanying notes to consolidated financial statements.
F-5
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Changes in Financial Position
(Millions of constant Mexican pesos as of December 31, 2005)
Years ended December 31, (unaudited)
2005
2003 2004 2005 (Note 3A)
-------------------------------------------------------------------- ----------- ------------- ------------- ------------
Operating activities
Majority interest net income................................... Ps 7,201 13,965 22,425 U.S. $2,112
Adjustments to reconcile to resources provided by
operating activities:
Depreciation of properties, machinery and equipment.......... 6,584 6,407 9,986 940
Amortization of deferred charges and credits, net............ 2,861 2,752 1,605 151
Impairment of properties and intangible assets............... 1,206 1,505 166 16
Pensions, and other postretirement benefits.................. 471 451 2,001 188
Deferred income taxes charged to results..................... (447) 1,209 814 76
Equity in income of affiliates............................... (398) (428) (928) (87)
Minority interest............................................ 348 224 585 55
----------- ------------- ------------- ------------
Resources provided by operating activities................ 17,826 26,085 36,654 3,451
Changes in working capital, excluding acquisition effects:
Trade accounts receivable, net............................... (644) 706 (462) (43)
Other accounts receivables and other assets.................. 259 (319) (1,372) (129)
Inventories.................................................. 1,562 (145) 1,576 148
Trade accounts payable....................................... 815 150 1,825 172
Other accounts payable and accrued expenses.................. (1,881) (2,666) (1,921) (181)
----------- ------------- ------------- ------------
Net change in working capital............................. 111 (2,274) (354) (33)
----------- ------------- ------------- ------------
Net resources provided by operating activities............ 17,937 23,811 36,300 3,418
----------- ------------- ------------- ------------
Financing activities
Proceeds from bank loans (repayments), net..................... (3,116) 2,898 8,766 825
Notes payable, net, excluding foreign exchange effect......... 1,237 (6,800) 6,051 570
Investment by subsidiaries..................................... (23) - - -
Liquidation of optional instruments............................ - (1,085) - -
Dividends paid................................................. (4,038) (4,142) (4,864) (458)
Issuance of common stock from stock dividend elections......... 4,017 4,282 4,537 427
Issuance of common stock under stock option programs........... 47 69 18 2
Repurchase of preferred stock by subsidiaries................... (7,482) (759) - -
Disposal of shares under repurchase program.................... 420 - - -
Other financing activities, net................................ 3,589 (1,750) (5,571) (524)
----------- ------------- ------------- ------------
Resources provided by (used in) financing activities...... (5,349) (7,287) 8,937 842
----------- ------------- ------------- ------------
Investing activities
Properties, machinery and equipment, net....................... (4,510) (4,637) (8,341) (785)
Acquisition of subsidiaries and affiliates..................... (934) (179) (215) (21)
Investment in RMC Group p.l.c.................................. - (8,397) (47,080) (4,433)
Disposal of assets............................................. 160 680 6,084 573
Minority interest.............................................. (876) (1,402) (155) (15)
Deferred charges............................................... (579) 1,488 10,278 968
Other investments and monetary foreign currency effect......... (6,732) (3,757) (3,078) (290)
----------- ------------- ------------- ------------
Resources used in investing activities.................... (13,471) (16,204) (42,507) (4,003)
----------- ------------- ------------- ------------
Increase (decrease) in cash and investments .............. (883) 320 2,730 257
Cash and investments at beginning of year................. 4,220 3,337 3,657 344
----------- ------------- ------------- ------------
Cash and investments at end of year....................... Ps 3,337 3,657 6,387 U.S.$ 601
------------------------------------------------------------------ ----------- ------------- ------------- ------------
See accompanying notes to consolidated financial statements.
F-6
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Financial Statements
As of December 31, 2003, 2004 and 2005
(Millions of constant Mexican pesos as of December 31, 2005)
1. DESCRIPTION OF BUSINESS
CEMEX, S.A. de C.V. (CEMEX or the Company) is a Mexican holding company (parent)
of entities whose main activities are oriented to the construction industry,
through the production and marketing of cement, ready-mix concrete and
aggregates.
2. OUTSTANDING EVENTS IN 2005
o On March 1, 2005, CEMEX completed the acquisition of a 100% equity interest
in RMC Group p.l.c. ("RMC"). RMC was one of the largest European cement
producers and one of the largest distributors of ready-mix concrete and
aggregates in the world. The purchase price of the shares, considering the
18.8% equity interest acquired in 2004 for approximately U.S.$786 million,
net from the sale of certain assets, and considering acquisition expenses,
amounted to approximately U.S.$4,217 million, not including approximately
U.S.$2,249 million of assumed debt (note 9).
o On April 28, 2005, CEMEX stockholders approved a stock split, which became
effective on July 1, 2005. In connection with the stock split, each of
CEMEX's series A shares was surrendered in exchange for two new series A
shares, and each of CEMEX's series B shares was surrendered in exchange for
two new series B shares. The proportional equity interest of existing
stockholders did not change as a result of the stock split (note 15).
o On October 3, 2005, CEMEX completed a secondary public offering of Ordinary
Participation Certificates ("CPOs") and American Depositary Shares ("ADSs"),
which included the sale of 22,943,340 ADSs (placed in international markets)
and 80,500,000 CPOs (placed in the Mexican market). The CPOs and ADSs placed
in the offering were owned by financial institutions, and were the underlying
securities in equity forward contracts in the Company's own stock negotiated
by CEMEX with those institutions. From the offering proceeds of approximately
U.S.$1,500 million, after related expenses, approximately U.S.$1,300 million
were used to settle the Company's obligations under such forward contracts
(note 17).
3. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION AND DISCLOSURE
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles in Mexico ("Mexican GAAP"), which
recognize the effects of inflation on the financial information. When reference
is made to "pesos" or "Ps", it means Mexican pesos. When reference is made to
"dollars" or "U.S.$", it means millions of dollars of the United States of
America ("United States"). All amounts herein are presented in constant pesos
and, for the year 2005 amounts in the financial statements, also in dollars, the
latter being unaudited and presented solely for the convenience of the reader at
the rate of U.S.$1 = Ps10.62, the CEMEX accounting rate on December 31, 2005.
When reference is made to "(pound)" or "pounds", it means British Sterling
Pounds. Except when specific references are made to "earnings per share" and
"prices per share or per instrument", the amounts in these notes are stated in
millions of constant Mexican pesos as of the latest balance sheet date.
When reference is made to "CPO" or "CPOs" it means the Ordinary Participation
Certificates of CEMEX. As a result of the stock split previously mentioned, each
CPO was surrendered in exchange for two new CPOs. Each new CPO represents the
participation in two new series "A" shares and one new series "B" share of the
common stock.
References to "ADS" or "ADSs" refer to American Depositary Shares, listed on the
New York Stock Exchange ("NYSE"). The number of CEMEX's outstanding ADSs did not
change as a result of the stock split; instead the ratio of CPOs to ADSs was
modified so that each ADS now represents ten new CPOs. All amounts in CPOs,
shares and prices per share for 2003 and 2004 included in the financial
statements and their accompanying notes have been adjusted to retroactively
reflect the stock split.
Certain amounts reported in the consolidated financial statements and these
notes as of December 31, 2003 and 2004 have been reclassified to conform to the
presentation as of December 31, 2005.
B) RESTATEMENT OF COMPARATIVE FINANCIAL STATEMENTS
The restatement factors applied to the consolidated financial statements of
prior periods were calculated using the weighted average inflation and the
fluctuation in the exchange rate of each country in which the Company operates
relative to the peso.
Weighted average Mexican inflation
factor factor
------------------ ------------------
2002 to 2003............................. 1.1049 1.0387
2003 to 2004............................. 1.0624 1.0539
2004 to 2005............................. 0.9590 1.0300
------------------ ------------------
Common stock and additional paid-in capital are restated by Mexican inflation.
The weighted average inflation factor is used for all other restatement
adjustments to stockholders' equity.
F-7
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include those of CEMEX and the subsidiary
companies in which the Company holds more than 50% of their common stock and/or
has control. All significant balances and transactions between related parties
have been eliminated in consolidation.
Financial statements of joint ventures are consolidated through the
proportionate consolidation method, based on International Accounting Standard
31, "Interests in Joint Ventures". The Company applies full consolidation or the
equity method, as applicable, for those joint ventures in which one of the
venture partners controls the entity's administrative, financial and operating
policies.
As of December 31, 2005, the main operating subsidiaries, ordered by holding
company, and the percentage of interest directly held by their immediate holding
company, are as follows:
%
Subsidiary Country interest
------------------------------------------------- ------------------ ---------
CEMEX Mexico, S. A. de C.V. 1.................... Mexico 100.0
CEMEX Espana, S.A. 2............................. Spain 99.7
CEMEX Venezuela, S.A.C.A....................... Venezuela 75.7
CEMEX, Inc..................................... United States 100.0
CEMEX (Costa Rica), S.A. ...................... Costa Rica 99.1
Assiut Cement Company ......................... Egypt 95.8
CEMEX Colombia, S.A. .......................... Colombia 99.7
Cemento Bayano, S.A. .......................... Panama 99.3
CEMEX Dominicana, S.A.......................... Dominican Republic 99.9
CEMEX de Puerto Rico, Inc...................... Puerto Rico 100.0
RMC France, S.A.S.............................. France 100.0
CEMEX Asia Holdings Ltd. 3..................... Singapore 100.0
Solid Cement Corporation 4................... Philippines 99.9
APO Cement Corporation 4..................... Philippines 99.9
CEMEX (Thailand) Co. Ltd. ................... Thailand 100.0
CEMEX U.K. Ltd. 5.............................. United Kingdom 100.0
CEMEX Investments Limited.................... United Kingdom 100.0
CEMEX Deutschland, AG. ...................... Germany 100.0
CEMEX Austria p.l.c. ........................ Austria 100.0
Dalmacijacement d.d. ........................ Croatia 99.2
CEMEX Czech Republic, s.r.o. ................ Czech Republic 100.0
CEMEX Polska sp. z.o.o. ..................... Poland 100.0
Danubiusbeton Betonkeszito Kft............... Hungary 100.0
Readymix Plc. 6.............................. Ireland 61.7
CEMEX Holdings (Israel) Ltd. ................ Israel 100.0
SIA CEMEX ................................... Latvia 100.0
RMC Topmix LLC, Gulf Quarries Company,
RMC Supermix LLC y Falcon Cement LLC 7..... United Arab Emirates 100.0
------------------------------------------------- --------------------- -------
1. CEMEX Mexico, S.A. de C.V. ("CEMEX Mexico") holds 100% of the shares of
Empresas Tolteca de Mexico, S.A. de C.V. ("ETM") and Centro Distribuidor de
Cemento, S.A. de C.V. ("Cedice"). CEMEX Mexico indirectly holds CEMEX Espana,
S.A. and subsidiaries.
2. CEMEX Espana, S.A. is the indirect holding company of all CEMEX's
international operations, including those acquired from RMC.
3. In December 2005, the Company acquired an additional 0.9% equity interest in
CEMEX Asia Holdings Ltd. ("CAH") (note 9A). As of December 31, 2005, this
acquisition is pending for registration with the Singapore authorities.
4. Represents the Company's interest, held through CAH, in the economic benefits
of these entities.
5. CEMEX U.K. Ltd. is the indirect holding company of the entities that control
the operations acquired in 2005 from RMC, except those located in the United
States and France.
6. The Irish subsidiary is a public company, whose main minority shareholder is
the Bank of Ireland Nominees Ltd., which owns approximately 14.2% of the
subsidiary's common stock.
7. CEMEX owns 49% of the common stock and obtains 100% of the economic benefits
of the operating subsidiaries in that country, through an agreement with
other shareholders.
F-8
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
D) BUSINESS COMBINATIONS (notes 9 and 23)
Based on Bulletin B-7, "Business Acquisitions", which is effective for business
combinations beginning on January 1, 2005, CEMEX applies the following
accounting guidelines: a) adoption of the purchase method as the sole valuation
method for the accounting of acquired business; b) allocation of the purchase
price to all assets acquired and liabilities assumed based on their fair value
as of the acquisition date; c) goodwill is not amortized and is subject to
periodic impairment evaluations; d) intangible assets acquired are identified,
valued and recognized; and e) the unallocated portion of the purchase price
represents goodwill.
E) FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN CURRENCY FINANCIAL
STATEMENTS
Transactions denominated in foreign currencies are recorded at the exchange
rates prevailing on the dates of their execution. Monetary assets and
liabilities denominated in foreign currencies are adjusted into pesos at the
exchange rates prevailing at the balance sheet date and the resulting foreign
exchange fluctuations are recognized in earnings, except for the exchange
fluctuations arising from foreign currency indebtedness directly related to the
acquisition of foreign entities and the fluctuations associated with related
parties balances denominated in foreign currency that are of a long-term
investment nature, which are recorded against stockholders' equity, as part of
the foreign currency translation adjustment of foreign subsidiaries.
The financial statements of foreign subsidiaries are restated in their
functional currency based on the subsidiary country's inflation rate and
subsequently translated by using the foreign exchange rate at the end of the
reporting period for balance sheet and income statement accounts. The peso to
U.S. dollar exchange rate used by CEMEX is an average of free market rates
available to settle its foreign currency transactions.
F) CASH AND INVESTMENTS (note 4)
Investments in this caption are held for trading purposes. Those investments in
fixed-income securities are recorded at cost plus accrued interest. Investments
in marketable securities are recorded at market value. Gains or losses resulting
from changes in market values, accrued interest and the effects of inflation are
included in the income statements as part of the Comprehensive Financing Result.
G) INVENTORIES AND COST OF SALES (note 7)
Inventories are recognized at the lower of replacement cost or market value.
Replacement cost is based on the latest purchase price, the average price of the
last purchases or production cost. Cost of sales reflects replacement cost of
inventories at the time of sale, expressed in constant pesos as of the balance
sheet date.
The Company analyzes its inventory balances to determine if, as a result of
internal events, such as physical damage, or external events, such as
technological changes or market conditions, certain portions of such balances
have become obsolete or impaired. When an impairment situation arises, the
inventory balance is adjusted to its net realizable value, whereas, if an
obsolescence situation occurs, the inventory obsolescence reserve is increased.
In both cases, these adjustments are recognized against the results of the
period.
H) INVESTMENTS AND NONCURRENT RECEIVABLES (note 9)
Investments in affiliated companies are accounted for by the equity method, when
the Company holds between 10% and 50% of the issuer's capital stock, and does
not have effective control. Under the equity method, after acquisition, the
investment's original cost is adjusted for the proportional interest of the
holding company in the affiliate's equity and earnings, considering the effects
of inflation.
Other long-term investments, included under this caption, are recognized at
their estimated fair value, and their changes in valuation are included in the
results of the period as part of the Comprehensive Financing Result.
I) PROPERTIES, MACHINERY AND EQUIPMENT (note 10)
Properties, machinery and equipment ("fixed assets") are presented at their
restated value, using the inflation index of the fixed assets' origin country
and the variation in the foreign exchange rate between the country of origin
currency and the Company's functional currency. Depreciation is calculated using
the straight-line method over the estimated useful lives. The maximum useful
lives by category of fixed assets are as follows:
Years
--------------
Administrative buildings....................................... 50
Industrial buildings........................................... 35
Machinery and equipment in plant............................... 20
Ready-mix trucks and motor vehicles............................ 8
Office equipment and other assets.............................. 10
--------------
Properties, machinery and equipment are subject to impairment evaluations (note
3K). The Comprehensive Financing Results arising from indebtedness incurred
during the construction or installation period of fixed assets are capitalized
as part of the carrying value of such assets.
F-9
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
J) INTANGIBLE ASSETS AND DEFERRED CHARGES (note 11)
Intangible assets acquired, as well as costs incurred in the development stages
of intangible assets, are capitalized when associated future benefits are
identified and the control over such benefits is established. Expenditures not
meeting these requirements are charged to earnings as incurred. Intangible
assets are presented at their restated value and are classified as having a
definite life, which are amortized over the benefited periods, and as having an
indefinite life, which are not amortized since the period cannot be accurately
established in which the benefits associated with such intangibles will
terminate. Amortization of intangible assets of definite life is calculated
under the straight-line method.
Intangible assets acquired in a business combination are accounted for at fair
value at the acquisition date. When the value cannot be reasonably estimated,
such value is included as part of goodwill, which is not amortized since January
1, 2005 and is subject to periodic impairment tests (note 3K). Until December
31, 2004, goodwill was amortized under the present worth or sinking fund method,
which was intended to provide a better matching of goodwill amortization with
the revenues generated from the acquired companies. Goodwill generated before
1992 was amortized over a maximum period of 40 years, while goodwill generated
from 1992 to 2004 was amortized over a maximum period of 20 years.
Direct costs incurred in debt issuances or borrowings are capitalized and
amortized as part of the effective interest rate of each transaction over its
maturity. These costs include discounts, commissions and professional fees.
Direct costs incurred in the development stage of computer software for internal
use are capitalized and amortized through the operating results over the useful
life of the software, which is approximately 4 years.
Preoperational expenses are recognized in the income statement as they are
incurred. Those preoperative expenses deferred until December 31, 2003, in
compliance with regulations effective as of that date, continue to be amortized
over their original periods.
K) IMPAIRMENT OF LONG LIVED ASSETS (notes 10 and 11)
The Company evaluates the balances of its machinery and equipment, intangible
assets of definite life and other investments to establish if factors such as
the occurrence of a significant adverse event, changes in the operating
environment in which the Company operates, changes in projected use or in
technology, as well as expectations of operating results for each cash
generating unit, provide elements indicating that the book value may not be
recovered, in which case an impairment loss is recorded in the income statement
for the period when such determination is made, resulting from the excess of the
carrying amount over the net present value of estimated cash flows related to
such assets.
Likewise, CEMEX periodically evaluates the balances of goodwill and other
intangible assets of indefinite life by determining the cash flows to be
generated by the reporting units to which those assets relate. A reporting unit
refers to a group of one or more cash generating units. Cash flows are
discounted at present value, and an impairment loss is recognized if such
discounted cash flows are lower than the net book value of the reporting unit.
L) DERIVATIVE FINANCIAL INSTRUMENTS (notes 12 and 17)
In compliance with the guidelines established by the Risk Committee, CEMEX uses
derivative financial instruments, in order to change the risk profile associated
with changes in interest rates and exchange rates of foreign currency
denominated debt instruments, as a vehicle to reduce financing costs (note 12);
as an alternative source of financing (note 17), and as hedges of: (i)
forecasted transactions, (ii) net assets in foreign subsidiaries and (iii)
executive stock option programs (note 16).
Derivative financial instruments are recognized as assets or liabilities in the
balance sheet at their estimated fair value and the changes in such values are
recognized in the income statement for the period in which they occur, unless
such instruments have been designated as accounting hedges of debt or equity
instruments. Until December 31, 2004, no specific rules existed in Mexico for
hedging transactions. Beginning January 1, 2005, Bulletin C-10, "Derivative
Financial Instruments and Hedging Activities", establishes accounting standards
for hedging instruments.
Until December 31, 2004, as a result of the absence of specific rules for
designated transactions that qualify as hedging activities, CEMEX applied the
following accounting rules, which remained effective in 2005, since they comply
with the rules set forth in Bulletin C-10:
a) Changes in the estimated fair value of interest rate swaps to exchange
floating rates for fixed rates, designated as accounting hedges of the
variability in the cash flows associated with the interest expense of a
portion of the contracted debt, as well as those instruments negotiated to
hedge the interest rates at which certain forecasted debt is expected to be
contracted or existing debt is expected to be renegotiated, are recognized
temporarily in stockholders' equity (note 15G). These effects are
reclassified to earnings, in the case of the forecasted debt, once the
related debt is recognized in the balance sheet and its related financial
expense is accrued.
b) Changes in the estimated fair value of foreign currency forwards, designated
as hedges of a portion of the Company's net investments in foreign
subsidiaries, are recognized in stockholders' equity, offsetting the foreign
currency translation result (notes 3E and 15D). The accumulated effect in
stockholders' equity is reversed through the income statement upon
disposition of the foreign investment.
F-10
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
c) Beginning in January 1, 2005, changes in fair value of all forward contracts
in the Company's own shares are recognized in the income statement as part of
the comprehensive financial result. Until December 31, 2004, only the effect
of those contracts designated as hedges for executive stock option programs
(note 16) were recognized in the income statement as part of the costs
related to such programs. The results derived from equity forward contracts
not designated as hedges of the stock option programs during 2004 and 2003,
and from equity instruments (appreciation warrants) during 2003, were
recognized in stockholders' equity upon settlement (notes 15F and 17A).
d) Changes in fair value of derivative instruments, such as foreign currency
forward contracts or options, negotiated to hedge a firm commitment are
recognized through stockholders' equity, following the cash flow hedging
model, and are reclassified to the income statement once the operation
underlying the firm commitment takes place, as the effects from the hedged
item are reflected in the income statement. With respect to hedges of the
foreign exchange risk associated with a firm commitment for the acquisition
of a net investment in a foreign country (note 17B), the accumulated effect
in stockholders' equity is reclassified to the income statement when the
purchase occurs.
e) Changes in fair value of the following derivative instruments are recognized
in the income statement within the valuation and liquidation of financial
instruments: (i) interest rate swaps not designated as cash flow hedges; (ii)
derivative instruments for the exchange of interest rates and currencies
(Cross Currency Swaps or "CCS"), negotiated to change the profile of the
interest rate and currency of existing debt; and (iii) other derivative
instruments not identified with a particular exposure.
Until December 31, 2004, financial debt related to CCS, was presented in the
balance sheet as if it had been negotiated in the exchanged currencies, through
the reclassification to such debt of a portion of the assets or liabilities
resulting from the estimated fair value recognition of such CCS. The
non-reclassified portion, resulting mainly from the difference between the
forward exchange rates and those in effect as of the balance sheet date,
remained within other assets or other liabilities. Beginning on January 1, 2005,
Bulletin C-10, does not allow the synthetic presentation of two financial
instruments, the primary position and the derivative instrument, as if they were
a single instrument; therefore, the reclassification mentioned above was
discontinued; consequently, financial debt related to CCS is presented in the
currencies originally negotiated.
Interest accruals generated by interest rate swaps and CCS, are recognized as
financial expense, adjusting the effective interest rate of the related debt.
Interest accruals from other hedging derivative instruments are recorded within
the same item when the effects of the primary instrument subject to the hedging
relation are recognized. Transaction costs are deferred and amortized in
earnings over the life of the instrument or immediately upon settlement.
Derivative instruments are negotiated with institutions with significant
financial capacity; therefore, the Company considers the risk of non-performance
of the obligations agreed to by such counterparties to be minimal. The estimated
fair value represents the amount at which a financial asset could be bought or
sold, or a financial liability could be extinguished, between willing parties in
an arm's length transaction. Occasionally, there is a reference market that
provides the estimated fair value; in the absence of a market, such value is
determined by the net present value of projected cash flows or through
mathematical valuation models. The estimated fair values of derivative
instruments, determined by CEMEX and used for recognition and disclosure
purposes in the financial statements and their notes, are supported by the
confirmations of these values received from the financial counterparties.
M) ASSET RETIREMENT OBLIGATIONS (note 13)
Beginning in 2003, the Company recognizes unavoidable obligations, legal or
assumed, to restore the site or the environment when removing operating assets
at the end of their useful lives. These obligations represent the net present
value of expected cash outflows to be incurred in the restoration process, and
are initially recognized against the related assets' book value. The additional
asset is depreciated during its remaining useful life. The increase in the
liability, by the passage of time, is charged to results of the period.
Adjustments to the obligation for changes in the estimated cash flows or the
estimated disbursement period are made against fixed assets and depreciation is
modified prospectively.
Asset retirement obligations in the case of CEMEX are related mainly to future
costs of demolition, cleaning and reforestation, derived from commitments, both
legal or assumed, so that at the end of the operation, the sites where raw
material is extracted, the maritime terminals and other production sites, are
left in acceptable condition. For those situations identified and quantified,
effective January 1, 2003, a remediation liability was recorded for
approximately Ps515, against fixed assets for Ps372, deferred income tax assets
for Ps56 and an initial cumulative effect for Ps87, which was recorded in
stockholders' equity as an element of comprehensive net income. Before 2003,
CEMEX had already provided accruals for certain situations.
N) CONTINGENCIES AND COMMITMENTS (note 22)
Obligations or losses, related to contingencies, are recognized as liabilities
in the balance sheet when present obligations exist, and when, as a result of
past events, it is probable that the effects will materialize and can be
reasonably quantified. Otherwise, a qualitative disclosure is included in the
notes to the financial statements. The effects of long-term commitments
established with third parties, such as supply contracts formalized with
suppliers or clients, are recognized in the financial statements on the incurred
or accrued basis, taking into consideration the substance of the agreements.
Relevant commitments are disclosed in the notes to the financial statements. The
Company does not recognize contingent revenues, income or assets.
F-11
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
O) PENSIONS AND OTHER POSTRETIREMENT BENEFITS (note 14)
The costs related to benefits to which employees are entitled by pension plans
and other postretirement benefits, including medical expenses, life insurance,
severance payments and seniority premiums, legally or by Company grant, are
recognized in the operating results, as services are rendered, based on
actuarial estimations of the benefits' present value. The amortization of prior
service cost (transition asset) and of changes in assumptions and adjustments
based on experience is recognized over the employee's estimated active service
life. For certain pension plans, irrevocable trust funds have been created to
cover future benefit payments.
The actuarial assumptions upon which the Company's employee benefit liabilities
are determined consider the use of real rates (nominal rates discounted by
inflation). Until December 31, 2004, postemployment benefits paid upon
termination of the working relationship but before retirement, such as severance
benefits, were recognized as an expense in the year in which they were paid. In
some circumstances, however, provisions were made for these benefits. Starting
January 1, 2005, according to Bulletin D-3, "Labor Obligations", the costs
related to severance benefits are recognized over the estimated active service
life of the employees.
P) DEFICIT IN EQUITY RESTATEMENT (note 15)
The deficit in equity restatement includes: (i) the accumulated effect from
holding non-monetary assets; (ii) the currency translation effects from foreign
subsidiaries' financial statements, net of exchange fluctuations arising from
foreign currency indebtedness directly related to the acquisition of foreign
subsidiaries and foreign currency related parties balances that are of a
long-term investment nature (notes 3E and 15D); and (iii) valuation and
liquidation effects of certain derivative financial instruments that qualify as
hedge instruments, which are recorded temporarily or permanently in
stockholders' equity (note 3L).
Q) COMPREHENSIVE NET INCOME (note 15G)
The Company presents comprehensive net income and its components as a single
item in the statement of changes in stockholders' equity. Comprehensive net
income represents the change in stockholders' equity during a period for
transactions and other events not representing contributions, reductions or
distributions of capital.
R) EXECUTIVE STOCK OPTION PROGRAMS (note 16)
Until December 31, 2004, the Company recognized the cost associated with
executive stock options programs as part of the cost of the period, using the
intrinsic value method, for those options which, as of the grant date, it was
not known the exercise price at which the underlying shares would be exercised,
because such exercise price is increasing (variable) over the life of the
options, and did not imply the issuance of new shares upon exercise. The
intrinsic value method represents the existing appreciation between the market
price of the share and the exercise price established in the option. The Company
did not recognize cost for those programs in which the exercise price was equal
to the CPO price at the option's grant date, remained fixed for the life of the
option and implied the issuance of new shares upon exercise.
Beginning in 2005, under Mexican GAAP, the Company adopted the International
Financial Reporting Standard No. 2, "Shared-based Payment" ("IFRS 2"). Based on
IFRS 2, options granted to executives are defined as equity instruments, in
which services received from employees are settled through the delivery of
shares; or as liability instruments, in which the Company incurs a liability by
committing to pay, in cash or other instruments, the intrinsic value of the
option as of the exercise date. The Company determined that the options in its
fixed program (note 16) are defined as equity instruments, while the other
programs (note 16) are liability instruments. The cost of equity instruments
represents their estimated fair value at the date of grant and is recognized in
earnings during the instruments' vesting period. Liability instruments under
IFRS 2 are valued at their estimated fair value at each reporting date,
recognizing the changes in valuation through the income statement. The estimated
fair value of options should be determined using financial option pricing
models.
In addition, under IFRS 2, a cost should be recognized for those equity
instruments which as of the adoption date have a remaining vesting period.
Regarding the Company's fixed program, as of the adoption date, the exercise
rights were fully vested. In respect to the liability instruments, CEMEX
determined the estimated fair value of the outstanding options in the different
programs and recognized in the income statement an expense of approximately
Ps992 (Ps860 after income tax), resulting from the difference between the
estimated fair value of the instruments and the existing accrual related to such
programs, which was quantified through the intrinsic value of the options. This
expense was recognized as the initial cumulative effect of changes in accounting
standards and is presented within the results from valuation and liquidation of
financial instruments. In accordance with Bulletin A-7, "Comparability", the
Company did not restate the financial information of prior years in connection
with the accounting change mentioned above.
F-12
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Had the Company used the same accounting rules during the years ended December
31, 2003 and 2004, net income as well as basic net earnings per share would have
been as follows:
2003 2004
------------ ------------
Majority net income as reported.................... Ps 7,201 Ps 13,965
Options' fair value 1.............................. (454) (363)
------------ ------------
Majority net income pro forma...................... Ps 6,747 Ps 13,602
============ ============
Basic earnings per share as reported............... 0.76 1.40
------------ ------------
Basic earnings per share pro forma................. 0.71 1.36
============ ============
1 In order to determine fair value in 2003 and 2004, considering the different
exchanges of options which had previously occurred, CEMEX opted for
simplicity to value the same portfolio of options outstanding as of the
adoption date in 2005, as if it had been in effect in 2003 and 2004, using
the market prices and other assumptions prevailing during those years in the
option pricing models.
S) INCOME TAX, BUSINESS ASSETS TAX, EMPLOYEES' STATUTORY PROFIT SHARING AND
DEFERRED INCOME TAXES (note 18)
The Income Tax ("IT"), Business Assets Tax ("BAT") and Employees' Statutory
Profit Sharing ("ESPS"), reflected in the income statements, include amounts
incurred during the period and the effects of deferred IT and ESPS. Consolidated
deferred IT represents the summary of the effect determined in each subsidiary
by the assets and liabilities method, by applying the enacted statutory income
tax rate to the total temporary differences resulting from comparing the book
and taxable values of assets and liabilities, considering when the effects
became available and subject to a recoverability analysis, reflecting tax loss
carryforwards as well as other recoverable taxes and tax credits. The effect of
a change in the effective statutory tax rate is recognized in the income
statement for the period in which the change occurs and is officially declared.
The effect of deferred ESPS is recognized for those temporary differences, which
are of a non-recurring nature, arising from the reconciliation of the net income
for the period and the taxable income for the period for ESPS.
The cumulative initial effect, arising from the adoption of the asset and
liability method, was recognized on January 1, 2000 in stockholders' equity
under the caption "Cumulative initial deferred income tax effects". In the
statement of changes in stockholders' equity, the cumulative initial effect
corresponds to the consolidated entity. The difference between the Parent
Company's and the consolidated accumulated initial deferred IT effects is
included under the caption "Deficit in Equity Restatement".
T) REVENUE RECOGNITION
Revenue is recognized upon shipment of cement, ready-mix concrete and aggregates
to customers, and they assume the risk of loss. Income from activities other
than the Company's main line of business is recognized when the revenue has been
realized, thorough goods delivered or services rendered, and there is no
condition or uncertainty implying a reversal thereof.
U) MONETARY POSITION RESULT
The monetary position result, which represents the gain or loss from holding
monetary assets and liabilities in inflationary environments, is calculated by
applying the inflation rate of the country of each subsidiary to its net
monetary position (difference between monetary assets and liabilities).
V) OTHER INCOME AND EXPENSE
Other income and expense, in the statements of income, consists primarily of
goodwill amortization until 2004, dumping duties, results from the sales of
fixed assets, impairment losses of long-lived assets, net results from the early
extinguishment of debt and other unusual or non-recurring transactions.
W) USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
period. The main captions subject to estimates and assumptions include the book
value of fixed assets, allowances for doubtful accounts, inventories and assets
for deferred income taxes, the fair market values of financial instruments and
the assets and liabilities related to labor obligations. Actual results could
differ from these estimates.
X) CONCENTRATION OF CREDIT
CEMEX sells its products primarily to distributors in the construction industry,
with no specific geographic concentration within the countries in which the
Company operates. No single customer accounted for a significant amount of the
Company's sales in 2003, 2004 and 2005, and there were no significant accounts
receivable from a single customer for the same periods. In addition, there is no
significant concentration of a specific supplier relating to the purchase of raw
materials.
F-13
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
4. CASH AND INVESTMENTS
Consolidated cash and investments as of December 31, 2004 and 2005 consists of:
2004 2005
---------- ----------
Cash and bank accounts............................... Ps 1,549 3,532
Fixed-income securities.............................. 1,650 2,384
Investments in marketable securities................. 458 471
---------- ----------
Ps 3,657 6,387
========== ==========
5. TRADE ACCOUNTS RECEIVABLE
The Company evaluates each of its customers' credit and risk profiles in order
to establish the required allowance for doubtful accounts. Consolidated trade
accounts receivable as of December 31, 2004 and 2005, include allowances for
doubtful accounts of Ps725 and Ps1,242, respectively.
As of December 31, 2004 and 2005, the Company has established sales of trade
accounts receivable programs with financial institutions ("securitization
programs") in Mexico, United States and Spain, through which accounts receivable
have been sold for Ps6,822 (U.S.$642) and Ps7,334 (U.S.$691), respectively.
Through these programs, the Company effectively surrenders control, risks and
the benefits associated with the accounts receivable sold; therefore, the amount
of accounts receivable sold is recognized as a sale of financial assets and the
balances are removed from the balance sheet at the moment of sale, except for
the amounts that the counterparties have not paid, which are reclassified to
other accounts receivable (note 6). The accounts receivable qualifying for sale
do not include amounts over certain days past due or concentrations over certain
limits to any one customer, according to the terms of the programs. Expenses
incurred under these programs, originated by the discount granted to the
acquirers of the accounts receivable, are recognized in the income statements
and were approximately Ps109 (U.S.$10) in 2003, Ps121 (U.S.$11) in 2004
and.Ps210 (U.S.$20) in 2005
6. OTHER ACCOUNTS RECEIVABLE
Consolidated other accounts receivable as of December 31, 2004 and 2005 consist
of:
2004 2005
---------- ----------
Non-trade accounts receivable....................... Ps 1,160 4,849
Advances and valuation of
derivative instruments (notes 12 and 17).......... 1,762 964
Interest and notes receivable....................... 1,148 1,389
Advances for travel expenses and
loans to employees............................... 415 262
Refundable taxes.................................... 372 772
---------- ----------
Ps 4,857 8,236
========== ==========
Non-trade accounts receivable are mainly originated by the sale of assets.
Interest and notes receivable include Ps1,114 (U.S.$105) in 2004 and Ps1,369
(U.S.$129) in 2005, arising from securitization programs (note 5).
7. INVENTORIES
Consolidated balances of inventories as of December 31, 2004 and 2005 are
summarized as follows:
2004 2005
---------- ----------
Finished goods...................................... Ps 1,607 3,330
Work-in-process..................................... 1,538 1,712
Raw materials....................................... 639 2,563
Supplies and spare parts,
net of obsolescence provision.................... 2,404 2,523
Advances to suppliers............................... 255 351
Inventory in transit................................ 315 536
---------- ----------
Ps 6,758 11,015
========== ==========
In December 2004, impairment losses of approximately Ps182 were recognized
within other expenses (note 3G).
F-14
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
8. OTHER CURRENT ASSETS
Other current assets in the consolidated balance sheets as of December 31, 2004
and 2005 consist of:
2004 2005
---------- ----------
Advance payments.................................... Ps 452 1,047
Assets held for sale................................ 554 650
---------- ----------
Ps 1,006 1,697
========== ==========
Assets held for sale are stated at their estimated realizable value and mainly
consist of: (i) non-cement related assets acquired in business combinations and
(ii) assets held for sale received from customers as payment of trade
receivables.
9. INVESTMENTS AND NONCURRENT ACCOUNTS RECEIVABLE
A) INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES
Consolidated investments in affiliated companies as of December 31, 2004 and
2005 are summarized as follows:
2004 2005
---------- ----------
Book value at acquisition date...................... Ps 12,635 5,034
Revaluation by equity method........................ 3,338 3,889
---------- ----------
Ps 15,973 8,923
========== ==========
Investments held by subsidiaries in CEMEX shares, amounting to Ps11,999
(154,014,032 CPOs) in 2004 and Ps19,864 (314,308,790 CPOs) in 2005, are offset
against majority interest stockholders' equity in the accompanying financial
statements.
The Company's principal acquisitions and divestitures during 2003, 2004 and 2005
are as follows:
I. On March 1, 2005, following board and shareholders approval and clearance
from applicable regulators, CEMEX completed the acquisition of 100% of the
outstanding stock of RMC Group p.l.c. ("RMC"). The purchase price of the
shares, considering the 18.8% equity interest acquired in 2004 for
approximately U.S.$786, net from the sale of certain assets and considering
acquisition expenses, amounted to approximately U.S.$4,217 (Ps44,787). This
amount does not include approximately U.S.$2,249 (Ps23,886) of assumed debt.
RMC, headquartered in the United Kingdom, was one of Europe's largest cement
producers and one of the world's largest suppliers of ready-mix and
aggregates. RMC had operations in 22 countries, primarily in Europe and the
United States, and employed over 26,000 people. In 2004, RMC sold 14.4
million tons of cement, 51.4 million cubic meters of ready-mix and 131.6
million tons of aggregates. The assets acquired include 13 cement plants
with total installed capacity of approximately 17 million tons, located in
the United Kingdom, the United States, Germany, Croatia, Poland and Latvia.
The acquisition, which began in September 2004 through a public purchase
offer, was subject to the approval by RMC shareholders and applicable
regulators in Europe and the United States.
On December 22, 2005 CEMEX terminated its joint ventures with the French
construction materials company Lafarge S.A. ("Lafarge"), through the sale to
Lafarge of its 50% equity interest in ReadyMix Asland S.A. ("RMA") in Spain
and Betecna Betao Pronto S.A. ("Betecna") in Portugal after receiving
regulatory approval from the applicable regulators. Subsequent to the sale
and according to the terms of the agreement, CEMEX acquired from RMA assets
in the ready-mix and aggregates sector, representing 29 concrete plants and
5 aggregate quarries. The net sale price, considering the purchase of assets
from RMA, was approximately U.S.$61. The Company's equity interest in RMA
and Betecna was acquired through the purchase of RMC. The consolidated
income statement for the year ended December 31, 2005, includes the
operating results of RMA and Betecna from March 1 to December 22, 2005, and
both companies were consolidated through the proportionate consolidation
method (note 3C).
In addition, as a condition of the authorities in the United States to
approve the acquisition of RMC, on August 29, 2005, ready-mix assets were
sold to California Portland Cement Company in the area of Tucson, AZ, for an
approximate amount of U.S.$16. These assets derived from RMC's operations in
the United States.
II. On July 1, 2005, CEMEX Inc., the Company's subsidiary in the United States,
and Ready Mix USA, Inc. ("Ready Mix USA"), a private ready-mix producer with
operations in the Southeastern United States, established two joint ventures
to satisfy construction needs in that region. Under the terms of the
arrangement, CEMEX Inc. contributed a to a cement joint venture, two cement
plants (Demopolis, AL and Clinchfield, GA) and eleven cement terminals in
exchange for a 50.01% equity interest in this entity. To a second joint
venture, CEMEX Inc. contributed ready-mix, aggregates and concrete blocks
plants in Florida and Georgia, in exchange for a 49.99% equity interest in
such venture. Ready Mix USA contributed all its ready-mix concrete and
aggregate operations in Alabama, Georgia, the Florida Panhandle and
Tennessee, as well as its concrete block operations in Arkansas, Tennessee,
Mississippi, Florida and Alabama, in exchange for a 49.99% equity interest
in the cement joint venture and a 50.01% equity interest in the ready-mix
concrete and aggregates joint venture. In addition, on September 1, 2005,
CEMEX sold to the ready-mix joint venture 27 ready-mix plants and 4 concrete
block facilities located in the Atlanta, GA area, as well as working capital
related to these assets, in exchange for approximately U.S$125.
F-15
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
After the third year of the strategic alliance and for a 25-year period,
Ready Mix USA will have the right, but not the obligation, to require CEMEX
to acquire the interests contributed by Ready Mix USA to the joint ventures.
As of December 31, 2005, CEMEX has control and consolidates in the balance
sheet the cement joint venture, while Ready Mix USA controls the joint
venture that manages the ready-mix and construction materials assets;
therefore, CEMEX interest in this business is accounted for by the equity
method.
III. In March 2005, the Company sold the Charlevoix, Michigan, and Dixon,
Illinois cement plants, both in the United States, including a cement
terminal located in the Great Lakes region to Votorantim Participacoes S.A.,
for an aggregate purchase price of approximately U.S.$413. The combined
capacity of the two cement plants sold was approximately two million tons
per year and the operations of these plants represented approximately 9% of
CEMEX's annual operating cash flow in the United States before the RMC
acquisition. The consolidated income statement for the year ended December
31, 2005 includes the results of operations relating to these plants for the
three-month period ended March 31, 2005.
IV. On December 23, 2005 the Company acquired 0.9% (93,241 shares) of CAH, stock
that remained owned by third parties, for approximately U.S.$8 (Ps84). In
2004, CEMEX acquired approximately 20.6% (2,093,667 shares) of CAH stock in
exchange for a cash payment of approximately U.S.$70 and 27,850,713 CPOs,
with a value of approximately U.S.$172 (Ps1,837), recognizing a loss of
Ps960 in equity in 2004 as part of comprehensive income (loss), resulting
from the excess of the price paid over the book value of the shares. CAH is
the holding company of the subsidiaries in the Philippines, Thailand and
Bangladesh, as well as the investment in Indonesia. CAH was constituted in
1999 by CEMEX and institutional investors in Asia with the objective of
investing in that region. Through these operations, the Company's interest
on CAH increased to 100%.
V. On April 26, 2005, CEMEX concluded the divestiture of its 11.9% equity
interest in the Chilean cement company Cementos Bio Bio, S.A., for
approximately U.S.$65 (Ps690), recognizing a gain of Ps207 within the
caption of other income. Until the date of the sale, this investment was
accounted for by the equity method.
VI. In August and September 2003, for a combined price of approximately U.S.$100
(Ps1,142), CEMEX, Inc. acquired Mineral Resource Technologies, Inc. ("MRT"),
distributor of minerals used in manufacturing of ready-mix concrete, and a
cement plant and quarry with an annual production capacity of 560 thousand
tons located in Dixon, Illinois, United States. The consolidated income
statement of 2003, includes the operating results of MRT and the Dixon plant
since the respective acquisition dates. As noted in III above, the Dixon
plant was sold in March 2005.
As of December 31, 2004 and 2005, the consolidated investments in affiliated
companies were as follows:
Activity Country % 2004 2005
------------ --------------- -------- --------- ---------
RMC Group p.l.c. ................................... Concrete United Kingdom 18.8 Ps 8,810 -
PT Semen Gresik, Tbk................................ Cement Indonesia 25.5 2,661 2,541
Control Administrativo Mexicano, S.A. de C.V........ Cement Mexico 49.0 2,147 2,491
Ready Mix USA....................................... Concrete EUA 49.0 - 341
Trinidad Cement Ltd................................. Cement Trinidad 20.0 286 325
Cementos Bio Bio, S.A............................... Cement Chile 11.9 453 -
Cancem, S.A. de C.V................................. Cement Mexico 10.0 219 255
Lehigh White Cement Company......................... Cement EUA 24.5 136 148
Societe des Ciments Antillais....................... Cement French Antilles 26.1 190 177
Caribbean Cement Company Ltd........................ Cement Jamaica 5.0 112 -
Other............................................... - - 959 2,645
--------- ---------
Ps 15,973 8,923
========= =========
During 2003, the management of PT Semen Padang ("Padang"), subsidiary of Gresik,
by different means obstructed the ownership rights of Gresik, by not
acknowledging the administration of Padang elected by Gresik at the May 2003
stockholders' meeting. In September 2003, pursuant to a court order, the
management appointed by Gresik finally assumed its duties. In December 2003,
Gresik designated new auditors to review the 2002 and 2003 consolidated
financial statements. The in-depth troubles persist and are related to the
agreements of 1998 between the Indonesian government and CEMEX, which are
determinant for the Company's decision to invest in Indonesia. According to
these agreements, the government would sell to CEMEX the majority interest of
Gresik and subsidiaries, which has not occurred mainly due to the opposition of
the provincial administration of West Sumatra, which has argued that the
original sale of Padang by the government to Gresik in 1995 is invalid, since
certain necessary approvals were not obtained.
In December 2003, CEMEX filed before the International Center for the Settlement
of Investments Disputes a request for arbitration against the Indonesian
government. The arbitration tribunal held its first session in July 2004, at
which the Indonesian government objected to the tribunal's jurisdiction. As of
December 31, 2005, the tribunal was still determining if it has jurisdiction to
hear the dispute. The resolution of in-depth issues can take several years.
CEMEX evaluates its investment in conformity with its accounting policies. As of
December 31, 2004 and 2005, CEMEX used the best information available in order
to value its investment in Gresik.
F-16
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
B) OTHER INVESTMENTS AND NONCURRENT ACCOUNTS RECEIVABLE
Amounts include assets for the valuation of derivative instruments (notes 12 and
17) of Ps1,592 in 2004 and.Ps4,190 in 2005 Furthermore, the amounts include
investments in private funds, recorded at fair value of U.S.$8 (Ps89) in 2004
and U.S.$19 (Ps203) in 2005. In 2004 and 2005, approximately U.S.$2 (Ps25) and
U.S.$9 (Ps91), were contributed to these funds, respectively.
10. PROPERTIES, PLANT AND EQUIPMENT
During 2004 and 2005, impairment losses of approximately Ps1,084 and Ps166 were
recognized within other expenses, respectively, derived from idle assets
resulting from the closing of cement assets in Mexico and the Philippines. These
assets were adjusted to their estimated realizable value.
11. INTANGIBLE ASSETS AND DEFERRED CHARGES
As of December 31, 2004 and 2005, consolidated intangible assets of definite and
indefinite life and deferred charges are summarized as follows:
2004 2005
---------- ---------
Intangible assets of indefinite useful life:
Goodwill............................................. Ps 45,872 57,331
Accumulated amortization ............................ (9,794) (9,593)
---------- ---------
36,078 47,738
Intangible assets of definite useful life:
Cost of internally developed software................ 2,891 3,233
Intangible asset for pensions (note 14) ............. 874 604
Accumulated amortization ............................ (1,858) (2,579)
---------- ---------
1,907 1,258
Deferred charges:
Prepaid pension costs (note 14)...................... 422 -
Deferred financing costs............................. 529 528
Deferred income taxes (note 18B)..................... 1,835 3,667
Others............................................... 3,422 7,455
Accumulated amortization ............................ (1,767) (2,280)
---------- ---------
4,441 9,370
---------- ---------
Ps 42,426 58,366
========== =========
As a result of the Company's periodic impairment evaluations (note 3K), in 2003
and 2004, the book values of the Company's information technology business unit
and the Company's business unit in the Philippines were determined to exceed the
respective amount of expected cash flows; therefore, impairment losses of
goodwill were recognized within other expenses for Ps898 in 2003 and Ps239 in
2004. The losses related to the Company's information technology business unit
were Ps160 in 2003 and Ps239 in 2004 and those related to the business unit in
the Philippines in 2003 were Ps738. In 2005 no impairment losses were determined
in connection with the impairment evaluations.
The amortization expenses of intangible assets and deferred charges were Ps2,861
in 2003, Ps2,752 in 2004 and Ps1,605 in 2005, of which approximately 69%, 66%
and14%, respectively, were recognized in other expenses, while the difference in
each year was recognized within operating expenses.
F-17
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
12. SHORT-TERM AND LONG-TERM BANK LOANS AND NOTES PAYABLE
As of December 31, 2004 and 2005, short-term and long-term consolidated debt and
their related derivative instruments are summarized as follows:
According to the interest rate in which debt was contracted:
2004 2005
--------------------------- ----------------------------
Effective Carrying Effective Carrying
rate 1 amount rate 1 amount
---------- ------------ ---------- ------------
Short-term
Floating rate 3..................................... 2.35% Ps 11,136 4.65% Ps 11,818
Fixed rate 3........................................ 6.98% 15 11.08% 829
------------ ------------
11,151 12,647
------------ ------------
Long-term
Fixed rate 3........................................ 5.54% 22,247 5.14% 42,269
Floating rate 3..................................... 3.67% 29,960 4.01% 45,737
------------ ------------
52,207 88,006
------------ ------------
Ps 63,358 Ps 100,653
============ ============
According to currency contracted:
2004 2005
----------------------------------------------- ---------------------------------------------
Short Long Total 2 Effective Short Long Total 2 Effective
term term rate 1 term term rate 1
------------ ------------ ----------- --------- ------------ ----------- ----------- --------
Dollar................. Ps 3,186 Ps 32,177 Ps 35,363 4.9% Ps 5,478 Ps 45,921 Ps 51,399 5.2%
Japanese yen........... 3,071 5,908 8,979 1.2% 337 4,224 4,561 1.1%
Euros.................. 4,698 4,978 9,676 3.1% 2,052 18,772 20,824 2.9%
Sterling pounds........ - 8,906 8,906 5.5% 537 1,872 2,409 5.5%
Pesos.................. 185 214 399 6.2% 4,064 17,166 21,230 10.4%
Egyptian pounds........ 11 - 11 13.5% 54 - 54 9.6%
Other currencies....... - 24 24 15.6% 125 51 176 10.6%
------------ ------------ ----------- ------------ ----------- -----------
Ps 11,151 Ps 52,207 Ps 63,358 Ps 12,647 Ps 88,006 Ps 100,653
============ ============ =========== ============ =========== ===========
By category or instrument type:
2004 Short- Long-
term term
--------- ----------
Bank loans
Lines of credit in Mexico.............................. Ps 509 -
Lines of credit in foreign countries................... 4,317 -
Syndicated loans, 2005 to 2009......................... - 29,060
--------- ----------
4,826 29,060
Notes payable
Foreign commercial paper............................... 242 -
Euro medium-term notes, 2005 to 2009................... - 1,212
Medium-term notes, 2005 to 2008........................ - 8,075
Medium-term notes, 2005 to 2015........................ - 18,774
Other documents........................................ 65 1,104
--------- ----------
307 29,165
--------- ----------
Total bank loans and notes payable..................... 5,133 58,225
Current maturities..................................... 6,018 (6,018)
--------- ----------
Ps 11,151 52,207
========= ==========
F-18
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
2005 Short- Long-
term term
--------- ----------
Bank loans
Lines of credit in Mexico.............................. Ps 2,039 -
Lines of credit in foreign countries................... 3,962 -
Syndicated loans, 2006 to 2010......................... - 51,728
Bank Loans, 2006 to 2007............................... - 8,746
--------- ----------
6,001 60,474
Notes payable
Euro medium-term notes, 2006 to 2009................... - 1,204
Euro medium-term notes, 2006 to 2008................... - 5,818
Euro medium-term notes, 2006 to 2015................... - 24,088
Other notes............................................ 651 2,417
--------- ----------
651 33,527
--------- ----------
Total bank loans and notes payable..................... 6,652 94,001
Current maturities..................................... 5,995 (5,995)
--------- ----------
Ps 12,647 88,006
========= ==========
(1) Represents the weighted average effective rate.
(2) In 2004, includes the effects for currencies exchange originated by the
Cross Currency Swaps ("CCS") (note 12B).
(3) Includes the effects of Interest Rate Swaps (note 12A), as well as CCS (note
12B).
The most representative exchange rates to the financial debt as of December 31,
2004 and 2005 are as follows:
2004 2005
---------- ---------
Mexican pesos per dollar................................ 11.14 10.62
Japanese yen per dollar................................. 102.49 117.81
Euros per dollar........................................ 0.7383 0.8440
Sterling pounds per dollar.............................. 0.5218 0.5812
========== =========
The most important transactions in the consolidated financial debt during 2005
are as follows:
Debt as of December 31, 2004.................................... Ps 63,358
=========
Transactions during 2005:
Credits in connection with the financing of the RMC acquisition Ps 37,170
New bank loans.................................................... 30,267
Debt assumed through RMC acquisition.............................. 23,886
Medium-term Mexican commercial paper.............................. 3,640
Medium-term foreign commercial paper.............................. 3,452
Debt repayments, net.............................................. (61,120)
---------
Change during the period....................................... 37,295
---------
Ps 100,653
=========
The maturities of long-term debt as of December 31, 2005 are as follows:
2005
---------
2007.............................................................. Ps 14,246
2008.............................................................. 15,878
2009.............................................................. 25,894
2010.............................................................. 22,241
2011 and thereafter............................................... 9,747
---------
Ps 88,006
=========
As of December 31, 2004 and 2005, there were short-term debt transactions
amounting to U.S.$847 (Ps9,051) and U.S.$505 (Ps5,362), respectively, classified
as long-term debt due to the Company's ability and the intention to refinance
such indebtedness with the available amounts of committed long-term lines of
credit.
F-19
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
As of December 31, 2005, the Company and its subsidiaries have the following
lines of credit, both committed and subject to the banks' availability, at
annual interest rates ranging between 0.42% and 17.74%, depending on the
negotiated currency:
Line of
Credit Available
---------- ---------
European commercial paper (U.S.$600).................... Ps 6,372 6,372
Revolving credit facility (U.S.$700).................... 7,434 1,328
Multi-currency revolving credit (U.S.$1,200)............ 12,744 7,222
Other lines of credit in foreign subsidiaries........... 67,405 13,567
Other lines of credit form banks........................ 11,470 2,835
---------- ---------
Ps 105,425 31,324
========== =========
Derivative Financial Instruments (note 3L)
As of December 31, 2004 and 2005, in order to: (i) change the profile of the
interest rate originally negotiated on a debt portion (note 12A), and (ii)
reduce the financial cost of debt originally contracted in dollars or pesos
(note 12B), the Company has negotiated derivative financing instruments related
to existing short-term and long-term debt, which are described as follows:
A) Interest Rate Swap Contracts
As of December 31, 2004 and 2005, information with respect to interest rate
swaps ("IRS") related to short-term and long-term financial debt is summarized
as follows:
(Amounts in millions) Notional Fair Effective
Amount Value rate
--------- ---------- ---------
2004
----
Swaps related to long-term debt 3..................... U.S.$ 1,950 (174) 5.8%
========= ========== =========
2005
----
Swaps related to long-term debt 1..................... U.S.$ 387 6 4.4%
Swaps related to long-term debt 2..................... 1,113 6 4.5%
Swaps related to long-term debt 3..................... 1,000 37 4.9%
Swaps related to long-term debt 4..................... 225 3 4.9%
--------- ---------- ---------
U.S.$ 2,725 52
========= ========== =========
1 As of December 31, 2005, under these contracts, CEMEX receives a floating
LIBOR* rate and pays a fixed rate of 4.0%. These contracts were designated as
accounting hedges of contractual cash flows (interest payments) of the
related underlying U.S. dollar floating rate debt, and mature in June 2009.
Changes in the estimated fair value of these instruments are recognized in
stockholders' equity.
2 As of December 31, 2005, under these contracts, CEMEX receives a floating
LIBOR* rate and pays a fixed rate of 4.1%. The contracts were designated as
accounting hedges of contractual cash flows (interest payments) of the
related underlying U.S. dollar floating rate debt, and mature in August 2009.
Changes in the estimated fair value of these instruments are recognized in
stockholders' equity.
3 As of December 31, 2004 and 2005, these contracts were not designed as
accounting hedges since they have optionality. Nevertheless, the contracts
complement CEMEX's financial strategy. Under these instruments, CEMEX
receives a floating LIBOR* rate and pays a fixed rate of 4.6%. The maturity
of these contracts is in October 2009. Changes in the estimated fair value of
these instruments are recognized in the income statement of the period.
4 Likewise, as of December 31, 2005, these contracts were not designed as
accounting hedges since they have optionality. Through these instruments,
CEMEX receives a floating LIBOR* rate and pays a fixed rate of 3.9%. These
contracts mature in April 2010. Changes in the estimated fair value are
recognized in the income statement of the period.
* LIBOR represents the London Interbank Offering Rate, used in the market for
debt denominated in US dollars. "Bps" means basis points. One basis point is
.01 percent.
During 2004 and 2005, due to changes in the interest rate mix of the financial
debt portfolio, interest rate swap contracts were settled for a nominal amount
of U.S.$100 and U.S.$775, respectively. As a result of the settlement, the
Company recognized losses of approximately U.S.$8 (Ps89) in 2004 and U.S.$4
(Ps38) in 2005, representing the estimated fair value of the contracts as of the
settlement date, which were recognized in the income statement of the period.
In addition, on March 1, 2005, as a result of the acquisition of RMC, CEMEX
assumed interest rate swap contracts for a notional amount of approximately
U.S.$585, with an estimated loss in the fair value of approximately U.S.$28.
These interest rate derivative instruments were settled by CEMEX in June 2005,
generating a gain in Comprehensive Financial Income for the change in the fair
value between the purchase date and the settlement date for approximately U.S.$8
(Ps79).
F-20
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
In July 2004, CEMEX negotiated with a financial institution interest rate swap
contracts for a notional amount of U.S.$200, receiving a fixed interest rate and
paying a floating interest rate for a five-year period. These contracts resulted
from the exercise, by the financial institution, of interest rate swap options
(swaptions) sold by CEMEX in previous years. In 2003, considering the premiums
obtained for the sale of swaptions net of changes in the fair value and
settlement effects, the Company recognized a net gain of approximately U.S.$3
(Ps31) in earnings of the period.
In June 2003, resulting from the settlement of Forward Rate Agreements ("FRAs")
for a notional amount of U.S.$650, the Company negotiated interest rate swap
contracts. FRAs were designated as accounting hedges of the interest rate of
forecasted debt issuances. Upon settlement, a loss of approximately U.S.$38
(Ps431) was recognized in stockholders' equity and is being amortized to the
financial expense as part of the effective interest rate of the related existing
debt. The amount amortized was U.S.$8 (Ps89) in 2003, U.S.$4 (Ps46) in 2004 and
U.S.$3 (Ps34) in 2005.
B) Cross Currency Swap Contracts ("CCS") and Other Currency Instruments (note
3L)
As of December 31, 2004 and 2005, there were Cross Currency Swaps ("CCS"),
through which the Company exchanges the originally contracted interest rates and
currencies on notional amounts of related short-term and long-term debt. During
the life of the CCS and at their maturity, the cash flows related to the
exchange of interest rates and currencies under the CCS, match, in interest
payment dates and conditions, those of the underlying debt.
As of December 31, 2004 and 2005, information with respect to the CCS is
summarized as follows:
(Amounts in millions) Nominal Fair Effective
amount value rate
---------- --------- ----------
2004
Short-term
----------
Exchange U.S.$67 to (Y)1,904 million 7........................... U.S.$ 67 93 2.9%
---------- ---------
Long-term
---------
Exchange Ps3,804 to dollars 2.................................... 308 33 4.0%
Exchange Ps3,369 to dollars 3.................................... 233 88 3.3%
Exchange Ps4,022 to dollars 4.................................... 378 3 3.9%
Exchange Ps800 to dollars 5...................................... 80 (6) 4.3%
Exchange Ps602 to (Y)6,008 million 8............................. 52 (2) 1.3%
---------- ---------
1,051 116
---------- ---------
U.S.$ 1,118 209
========== =========
2005
Short-term
----------
Exchange Ps5,362 to dollars 1.................................... U.S.$ 500 6 4.7%
Exchange Ps2,800 to dollars 2.................................... 260 5 4.9%
---------- ---------
760 11
---------- ---------
Long-term
---------
Exchange Ps2,488 to dollars 3.................................... 142 100 4.8%
Exchange Ps6,888 to dollars 4.................................... 618 86 4.0%
Exchange Ps2,940 to dollars 5.................................... 270 17 4.8%
Exchange Ps5,281 to dollars 6.................................... 500 (2) 4.5%
---------- ---------
1,530 201
---------- ---------
U.S.$ 2,290 212
========== =========
2004 2005
-------------------------------------- -------------------------------------------
Maturity CEMEX receives CEMEX pays CEMEX receives CEMEX pays
-------------------- ----------------- ---------------------- --------------------
1 June 2006 - - TIIE+25bps L+28bps
2 June 2006 TIIE+55bps L+125bps TIIE+80bps L+55bps
3 April 2007 MXN 12.4% L+97bps MXN 10.8% L+96bps
4 April 2012 MXN 8.6% US 4.6% MXN 9.2% US 5.1%
5 April 2009 CETES+145bps US 4.3% CETES+112bps US 4.8%
6 June 2011 - - MXN 8.3% L+25bps
7 - L+27bps (Y) 1.9% - -
8 - MXN 8.8% (Y) 2.6% - -
* TIIE represents the Interbank Offering Rate in Mexico and CETES are public
debt instruments issued by the Mexican government. As of December 31, 2005,
the LIBOR rate was 4.39%, the TIIE was 8.56% and the CETES yield was 8.01%.
F-21
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
As of December 31, 2004 and 2005, related to the fair value of the CCS, the
Company recognized net assets of U.S.$209 (Ps2,227) and U.S.$212 (Ps2,250),
respectively, of which U.S.$301 (Ps3,299) in 2004 and U.S.$138 (Ps1,466) in 2005
relate to prepayments made to yen and dollar denominated obligations under the
CCS. As of December 31, 2004, the amount of the prepayments was presented by
decreasing the carrying amount of the related debt. The estimated fair value of
the CCS, without the effects of prepayments, resulted in a net liability of
U.S.$92 (Ps985) in 2004 and a net asset of U.S.$74 (Ps784) in 2005. The CCS have
not been designated as accounting hedges; therefore, changes in fair value are
recognized through the income statement. For the years ended December 31, 2003,
2004 and 2005, changes in the estimated fair values of the CCS, excluding the
effects of prepayments, resulted in a loss of U.S.$150 (Ps1,714), a gain of
U.S.$10 (Ps110) and a gain of U.S.$3 (Ps36), respectively, which were recognized
in the income statements of the respective periods.
As of December 31, 2005, the assets and liabilities arising from the valuation
of the CCS were presented separately from the related debt. As of December 31,
2004, in accordance with presentation guidelines applied by the Company as of
that date (note 3L), a portion of the net liability resulting from the fair
value recognition of the CCS of approximately U.S.$132 (Ps1,408), directly
related to variations in exchange rates between the origination of the CCS and
the balance sheet date, was presented as part of the related debt carrying
amount, in order to reflect the expected cash flows that the Company expected to
receive or pay upon settlement of these financial instruments. Through this
presentation, the carrying amount of the financial indebtedness directly related
to the CCS was presented as if it had been effectively negotiated in the
exchange currencies instead of in the originally negotiated currencies.
The periodic cash flows underlying the CCS arising from the exchange of interest
rates are determined over the notional amounts of the exchanged currency. These
cash flows are recognized as part of the effective interest rate of the related
financial debt within the interest expense.
The portion of the estimated fair value of the CCS, attributable to accrued
interest as of the reporting date, is presented as an adjustment of the related
financing interest payable.
On March 1, 2005, as a result of the acquisition of RMC, CEMEX assumed CCS for a
notional amount of approximately U.S.$397, with an estimated loss in the fair
value of approximately U.S.$84. These CCS were settled by CEMEX in May and June
2005, generating a gain of approximately U.S.$21 (Ps227) in the Comprehensive
Financial Income for the change in the fair value between the acquisition date
and the settlement date.
During 2003, resulting from the settlement of other currency derivative
instruments for a notional amount of U.S.$105, the Company recognized a loss of
approximately U.S.$4 (Ps41) in the income statement of the period.
The estimated fair value of derivative instruments fluctuates over time and will
be determined by future interest rates and currency prices, according to the
yield curves shown in the market as of the balance sheet date. These values
should be viewed in relation to the fair values of the underlying transactions
and as part of the Company's overall exposure attributable to fluctuations in
interest rates and foreign exchange rates. The notional amounts of derivative
instruments do not necessarily represent amount exchanged by the parties, and
consequently, there is no direct measure of the Company's exposure to the use of
these derivatives. The amounts exchanged in cash are determined based on the
basis of the notional amounts and other terms included in the derivative
financial instruments.
C) Guaranteed Debt
As of December 31, 2004 and 2005, CEMEX Mexico and ETM jointly, fully and
unconditionally guaranteed indebtedness of the Company for an aggregate amount
of U.S.$3,088 (Ps32,988) and U.S.$3,780 (Ps40,145), respectively. The combined
summarized financial information of these guarantors as of December 31, 2005,
2004 and 2003 is as follows:
2004 2005
---------- ---------
Assets............................................... Ps 146,436 193,617
Liabilities.......................................... 100,921 83,953
Stockholders' equity................................. 45,515 109,664
========== =========
2003 2004 2005
--------- ---------- ---------
Net sales.................................. Ps 24,868 24,970 26,914
Operating income........................... 2,831 3,188 11,032
Net income................................. 6,150 16,464 26,911
========= ========== =========
Certain debt contracts guaranteed by the Company and/or some of its subsidiaries
contain restrictive covenants limiting sale of assets and requiring maintenance
of a controlling interest in certain subsidiaries. As of December 31, 2004 and
2005, CEMEX was in compliance with such covenants.
F-22
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
13. OTHER SHORT-TERM AND LONG-TERM LIABILITES
As of December 31, 2004 and 2005, consolidated other accounts payable and
accrued expenses are as follows:
2004 2005
---------- ---------
Other accounts payable and accrued expenses............. Ps 1,781 4,091
Interest payable........................................ 552 544
Tax payable............................................. 1,394 2,760
Dividends payable....................................... 17 33
Provisions.............................................. 3,437 6,572
Advances from customers................................. 780 1,126
Valuation of derivative instruments (notes 12 and 17)... 941 1,449
---------- ---------
Ps 8,902 16,575
========== =========
Short-term provisions primarily consist of: (i) remuneration and other personnel
benefits accrued at the balance sheet date; (ii) insurance payments, and (iii)
accruals related to the portion of legal and environmental assessments to be
settled in the short-term (notes 22C and 22G). Commonly, these amounts are
revolving in nature and are to be settled and replaced by similar amounts within
the next 12 months.
Other long-term liabilities as of December 31, 2004 and 2005 consist of:
2004 2005
---------- ---------
Valuation of derivative instruments
(notes 12 and 17).................................. Ps 3,539 1,896
Accruals for legal assessments and
other responsibilities............................. 1,315 2,063
Asset retirement obligations and other
environmental liabilities.......................... 830 4,699
Other liabilities and deferred credits ............... 1,276 1,640
---------- ---------
Ps 6,960 10,298
========== =========
Liabilities from derivative financial instruments represent the accumulated
valuation losses resulting from the estimated fair value recognition of these
instruments (notes 12 and 17). Accruals for legal assessments and other
responsibilities refer to the best estimation of cash flows with respect to
legal claims where the Company is determined to be responsible and which are
expected to be settled over a period greater than twelve months (note 22).
During 2005, the balance of this caption increased primarily as a result of the
asset retirement obligations and other remediation liabilities assumed in the
acquisition of RMC for approximately Ps4,005. Asset retirement obligations and
other environmental liabilities include estimated future estimated costs for
demolition, cleaning and reforestation of production sites at the end of their
operation (note 3M). The expected average period to settle these obligations is
greater than 15 years.
14. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (note 3O)
On January 10, 2006, CEMEX communicated to its Mexican employees subject to
pension benefits about the beginning of a new defined contribution pension plan
scheme, which, from the communication date, replaces the former defined benefit
pension plan scheme. Those employees born before March 1, 1956, which represent
approximately 5% of the employees eligible for these benefits, have the option
to remain in the defined benefit plan, and have been requested to confirm their
selection before March 31, 2006. For all other employees, the change is
automatic.
As part of the plan conversion process, CEMEX will contribute to the employees'
retirement individual accounts, with a private retirement funds manager, an
approximate amount of Ps1,060. This amount represents the actuarial value of the
projected benefit obligations ("PBO") as of the change date, which represented
32% of the total PBO from the previous pension plan. The amount assumes that
approximately 85% of the employees with 50 years will elect to remain in the
current plan. The cash contribution will be obtained from the existing pension
funds. The administrative execution of the plans change is expected to occur
during the first quarter of 2006.
The initiation of the new defined contribution pension plan was considered to be
a material event which occurred before the issuance of the financial statements;
therefore, the accounting effects arising from the change were retroactively
recognized in the consolidated financial statements as of December 31, 2005. As
a result of the new plan, events of settlement and curtailment of obligations
occurred. For these reasons, the unrecognized net actuarial results (actuarial
gains and losses) were amortized proportionally to the decrease in the PBO,
while the unrecognized prior service cost was amortized proportionally to the
reduction of the expected years of future service of the present employees
within the plan. The combined net effect of the amortization of the items
mentioned above represented a loss of approximately Ps976, which was recognized
in the 2005 income statement within other expenses.
F-23
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
For the years ended December 31, 2003, 2004 and 2005, the net periodic cost of
pension plans and other postretirement benefits, is described as follows:
Pensions Other Postretirement Benefits* (OPB)
------------------------------- ------------------------------------
Net periodic cost: 2003 2004 2005 2003 2004 2005
--------- ---------- ---------- ------------ ---------- ------------
Service cost............................... Ps 293 295 641 32 39 81
Interest cost.............................. 290 348 1,139 46 33 75
Actuarial return on plan assets............ (341) (381) (1,077) (1) (1) (1
Amortization of prior service cost,
changes in assumptions and experience
adjustments.............................. 134 126 123 15 (8) 44
Settlements and curtailments(1)............ 3 - 976 - - -
--------- ---------- ---------- ----------- ----------- ------------
Ps 379 388 1,802 92 63 199
========= ========== ========== =========== =========== ============
(1) Effect of change of plan in Mexico
As of December 31, 2004 and 2005, the actuarial value of pension plans and other
postretirement benefits ("OPB"), as well as the funded status, are presented as
follows:
Pensions OPB*
--------------------- --------------------
2004 2005 2004 2005
---------- ---------- --------- ----------
Change in benefits obligation:
PBO at beginning of year.................................................. Ps 6,498 6,210 818 586
Service cost.............................................................. 295 641 39 81
Interest cost............................................................. 348 1,139 33 75
Actuarial result.......................................................... (299) 677 (214) 83
Employee' contributions................................................... - 64 - -
PBO from acquisitions..................................................... (1) 20,166 - 656
Initial valuation of other postretirement benefits........................ - - - 305
Foreign exchange variations and inflation adjustments..................... (190) (2,371) 13 (62)
Settlements and curtailments.............................................. (9) (1,060) (33) -
Benefits paid............................................................. (432) (1,093) (70) (130)
---------- ---------- --------- ----------
PBO at end of year........................................................ 6,210 24,373 586 1,594
---------- ---------- --------- ----------
Change in plan assets:
Fair value of plan assets at beginning of year............................ 5,612 5,713 35 20
Return on plan assets..................................................... 456 3,054 1 6
Foreign exchange variations and inflation adjustments..................... (182) (1,830) - -
Assets for acquisitions................................................... - 14,450 - -
Funds contribution........................................................ 168 852 - 48
Employee contribution..................................................... - 64 - -
Settlements and curtailments.............................................. (9) (1,060) - -
Benefits paid............................................................. (332) (1,093) (16) (48)
---------- ---------- --------- ----------
Fair value of plan assets at end of year.................................. 5,713 20,150 20 26
---------- ---------- --------- ----------
Amounts recognized in the balance sheets:
Funded status............................................................. 497 4,223 566 1,568
Net transition obligation ................................................ (1,346) (106) (14) (386)
Prior service cost and actuarial results.................................. (438) 417 69 70
---------- ---------- --------- ----------
Accrued benefit liability (prepayment).................................... (1,287) 4,534 621 1,252
Additional minimum liability.............................................. 865 331 9 273
---------- ---------- --------- ----------
Net projected liability (prepayment) recognized........................... Ps (422) 4,865 630 1,525
========== ========== ========= ==========
* OPB includes the cost and obligations of seniority premiums, severance
payments, health care and life insurance benefits.
At December 31, 2004 and 2005, the combined actual benefit obligation ("ABO") of
pensions and other postretirement benefits, equivalent to the PBO not
considering salary increases, amounted to Ps5,862 and Ps23,234, respectively. An
additional minimum liability is recognized in those individual cases when the
ABO less the plan assets (net actual liability) is lower than the net projected
liability. The Company recognized minimum liabilities against intangible assets
for approximately Ps874 in 2004 and Ps604 in 2005.
F-24
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Net transition obligations, prior service costs and net actuarial results are
amortized over the estimated service life of the employees under plan benefits.
As of December 31, 2005, the average estimated service life for pension plans is
approximately 15.2 years, and for other postretirement benefits is approximately
13.3 years.
As of December 31, 2004 and 2005, the consolidated assets of the pension plans
and other postretirement benefits are valued at their estimated fair value and
are aggregated as follows:
2004 2005
--------- ----------
Fixed-income securities................................ Ps 1,861 8,653
Marketable securities.................................. 3,354 9,605
Private funds and other investments.................... 518 1,918
--------- ----------
Ps 5,733 20,176
========= ==========
As of December 31, 2005, estimated future benefit payments for pensions and
other postretirement benefits during the next ten years are as follows:
2005
----------------
2006....................................................... Ps 1,442
2007....................................................... 1,405
2008....................................................... 1,484
2009....................................................... 1,469
2010....................................................... 1,561
2011- 2015................................................. 8,204
================
CEMEX applies real rates (nominal rates discounted for inflation) in the
actuarial assumptions used to determine pensions and other postretirement
benefit liabilities. The most significant assumptions used in the determination
of the net periodic cost are summarized as follows:
2003 2004 2005
-------------- --------------- -------------
Range of discount rates used
to reflect the obligations' present value............ 3.0% to 7.0% 4.5% to 8.0% 3.5% to 5.5%
Weighted average rate of return on plan assets......... 7.8% 7.8% 6.7%
Weighted average rate of salary increases.............. 7.8% 7.8% 3.2%
-------------- --------------- -------------
15. STOCKHOLDERS' EQUITY
A) COMMON STOCK
The Company's common stock as of December 31, 2004 and 2005 is as follows:
2004 2005 (4)
Shares Series A (1) Series B (2) Series A (1) Series B (2)
-------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Subscribed and paid shares........................ 7,407,268,488 3,703,634,244 7,676,571,754 3,838,285,877
Treasury shares (3)............................... 498,267,340 249,133,670 213,087,000 106,543,500
Unissued shares authorized for Stock Option Plans. 215,921,248 107,960,624 213,530,982 106,765,491
---------------- ----------------- ---------------- ----------------
8,121,457,076 4,060,728,538 8,103,189,736 4,051,594,868
================ ================= ================ ================
(1) Series "A" or Mexican shares must represent at least 64% of capital stock.
(2) Series "B" or free subscription shares must represent at most 36% of capital
stock.
(3) Includes the shares issued pursuant to the ordinary stockholders' meeting of
April 28, 2005 that were not subscribed.
(4) Includes the effect of the stock split approved in 2005.
Of the total number of shares, 6,534,000,000 in 2004 and 2005 correspond to the
fixed portion, and 5,648,185,614 in 2004 and 5,620,784,604 in 2005 to the
variable portion.
On April 29, 2004, the annual stockholders' meeting approved: (i) a reserve for
share repurchases of up to Ps6,000 (nominal amount); (ii) an increase in the
variable common stock through the capitalization of retained earnings of up to
Ps4,169 (nominal amount), issuing shares as a stock dividend for up to 600
million shares equivalent to up 200 million CPOs, at a subscription price of
Ps53.129 (nominal) per CPO, or instead, stockholders could have chosen to
receive Ps2.35 (nominal amount) in cash for each CPO. As a result, shares
equivalent to 75,433,165 CPOs were subscribed and paid, representing an increase
in common stock of Ps3, considering a nominal value of Ps0.0333 pesos per CPO,
and in additional paid-in capital of Ps4,279, while an approximate cash payment
through December 31, 2004 was made for Ps161; and (iii) the cancellation of the
corresponding shares held in the Company's treasury.
F-25
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
On April 28, 2005, the annual ordinary stockholders' meeting approved: (i) a
reserve for share repurchases of up to Ps6,000 (nominal amount); (ii) an
increase in the variable common stock through the capitalization of retained
earnings of up to Ps4,815 (nominal amount), issuing shares as a stock dividend
for up to 360 million shares (before the split) equivalent to up 120 million
CPOs, at a subscription price of Ps66.448 pesos (nominal) per CPO, or instead,
stockholders could have chosen to receive Ps2.60 pesos (nominal amount) in cash
for each CPO. As a result, shares equivalent to 66,728,250 CPOs were subscribed
and paid, representing an increase in common stock of Ps2, considering a nominal
value of Ps0.0333 pesos per CPO, and in additional paid-in capital of Ps4,535,
while an approximate cash payment through December 31, 2005 was made for Ps380;
and (iii) the cancellation of the corresponding shares held in the Company's
treasury.
On April 28, 2005, the annual extraordinary stockholders' meeting approved a
stock split, which became effective on July 1, 2005. In connection with the
stock split, each of CEMEX's series "A" shares was surrendered in exchange for
two new series "A" shares, and each of CEMEX's series "B" shares was surrendered
in exchange for two new series "B" shares. The proportional equity interest of
the stockholders did not change as a result of the stock split.
B) RETAINED EARNINGS
Retained earnings as of December 31, 2005 include Ps99,537 of earnings generated
by subsidiaries and affiliated companies that are not available to be paid as
dividends by CEMEX until these entities distribute such amounts to CEMEX.
Additionally, retained earnings as of December 31, 2005 include a share
repurchase reserve in the amount of Ps5,737. Net income for the year is subject
to a 5% allocation toward a legal reserve until such reserve equals one fifth of
the common stock. As of December 31, 2005 the legal reserve amounted to Ps1,526.
C) EFFECTS OF INFLATION
The effects of inflation on majority interest stockholders' equity as of
December 31, 2005 are as follows:
Inflation
Nominal adjustment Total
---------- ---------- -----------
Common stock......................................... Ps 64 3,735 3,799
Additional paid-in capital........................... 28,506 18,627 47,133
Deficit in equity restatement........................ - (75,329) (75,329)
Cumulative initial deferred income tax effects....... (4,698) (1,152) (5,850)
Retained earnings.................................... 63,396 48,770 112,166
Net income........................................... Ps 22,817 (392) 22,425
========== =========== ===========
D) FOREIGN CURRENCY TRANSLATION
The foreign currency translation results recorded in stockholders' equity as of
December 31, 2003, 2004 and 2005, are summarized as follows:
2003 2004 2005
---------- ----------- ----------
Foreign currency translation adjustment............... Ps 5,267 3,117 (5,174)
Foreign exchange gain (loss) (1)....................... (1,594) 156 1,414
---------- ----------- ----------
Ps 3,673 3,273 (3,760)
========== =========== ==========
(1) Foreign exchange gain (loss) resulting from the financing identified with
the acquisitions of foreign subsidiaries.
The foreign currency translation adjustment includes foreign exchange results
from financing related to the acquisition of foreign subsidiaries made by the
Company's subsidiary in Spain, representing a gain of approximately Ps61, a gain
of Ps3 and a loss of Ps11, in 2003, 2004 and 2005, respectively.
E) PREFERRED STOCK
In October 2003, CEMEX repurchased the remaining balance of preferred stock of
U.S.$650 (Ps7,444), which was to mature in February and August 2004. The
preferred stock was issued in 2000 by a Dutch subsidiary for U.S.$1,500 with an
original maturity in May 2002. The preferred stock was mandatorily redeemable
upon maturity and granted its holders 10% of the subsidiary's voting rights, as
well as the right to receive a guaranteed variable preferred dividend, and the
option, in certain circumstances, to subscribe for additional preferred stock or
common shares for up to 51% of the subsidiary's voting rights. Until its
liquidation, this transaction was included as minority interest. Preferred
dividends declared for approximately U.S.$13 (Ps147) in 2003 were recognized as
part of minority interest in the consolidated income statement in that period.
F-26
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
In October 2004, CEMEX liquidated the remaining capital securities for
approximately U.S.$66 (Ps705). The capital securities were issued in 1998 by a
Spanish subsidiary for U.S.$250, with an annual dividend rate of 9.66%. In April
2002, through a tender offer, U.S.$184 of capital securities were repurchased.
The amount paid to holders in excess of the nominal amount of the capital
securities pursuant to the early retirement of approximately U.S.$20 (Ps229) was
recognized against stockholders' equity. During 2004 and until its termination,
as a result of the adoption of new accounting principles, this transaction was
recognized as financial debt. Preferred dividends declared in 2003 were
recognized in the income statement as minority interest of approximately U.S.$6
(Ps75). Meanwhile, preferred dividends declared during 2004 of U.S.$6 (Ps63),
were recognized in earnings as part of financial expenses
F) OTHER EQUITY TRANSACTIONS
In December 2004, 13,772,903 appreciation warrants ("warrants") remaining from
the public purchase offer that took place in December 2003, and which was
concluded in January 2004, were settled upon maturity. Through the prior offer
90,018,042 warrants were repurchased at a purchase price of Ps7.8 pesos per
warrant (Ps38.80 pesos per American Depositary Warrant or ADW). Considering the
results of the purchase of warrants in January 2004, the expiration in December
2004, and the direct expenses related to these transactions, approximately
Ps1,010 was paid. This amount was recognized against stockholders' equity within
additional paid-in capital. At the end of 2003, CEMEX announced a public offer
to purchase in cash up to 90,018,042 warrants in the Mexican Stock Exchange
("MSE"), and warrants represented by ADWs, each ADW representing five warrants,
traded on the New York Stock Exchange ("NYSE"). The warrants purchased pursuant
to the offer represented approximately 86.73% of the then total outstanding
warrants and included approximately 34.9 million warrants owned by or controlled
by CEMEX and its subsidiaries.
The warrants and ADWs were originally issued in 1999 by means of a public offer
on the MSE and the NYSE, in which 105 million warrants and warrants represented
by ADWs were sold. Each ADW represented five warrants. The warrants permitted
the holders to benefit from the future increases in the market price of the
Company's CPOs above the strike price, which as of December 31, 2003 was
approximately U.S.$5.45 per CPO (U.S.$27.23 per ADS). The benefit was settled in
CPOs. Until September 2003, the CPOs and ADSs required to cover exercises of
warrants were held in equity forward contracts with financial institutions.
These forward contracts were settled in October 2003 as a result of a
simultaneous secondary equity offering, made by the Company and the banks
holding the shares.
In addition, in December 2003, through the payment of approximately U.S.$76
(Ps869), CEMEX exercised the option that it retained and repurchased the assets
related to a financial transaction through which, in December 1995, CEMEX
transferred assets to a trust, while simultaneously investors contributed
U.S.$124, in exchange for notes representing a beneficial interest in the trust.
During the life of the transaction and until maturity in 2007, periodic
repurchases of the assets underlying in the trust were stipulated. CEMEX
maintained an option to reacquire the related assets at different dates. The
cost of retaining this option was recognized as interest expense for
approximately U.S.$15 (Ps166) in 2003. Until its settlement in December 2003,
this transaction was included as part of the minority interest in stockholders'
equity.
G) COMPREHENSIVE NET INCOME
For the years ended December 31 2003, 2004 and 2005, consolidated comprehensive
net income is as follows:
2003 2004 2005
---------- --------- ----------
Majority interest net income............................................. Ps 7,201 13,965 22,425
Effects from holding non-monetary assets................................. (3,498) (2,759) 5,558
Foreign currency translation results..................................... 5,267 3,117 (5,174)
Capitalized foreign exchange result (note 15D) .......................... (1,594) 156 1,414
Hedge derivative instruments (notes 12 and 17)........................... 467 2,300 2,894
Deferred IT of the year recorded in stockholders' equity (note 18)....... (219) 685 1,745
Excess of price paid over book value of minority interests............... - (958) -
Settlement of equity instruments......................................... (666) - -
Cumulative initial effects of asset retirement obligations............... (87) - -
Inflation effect on equity(1)............................................ (94) 7 -
---------- --------- ----------
Total comprehensive income items......................................... (424) 2,548 6,437
---------- --------- ----------
Majority comprehensive net income........................................ 6,777 16,513 28,862
Minority interest........................................................ 348 224 584
---------- --------- ----------
Comprehensive net income................................................. Ps 7,125 16,737 29,446
========== ========= ==========
(1) Relates to the adjustment resulting from the use of the weighted average
inflation index for the restatement of stockholders' equity and the use of
the index of inflation in Mexico to restate common stock and additional
paid-in capital (note 3B).
F-27
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
16. EXECUTIVE STOCK OPTION PROGRAMS
In May 2005, as a result of change of control clauses, the existing executive
stock option and share programs in RMC Group p.l.c. as of the acquisition date
were liquidated through the payment of approximately (pound)40 million (U.S.$69
or Ps735). This amount was included as part of the purchase price of RMC. Except
for the stock option program of the Irish subsidiary mentioned in the last
paragraph of the caption below, there are no other stock option programs in
subsidiaries of CEMEX that were acquired in 2005.
Equity Programs
From June 1995 through June 2001, CEMEX granted stock options with a fixed
exercise price in pesos ("fixed program"), equivalent to the market price of the
CPO at the grant date and with a tenure of 10 years. Exercise prices are
adjusted for stock dividends. The employees option rights vested up to 25%
annually during the first four years after having been granted.
As mentioned in note 3R, in 2005, CEMEX adopted IFRS 2 to account for its stock
option programs. According to IFRS 2, the Company's fixed program qualified as
equity instruments, and no cost was recognized, considering that all options
were fully vested as of the adoption date of IFRS 2. During 2004 and 2005, the
new CPOs issued pursuant to exercise of these options generated an additional
paid-in capital of approximately Ps64 and Ps18, respectively, and increased the
number of shares outstanding.
The information related to options granted under the Company's fixed program,
for the years ended December 31, 2004 and 2005, is summarized as follows:
Options Fixed Program
------------------
Options at the beginning of 2004........................ 4,689,335
Changes in 2004:
Options exercised....................................... (1,998,466)
------------------
Options at the end of 2004.............................. 2,690,869
Changes in 2005:
Options cancelled....................................... (1,141,345)
Options exercised....................................... (469,224)
------------------
Options at the end of 2005.............................. 1,080,300
==================
Exercise prices:
Options outstanding at the beginning of 2005 *.......... Ps15.1
Options exercised during the year *..................... Ps15.0
Options outstanding at the end of 2005 *................ Ps14.5
==================
* Weighted average exercise prices per CPO. Prices include the effects of the
stock split (note 15A).
Considering the anti-dilution adjustments to options, resulting from the stock
split and stock dividends declared by CEMEX, as of December 31, 2005, there are
1,355,587 CPOs underlying the outstanding options under the fixed program.
In addition, as of December 31, 2005, CEMEX's subsidiary in Ireland, Ready Mix,
Ltd., acquired on March 1, 2005 as part of the RMC acquisition, has 1,640,000
options outstanding under an executive option plan in the subsidiary's own
shares. The average exercise price of these options is approximately 1.35 Euros
per option. The market price of the subsidiary's share as of December 31, 2005
was 2.35 Euros.
F-28
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Liability Programs
According to IFRS 2, those executive option programs in which the Company,
through the exercise of the option, commits to pay the executive the intrinsic
value of the options are classified as liability instruments. These programs are
valued at their estimated fair value as of the date of the financial statements,
recognizing changes in fair value through the income statement. As of December
31, 2004 and 2005, the information of those programs, which do not generate
dilution to existing shareholders, is summarized as follows:
Restricted Variable Special program
Options programs (A) program (B) (C)
---------------- ---------------- ---------------
Options at the beginning of 2004..................... - 120,916,763 15,258,520
Changes in 2004:
Options granted...................................... 273,582,522 14,554,323 5,485,010
Options exercised.................................... (121,517,922) (132,393,239) (1,489,010)
---------------- ---------------- ---------------
Options at the end of 2004........................... 152,064,600 3,077,847 19,254,520
Changes in 2005:
Options granted...................................... - - 1,859,000
Options exercised.................................... (135,254,554) (592,848) (4,475,460)
---------------- ---------------- ---------------
Options at the end of 2005........................... 16,810,046 2,484,999 16,638,060
================ ================ ===============
Exercise prices:
Options outstanding at the beginning of 2005 *....... U.S.$3.7 U.S.$2.6 U.S.$2.5
Options exercised during the year *.................. U.S.$3.6 U.S.$2.7 U.S.$2.4
Options outstanding at the end of 2005 *............. U.S.$3.8 U.S.$2.7 U.S.$2.6
================ ================ ===============
* Weighted average exercise prices per CPO. Prices include the effects of the
stock split (note 15A).
Considering the anti-dilution adjustments to the options, resulting from the
stock split and stock dividends declared by CEMEX, as of December 31, 2005,
there are 40,599,334 CPOs underlying the outstanding options under the
restricted and variable programs.
A) Restricted Programs
In January 2005, the 1,190,224 options then outstanding as a result of the
exchange which occurred in February 2004 and that contained a mandatory exercise
condition, were automatically exercised when the CPO market price reached the
level of U.S.$3.75.
Likewise, in June 2005, 131,996,243 options that contained a mandatory exercise
condition, of which 11,168,873 options were granted in June 2004 and 120,827,370
options were issued in the exchange which occurred in December 2004, were
automatically exercised when the CPO market price reached the level of
U.S.$4.25. As a result of the mandatory exercises of options occurred during
2005, the Company recognized a cost of approximately U.S.$177 (Ps1,880) in the
income statement of the period.
In February 2004, through a voluntary option exchange program, 112,495,811
options from the variable program and 1,625,547 options from other programs were
redeemed, and 122,708,146 new options were granted with a remaining tenure of
8.4 years. These options had an initial exercise price of U.S.$2.53 per CPO,
which increased annually at a 7% rate, and included a mandatory exercise
condition when the CPO price reached U.S.$3.75. The gains obtained by the
employees were paid in the form of CPOs, which were acquired at a 20% discount
to market. These CPOs were restricted for sale for an approximate period of four
years, depending on the exercise date. This program was intended, by limiting
the potential for gains, to be an improved hedge through equity forward
contracts (note 17). As consideration to the employees resulting from the
mandatory exercise condition and the sale restriction, CEMEX paid in 2004
U.S.$0.10 per option, net of taxes.
In addition, in December 2004, through a voluntary early exercise program,
16,580,004 options from the variable program, 120,827,370 options issued in the
exchange of February 2004 and 399,848 options from other programs were redeemed,
through the payment of the options' intrinsic value, and the issuance of
139,151,236 new options with an initial exercise price of U.S.$3.73 per CPO,
which increased annually at a 5.5% rate and had a remaining tenure of 7.5 years,
of which, 120,827,370 options included a mandatory exercise condition when the
CPO price reached U.S.$4.25, while the remaining 18,323,866 options do not have
exercise conditions. The initial exercise price was U.S.$0.25 higher than the
CPO market price at the early exercise date. The intrinsic value was paid in the
form of CPOs, which were restricted for sale for a period of four years from the
exercise date. This early exercise was intended to make a more efficient hedge
through equity forward contracts (note 17). The cost of the early exercise of
approximately U.S.$61 (Ps653) was recognized in earnings in the year 2004. As
consideration to the employees resulting from the initial exercise price being
above market, the mandatory exercise condition and the sale restriction, CEMEX
paid in 2005 U.S.$0.11 per option, net of taxes.
B) Variable program
In November 2001, by means of a voluntary exchange program for options granted
under the fixed program, CEMEX initiated a stock option program with exercise
prices denominated in U.S. dollars increasing a annually at a 7% rate, through
the payment of the options' intrinsic value and the issuance of 88,937,805 new
options. In the exchanges of February 2004 and December 2004, 129,075,815
options granted under the variable program were exercised.
F-29
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
C) Special program
Starting in 2001, a stock option program to purchase CEMEX ADSs was established
in the United States. The options granted have a fixed exercise price in dollars
and tenure of 10 years. The employees' option rights vest up to 25% annually
after having been granted. The options exercises are hedged using ADSs currently
owned by subsidiaries, potentially increasing stockholders' equity and the
number of shares outstanding. The amounts of these ADS programs are presented in
terms of equivalent CPOs (ten CPOs represent one ADS).
D) Number of options by exercise price:
Fixed program Special program Restricted program Variable program
---------------- ------------------- ------------------- ------------------
301,730 - Ps10.4 2,341,510 - US$2.3 16,810,046 - US$3.8 1,624,896 - US$2.7
72,893 - Ps12.0 3,476,190 - US$2.7 - 386,703 - US$3.0
150,944 - Ps15.7 4,045,250 - US$1.9 - 67,295 - US$2.4
155,099 - Ps14.2 4,916,110 - US$2.8 - 347,363 - US$2.2
153,189 - Ps17.4 1,859,000 - US$3.8 - 58,742 - US$2.6
246,445 - Ps18.3 - - 1,624,896 - US$2.7
As of December 31, 2005, the options from the fixed, special, restricted and
variable programs have a remaining average tenure of 2.7 years, 7.5 years, 6.5
years and 6.3 years, respectively. Likewise, the employees' option rights under
such programs are vested in 100%, 49.3%, 100% and 85.3%, respectively.
In addition, as of December 31, 2005 there are 5,000 remaining options from
voluntary programs sold to executives in April 2002. These options have an
exercise price of U.S.$3.05 per CPO and a remaining tenure of approximately 2
years.
E) Options hedging activities
In December 2005, CEMEX negotiated a derivative instrument in its own shares, by
means of which, through a prepayment of U.S.$145 (Ps1,540), CEMEX secures the
appreciation over 25 million CPOs, sufficient to hedge cash flows from the
exercise of options in the short and medium term. As of December 31, 2005, the
fair value of this instrument was a gain of approximately U.S.$3 (Ps32)
recognized in earnings.
Beginning in 2001 and until September 2005, CEMEX hedged most of its stock
option programs through forward contracts in its own stock (note 17A),
negotiated to guarantee that shares would be available at prices equivalent to
those established in the options, without the necessity of issuing new CPOs into
the market; therefore, these programs do not increase the number of shares
outstanding and consequently do not result in dilution of the basic earnings per
share. The equity forward contracts were fully settled during September 2005
through a secondary public offer (note 17A).
Commencing in 2005, as a result of the adoption of IFRS 2, CEMEX recognizes the
cost of its option plans that qualify as liability instruments through the fair
value of the options as of the balance sheet date (note 3R). For the year ended
December 31, 2005, the income statement includes the cumulative effect from the
adoption of IFRS 2, which represented an expense of approximately Ps992 (Ps860
net of IT). Beginning in 2001 and until September 2005, CEMEX recognized the
cost of its stock option programs, except for its fixed program, through valuing
the intrinsic value of the options as of the balance sheet date.
In addition, during 2005, the Company recognized an expense of approximately
U.S.$41 (Ps435), resulting from changes in the fair value of the options after
the adoption of IFRS 2 until year-end. Moreover, for the years ended December
31, 2003 and 2004, and during 2005 before the adoption of IFRS 2, the expense
arising from the options measured by the intrinsic value was approximately
U.S.$45 (Ps519), U.S.$51 (Ps541) and U.S.$116 (Ps1,232), respectively. Likewise,
the Company recognized in the income statement the changes in the estimated fair
value and the cash flows generated by the settlement of the equity forward
contracts designated as hedges for these plans (note 17A), which resulted in a
loss of approximately U.S.$28 (Ps321) in 2003, a gain of approximately U.S.$45
(Ps479) in 2004 and a gain of approximately U.S.$422 (Ps4,482) in 2005. The
gains or losses resulting from the hedging instruments negotiated in the
Company's own stock are recognized in addition to the expense related to the
stock option programs.
The fair value of the options was determined through binomial option pricing
models. As of December 31, 2005, the most important assumptions used in
valuation are the following:
Assumptions 2005
--------------
Expected dividend.............................................. 3.8%
Volatility..................................................... 35%
Interest rate.................................................. 4.4%
Weighted average remaining tenure.............................. 6.8 years
==============
During 2005, CEMEX only granted options under its special program. The other
eligible executives received a salary bonus, recognized in operating expense,
which was used by the executives to purchase CPOs in the market. These CPOs are
held in an employees' trust during a restriction for sale period of
approximately 4 years.
F-30
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
17. DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 2004 and 2005, the Company's derivative financial
instruments, other than those related to financial debt (note 12), are
summarized as follows:
2004 2005
---------------------------------- -------------------------------
Millions of dollars Notional amount Fair value Notional amount Fair value
------------------- -------------- ----------------- -------------
A) Equity forward contracts....................... 1,157 66 - -
B) Foreign exchange instruments................... 4,898 63 3,200 173
C) Derivatives related to energy projects......... 168 (6) 159 (4)
=================== ============== ================= =============
Upon liquidation and at CEMEX's option, the equity forward contracts allowed for
physical or net cash settlement of the estimated fair value. In 2005, the fair
value effects related to these instruments were recognized in the income
statement, while in 2004, such effects were recognized in the income statement
or as part of stockholders' equity, according to their characteristics and use.
At maturity, if these forward contracts were not settled or replaced, or if the
Company defaulted on the agreements established, this might have had an adverse
affect on the Company's stock market price or its ability to operate.
A) On October 3, 2005, through a secondary equity offering agreed to by the
Company, launched simultaneously on the MSE and the NYSE, financial
institutions offered and sold 30,993,340 ADSs (22,943,340 ADSs and
80,500,000 CPOs) held through forward contracts, at a price of approximately
U.S.$49.5 per ADS and Ps53.9 per CPO. Of the total sale proceeds of
approximately U.S.$1,500 (Ps15,930), net of the offering expenses, the
financial institutions kept approximately U.S.$1,300 as payment for the
liquidation of the related forward contracts. The ADSs subject to the offer
represented the entire amount of shares subject to the forward contracts in
the Company's stock as of the offering date. This transaction did not
increase the number of shares outstanding. For the year ended December 31,
2005, considering the results of the secondary offer, as well as those of
the forward contracts initiated and settled during the year to hedge the
exercises of options under the stock option programs, CEMEX recognized in
the income statement a gain of approximately U.S.$422 (Ps4,482), which was
recognized in addition to the expenses generated by the stock option
programs (note 16E).
As of December 31, 2004, there were forward contracts with different
maturities until October 2006, for a notional amount of U.S.$1,112 covering
30,644,267 ADSs, which were designated to hedge the exercise of the options
granted under the employee stock option programs. Changes in the estimated
fair value of these contracts were recognized in the income statement as a
complement of the cost generated by such programs. As of December 31, 2004,
the estimated fair value of these contracts was a gain of approximately
U.S.$45 (Ps479).
During 2004, contracts representing 2,509,524 CPOs that were held to meet
the Company's requirements of shares under the remaining warrants from the
repurchase in 2003 were settled, resulting in a gain of approximately U.S.$3
(Ps28), recognized in stockholders' equity. In addition, in October 2003,
through a secondary equity offering, forward contracts for a notional amount
of U.S.$461, covering 24,008,392 ADSs (120,041,960 CPOs) and 33.8 million
shares of CEMEX's subsidiary in Spain were settled, resulting a net gain of
approximately U.S.$20 (Ps223), which was recognized in stockholders' equity.
These contracts were negotiated in 1999 to hedge future exercises under the
105 million warrants program (note 15F). These warrants were subject to a
voluntary repurchase offer by CEMEX in December 2003, and the remaining
warrants expired in December 2004 (note 15F). From execution of the
contracts until their settlement, the Spanish subsidiary's shares underlying
the contracts were considered as owned by CEMEX.
In addition, during 2004, forward contracts covering 23,622,500 CPOs that
hedged the purchase of CAH shares through exchange of the Company's CPOs
(note 9A) were settled. Through this settlement, a gain of approximately
U.S.$15 (Ps155) was recognized in stockholders' equity.
As of December 31, 2004, there were forward contracts with different
maturities until January 2006, for a notional amount of U.S.$45 that covered
1,364,061 ADSs. Until December 31, 2004, these contracts were treated as
equity instruments; therefore, changes in their fair value were recognized
in stockholders' equity when settled. During 2005, changes in the fair value
of these contracts were recognized against the income statement. As of
December 31, 2004, the estimated fair value was a gain of approximately
U.S.$6 (Ps64).
B) In order to hedge financial risks associated with variations in foreign
exchange rates, CEMEX has negotiated foreign exchange forward contracts for
notional amounts of U.S.$957 and U.S.$3,137, at December 31, 2004 and 2005,
respectively, with different maturities until 2007. These contracts have
been designated as hedges of the Company's net investment in foreign
subsidiaries. The estimated fair value of these instruments is recorded in
stockholders' equity as part of the foreign currency translation effect
(note 15D). In addition, as of December 31, 2004, there were foreign
exchange options for a notional amount of U.S.$488, which matured in June
2005. For the sale of these options, CEMEX received premiums of
approximately U.S.$63 in 2003. The changes in the estimated fair value
resulted in losses of U.S.$57 (Ps605) in 2003, U.S.$19 (Ps205) in 2004 and
U.S.$6 (Ps60) in 2005, which were recognized in earnings. In addition, as of
December 31, 2005 there is a foreign exchange forward contract for a
notional amount of U.S.$63, not designated as hedge, whose effects are
recognized in earnings.
F-31
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
In September 2004, in connection with the commitment to acquire RMC (notes 2
and 9A) that was denominated in sterling pounds, CEMEX entered into a
foreign exchange hedge program, oriented to hedge the variability in cash
flows associated with exchange fluctuations between the U.S. dollar, the
currency in which CEMEX obtained the proceeds, and sterling pounds. For this
purpose, the Company negotiated foreign exchange forwards, collars and
digital options, for a combined notional amount of U.S.$3,453. These
contracts were designated as accounting hedges of the foreign exchange risk
associated with the firm commitment agreed on November 17, 2004, the date on
which RMC's shareholders committed to sell their shares at a fixed price.
Changes in the estimated fair value of these contracts from the designation
date, which represented a gain of approximate U.S.$132 (Ps1,411), was
recognized in stockholders' equity in 2004 and was reclassified to earnings
in 2005 on the purchase date. Changes in the estimated fair value of these
contracts from their origination until their designation in 2004 as hedges,
were a gain of approximately U.S.$102 (Ps1,094), which was recognized in
earnings in 2004.
C) As of December 31, 2004 and 2005, CEMEX had an interest rate swap maturing
in May 2017, with a notional amount of U.S.$159 and U.S.$150, respectively,
negotiated to exchange floating for fixed interest rates in connection with
agreements entered into by CEMEX for the acquisition of electric energy
(note 22F). During the life of the swap and based on its notional amount,
CEMEX will pay a LIBOR rate and will receive a 7.53% fixed rate until May
2017. In addition, during 2001, the Company sold a floor option with a
notional amount of U.S.$168 in 2004 and U.S.$159 in 2005, related to the
interest rate swap contract, pursuant to which, until 2017, CEMEX will pay
the difference between the 7.53% fixed rate and the LIBOR rate. As of
December 31, 2004 and 2005, the combined fair value of the swap and the
floor option represented losses of approximately U.S.$6 (Ps67) and U.S.$4
(Ps44), respectively, recognized in earnings during the respective periods.
The nominal amount of both contracts is not aggregated, considering that
there is only one notional amount with exposure to changes in interest rates
and the effects of one contract are proportionally inverse to the changes in
the other one.
The estimated fair values of derivative financial instruments fluctuate over
time and are based on estimated settlement costs or quoted market prices. These
values should be viewed in relation to the fair values of the underlying
instruments or transactions and as part of the Company's overall exposure to
fluctuations in foreign exchange rates, interest rates and prices of shares. The
notional amounts of derivative instruments do not necessarily represent amounts
exchanged by the parties and, therefore, are not a direct measure of the
Company's exposure through its use of derivatives. The amounts exchanged are
determined on the basis of the notional amounts and other terms included in the
derivative instruments.
18. INCOME TAX (IT), BUSINESS ASSETS TAX (BAT), EMPLOYEES' STATUTORY PROFIT
SHARING (ESPS) AND DEFERRED INCOME TAXES
The income tax law in Mexico provides that companies must pay either IT or BAT
depending on which amount is greater with respect to their Mexican operations.
Both taxes recognize the effects of inflation, although in a manner different
from Mexican GAAP. ESPS is calculated on similar basis as IT without recognizing
the effects of inflation.
A) IT, BAT AND ESPS
CEMEX and its Mexican subsidiaries generate IT and BAT on a consolidated basis;
therefore, the amounts of these items included in the financial statements, with
respect to the Mexican subsidiaries, represent the consolidated result of these
taxes. For ESPS purposes, the amount presented is the sum of the individual
results of each company.
Beginning in 1999, the determination of the consolidated IT for the Mexican
companies considers a maximum of 60% of the taxable income or loss of each of
the subsidiaries. In addition, the taxable income of those subsidiaries that
have tax loss carryforwards generated before 1999 will be considered by the
parent company according to its equity ownership. Beginning in 2002, in the
determination of consolidated IT, 60% of the taxable result of the controlling
entity should be considered, unless it obtains taxable income, in which case
100% should be considered, until the restated balance of the individual tax loss
carryforwards before 2001 are amortized. Beginning in 2002, a new IT law became
effective in Mexico, establishing that the IT rate were scheduled to be
decreased by 1% each year, beginning in 2003, until the rate reached 32% in
2005. Nevertheless, according to reforms approved to such law in November 2004,
the tax rate for 2005 will be 30%, 29% for 2006 and 28% starting in 2007. In
addition, beginning in 2005, the maximum of 60% for tax consolidation factor was
eliminated, except in those situations when the subsidiaries would have
generated tax loss carryforwards in the period from 1999 to 2004, or the parent
company from the period of 2002 to 2004. In those cases, the 60% factor will
prevail in the IT consolidation, until tax loss carryforwards are extinguished
in each company.
The IT expense, presented in the income statements, is summarized as follows:
2003 2004 2005
---------- ----------- ----------
Current income tax........................ Ps (1,645) (1,024) (2,440)
Deferred IT............................... 518 (1,006) (1,124)
Effects of inflation (note 3B)............ 101 70 -
---------- ----------- ----------
Ps (1,026) (1,960) (3,564)
========== =========== ==========
F-32
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
For the years ended December 31, 2003, 2004 and 2005, the total consolidated IT
includes expenses of Ps1,423, Ps1,207and Ps1,413, respectively, from foreign
subsidiaries, and income of Ps397 in 2003, expense of Ps753 in 2004 and expense
of Ps2,151 in 2005 from Mexican subsidiaries. In addition, the Company
recognized a consolidated tax benefit, excluding deferred taxes, of Ps1,352,
Ps1,302 and Ps1,548, in 2003, 2004 and 2005, respectively.
For its operations in Mexico, CEMEX has tax loss carryforwards, which, restated
for inflation, can be amortized against taxable income in the succeeding ten
years. The tax loss carryforwards at December 31, 2005 are as follows:
Year in which tax loss occurred Amount of Year of
carryforwards expiration
--------------- ----------
2001............................................ Ps 863 2011
2002............................................ 4,192 2012
2003............................................ 596 2013
---------------
Ps 5,651
===============
The BAT Law in Mexico establishes a 1.8% tax levy on assets, restated for
inflation in the case of inventory and fixed assets, and deducting certain
liabilities. BAT levied in excess of IT for the period may be recovered,
restated for inflation, in any of the succeeding ten years, provided that the IT
incurred exceeds BAT in such period. The recoverable BAT as of December 31, 2005
is as follows:
Year in which BAT exceeded IT Amount of Year of
carryforwards expiration
-------------- -----------
1997........................................... Ps 177 2007
2005........................................... 96 2015
-------------- -----------
Ps 273
==============
B) DEFERRED IT AND ESPS (note 3S)
Deferred IT for the period represents the difference in nominal pesos between
the initial balance and the year-end balance. As of December 31, 2004 and 2005,
the IT effects of the main temporary differences that generate the consolidated
deferred IT assets and liabilities are presented below:
2004 2005
------------- ------------
Deferred tax assets and liabilities(1):
Tax loss carryforwards and other tax credits to be amortized................ Ps 12,728 13,788
Accounts payable and accrued expenses....................................... 3,684 3,890
Trade accounts receivable................................................... 104 217
Others...................................................................... - 589
------------- ------------
Total deferred tax assets................................................. 16,516 18,484
Less - Valuation allowance.................................................. (4,127) (5,665)
------------- ------------
Net deferred tax assets................................................... 12,389 12,819
Properties, plant and equipment............................................. (19,953) (27,957)
Inventories................................................................. (150) (16)
Others...................................................................... (2,489) (7,068)
------------- ------------
Total deferred tax liabilities............................................ (22,592) (35,041)
------------- ------------
Net deferred tax position (liability)..................................... (10,203) (22,222)
Less - Deferred IT of acquired subsidiaries at the acquisition date......... (4,614) (17,386)
------------- ------------
Total effect of deferred IT in stockholders' equity at end of year.......... (5,589) (4,836)
Total effect of deferred IT in stockholders' equity at beginning of year.... (5,268) (5,589)
------------- ------------
Change in deferred IT for the period........................................ Ps (321) 753
============= ============
(1) Bulletin D-4 does not allow the offsetting of deferred IT assets and
liabilities relating to different tax jurisdictions.
F-33
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
For the years ended December 31, 2003, 2004 and 2005, the breakdown of the
change in consolidated deferred income tax for the period is as follows:
2003 2004 2005
--------- ---------- ---------
Deferred IT charged (credited) to the income statement............ Ps 518 (1,006) (1,124)
Changes in accounting principles.................................. - - 132
Deferred IT applied directly to stockholders' equity(2)........... (219) 685 1,745
--------- ---------- ---------
Change in deferred IT for the period.............................. Ps 299 (321) 753
========= ========== =========
(2) Bulletin D-4 states that all items whose effects are recorded directly in
stockholders' equity should be recognized net of their deferred income tax
effects.
The Company's management considers that sufficient taxable income will be
generated as to realize the tax benefits associated with the deferred income tax
assets, and the tax loss carryforwards, prior to their expiration. In the event
that present conditions change, and it is determined that future operations
would not generate enough taxable income, or that tax strategies are no longer
viable, the valuation allowance would be increased and reflected in the income
statement.
Temporary differences between net income of the period and taxable income for
ESPS generated expense of Ps71 in 2003, expense of Ps203 in 2004 and income of
Ps178 in 2005, reflected in the income statement of each period.
C) EFFECTIVE TAX RATE
The effects of inflation are recognized differently for IT and for accounting
purposes. This situation, and other differences between the book and the IT
basis, arising from the several income tax rates and laws in each of the
countries in which CEMEX operates, give rise to permanent differences between
the approximate statutory tax rate and the effective tax rate presented in the
consolidated income statement, which for the years ended December 31, 2003, 2004
and 2005 are as follows:
2003 2004 2005
--------- ---------- ---------
% % %
Approximated consolidated statutory tax rate.................... 34.0 33.0 30.0
Additional deductions and other deductible items................ (15.8) (21.6) (10.7)
Expenses and other non-deductible items......................... 1.2 1.9 (1.4)
Non-taxable sale of marketable securities and fixed assets...... - 0.4 (0.3)
Difference between book and tax inflation....................... (0.3) 1.6 1.2
Others(3)...................................................... (6.8) (3.1) (4.9)
--------- ---------- ---------
Effective consolidated tax rate................................. 12.3 12.2 13.9
========= ========== =========
(3) Includes the effects for the different IT rates enacted in the countries
where CEMEX operates, and the difference between the 2004 rate in Mexico of
33% and those in effect in 2005 (30%) and 2006 (29%) until reaching a tax
rate of 28% in 2007.
F-34
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
19. GEOGRAPHIC SEGMENT DATA
The Company operates principally in the construction industry segment through
the production and marketing of cement, ready-mix concrete and aggregates.
The following table presents, in accordance with information analyzed for
decision-making by management, selected condensed financial information,
referring to the main countries or regions in which CEMEX operates, and includes
new operations resulting from the acquisition of RMC for the ten-month period
ended December 31, 2005.
Selected financial information by geographic segment for the years ended
December 31, 2003, 2004 and 2005, is presented below:
Net Sales(1) Operating Income
----------------------------- ------------------------------
2003 2004 2005 2003 2004 2005
--------- --------- --------- --------- ---------- ---------
NORTH AMERICA
Mexico...............................................Ps 30,102 31,196 33,732 11,593 11,707 10,734
United Status(2)...................................... 19,836 21,097 43,441 2,344 2,776 7,145
EUROPE
Spain(3).............................................. 13,910 14,741 16,098 3,037 3,582 3,819
United Kingdom........................................ - - 16,299 - - 567
Rest of Europe(4)..................................... - - 28,837 - - 1,795
CENTRAL AND SOUTH AMERICA AND THE CARIBBEAN
Venezuela............................................. 3,652 3,742 4,399 1,218 1,169 1,432
Colombia.............................................. 2,530 2,620 2,664 1,052 1,194 362
Rest of Central and South America and the Caribbean(5) 6,794 7,357 7,195 1,202 1,685 685
AFRICA AND MIDDLE EAST
Egypt................................................. 1,542 2,028 2,806 341 613 1,045
Rest of Africa and Middle East(6)..................... - - 2,981 - - 100
ASIA
Philippines........................................... 1,536 1,617 2,039 (145) 289 437
Rest of Asia(7)....................................... - - 1,019 - - (18)
Others(8)............................................. 9,602 10,587 14,145 (3,977) (3,232) (1,694)
--------- --------- --------- --------- ---------- ---------
89,504 94,985 175,655 16,665 19,783 26,409
Eliminations.......................................... (7,459) (7,923) (12,946) - - -
--------- --------- --------- --------- ---------- ---------
Consolidated.........................................Ps 82,045 87,062 162,709 16,665 19,783 26,409
========= ========= ========= ========= ========== =========
Depreciation and Amortization(9) 2003 2004 2005
-----------------------------
-------- -------- --------
NORTH AMERICA
Mexico......................................................................... Ps 1,676 1,743 1,654
United States(2)............................................................... 2,051 2,266 3,204
EUROPE
Spain(3)....................................................................... 1,395 1,387 759
United Kingdom................................................................. - - 986
Rest of Europe(4).............................................................. - - 1,771
CENTRAL AND SOUTH AMERICA AND THE CARIBBEAN
Venezuela...................................................................... 647 568 560
Colombia....................................................................... 846 413 369
Rest of Central and South America and the Caribbean(5)......................... 614 585 604
AFRICA AND MIDDLE EAST
Egypt.......................................................................... 361 190 202
Rest of Africa and Middle East(6).............................................. - - 98
ASIA
Philippines.................................................................... 453 374 227
Rest of Asia(7)................................................................ - - 69
Others(8)...................................................................... 1,402 1,633 1,088
-------- -------- --------
Consolidated................................................................... Ps 9,445 9,159 11,591
======== ======== ========
F-35
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Total assets and investment in fixed assets ("FA") by geographic segment are
summarized as follows:
Total Assets Investment in FA (11)
---------- --------- ---------- ---------
2004 2005 2004 2005
---------- --------- ---------- ---------
NORTH AMERICA
Mexico....................................................... Ps 61,741 72,356 1,128 1,098
United States(2)............................................. 42,936 72,256 1,174 1,721
EUROPE
Spain(3)..................................................... 31,452 27,896 577 704
United Kingdom............................................... - 49,001 - 577
Rest of Europe(4)............................................ - 48,531 - 1,466
CENTRAL AND SOUTH AMERICA AND THE CARIBBEAN
Venezuela.................................................... 8,106 9,609 143 241
Colombia..................................................... 8,785 8,728 98 79
Rest of Central and South America and the Caribbean(5)....... 13,040 14,031 302 1,264
AFRICA AND MIDDLE EAST
Egypt........................................................ 5,796 6,930 89 100
Rest of Africa and Middle East(6)............................ - 2,522 - 73
ASIA
Philippines.................................................. 7,692 6,734 25 38
Rest of Asia(7).............................................. 4,035 4,587 33 53
Others(8, 10)................................................ 80,120 88,631 1,009 1,044
---------- --------- ---------- ---------
263,703 411,812 4,578 8,458
Eliminations................................................. (78,019) (127,584) - -
---------- --------- ---------- ---------
Consolidated................................................. Ps 185,684 284,228 4,578 8,458
========== ========= ========== =========
(1) Net sales between geographic segments are presented in the country or
region of origin and cancelled under the caption "eliminations".
(2) In 2005, United States includes the 10-month results of the operations
acquired from RMC (note 9A).
(3) In 2005, Spain includes the approximately 10-month results of the
operations acquired from RMC (note 9A).
(4) Rest of Europe includes the operations in Germany, France, Republic of
Ireland, Czech Republic, Austria, Poland, Croatia, Hungary, Latvia and
Denmark, acquired from RMC.
(5) Rest of Central and South America and the Caribbean includes the operations
in Costa Rica, Panama, Dominican Republic, Nicaragua, Guatemala and the
Caribbean. Likewise, in 2005, this region includes Jamaica and Argentina,
acquired from RMC.
(6) Rest of Africa and Middle East includes the operations in United Arab
Emirates and Israel, acquired from RMC.
(7) Rest of Asia includes operations in Thailand and Bangladesh. In addition,
in 2005, Malaysia, acquired from RMC is included.
(8) Refers to the trade maritime operations, the information solutions company
(Neoris, S.A. de C.V.) and other minor subsidiaries.
(9) For the years 2003 and 2004, goodwill amortization reported by holding
companies was allocated to the segment that originated such goodwill.
Therefore, this information is not directly comparable with the information
of the individual entities, which are comprised in each segment. Goodwill
amortization was recognized as part of other expenses, net.
(10) Includes, in addition to trade maritime operating assets and other assets,
related party balances of the Parent Company of Ps32,354 in 2004 and
Ps31,739 in 2005, which are eliminated in consolidation. In addition, other
assets in 2004 include Ps8,810 related to the equity interest in RMC (notes
2 and 9A).
(11) Corresponds to investments in fixed assets not considering the effects of
inflation. As a result, this balance differs from the amount presented as
investing activities in the Statement of Changes in the Financial Position
within "Properties, machinery and equipment", which considers the inflation
effects in accordance with Bulletin B-10.
As of December 31, 2004 and 2005, of the consolidated financial debt amounting
to Ps63,358 and Ps100,653, respectively, approximately 35% in 2004 and 36% in
2005 was in the Parent Company, 14% and 7% in the United States, 15% and 32% in
Spain and 36% and 25% in other countries, respectively. Of the 36% and 25% of
such financial debt in other countries in 2004 and 2005, respectively, 62% and
29% was in a Dutch subsidiary, guaranteed by the subsidiaries conducting Mexican
operations and the Parent. The other 24% in 2004 and 35% in 2005 was in finance
companies in the United States, guaranteed by the subsidiaries conducting
Spanish operations.
F-36
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
20. FOREIGN CURRENCY POSITION
As of December 31, 2005, the main balances denominated in foreign currencies,
are as follows:
U.S. dollars millions Mexico Foreign Total
--------- ---------- ---------
Current assets................................ 55 4,295 4,350
Noncurrent assets *........................... 2,552 16,252 18,804
--------- ---------- ---------
Total assets................................ 2,607 20,547 23,154
--------- ---------- ---------
Current liabilities........................... 419 2,222 2,641
Long-term liabilities......................... 1,919 8,370 10,289
--------- ---------- ---------
Total liabilities........................... 2,338 10,592 12,930
========= ========== =========
* In the case of Mexico refer to non-monetary assets of foreign origin.
The peso to dollar exchange rate as of December 31, 2003, 2004 and 2005 was
Ps11.24, Ps11.14 and Ps10.62 pesos per dollar, respectively. As of January 27,
2006, the exchange rate was Ps10.45 pesos per dollar.
Transactions of the Company's Mexican operations denominated in foreign
currencies during 2003, 2004 and 2005 are summarized as follows:
U.S. dollars millions 2003 2004 2005
--------- ---------- ---------
Export sales.................................. 57 76 124
Import purchases.............................. 91 88 85
Financial income.............................. 8 13 16
Financial expense............................. 389 338 337
--------- ---------- ---------
21. EARNINGS PER SHARE
Basic earnings per share are calculated by dividing majority interest net income
for the year by the weighted average number of common shares outstanding during
the year. Diluted earnings per share reflect the effects of any transactions
carried out by the Company, which have a potentially dilutive effect on the
weighted average number of common shares outstanding. The amounts considered for
calculations, which in 2003 and 2004 include the effect of the stock split, are
summarized as follows:
Basic number Diluted number
of shares of shares
--------------- ----------------
December 31, 2003............................ 9,456,402,458 9,674,388,376
December 31, 2004............................ 9,987,365,042 10,039,265,534
December 31, 2005............................ 10,378,589,918 10,410,888,190
--------------- ----------------
Majority Basic Diluted
net income EPS EPS
--------- ---------- ---------
December 31, 2003............................ Ps 7,201 0.76 0.74
December 31, 2004............................ 13,965 1.40 1.39
December 31, 2005............................ Ps 22,425 2.16 2.15
--------- ---------- ---------
The difference between the basic and diluted average number of shares in 2003,
2004 and 2005 is attributable to the additional shares to be issued under the
Company's fixed employee stock option programs (note 16). In addition, beginning
in 2003, the Company has included the dilutive effect on the basic number of
shares resulting from the equity forward contracts in the Company's own stock,
determined under the inverse treasury method.
22. CONTINGENCIES AND COMMITMENTS
A) GUARANTEES
As of December 31, 2004 and 2005, CEMEX, S.A. de C.V. had signed as guarantor of
loans made to certain subsidiaries for approximately U.S.$1,355 and U.S.$711,
respectively. As of December 31, 2004, the Company and certain subsidiaries had
guaranteed the risks associated with certain financial transactions, assuming
contingent obligations under standby letters of credit, issued by financial
institutions for a total of U.S.$26.
F-37
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
B) TAX ASSESSMENTS
CEMEX and some of its subsidiaries in Mexico have been notified of several tax
assessments related to different tax periods, determined by the Mexican tax
authorities according to their verification attributions. These tax assessments
are for an amount of approximately Ps742 as of December 31, 2005. The tax
assessments result primarily from: (i) disallowed restatement of tax loss
carryforwards in the same period in which they occurred and (ii) disallowed
determination of tax loss carryforwards. The companies involved are using the
available defense actions granted by law in order to cancel the tax claims. The
appeals are pending resolution.
Pursuant to amendments to the Mexican Income tax Law, which became effective on
January 1, 2005, Mexican companies with direct or indirect investments in
entities incorporated in foreign countries whose income tax liability in those
countries is less than 75% of the income tax that would be payable in Mexico,
are required to pay taxes in Mexico on income derived from such foreign
entities, provided that the income is not derived from entrepreneurial
activities in such countries. In those applicable cases, the tax payable by
Mexican companies in respect of the 2005 tax year pursuant to these amendments
will be due upon filing their annual tax returns in 2006. CEMEX believes these
amendments are contrary to Mexican constitutional principles; consequently, on
August 8, 2005 the Company filed a motion in the Mexican federal courts
challenging the constitutionality of the amendments. In this endeavor, the
Company obtained a favorable ruling on December 23, 2005 in the first stage but
it is possible that the authority would challenge the ruling.
The Philippine Bureau of Internal Revenue notified the Company's subsidiaries in
the Philippines, of tax assessments related to different tax periods for an
amount of approximately 3,119 million Philippine pesos (approximately U.S.$59)
as of December 31, 2005. Tax assessments result primarily from: (i) disallowed
determination certain tax benefits, and (ii) deficiencies in the determination
of national taxes. The affected companies have appealed available defense
actions granted by law and in some cases, some resources are pending resolution.
C) ANTI-DUMPING DUTIES
In 1990, the United States Department of Commerce ("DOC") imposed an
anti-dumping duty order on imports of gray Portland cement and clinker from
Mexico. As a result, since that year and until December 31, 2005, CEMEX has paid
anti-dumping duties for cement and clinker exports to the United States at rates
that in the most recent years have fluctuated between 37.49% and 80.75% over the
transaction amount, and beginning in August 2003, anti-dumping duties had been
paid at a fixed rate of approximately U.S.$52.4 per ton, which decreased to
U.S.$32.9 per ton starting in December 2004 and to U.S.$26.0 per ton in 2005.
Through these years, CEMEX has used all available legal resources to revoke the
order from the United States International Trade Commission ("ITC"). During
October 2005, the DOC and the ITC started their second sunset review for the
collection of anti-dumping duties, held every five years, to determine if the
imposed anti-dumping order should continue.
On January 19, 2006, officials from the Mexican and the United States
governments informed that they had reached an agreement in principle that will
bring to an end the longstanding dispute over Mexican cement exports to the
United States. According to the agreement, restrictions imposed by the United
States will first be eased during a three-year transition period and completely
eliminated in early 2009, allowing cement from Mexico to enter the U.S. without
duties or other limits on volumes. During the transition period, 3 million tons
of Mexican cement per year will be allowed into the U.S. This amount may be
increased in response to market conditions during the second and third year of
the transition period, subject to a maximum increase per year of 4.5%. Quota
allocations to competitors will be made on a regional basis. The transitional
anti-dumping duty will be lowered to U.S.$3.0 per ton from current amount of
approximately U.S.$26.0 per ton.
As of December 31, 2005, CEMEX has accrued a liability of U.S.$68, including
accrued interest, for the difference between the anti-dumping duties paid on
imports and the latest findings of the DOC in its administrative reviews for all
periods under review. If implemented as proposed, the changes related to the
anti-dumping order cancellation and its effect on the anti-dumping duties paid
since the order was imposed, CEMEX will receive approximately U.S.$100 in cash
and will also reverse approximately U.S.$65 of the accrued liability. The final
resolutions related to this settlement are expected during the second half of
2006.
During 2001, the Ministry of Finance ("MOF") of Taiwan in response of the claim
of five Taiwanese cement producers, initiated a formal anti-dumping
investigation involving imported gray Portland cement and clinker from the
Philippines and South Korea. In July 2002, the MOF gave notice of a cement and
clinker import duty, from imports on South Korea and the Philippines, beginning
on July 19, 2002. The imposed tariff was 42% on imports from the Company's
Philippine subsidiaries.
In September 2002, these entities appealed the anti-dumping duty before the
Taipei High Administrative Council ("THAC"). In August 2004, the Company
received an adverse response to its requests from the THAC. CEMEX did not appeal
this resolution.
On September 13, 2005, Tunwoo Co. Ltd. ("Tunwoo"), the Company's subsidiary in
Taiwan, was notified by the Taiwan Fair Trade Commission ("FTC"), of an
investigation based on connection to the presumption that Tunwoo, together with
other cement companies in Taiwan, were coordinated in activities that violated
the regulations of fair competition in that country. Tunwoo received the FTC's
decision issued on December 21, 2005 to impose a penalty order varying from 5 to
18 million Taiwanese dollars fine against 21 cement companies in Taiwan. Tunwoo
was imposed with a fine of 18 million Taiwanese dollars. The company has two
months to appeal such resolution.
F-38
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
D) LEASES
CEMEX has entered into various operating leases, primarily for operating
facilities, cement storage and distribution facilities and certain
transportation and other equipment, under which annual rental payments are
required plus the payment of certain operating expenses. Future minimum rental
payments due under such leases are as follows:
Year ending December 31, U.S. dollars
millions
--------------------------------------------------------------- --------------
2006........................................................... U.S.$ 178
2007........................................................... 149
2008........................................................... 102
2009........................................................... 71
2010........................................................... 42
2011........................................................... 23
2012 and thereafter............................................ 69
--------------
U.S.$ 634
==============
Rental expense for the years ended December 31, 2003, 2004 and 2005 was
approximately U.S.$56 (Ps641), U.S.$114 (Ps1,218) and U.S.$152 (Ps1,614),
respectively. The estimated future minimum payments of U.S.$634 at December 31,
2005, include U.S.$109 of operating leases assumed through the purchase of RMC.
E) PLEDGED ASSETS
As of December 31, 2004 and 2005, there are liabilities amounting to U.S.$2 and
U.S.$100, respectively, secured by properties, machinery and equipment.
F) COMMITMENTS
As of December 31, 2004 and 2005, the Company had commitments for the purchase
of raw materials for an approximate amount of U.S.$172 and U.S.$169,
respectively.
During 1999, CEMEX entered into agreements with an international partnership,
which built and currently operates an electrical energy generating plant in
Mexico. According to the agreements, CEMEX will purchase, starting from the
beginning of operations of the plant, all the energy generated for a term of not
less than 20 years. The electrical energy generating plant started operations on
April 29, 2004. In addition, as part of the agreements, CEMEX has committed to
supply the electrical energy plant with all fuel necessary for its operations, a
commitment that has been hedged through a 20-year agreement entered into by the
Company with Petroleos Mexicanos. The Company is not required to make any
capital investment in the project. By means of this transaction, at December 31,
2005, the energy generated by the plant has supplied electricity to 10 cement
plants of CEMEX in Mexico, covering 73% of their needs and decreasing
electricity costs by 28%.
G) OTHER CONTINGENCIES
On August 5, 2005, Cartel Damages Claims, S.A. ("CDC"), filed a lawsuit in the
District Court in Dusseldorf, Germany against CEMEX Deutschland AG, the
subsidiary of the Company in Germany, and other German cement companies. By
means of this lawsuit, CDC is seeking 102 million euros (approximately U.S.$121)
in respect of damage claims by 28 entities relating to alleged price and quota
fixing by German cement companies between 1993 and 2002. CDC is a Belgian
company established in the aftermath of the German cement cartel investigation
that took place from July 2002 to April 2003 by Germany's Federal Cartel Office,
with the purpose of purchasing potential damage claims from cement consumers and
pursuing those claims against the cartel participants. At this preliminary stage
in the proceedings, it is not possible to assess the likelihood of an adverse
result in this lawsuit for CEMEX or the potential damages. However, at December
31, 2005, CEMEX has accrued a provision of approximately Ps428 (euros 34
million) in connection with this legal proceeding representing CEMEX's best
estimate of the possible future cash outflows.
In August 2005, a lawsuit was filed against a subsidiary of CEMEX Colombia,
claiming that it was liable along with certain employees and former employees of
Asociacion Colombiana de Productores de Concreto, or ASOCRETO, a union formed by
all the ready-mix producers in Colombia, and the company in charge of building
the mass public transportation system of Bogota, Colombia, for the premature
distress of the roads built for such transportation system using ready-mix
concrete supplied by CEMEX Colombia and other ASOCRETO members. The plaintiffs
allege that the ASOCRETO defendants modified the initial specifications of the
transportation system to include certain construction materials supplied by
CEMEX Colombia, and that as a result of these changes in the specifications, the
base material supplied for the road construction failed to meet certain
technical quality standards.
The plaintiffs seek the repair of the roads and estimate that the cost of such
repair will be approximately U.S.$45. CEMEX Colombia is vigorously contesting
this lawsuit. At this preliminary stage in the proceedings, it is not possible
to assess the likelihood of an adverse result in this lawsuit, or the potential
damages that could be borne by CEMEX Colombia. Typically, proceedings of this
nature continue for several years before final resolution.
F-39
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
As of December 31, 2005, CEMEX Inc., the Company's subsidiary in the United
States, has accrued liabilities specifically relating to environmental matters
in the aggregate amount of approximately Ps276 (U.S.$26). The environmental
matters relate to: a) in the past, in accordance with industry practices,
disposing of various materials, which might be currently categorized as
hazardous substances or wastes, and b) the cleanup of sites used or operated by
the Company, including discontinued operations, in regard to the disposal of
hazardous substances or wastes, either individually or jointly with other
parties. Most of the proceedings remain in the preliminary stage, and a final
resolution might take several years. For purposes of recording any provision,
the subsidiary considers that it is probable that a liability has been incurred
and the amount of the liability is reasonably estimable, whether or not claims
have been asserted, and without giving effect to any possible future recoveries.
Based on the information developed to date, the subsidiary does not believe it
will be required to spend significant sums on these matters in excess of the
amounts previously recorded. Until all environmental studies, investigations,
remediation work and negotiations with or litigation against potential sources
of recovery have been completed, the ultimate cost that might be incurred to
resolve these environmental issues cannot be assured. In addition, at December
31, 2005, CEMEX recorded a provision of approximately Ps244 (U.S.$23)
representing the potential future cash outflows, in connection with other
environmental matters in the U.S. assumed through the acquisition of RMC during
2005.
During 2001, a subsidiary of the Company in Colombia received a civil liability
suit from 42 transporters, alleging that this subsidiary is responsible for
alleged damages caused by the alleged breach of provision of raw materials
contracts. The plaintiffs have asked for relief in an amount in Colombian pesos
equivalent, as of December 31, 2005, to approximately U.S.$57. As of December
31, 2005, the evidentiary stage has been closed, the final arguments have been
presented and the final decision is pending.
In addition, during 1999, several companies filed a lawsuit against two
subsidiaries of the Company in Colombia, alleging that the Ibague plants were
causing damage to their lands due to the pollution they generate. In January
2004, CEMEX Colombia, S.A. was notified that the court's decision was that
plaintiffs should be paid in the amount in Colombian pesos equivalent, as of
December 31 2005, to approximately U.S.$8. The Company's subsidiary sought leave
to appeal the resolution, which was accepted, and the case was sent to the
Superior Court of Ibague. The claim is under review in the Court of Appeals.
Typically, this process will continue for several years before its final
resolution.
23. ALLOCATION OF THE PURCHASE PRICE OF RMC AND PRO FORMA FINANCIAL INFORMATION
A) ALLOCATION OF THE PURCHASE PRICE
As of December 31, 2005, the Company is in the final stage of allocating the
price paid in the purchase of RMC of Ps44,787 (U.S.$4,217) to the fair values of
the assets acquired and the liabilities assumed. The price paid for RMC's shares
was adjusted to include: (i) direct acquisition expenses, and (ii) the proceeds
received from the sale of some RMC's assets (note 9A).
CEMEX considers that the unassigned portion of the purchase price that was
recognized as goodwill as of December 31, 2005, is representative of the final
amount that will result when the allocation process finishes at the end of the
first quarter of 2006. The Company has substantially finished with the valuation
of the assets acquired and the liabilities assumed and, recognizing that some
other issues may arise, the only pending issue is to conclude whether any
portion of goodwill should be further allocated to other intangible assets,
others than brands and trade names.
The allocation of the purchase price of RMC to the fair value of the assets
acquired and liabilities assumed is presented below:
As of March 1, 2005 RMC
---------
Current assets..................................................... Ps 21,915
Investments and other noncurrent assets............................ 2,536
Properties, machinery and equipment................................ 70,317
Other assets A .................................................... 979
Intangible assets B ............................................... 1,850
Goodwill........................................................... 12,411
---------
Total assets acquired.............................................. 110,008
---------
Current liabilities C.............................................. 28,556
Long-term debt C................................................... 13,173
Remediation liabilities............................................ 4,005
Pensions and other postretirement benefits......................... 5,561
Deferred IT liability.............................................. 13,186
Other long-term liabilities ....................................... 740
---------
Total liabilities assumed.......................................... 65,221
---------
Total net assets .................................................. Ps 44,787
=========
A Includes Ps718 of deferred tax assets.
B Identified intangible assets refer mainly to trade names and brands, which
have been assigned with an average useful life of approximately 5 years.
C Current liabilities include Ps11,983 of short-term financial debt, while
long-term debt includes Ps11,903 of financial debt.
F-40
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
B) PRO FORMA FINANCIAL INFORMATION
The following condensed pro forma income statements for the twelve-month periods
ended December 31, 2004 and 2005, gives effect to the RMC acquisition as if it
had occurred on January 1, 2004.
The pro forma adjustments consider the fair values of the net assets acquired,
under certain assumptions that CEMEX considers are reasonable.
Year ended December 31, 2004 CEMEX RMC Adjustments CEMEX pro
(1) (2) (3) forma
------------ ------------ ------------ -----------
Sales.......................................................... Ps 87,062 82,162 - 169,224
Operating income............................................... 19,783 2,510 (761) 21,532
Comprehensive financing result................................. 1,424 (971) 3,851 4,304
Other expenses, net............................................ (5,169) (5,237) (836) (11,242)
Income taxes................................................... (2,277) (630) (377) (3,284)
Equity in income of affiliates................................. 428 504 - 932
------------ ------------ ------------ -----------
Consolidated net income........................................ 14,189 (3,824) 1,877 12,242
Minority interest.............................................. 224 228 - 452
------------ ------------ ------------ -----------
Majority net income............................................ Ps 13,965 (4,052) 1,877 11,790
============ ============ ============ ===========
Basic EPS ..................................................... Ps 1.40 1.18
------------ -----------
Diluted EPS ................................................... 1.39 1.17
============ ===========
Year ended December 31, 2005 CEMEX RMC Adjustments CEMEX pro
1 2 3 forma
------------ ------------ ------------ -----------
Sales.......................................................... Ps 162,709 10,085 - 172,794
Operating income............................................... 26,409 (293) (115) 26,001
Comprehensive financing result................................. 2,600 (107) (1,790) 703
Other expenses, net............................................ (3,372) 2 (38) (3,408)
Income taxes................................................... (3,555) (46) 265 (3,336)
Equity in income of affiliates................................. 928 10 - 938
------------ ------------ ------------ -----------
Consolidated net income........................................ 23,010 (434) (1,678) 20,898
Minority interest.............................................. 585 13 - 598
------------ ------------ ------------ -----------
Majority net income............................................ Ps 22,425 (447) (1,678) 20,300
============ ============ ============ ===========
Basic EPS ..................................................... Ps 2.16 1.96
------------ -----------
Diluted EPS ................................................... 2.15 1.95
============ ===========
(1) Information derived from the consolidated income statements for the years
2004 and 2005, as reported. In 2005, includes RMC's operating results for
the ten-month period ended December 31, 2005.
(2) In 2005, the information relates to the two-month period (unaudited) ended
February 28, prepared under International Financial Reporting Standards
("IFRS"). In 2004, the information was obtained from the audited
consolidated financial statements, prepared under generally accepted
accounting principles in the United Kingdom ("UK GAAP"), and include
reclassifications to conform RMC amounts to CEMEX's presentation. RMC's
information was translated into pesos at the exchange rates of Ps18.27 and
Ps21.30, effective as of December 31, 2004 and February 28, 2005,
respectively, per (pound)1 United Kingdom sterling pound, and was restated
to constant pesos as of December 31, 2005.
(3) The pro forma adjustments for the two-month period of RMC in 2005 and the
twelve-month period of RMC in 2004 include adjustments related to the
allocation of RMC's purchase price. Likewise, the 2004 pro forma
adjustments include adjustments resulting from the relevant differences
identified between UK GAAP and Mexican GAAP. The main adjustments as of
December 31, 2004 and February 28, 2005, consist of:
F-41
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Items 2004 2005
----------- -----------
Complementary depreciation expense................. Ps (761) (115)
Financial expense D ............................... (1,114) (168)
Valuation of derivative instruments................ 1,475 (1,314)
Foreign exchange fluctuations D.................... 1,290 (351)
Monetary position result........................... 2,200 42
Intangible assets amortization..................... (246) (37)
Goodwill amortization.............................. (590) -
Deferred income tax................................ (377) 265
----------- -----------
Ps 1,877 (1,678)
=========== ===========
D Determined on the basis of the U.S.$3,326 in 2004 and U.S.$3,311 in 2005 of
average debt assumed for the purchase, using the interest rates of 2.4% in
2004 and 2.8% in 2005.
Pro forma financial information is not an indication of the consolidated results
of operations that CEMEX would have reported had the RMC acquisition been
completed as of January 1, 2004, nor should such information be taken as
representative of the Company's future consolidated results.
24. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
Until May 2004, the Accounting Principles Commission ("CPC") of the Mexican
Institute of Public Accountants was the accounting standards setter in Mexico.
Beginning in June 2004, this function was transferred to the Consejo Mexicano
para la Investigacion y Desarrollo de Normas de Informacion Financiera
("CINIF"). The CINIF is a private organization whose objectives are to develop
Financial Reporting Standards ("FRS") in Mexico that would be useful for
financial information issuers and users, as well as to accomplish the possible
convergence with IFRS, issued by the International Accounting Standards Board.
Through December 2005, the CINIF issued eight series A FRS and one series B FRS.
Effective January 1, 2006, standards in Mexico include the FRS issued by the
CINIF, as well as the Bulletins issued by the CPC that have not been modified,
superseded or revoked by a new FRS.
The main changes, included in the FRS issued, are the following:
a) Elimination of special and extraordinary items, classifying captions in the
income statements as ordinary and non-ordinary.
b) Retroactive recognition of the effects of changes in accounting principles.
c) Disclosure of the authorized date for the issuance of the financial
statements, as well as the officer or entity that authorized their
issuance.
F-42
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
25. DIFFERENCES BETWEEN MEXICAN AND UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in Mexico (Mexican GAAP), which differ in certain
significant respects from those applicable in the United States (U.S. GAAP).
The Mexican GAAP consolidated financial statements include the effects of
inflation as provided for under Bulletin B-10 and Bulletin B-15, whereas
financial statements prepared under U.S. GAAP are presented on a historical cost
basis. The reconciliation to U.S. GAAP includes (i) a reconciling item for the
reversal of the effect of applying Bulletin B-15 for the restatement to constant
pesos for the years ended December 31, 2003 and 2004, and (ii) a reconciling
item to reflect the difference in the carrying value of machinery and equipment
of foreign origin and related depreciation between the methodology set forth by
Bulletin B-10 (integrated document) and the amounts that would be determined by
using the historical cost/constant currency method. As described below, these
provisions of inflation accounting under Mexican GAAP do not meet the
requirements of Rule 3-20 of Regulation S-X of the Securities and Exchange
Commission. The reconciliation does not include the reversal of other Mexican
GAAP inflation accounting adjustments as these adjustments represent a
comprehensive measure of the effects of price level changes in the inflationary
Mexican economy and, as such, is considered a more meaningful presentation than
historical cost-based financial reporting for both Mexican and U.S. accounting
purposes. The other principal differences between Mexican GAAP and U.S. GAAP for
the years ended December 31, 2003, 2004 and 2005, and their effect on
consolidated net income and earnings per share, are presented below:
Years ended December 31,
---------------------------------------
2003 2004 2005
---------------------------------------
Net income reported under Mexican GAAP................................... Ps 7,201 13,965 22,425
Inflation adjustment (*)................................................. 471 1,034 -
---------------------------------------
Net income reported under Mexican GAAP after inflation adjustment........ 7,672 14,999 22,425
U.S. GAAP adjustments:
1. Amortization of goodwill (note 25(a)).................................... 2,113 910 -
2. Deferred income taxes (note 25(b))....................................... (67) 394 (200)
3. Deferred employees' statutory profit sharing (note 25(b))................ 97 (58) 149
4. Other employee benefits (note 25(c))..................................... 94 28 (794)
5. Capitalized interest (note 25(d))........................................ (50) 10 4
6. Minority interest (note 25(e)):
a) Financing transactions................................................ (190) - -
b) Effect of U.S. GAAP adjustments....................................... (26) (32) 9
7. Hedge accounting (note 25(l))............................................ (897) 190 1,075
8. Depreciation (note 25(f))................................................ 53 20 18
9. Accruals for contingencies (note 25(g)).................................. (118) (33) -
10. Equity in net income of affiliated companies (note 25(h))................ (11) (8) 4
11. Inflation adjustment of fixed assets (note 25(i))........................ (284) (247) (306)
12. Temporary equity from forward contracts (note 25(j))..................... 804 - -
13. Derivative instruments (note 25(l))...................................... - 1,515 (1,471)
quity forward contracts in CEMEX's stock (note 25(m))...................
14. E 451 444 -
15. Employee stock option programs (note 25 (r))............................. - - 860
16. Other adjustments - Computer software development (note 25(k))........... (377) (29) -
17. Other adjustments - Deferred charges (note 25(k))........................ 98 93 167
18. Other adjustments - Monetary position result (note 25(k))................ 317 309 175
---------------------------------------
U.S. GAAP adjustments before cumulative effect of accounting change...... 2,007 3,506 (310)
---------------------------------------
Net income under U.S. GAAP before cumulative effect of accounting change. 9,679 18,505 22,115
Cumulative effect of accounting change (notes 25(k) and 25(m))........... (695) - -
---------------------------------------
Net income under U.S. GAAP after cumulative effect of accounting change.. Ps 8,984 18,505 22,115
=======================================
Basic EPS under U.S. GAAP before cumulative effect of accounting change...... Ps 1.02 1.85 2.13
Diluted EPS under U.S. GAAP before cumulative effect of accounting change.... 1.00 1.84 2.12
=======================================
Basic EPS under U.S. GAAP after cumulative effect of accounting change....... Ps 0.95 1.85 2.13
Diluted EPS under U.S. GAAP after cumulative effect of accounting change..... 0.93 1.84 2.12
=======================================
F-43
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
At December 31, 2004 and 2005, the other principal differences between Mexican
GAAP and U.S. GAAP, and their effect on consolidated stockholders' equity, with
an explanation of the adjustments, are presented below:
At December 31,
--------------------------
2004 2005
------------- ------------
Total stockholders' equity reported under Mexican GAAP.............................. Ps 87,812 109,957
Inflation adjustment (*)............................................................ 6,501 -
------------- ------------
Total stockholders' equity reported under Mexican GAAP after inflation adjustment... 94,313 109,957
U.S. GAAP adjustments:
1. Goodwill, net (note 25(a)).......................................................... 5,790 4,767
2. Deferred income taxes (note 25(b)).................................................. 1,020 569
3. Deferred employees' statutory profit sharing (note 25(b))........................... (3,151) (2,907)
4. Other employee benefits (note 25(c))................................................ (153) (348)
5. Capitalized interest (note 25(d))................................................... (521) 54
6. Minority interest--U.S. GAAP presentation (note 25(e))............................... (4,672) (5,729)
7. Depreciation (note 25(f))........................................................... (81) (60)
8. Investment in net assets of affiliated companies (note 25(h))....................... (275) (237)
9. Inflation adjustment for machinery and equipment (note 25(i))....................... 3,305 4,548
10. Derivative instruments and equity forward contracts in CEMEX's stock (notes 25(l)
and 25(m)).......................................................................... 246 -
11. Employee stock option programs (note 25 (r))........................................ - 992
12. Other adjustments - Deferred charges (note 25(k))................................... (409) (225)
------------- ------------
U.S. GAAP adjustments............................................................... 1,099 1,424
------------- ------------
Stockholders' equity under U.S. GAAP................................................ Ps 95,412 111,381
============= ============
(*) Adjustment that reverses the restatement of prior periods into constant
pesos as of December 31, 2005, using the CEMEX weighted average inflation
factor (note 3B), and restates such prior periods into constant pesos as of
December 31, 2005 using the Mexican-only inflation factor, in order to comply
with current requirements of Regulation S-X. The Mexican and U.S. GAAP prior
periods amounts, included throughout note 25, were restated using the Mexican
inflation index, with the exception of those amounts of prior periods that are
also disclosed in notes 1 to 24, which were not restated in note 25 using the
Mexican inflation in order to have more straightforward cross-references
between note 25 and the Mexican GAAP notes.
The reconciling item cumulative effect of accounting change in the
reconciliation of net income to U.S. GAAP for the year ended December 31, 2003,
relates to the adoption of SFAS 143 Accounting for Asset Retirement Obligations
("SFAS 143") and SFAS 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150") (notes 25(k) and
25(m)). The term "SFAS" as used herein refers to U.S. Statements of Financial
Accounting Standards.
(a) Goodwill, acquisitions and other agreements
Goodwill
Goodwill represents the difference between the purchase price and the estimated
fair value of the acquired entity at the acquisition date. Goodwill recognized
under Mexican GAAP has been adjusted for U.S. GAAP purposes for (i) the effect
on goodwill from the U.S. GAAP adjustments as of the acquisition dates; (ii)
beginning January 1, 2002, SFAS 142, Goodwill and Other Intangible Assets,
("SFAS 142"), eliminated the amortization of goodwill under U.S. GAAP (note
25(s)) while under Mexican GAAP goodwill was amortized until December 31, 2004;
and (iii) the difference between goodwill amounts under U.S. GAAP, under which
are carried in the reporting unit's functional currency, are restated by the
inflation factor of the reporting unit's country, and are translated into
Mexican pesos at the exchange rates prevailing at the reporting date; as
compared to goodwill under Mexican GAAP, under which amounts are carried in the
functional currencies of the holding companies, translated into pesos and then
restated using the Mexican inflation index.
For the years ended December 31, 2003, and 2004, amortization of goodwill was
recorded within other expenses under Mexican GAAP. Starting January 1, 2005,
Mexican GAAP ceased amortization of goodwill (note 3D). According to SFAS 142
goodwill is not amortized and is subject to impairment testing at least once a
year. As a result, goodwill amortization recorded under Mexican GAAP for the
years ended December 31, 2003 and 2004 is adjusted for purposes of the
reconciliation of net income and stockholders' equity to U.S. GAAP.
CEMEX assesses goodwill for impairment annually unless events occur that require
more frequent reviews. Discounted cash flow analyses are used to assess goodwill
impairment (note 25(s)). If an assessment indicates impairment, the impaired
asset is written down to its fair market value based on the best information
available. Estimated fair market value is generally measured using estimated
discounted future cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows. Assumptions used for these cash flows are
consistent with internal forecasts.
F-44
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
During 2004, CEMEX acquired CAH shares held by minority shareholders through the
exchange for CEMEX's CPOs (note 9A), resulting in an excess in the fair value of
the assets delivered over the fair value of the assets received of approximately
Ps960. Under Mexican GAAP, this excess was recognized as an adjustment to
stockholders' equity. Under U.S. GAAP, this amount was reclassified and charged
to earnings in the reconciliation of net income by considering that estimations
of future cash flows did not support recognition of this amount as goodwill.
This reclassification had no effect in the reconciliation of stockholders'
equity to U.S. GAAP as of December 31, 2004.
Acquisitions
In addition, related to the purchase accounting exercise of RMC, the Company
concluded, in respect to the identification and valuation of intangibles assets,
other than goodwill, that there were no additional intangible assets which
required separate recognition in addition to trademarks and commercial names,
which were valued at December 31, 2005 under Mexican GAAP, as discussed in note
23A.
Other agreements
In connection with the ventures entered into with Ready Mix USA on July 1, 2005
(note 9A), pursuant to the relevant agreements, two limited liability companies
were formed, CEMEX Southeast, LLC and Ready Mix USA, LLC. CEMEX's contributions
to CEMEX Southeast, LLC, the entity that owns the cement related assets,
represented approximately 98% of the contributed capital, while Ready Mix USA's
contributions represented approximately 2% of the contributed capital. CEMEX's
contributions to Ready Mix USA, LLC, the entity that owns the ready-mix related
assets, represented approximately 9% of the contributed capital, while Ready Mix
USA's contributions represented approximately 91% of the contributed capital.
CEMEX owns a 50.01% interest, and Ready Mix USA owns a 49.99% interest, in the
profits and losses and voting rights of CEMEX Southeast, LLC, while Ready Mix
USA owns a 50.01% interest, and CEMEX owns a 49.99% interest, in the profits and
losses and voting rights of Ready Mix USA, LLC.
(b) Deferred Income Taxes ("IT") and Employees' Statutory Profit Sharing
("ESPS")
For U.S. GAAP purposes, CEMEX accounts for income taxes according to SFAS 109,
Accounting for Income Taxes ("SFAS 109"), which requires the asset and liability
method of accounting for deferred income taxes, under which deferred tax assets
and liabilities are recognized for the future tax consequences of "temporary
differences", which result from applying the enacted statutory tax rates
applicable in future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities,
considering tax loss carryforwards. The deferred income tax charged or credited
to earnings is determined by the difference between the beginning and the
year-end balance of the deferred tax assets or liabilities, and is recognized in
nominal pesos. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities under U.S. GAAP at
December 31, 2004 and 2005 are presented below:
2004 2005
------------ -----------
Deferred tax assets:
Net operating loss and assets tax carryforwards........................................ Ps 13,670 13,788
Trade accounts receivable.............................................................. 112 217
Accounts payable and accrued expenses.................................................. 3,957 3,890
Other.................................................................................. 675 806
------------ -----------
Total gross deferred tax assets........................................................ 18,414 18,701
Less valuation allowance............................................................... 4,432 5,665
------------ -----------
Total deferred tax assets under U.S. GAAP............................................ 13,982 13,036
------------ -----------
Deferred tax liabilities:
Property, plant and equipment.......................................................... 23,125 29,804
Investments in securities and related parties transactions............................. 2,477 4,917
Advanced payments...................................................................... 191 396
Inventories............................................................................ 161 16
Other.................................................................................. 212 1,738
------------ -----------
Total deferred tax liability under U.S. GAAP......................................... 26,166 36,871
------------ -----------
Net deferred tax liability under U.S. GAAP............................................. 12,184 23,835
Less--U.S. GAAP deferred IT liability of acquired subsidiaries at date of acquisition... 7,201 19,568
------------ -----------
Net deferred IT effect in stockholders' equity under U.S. GAAP......................... 4,983 4,267
Less-- Deferred IT effect in stockholders' equity under Mexican GAAP (note 18B)......... 5,589 4,836
------------ -----------
Income in reconciliation of stockholders' equity to U.S. GAAP.......................... 606 569
Inflation adjustment (note 3B)......................................................... 414 -
------------ -----------
Net income in reconciliation of stockholders' equity to U.S. GAAP...................... Ps 1,020 569
============ ===========
F-45
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Management considers that there is existing evidence that, in the future, CEMEX
will generate sufficient taxable income to realize the tax benefits associated
with the deferred tax assets, and the tax loss carryforwards that are expected
to be utilized prior to their expiration. In the event that present conditions
change, and it is determined that future operations would not generate enough
taxable income, or that tax strategies are no longer viable, the deferred tax
assets' valuation allowance would be increased by a charge to income.
CEMEX records a valuation allowance for the estimated amount of the deferred tax
assets, which may not be realized due to the expiration of tax loss
carryforwards. Through its continual evaluation of the effects of tax
strategies, among other economic factors, during 2004 and 2005 CEMEX increased
the valuation allowance by approximately Ps 443 and Ps1,233, respectively.
Under Mexican GAAP, CEMEX determines deferred income tax in a manner similar to
U.S. GAAP (notes 3S and 18B). Nonetheless, there are specific differences as
compared to the calculation under SFAS 109, resulting in adjustments in the
reconciliation to U.S. GAAP. These differences arise from: (i) the recognition
of the accumulated initial effect of the asset and liability method under
Mexican GAAP, which was recorded directly to stockholders' equity and therefore,
did not consider the provisions of APB Opinion 16 for the deferred tax
consequences in business combinations made before January 1, 2000; and (ii) the
effects of deferred tax on the reconciling items between Mexican and U.S. GAAP.
For Mexican GAAP presentation purposes, deferred tax assets and liabilities are
long-term items.
CEMEX has recorded a deferred tax liability for U.S. GAAP purposes, related to
ESPS in Mexico, under the asset and liability method at the statutory rate of
10%. The principal effects of temporary differences that give rise to
significant portions of the deferred ESPS liabilities at December 31, 2004 and
2005 are presented below:
2004 2005
------------- -------------
Deferred assets:
Employee benefits.......................... Ps 19 225
Trade accounts receivable.................. 25 20
Other...................................... 72 85
------------- -------------
Gross deferred assets under U.S. GAAP......... 116 330
------------- -------------
Deferred liabilities:
Property, plant and equipment.............. 3,060 2,965
Inventories................................ 1 -
Other...................................... 206 272
------------- -------------
Gross deferred liabilities under U.S. GAAP.... 3,267 3,237
------------- -------------
Net deferred liabilities under U.S. GAAP...... Ps 3,151 2,907
============= =============
In the condensed financial information presented under U.S. GAAP in note 25(o),
ESPS effect, both current and deferred, is included in the determination of
operating income. For Mexican GAAP presentation, ESPS effect, both current and
deferred, is considered as a separate line item equivalent to income tax.
Under Mexican GAAP, CEMEX recognizes deferred ESPS for those temporary
differences arising from the reconciliation of net income of the period and the
taxable income for ESPS. In the reconciliation of net income to U.S. GAAP,
deferred ESPS expense of Ps71 in 2003, expense of Ps203 in 2004 and income of
Ps178 in 2005, determined under Mexican GAAP, were reversed.
(c) Other Employee Benefits
Paid absences (Vacations)
Beginning in 2003, CEMEX recognizes vacation expense under Mexican GAAP during
the period the employees earn it, consistently with SFAS 43, Accounting for
Compensated Absences. For the year ended December 31, 2002, in some business
units of CEMEX, vacation expense was recorded for purposes of Mexican GAAP when
taken rather than during the period the employees earn it; therefore, a
reconciling item was determined for U.S. GAAP purposes representing expense of
approximately Ps1 in 2003. The amount of expense recognized during 2003 under
U.S. GAAP represents the difference between the estimated accrual made under
U.S. GAAP through December 31, 2002 and the accumulated initial effect from the
accounting change under Mexican GAAP, which was recognized as of January 1, 2003
directly to stockholders' equity.
Severance
Under U.S. GAAP, post-employment benefits for former or inactive employees,
including severance payments which are not part of a specific event of
restructuring, are accrued over an employee's service life. Until December 31,
2004 under Mexican GAAP, severance payments, which were not part of a business
restructuring or a substitution for pension benefits, were recognized in
earnings in the period in which they were paid. Beginning January 1, 2005,
according to newly issued Mexican GAAP, severance payments should also be
accrued over the employee's service life according to actuarial computations, in
a manner similar to U.S. GAAP (note 14).
F-46
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
For the years ended December 31, 2003, 2004 and 2005, severance provisions
recorded for U.S. GAAP purposes resulted in income of Ps94, income of Ps28 and
expense of Ps101, respectively, with an accrual of Ps153 and Ps295 at December
31, 2004 and 2005, respectively. At December 31, 2005, the provision for
severance payments under U.S. GAAP amounted to approximately Ps295,
approximately Ps250 higher that the provision accrued under Mexican GAAP. The
difference between the provision under U.S. GAAP and Mexican GAAP represents the
cumulative initial effect from the accounting change under Mexican GAAP, which
was recognized as of January 1, 2005 as part of the unrecognized net transition
obligation (note 14), net of the amortization expense recorded under Mexican
GAAP during 2005 related to such transition obligation.
Additionally, in connection with the purchase of RMC, as of December 31, 2005,
for purposes of the financial statements under Mexican GAAP, CEMEX recorded
restructuring costs, mainly integrated by severance payments, for approximately
Ps595 against goodwill. For purposes of the reconciliation to U.S. GAAP, such
restructuring costs have deemed not to comply with the rules of SFAS 141,
"Business Combinations" for recognition as part of the purchase price of RMC. As
a result, such restructuring costs under Mexican GAAP for approximately Ps595
(Ps422 after tax) were charged to earnings in the reconciliation of net income
to U.S. GAAP and removed from goodwill in the condensed financial information
under U.S. GAAP (note 25(o)).
Pension and other benefits
In connection with the change from defined benefit scheme to defined
contribution scheme for a portion of CEMEX's employees in Mexico effective
January 10, 2006 (note 14), considering that such change was a material event
which occurred before the issuance of the financial statements, under Mexican
GAAP, CEMEX recognized at December 31, 2005, a nonrecurring net expense of
approximately Ps976 related to: 1) an event of settlement of obligations, which
represented an income of approximately Ps98; and 2) an event of curtailment,
which represented an expense of approximately Ps1,074. The results from the
change in the pension plans were determined using a methodology consistent with
the rules set forth by SFAS 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits". For
purposes of the reconciliation of net income to U.S. GAAP, according to the
provisions of SFAS 88, settlement events should be recognized in the year in
which the settlement occurred. As a result, in the reconciliation of net income
to U.S. GAAP, the settlement income of approximately Ps98 (Ps74 after tax)
recognized under Mexican GAAP was canceled against the provision of pensions and
other postretirement benefits under U.S. GAAP.
CEMEX accounts for employee pension benefits based on the net present value of
the obligations determined by independent actuaries (notes 3J and 14), in a
manner similar to SFAS 87, Employers' Accounting for Pensions, under U.S. GAAP;
therefore, no reconciling item is necessary. The information of pensions and
other postretirement benefits, presented in note 14, include the obligations for
these items in all Mexican and foreign subsidiaries.
At December 31, 2004 and 2005, CEMEX has established self-insured health care
benefits plans in several of its operations. These plans, which are administered
on cost plus fee arrangements with major insurance companies or provided through
health maintenance organizations, contain stop-loss limits per employee. In
certain countries, CEMEX has established stop-loss limits for continued medical
assistance derived from a specific cause (e.g. an automobile accident, illness,
etc.) ranging from U.S.$23 thousand to U.S.$140 thousand; while in other
countries, CEMEX has established stop-loss limits per employee regardless the
number of events ranging from U.S.$300 thousand to U.S.$1. In theory, there is a
risk that all employees qualifying for health care benefits may require medical
services simultaneously; in that case, the contingency for CEMEX would be
significantly larger. However, this scenario while possible is not probable. The
amount expensed for the year ended December 31, 2005 through self-insured health
care benefits granted to our employees was approximately Ps531 (US$50). CEMEX
also provides life insurance benefits to its active and retired employees.
Generally, life insurance benefits for retired employees are reduced over a
number of years from the date of retirement to a minimum level.
(d) Capitalized Interest
Under Mexican GAAP, CEMEX capitalizes interest related to debt incurred to
finance construction projects, which is comprehensively measured in order to
include the following effects: (i) the interest cost, plus (ii) any foreign
currency fluctuations, and less (iii) the related monetary position result.
Under U.S. GAAP, only interest is considered an additional cost of constructed
assets to be capitalized and depreciated over the lives of the related assets.
The U.S. GAAP reconciliation removes the foreign currency gain or loss and the
monetary position result capitalized for Mexican GAAP derived from borrowings
denominated in foreign currency. For the years ended December 31, 2004 and 2005,
capitalized interest amounts were immaterial.
(e) Minority Interest
Financing Transactions
For U.S. GAAP presentation purposes (note 25(o)), related to the preferred stock
described in note 15E and as a result of the adoption of SFAS 150 during 2003,
preferred dividends declared in 2003 for approximately U.S.$13 (Ps147) were
classified as interest expense under U.S. GAAP.
For U.S. GAAP presentation purposes (note 25(o)), in respect to the capital
securities described in note 15E and as a result of the adoption of SFAS 150
during 2003, capital securities dividends declared in 2003 for approximately
U.S.$6 (Ps75) were classified as interest expense. During 2004, as a result of
newly issued Mexican GAAP, this transaction was treated as financial debt until
its termination; consequently, dividends declared in 2004 were recorded as
interest expense under both Mexican and U.S. GAAP.
F-47
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
U.S. GAAP adjustments to minority interest
Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component within stockholders' equity. Under U.S. GAAP,
minority interest is classified separately from stockholders' equity (note
25(o)). At December 31, 2004 and 2005, the amount presented in the
reconciliation of stockholders' equity to U.S. GAAP includes the
reclassification previously mentioned, as well as the share on minority interest
of the adjustments to U.S. GAAP determined in the consolidated subsidiaries.
(f) Depreciation
A subsidiary of CEMEX in Colombia records depreciation expense utilizing the
sinking fund method. This methodology for depreciation was in place before CEMEX
acquired the subsidiary in 1997. For Mexican GAAP purposes, CEMEX has maintained
this accounting practice due to tax consequences in Colombia arising from a
change in methodology and the immateriality of the effects in CEMEX's
consolidated results. For U.S. GAAP purposes, depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets. As a result,
for the years ended December 31, 2003, 2004 and 2005, income of Ps53, Ps20 and
Ps18, respectively, was reflected in the reconciliation of net income to U.S.
GAAP.
(g) Accruals for Contingencies
In prior years, CEMEX recorded accruals for contingent items related primarily
to guarantees given and other responsibilities that did not meet the accrual
criteria of SFAS 5, Accounting for Contingencies, under U.S. GAAP. Since the
likelihood of a loss occurring from these contingencies is considered to be
possible but not probable, the accruals under Mexican GAAP were reversed for
U.S. GAAP purposes. During 2003 and 2004, as a result of the adoption of new
Bulletin C-9, Liabilities, accruals, contingent assets and liabilities and
commitments, which is similar to SFAS 5 in respect to the accounting for
contingencies, CEMEX has evaluated certain previously created accruals and
determined to reverse them under Mexican GAAP. The amount presented in the
reconciliation of net income to U.S. GAAP in 2004 corresponds to the reversal of
the adjustment made in prior years under U.S. GAAP.
(h) Affiliated Companies
CEMEX has adjusted its investment and equity method in affiliated companies
(note 9A) for CEMEX's share of the approximate U.S. GAAP adjustments applicable
to these affiliates.
(i) Inflation Adjustment of Machinery and Equipment
For purposes of the reconciliation to U.S. GAAP, fixed assets of foreign origin
are restated by applying the inflation rate of the country that holds the
assets, regardless of the assets' origin countries, instead of using the Mexican
GAAP methodology, under which a fixed asset of foreign origin is restated by
applying a factor that considers the inflation of the asset's origin country,
not the inflation of the country that holds the asset, and the fluctuation of
the functional currency (currency of the country that holds the asset) against
the currency of the asset's origin country. Depreciation expense is based upon
the revised amounts.
(j) Temporary Equity from Forward Contracts
In October 2003, as a result of a secondary equity offering (note 17A), CEMEX
settled equity forward contracts that it held in connection with its
appreciation warrants (notes 15F and 17A), resulting in a gain of approximately
U.S.$19.5 (Ps223), recognized in stockholders' equity under Mexican GAAP. For
Mexican GAAP purposes, since origination, the forward contracts were treated as
equity transactions and gains or losses were recognized upon settlement or
extension as an adjustment to stockholders' equity. During the life of the
contracts, the difference between the proceeds from the sale of CEMEX equity and
the forward price, which was periodically paid to the counterparties, was
treated as a prepayment toward the forward contracts' final price and was
presented as other accounts receivable. Such prepayments were also treated as
preferred dividends in the reconciliation of net income to U.S. GAAP, in a
manner similar to a mandatorily redeemable preferred stock, representing an
income of approximately Ps804 in 2003. The amount of income in 2003 included:
(i) a net gain of Ps877 from the results of the secondary equity offering and
the reversal of prepayments accrued until settlement that were recognized as
preferred dividends during the life of the contracts and that were not realized
as a result of the offering and settlement; and (ii) expense of Ps73 from
prepayments made in 2003 treated as preferred dividends.
In connection with the secondary equity offering of CEMEX shares which occurred
during 2005, the equity forward contracts were settled and had been accounted at
fair value through earnings under Mexican GAAP, consistently with the accounting
treatment under U.S. GAAP. Accordingly, in 2005 there is no reconciling
adjustment.
(k) Other U.S. GAAP Adjustments
Capitalization of costs of computer software development--Under U.S. GAAP,
certain direct costs related to the development stage or purchase of
internal-use software are capitalized and amortized over the estimated useful
life of the software. Costs related to the preliminary project stage and the
post-implementation/operations stage, are expensed as incurred.
F-48
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Until December 31, 2000, under U.S. GAAP, CEMEX capitalized direct costs
incurred in the development and implementation of internal-use software. Under
Mexican GAAP such costs were expensed as incurred. Beginning in 2001, under
Mexican GAAP, CEMEX implemented the policy of capitalizing the direct costs
associated with internal-use software developments (note 11) in a manner similar
to U.S. GAAP. As a result, in the reconciliation of net income to U.S. GAAP for
the years ended December 31, 2003 and 2004, the reconciling item refers
exclusively to the amortization of the amounts capitalized under U.S. GAAP until
December 2000, which led to amortization expenses of Ps377 in 2003 and Ps29 in
2004. At December 31, 2004, the capitalized costs under U.S. GAAP until December
31, 2000 were fully amortized.
For the years ended December 31, 2003, 2004 and 2005, for both Mexican and U.S.
GAAP, direct costs capitalized associated with internal-use software
developments and implementations amounted to Ps129, Ps106 and Ps178,
respectively. The estimated average useful lives to amortize these capitalized
costs is between 3 and 5 years.
Deferred charges
Capitalized costs, net of accumulated amortization, that did not qualify for
deferral under U.S. GAAP were reversed through earnings under U.S. GAAP in the
period incurred, resulting in income of Ps98 in 2003, income of Ps 93 in 2004
and income of Ps167 in 2005. During 2003, 2004 and 2005, all amounts capitalized
under Mexican GAAP also met the requirements for capitalization under U.S. GAAP.
Accordingly, the adjustments in the reconciliation of net income to U.S. GAAP
for the years ended December 31, 2003, 2004 and 2005, refer exclusively to
amounts amortized under Mexican GAAP during the respective year and which were
expensed in prior years under U.S. GAAP. The net effect in the reconciliation of
stockholders' equity to U.S. GAAP was a decrease of Ps409 and Ps225 at December
31, 2004 and 2005, respectively.
Asset retirement obligations and other environmental costs
Effective January 1, 2003, SFAS 143, Accounting for Asset Retirement Obligations
("SFAS 143"), requires entities to record the fair value of an asset retirement
obligation as a liability in the period in which a legal or a constructive
obligation is incurred associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. Such liability would be recorded against an asset that
is depreciated over the life of the long-lived asset. Subsequent to the initial
measurement, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. Also effective January 1, 2003, Mexican GAAP's
Bulletin C-9 established generally the same requirements as SFAS 143. The
difference between Mexican GAAP and U.S. GAAP concerning this item relates to
the recognition of the cumulative initial effect from adoption, which under SFAS
143 was recognized in earnings after net income, while under Mexican GAAP it was
recognized in stockholders' equity. Accordingly, the reconciling item presented
in the reconciliation of net income to U.S. GAAP for the year ended December 31,
2003, includes the reclassification of approximately Ps87 of the cumulative
effect from adoption from stockholders' equity under Mexican GAAP to net income
under U.S. GAAP (notes 3M and 13).
In addition, environmental expenditures related to current operations are
expensed or capitalized, as appropriate. Other than those contingencies
disclosed in notes 13 and 22G, CEMEX is not currently facing other material
contingencies, which might result in the recognition of an environmental
remediation liability.
Monetary position result
Monetary position result of the U.S. GAAP adjustments is determined by (i)
applying the annual inflation factor to the net monetary position of the U.S.
GAAP adjustments at the beginning of the period, plus (ii) the monetary position
effect of the adjustments during the period, determined in accordance with the
weighted average inflation factor for the period.
(l) Financial Instruments
Derivative Financial Instruments (notes 3L, 12 and 17)
Under U.S. GAAP, all derivative instruments, including derivative instruments
embedded in other contracts, should be recognized in the balance sheet as assets
or liabilities at their fair values, and changes in fair value are recognized
immediately in earnings, unless the derivatives qualify as hedges of future cash
flows, in which case the effective portion of such changes in fair value is
recorded temporarily in equity, and then recognized in earnings along with the
related effects of the hedged items. Any ineffective portion of a hedge is
reported in earnings as it occurs. Mexican GAAP, through Bulletin C-2 (note 3L),
establishes a methodology similar to that of U.S. GAAP (SFAS 133, Derivative
Instruments and Hedging Activities). The differences between SFAS 133 and
Bulletin C-2 relate to the rules for hedge accounting. SFAS 133 provides
specific rules for hedge accounting, while under Bulletin C-2, hedge accounting
is based solely on an entity's intention and designation, provided that the
underlying hedged asset or liability is already recognized in the balance sheet.
Bulletin C-2 does not provide guidance for hedging forecasted transactions, for
cash flow hedges, for derivative instruments by an entity in its own equity, and
for hedges of an entity's net investment in its foreign subsidiaries.
Accordingly, such instruments have been accounted for by CEMEX in accordance
with SFAS 133 or with other U.S. GAAP accounting pronouncements, as appropriate.
Fair value hedges, as defined by SFAS 133, were precluded by Mexican GAAP until
December 31, 2004, since it was not permitted to record primary hedged
instruments at fair value (note 24).
F-49
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
At December 31, 2004 and 2005, the differences in derivative instruments' hedge
accounting between Mexican and U.S. GAAP, as they relate to CEMEX, led to an
adjustment in the reconciliation of net income to U.S. GAAP, and a
reclassification in the condensed financial information under U.S. GAAP in note
25(o), which are explained as follows:
o In connection with the fair value recognition of the derivatives related to
CEMEX's acquisition of RMC (note 17B) under Mexican GAAP, CEMEX designated
such derivatives as hedge of the variability in cash flows associated with
exchange fluctuations between the U.S. dollar, the currency in which CEMEX
obtained the funds to purchase, and the British pound, the currency in which
the firm commitment was established. As a result of this designation, CEMEX
recognized, in stockholders' equity, the changes in fair value of the
derivatives from the designation date that took place on November 17, 2004
until December 31, 2004, and which represented a gain of approximately
Ps1,515. This gain was reclassified to earnings under Mexican GAAP in March
2005, the date when the purchase occurred. Consequently, for purposes of the
reconciliation of net income to U.S. GAAP, for the year ended December 31,
2004, this gain was reclassified from stockholders' equity under Mexican GAAP
to earnings under U.S. GAAP for an amount of approximately Ps1,553, as SFAS
133, does not permit an entity to establish a cash flow hedging relationship
in a transaction that involves a business combination. Likewise, for the year
ended December 31, 2005, the gain recorded in earnings under Mexican GAAP was
reclassified to stockholders' equity under U.S. GAAP; therefore, an expense
of approximately Ps1,471 is presented as a reconciling item.
o As discussed in note 12B, as of December 31, 2004, related to the estimated
fair value of Cross Currency Swaps ("CCS"), CEMEX recognized net assets of
U.S.$209 (Ps2,227). Under U.S. GAAP, such amounts do not qualify for net
presentation and thus have been presented as gross amounts for purposes of
the condensed financial information under U.S. GAAP presented in note 25(o).
As a result, under U.S. GAAP at December 31, 2004, in respect to the portion
of the estimated fair value attributable to changes in exchange rates,
short-term and long-term debt increased U.S.$132 (Ps1,408), including
prepayments, against current and non-current assets, while in respect of the
portion of the estimated fair value attributable to accrued interest, current
liabilities increased U.S.$10.9 (Ps116) against current assets. As of
December 31, 2005, the Company did not make net presentation under Mexican
GAAP.
See note 25(m) for changes in accounting principles regarding CEMEX's equity
forward contracts in its own shares due to the adoption of SFAS 150. All
derivative instruments, with the exceptions described above and the equity
forwards described in notes 25(j) and 25(m), entered into by CEMEX and disclosed
in notes 12 and 17, were accounted under Mexican GAAP consistently with the
provisions of U.S. GAAP.
For all hedging relationships for accounting purposes, CEMEX formally documents
the hedging relationship and its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the hedged item, the nature of
the risk being hedged, how the hedging instrument's effectiveness in offsetting
the hedged risk will be assessed, and a description of the method of measuring
ineffectiveness. This process includes linking all derivatives that are
designated as cash-flow or foreign-currency hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions.
As of December 31, 2004 and 2005, CEMEX has not designated any derivative
instrument as a fair value hedge for accounting purposes under both Mexican GAAP
and U.S. GAAP. CEMEX also formally assesses, both at the hedge's origination and
on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items. When it is determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, CEMEX discontinues
hedge accounting prospectively.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, other accounts
receivable, trade accounts payable, other accounts payable and accrued expenses
and short-term debt, approximates fair value because of the short-term maturity
of these financial assets and liabilities.
Marketable securities and long-term investments are accounted for at fair value,
which is based on quoted market prices for these or similar instruments.
The carrying value of CEMEX's long-term debt and the related fair value based on
quoted market prices for the same or similar instruments or on current rates
offered to CEMEX for debt of the same remaining maturities (or determined by
discounting future cash flows using borrowing rates currently available to
CEMEX) at December 31, 2005 is summarized as follows:
At December 31, 2005
-------------------------------------
Million of U.S. Dollars Carrying amount Estimated fair
value
------------------ -----------------
Bank loans............................ Ps 5,694 5,638
Notes payable......................... 3,157 3,110
================== =================
F-50
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
As discussed in notes 3D and 15D, CEMEX has designated certain debt as hedges of
its investment in foreign subsidiaries and, for Mexican GAAP purposes, records
foreign exchange fluctuations on such debt in stockholders' equity. For purposes
of the U.S. GAAP net income reconciliation, expense of Ps 897 in 2003, income of
Ps 190 in 2004 and income of Ps1,075 in 2005, were recognized as foreign
exchange results since the related debt did not meet the conditions for hedge
accounting purposes, given that the currencies involved do not move in tandem.
(m) Financial Instruments with Characteristics of both Liabilities and Equity
In May 2003, the FASB issued SFAS 150, which requires an issuer to classify
financial instruments as liabilities (or assets under certain circumstances)
when they meet the following criteria: (i) a financial instrument issued in the
form of shares that is mandatorily redeemable, through the unconditional
obligation of transferring its assets at a specified or determinable date (or
dates) or upon an event that is certain to occur; (ii) a financial instrument,
other than an outstanding share, that, at origination, embodies an obligation to
repurchase the issuer's shares, or is indexed to such an obligation, and that
requires or may require the issuer to settle the obligation by transferring
assets (for example, a forward purchase contract or written put option on the
issuer's shares that is to be physically settled or net cash settled); and (iii)
a financial instrument that embodies an unconditional obligation, which the
issuer must or may settle by issuing a variable number of its shares if, at
origination, the monetary value of the obligation is based solely or
predominantly in a fixed monetary amount known at origination, if variations are
based on something other than the fair value of the issuer's shares, or if
variations are inversely related to changes in the fair value of the issuer's
shares. SFAS 150 is effective for all transactions entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003.
Under SFAS 150, mandatorily redeemable instruments must be classified as a
liability and initially measured at fair value against equity. Equity forward
contracts that require physical settlement by repurchase of a fixed number of
the issuer's shares in exchange for cash are measured initially at the fair
value of the shares at origination, adjusted for any consideration or unstated
rights or privileges, against equity. Subsequently, those instruments should be
measured at the net present value of the amount to be paid at settlement,
accruing interest cost using the rate implicit at origination. Other instruments
within the scope of SFAS 150 shall be initially measured at fair value with
subsequent changes in fair value recognized in earnings as interest expense.
SFAS 150 was adopted presenting the cumulative effect of a change in an
accounting principle for financial instruments created before the issuance date
of the statement. Restatement is not permitted.
Equity Forward Contracts in CEMEX's own Shares
As described in notes 16 and 17A, as of December 31, 2004, CEMEX held equity
forward contracts negotiated to hedge future exercises under its stock option
programs, for a notional amount of U.S.$1,112. In October 2005, as described in
note 17A, these equity forward contracts were liquidated. Since January 1, 2001,
under Mexican GAAP, these forward contracts, which could have been physically or
net cash settled at CEMEX's option, were recognized at their estimated fair
value as assets or liabilities in the balance sheet, and changes in fair value
and the result from the liquidation of the contracts have been recorded in
earnings for the years ended December 31, 2003, 2004 and 2005. The accounting
treatment given to these contracts since 2001 was consistent with SFAS 150 and,
therefore, with respect to these forwards, no reconciling adjustment was
required pursuant to the implementation of the statement.
In addition, as of December 31, 2004, CEMEX held other equity forward contracts
(note 17A), for a notional amount of U.S.$45, which could be physically or net
cash settled at CEMEX's option and were considered as equity transactions under
Mexican GAAP. For U.S. GAAP purposes, until December 31, 2002, the effects of
these contracts were recognized upon settlement as an adjustment to
stockholders' equity and no periodic recognition was made. Under SFAS 150, these
instruments should be initially recognized at their estimated fair market value
as assets or liabilities in the balance sheet, and subsequent changes in fair
value should be recorded in earnings, with the cumulative effect of adoption
recognized as an adjustment to net income. CEMEX adopted SFAS 150 as of June 30,
2003 and, as a result, for purposes of the reconciliation of net income to U.S.
GAAP for the year ended December 31, 2003, the estimated fair value of such
forward contracts was recognized against the cumulative effect from the change
in accounting principle, which represented an expense of approximately Ps608.
After initial recognition under U.S. GAAP, CEMEX recorded a gain related to
changes in fair value during 2003 amounting to approximately Ps454.
Related to the equity forwards in CEMEX's own shares, during 2004, upon
settlement of several contracts, CEMEX recognized a gain of approximately Ps444
(U.S.$39) under Mexican GAAP within stockholders' equity. Under U.S. GAAP,
instruments with a variety of settlement options are required to be marked to
market through earnings; accordingly, the gain recognized under Mexican GAAP was
reclassified to earnings under U.S. GAAP. The reclassification under U.S. GAAP
had no effect on stockholders' equity.
(n) Supplemental Debt Information
At December 31, 2004 and 2005, due to CEMEX's ability and its intention to
refinance short-term debt with the available amounts of the committed long-term
lines of credit, U.S.$ 847 (Ps 9,051) and U.S.$505 (Ps5,362), respectively, were
reclassified from short-term debt to long-term debt under Mexican GAAP (note
12). For purposes of the condensed balance sheets under U.S. GAAP in note 25(o),
this reclassification was reversed given that under U.S. GAAP the
reclassification is precluded when the long-term agreements contain "Material
Adverse Events" clauses, which in the case of CEMEX are customary covenants.
F-51
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
(o) Condensed Financial Information under U.S. GAAP
The following table presents consolidated condensed income statements for the
years ended December 31, 2003, 2004 and 2005, prepared under U.S. GAAP, and
includes all differences described in this note as well as certain other
reclassifications required for purposes of U.S. GAAP:
Years ended December 31,
-----------------------------------------
Statements of income 2003 2004 2005
------------- ------------- -------------
Net sales................................................................ Ps 86,568 92,553 159,516
Gross profit............................................................. 36,110 39,038 63,464
Operating income...................................................... 14,770 17,007 24,706
Comprehensive financial result........................................... (3,078) 3,495 2,862
Other expenses, net...................................................... (1,218) (630) (2,191)
Income tax (including deferred taxes).................................... (1,206) (1,684) (3,912)
Equity in income of affiliates........................................... 582 590 1,226
------------- ------------- -------------
Consolidated net income............................................... 9,850 18,778 22,691
Minority interest net income............................................. 171 273 576
------------- ------------- -------------
Majority interest net income before cumulative effect of accounting change 9,679 18,505 22,115
Cumulative effect of accounting change................................ (695) - -
------------- ------------- -------------
Majority interest net income............................................. Ps 8,984 18,505 22,115
============= ============= =============
The following table presents consolidated condensed balance sheets at December
31, 2004 and 2005, prepared under U.S. GAAP, including all differences and
reclassifications as compared to Mexican GAAP described in this note 25:
At December 31,
----------------------------------
Balance sheets 2004 2005
----------------- ----------------
Current assets.............................................................. Ps 25,282 43,398
Investments and non-current assets.......................................... 21,746 16,971
Property, machinery and equipment........................................... 112,829 169,553
Deferred charges............................................................ 52,693 63,821
----------------- ----------------
Total assets............................................................ 212,550 293,743
================= ================
Current liabilities......................................................... 37,327 52,763
Long-term debt.............................................................. 44,949 82,610
Other non-current liabilities............................................... 30,190 41,260
----------------- ----------------
Total liabilities....................................................... 112,466 176,633
----------------- ----------------
Minority interest....................................................... 4,672 5,729
----------------- ----------------
Stockholders' equity including cumulative effect of accounting change... 95,412 111,381
----------------- ----------------
Total liabilities and stockholders' equity.............................. Ps 212,550 293,743
================= ================
The prior period amounts presented in the tables above were restated to constant
pesos as of December 31, 2005 using the Mexican inflation rate in order to
comply with current requirements of Regulation S-X, instead of the weighted
average inflation factor used by CEMEX under Mexican GAAP (note 3B).
Reclassifications
The condensed financial information under U.S. GAAP presented in the tables
above, include, in addition to the adjustments included in the reconciliation of
net income and stockholders' equity, several reclassifications as compared to
the consolidated financial statements under Mexican GAAP, which arise from the
differences in the consolidation policy and other presentation rules under
Mexican GAAP and U.S. GAAP. The main reclassifications at December 31, 2004 and
2005 and for the years ended December 31, 2003, 2004 and 2005 are as follows:
o Under Mexican GAAP, CEMEX consolidates its investments in joint ventures
(note 3C) through the proportionate consolidation method, which incorporates
line-by-line all assets, liabilities, revenues and expenses according to
CEMEX's equity ownership in such joint ventures. Under U.S. GAAP, equity
interests between 20% and 50% are accounted for by the equity method.
Consequently, under U.S. GAAP, all assets, liabilities, revenues and expenses
related to CEMEX's joint ventures in Spain and Portugal were removed
line-by-line against the equity in affiliates for both the balance sheets and
the income statements.
o Assets held for sale (note 8) of Ps 554 and Ps650, as of December 31, 2004
and 2005, respectively, were reclassified to long-term assets for purposes of
the condensed financial information of balance sheet under U.S. GAAP in note
25(o). These assets are stated at their estimated fair value. Estimated costs
to sell these assets are not significant.
F-52
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
o Under Mexican GAAP, for the years ended December 31, 2003, 2004 and 2005,
other expenses, net, included goodwill amortization until 2004, dumping
duties, results from idle facilities, results from the sales of fixed assets,
impairment losses of long-lived assets, net results from the early
extinguishment of debt and other unusual or non-recurring transactions. For
purposes of the income statement condensed financial information under U.S.
GAAP in note 25(o), from other expenses, net, under Mexican GAAP, expenses of
Ps3,146 in 2003, Ps2,708 in 2004 and Ps891 in 2005 were reclassified to
operating expenses. Likewise, expenses of Ps479 in 2004 and Ps383 in 2005
were reclassified to the comprehensive financial result under U.S. GAAP.
(p) Supplemental Cash Flow Information Under U.S. GAAP
Under Mexican GAAP, statements of changes in financial position identify the
sources and uses of resources based on the differences between beginning and
ending financial statements in constant pesos. Monetary position results and
unrealized foreign exchange results are treated as cash items in the
determination of resources provided by operations. Under U.S. GAAP (SFAS 95),
statements of cash flows present only cash items and exclude non-cash items.
SFAS 95 does not provide any guidance with respect to inflation-adjusted
financial statements. The differences between Mexican GAAP and U.S. GAAP in the
amounts reported is primarily due to (i) the elimination of inflationary effects
of monetary assets and liabilities from financing and investing activities
against the corresponding monetary position result in operating activities, (ii)
the elimination of foreign exchange results from financing and investing
activities against the corresponding unrealized foreign exchange result included
in operating activities and (iii) the recognition in operating, financing and
investing activities of the U.S. GAAP adjustments.
The following table summarizes the cash flow items as required under SFAS 95
provided by (used in) operating, financing and investing activities for the
years ended December 31, 2003, 2004 and 2005, giving effect to the U.S. GAAP
adjustments, excluding the effects of inflation required by Bulletin B-10 and
Bulletin B-15. The following information is presented in millions of pesos on a
historical peso basis and is not presented in pesos of constant purchasing
power:
Years ended December 31,
----------------------------------------------
2003 2004 2005
--------------- ------------- ----------------
Net cash provided by operating activities................... Ps 9,772 21,885 28,909
Net cash provided by (used in) financing activities......... (4,874) (3,723) 12,502
Net cash used in investing activities....................... (5,419) (17,734) (38,818)
=============== ============= ================
Net cash flow from operating activities reflects cash payments for interest and
income taxes as follows:
Years ended December 31,
----------------------------------------------
2003 2004 2005
--------------- ------------- ----------------
Interest paid............................................... Ps 4,897 3,654 5,124
Income taxes paid........................................... 576 1,314 2,433
=============== ============= ================
Non-cash activities are comprised of the following:
Long-term debt assumed through the acquisition of businesses was Ps137.8 in 2003
and Ps11,903 in 2005.
(q) Restatement to Constant Pesos of Prior Years
The following table presents summarized financial information under Mexican GAAP
of the consolidated income statements for the years ended December 31, 2003 and
2004 and balance sheet information as of December 31, 2004, in constant Mexican
pesos as of December 31, 2005, using the Mexican inflation index:
Years ended December 31, 2003 2004
-------------------- --------------------
Sales....................................................... Ps 87,414 93,507
Gross profit................................................ 37,023 40,883
Operating income............................................ 17,755 21,247
Majority interest net income................................ 7,672 14,999
==================== ====================
At December 31, 2004
--------------------
Current assets.............................................. Ps 22,394
Non-current assets.......................................... 177,038
Current liabilities......................................... 27,680
Non-current liabilities..................................... 77,438
Majority interest stockholders' equity...................... 89,851
Minority interest stockholders' equity...................... 4,463
====================
F-53
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
(r) Stock Option Programs
Stock options activity during 2004 and 2005, the balance of options outstanding
at December 31, 2004 and 2005 and other general information regarding CEMEX's
stock option programs is presented in note 16. Until December 31, 2004, the
availability of CPOs for the potential future exercise of the programs was fully
hedged through equity forward contracts in CEMEX's own stock (note 17A).
Resulting from the secondary equity offering and the concurrent settlement of
the equity forward contracts, as of December 31, 2005, the availability of CPOs
for the potential future exercise of the programs is mainly hedged through the
use of treasury shares.
At December 31, 2004, for financial reporting under Mexican GAAP, CEMEX
accounted for its stock option programs (note 16) using a methodology that is
consistent with the rules set forth in APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") under U.S. GAAP. According to APB 25,
compensation cost should be determined under the intrinsic value method, which
represents the difference between the strike price and the market price of the
stock at the reporting date, for all plans that do not meet the following
characteristics: (i) the exercise price established in the option is equal to
the quoted market price of the stock at the measurement date, (ii) the exercise
price is fixed for the option's life, and (iii) the option's exercise is hedged
through the issuance of new shares of common stock. After considering these
characteristics, no compensation cost was recognized for the CEMEX's fixed
program (note 16-Equity programs), while compensation cost, under the intrinsic
method, was periodically determined for all other programs granted by CEMEX
(note 16-Liability programs).
During 2005, as mentioned in notes 3R and 16, under Mexican GAAP CEMEX
obligatorily adopted IFRS 2, "Share-based Payment" ("IFRS 2") As a result of the
adoption of IFRS 2, as of December 31, 2005, CEMEX accrued a provision
representing the fair value of the outstanding options classified as liability
instruments of approximately Ps2,659 (U.S.$250). During the year ended December
31, 2005, CEMEX recorded an expense in its income statement from the change in
fair value of approximately Ps2,119 (U.S.$200).
For purposes of the reconciliation of net income to US GAAP, for the year ended
December 31, 2005, CEMEX reversed the adjustment to fair value made under
Mexican GAAP and maintained the valuation of the outstanding options under the
intrinsic value method, which resulted in a decrease in the compensation expense
in 2005 of approximately Ps860 (Ps992 before the related income tax effect) as
compared to the accrual under the fair value method.
As of and for the years ended December 31, 2003, 2004 and 2005, under U.S. GAAP,
CEMEX applied the disclosure rules of SFAS 123, Accounting for Stock-Based
Compensation ("SFAS 123") SFAS 123 requires compensation cost for stock option
plans that meet the characteristics of equity instruments, to be determined
based on the options' fair value at the grant date, using a qualified
option-pricing model, and recorded in results of operations during the options'
vesting period, after which no further recognition is required. Moreover, SFAS
123 requires that compensation cost related to stock awards that meet the
characteristics of liability instruments should be determined based on the
intrinsic value of the awards at each balance sheet date, recording changes in
such intrinsic value through earnings, in a manner similar to the accounting
treatment prescribed under APB 25 for variable plans and that was applied by
CEMEX under Mexican GAAP until December 31, 2004 as mentioned above. SFAS 123
allows entities to continue the use of APB 25 for valuation purposes, requiring
entities to disclose the estimated effect as if they had applied the fair value
method during the periods presented.
In 2005, CEMEX identified that its option programs granted in prior years,
except for the fixed program, and that were accounted for as variable awards
under Mexican GAAP were considered as fixed awards for purposes of determining
the pro forma impact of the fair value of option grants. As a result, on the pro
forma disclosure, CEMEX removed the expense for those periods determined under
Mexican GAAP, and recorded on a pro forma basis under U.S. GAAP, the fair values
of these awards determined at the date of grant using an option pricing model.
Pro forma adjustments were not necessary since the variable accounting under
Mexican GAAP for these programs was in accordance with the rules of both APB 25
and SFAS 123. Accordingly, the pro forma disclosures for the years 2003 and 2004
were removed to reflect the correction of this error.
Compensation cost (income) by plan recorded under Mexican GAAP according to the
intrinsic value method for the years ended December 31, 2003 and 204 were as
follows:
For the years ended December 31, 2003 2004
----------- -----------
Restricted program 2.............................. Ps - 221
Special program................................... 63 157
Variable program 2................................ 385 (238)
Voluntary programs 1.............................. 48 (84)
----------- -----------
496 56
=========== ===========
F-54
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
For the year ended December 31, 2005, had compensation cost be determined under
SFAS 123, based on the intrinsic value of stock options at each reporting date,
CEMEX's net income and earnings per share would have been as follows:
For the year ended December 31, 2005 Restricted Special Variable Total
program program program
------------ ------------ ------------ ------------
Net income, as reported (Mexican GAAP).......................... Ps 22,425
Reversal of cost (income) under Mexican GAAP according to
IFRS(2)(3)................................................. (214) 511 1,822 2,119
(Cost) income of options according to intrinsic value method
under SFAS (1)(2)(3)....................................... (577) (349) (90) (1,016)
------------ ------------ ------------ ------------
Approximate net income, pro forma............................... 23,528
============
Basic earnings per share, as reported........................... Ps 2.16
------------
Basic earnings per share, pro forma............................. Ps 2.27
============
(1) For the year ended December 31, 2003, net income under Mexican GAAP
includes a liquidation cost of approximately Ps710 related to the voluntary
program, which was fully exercised during the year.
(2) As a result of the early exercise in December 2004, CEMEX recognized a
liquidation cost of approximately U.S.$61 (Ps653) related to options
redeemed from old programs (note 16), including those of the variable
program granted in February 2004 and those of the restricted program
initiated also in February 2004.
(3) The amount of expense (income), recognized under Mexican GAAP and reversed
for purposes of the pro forma disclosure under U.S. GAAP, reflects the
change between the initial balance of the provision created for under the
intrinsic value method, and the year-end balance of the provision created
for under the fair value method in 2005, and does not include amounts
expensed in actual exercises or liquidations. Amounts expensed are included
in earnings under Mexican GAAP and are not reversed for U.S. GAAP disclosure
purposes.
In December 2004, the FASB issued SFAS 123R, Share-Based Payment, which is
effective for companies beginning January 1, 2006 (note 25(w)). SFAS 123R
eliminates the alternative to use APB 25's intrinsic value method and requires
entities to recognize the cost of employee services received in exchange of
awards of equity instruments based on the grant-date fair value of those awards.
Moreover, SFAS 123R requires that stock awards that meet the characteristics of
liabilities to be recorded at their fair value at each reporting date,
recognizing changes in valuation through earnings. CEMEX will adopt SFAS 123R
under U.S. GAAP during 2006.
(s) Impairment of Long Lived Assets
Under U.S. GAAP, effective January 1, 2002, CEMEX adopted SFAS 142, which
eliminates the amortization of goodwill and of indefinite-lived intangible
assets, addresses the amortization of intangible assets with finite lives,
impairment testing and the recognition of goodwill and other intangible assets
acquired in business combinations. Likewise, effective January 1, 2002, CEMEX
adopted SFAS 144, which establishes a single model for the impairment of
long-lived assets and broadens the presentation of discontinued operations to
include disposal of an individual business.
As a result of such adoption under U.S. GAAP, CEMEX ceased the amortization of
the goodwill balances determined at December 31, 2001; however, such amounts
remain subject to impairment evaluations. During the first half of 2002, in
connection with SFAS 142's transitional goodwill impairment evaluation, which
required an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption, CEMEX identified its reporting units and
determined the carrying value of each reporting unit as of January 1, 2002, by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units. CEMEX also determined the fair
value of each reporting unit and compared it to their related carrying amounts.
Fair value of the reporting units exceeded in each case the corresponding
carrying amount and, therefore, no impairment charges resulted from the
transitional evaluation performed on the recorded goodwill as of January 1,
2002. For the years ended December 31, 2003 and 2004, goodwill under Mexican
GAAP continued to be an amortizable intangible asset. Based on the similarities
of the components of the operating segments (cement, ready-mix concrete,
aggregates and other construction materials), CEMEX's geographical segments
under SFAS 131 are also the reporting units under SFAS 142 for purposes of
assessing fair value in determining potential impairment at transition and in
future periods.
Under U.S. GAAP, CEMEX assesses goodwill and indefinite-lived intangibles for
impairment annually unless events occur that require more frequent reviews.
Long-lived assets, including amortizable intangibles, are tested for impairment
if impairment triggers occur. Discounted cash flow analyses are used to assess
the possible impairment of non-amortizable intangible assets and goodwill, while
undiscounted cash flow analyses are used to assess the existence of impairment
of other long-lived assets such as property, plant and equipment. If an
assessment indicates impairment, the impaired asset is written down to its fair
value based on the best information available.
F-55
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
The useful lives of amortizable intangibles are evaluated periodically, and
subsequent to impairment reviews, to determine whether revision is warranted. If
cash flows related to a non-amortizable intangible are not expected to continue
for the foreseeable future, a useful life is assigned. Considerable management
judgment is necessary to estimate undiscounted and discounted future cash flows.
Assumptions used for these cash flows are consistent with internal forecasts and
industry practices. For the years ended December 31, 2003, 2004 and 2005, there
were no impairment charges under U.S. GAAP in addition to those described in
notes 10 and 11, which were recorded under Mexican GAAP, as CEMEX's policy for
impairment is consistent with U.S. GAAP, except, during 2004, for the expense of
approximately Ps960 reclassified from stockholders' equity under Mexican GAAP to
net income under U.S. GAAP in connection with the purchase of CAH shares in
exchange for CEMEX's CPOs (note 25(a)). Impairment charges are recorded as other
expenses under Mexican GAAP and are reclassified to operating income under U.S.
GAAP (note 25 (o)). Approximate goodwill by reporting unit under U.S. GAAP is
summarized as follows:
Inflation Inflation
Acquisi- and Acquisi- and
tions currency tions currency
December (divesti- Impairment fluctuation December (divesti- fluctuation December
31, 2003 tures)(1) losses (2) 31, 2004 tures(1) (2) 31, 2005
----------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
NORTH AMERICA
United States.............. 17,560 103 - (516) 17,147 5,248 (729) 21,666
Mexico..................... 6,820 - - - 6,820 - - 6,820
EUROPE
Spain...................... 12,166 - - 572 12,738 63 (2,049) 10,752
France..................... - - - - - 2,209 - 2,209
UK......................... - - - - - 648 - 648
Other Europe (3)........... - - - - - 745 - 745
SOUTH, CENTRAL AMERICA &
THE CARIBBEAN
Colombia................... 4,020 - - 635 4,655 - 111 4,766
Venezuela.................. 344 - - (23) 321 - (18) 303
Dominican Republic......... 358 - - 122 480 - (52) 428
Costa Rica................. 335 - - (14) 321 - (14) 307
The Caribbean.............. 457 - - (13) 444 - (19) 425
Other South, Central. America
& the Caribbean (4)...... 73 - - (2) 71 320 (4) 387
AFRICA & MIDDLE EAST
Egypt...................... 253 - - - 253 - 11 264
United Arab Emirates....... - - - - - 1,378 - 1,378
ASIA
The Philippines............ 1,437 - - (5) 1,432 - 48 1,480
Thailand................... 520 - - (5) 515 - (38) 477
Other Asia................. 364 - - (10) 354 - (15) 339
Other reporting units (5).. 1,073 - (256) (47) 770 - (33) 737
Affiliates (note 9A)....... 608 - - (4) 604 (14) (6) 584
----------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
46,388 103 (256) 690 46,925 10,597 (2,807) 54,715
=========== ========== ========== =========== ========== =========== =========== ==========
1. During 2004 CEMEX acquired a ready-mix company in the state of Georgia for
approximately U.S.$16.7 (Ps 178.0). In addition, during 2005, CEMEX acquired
RMC and other minor operations in Central America. The net increase in
goodwill for Ps10,597, includes the decrease in goodwill resulting from
assets disposals in the U.S. (note 9A) for approximately Ps1,570 and the
decrease of Ps595 of restructuring charges considered as part of the
purchase price of RMC under Mexican GAAP, wich were charged to earnings
under U.S. GAAP.
2. The amounts presented in this column include: (i) the effects on goodwill
from foreign exchange fluctuations during the period between the reporting
unit's currencies and the Mexican peso, and (ii) the effect of removing the
restatement into constant pesos as of December 31, 2005, using Mexican
inflation, applied to the goodwill balances at the beginning of the year.
3. Other Europe refers to goodwill determined on the operations located in the
Czech Republic, Ireland and Latvia, generated in the acquisition of RMC.
4. Other South, Central America and the Caribbean refer mainly to goodwill
determined on the operations located in Panama and Puerto Rico, acquired in
prior years.
5. Other reporting units primarily consist of units engaged in software
development projects.
F-56
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
(t) Sale of Accounts Receivable
CEMEX accounts for transfers of receivables under Mexican GAAP consistently with
the rules set forth by SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Under SFAS 140,
transactions that meet the criteria for surrender of control are recorded as
sales of receivables and their amounts are removed from the consolidated balance
sheet at the time they are sold (note 5).
(u) Other Disclosures Under U.S. GAAP
Accounting for Costs Associated with Exit or Disposal Activities
Effective January 1, 2003, CEMEX adopted SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146, which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
basically requires, as a condition to accrue for the costs related to an exit or
disposal activity, including severance payments, that the entity communicate the
plan to all affected employees and that the plan be terminated in the
short-term; otherwise, associated costs should be expensed as incurred. For the
years ended December 31, 2003, 2004 and 2005, CEMEX did not recognize any such
costs related to exit or disposal activities.
Guarantor's Accounting and Disclosure Requirements for Guarantees
Effective January 1, 2003, CEMEX adopted Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5, 57
and 107 and a rescission of FASB Interpretation 34, which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The interpretation
also clarifies that a guarantor is required to recognize, at origination of a
guarantee, a liability for the fair value of the obligation undertaken. As of
December 31, 2004 and 2005, CEMEX has not guaranteed any third parties'
obligations; however, with respect to the electricity supply long-term contract
discussed in note 22F, CEMEX may also be required to purchase the power plant
upon the occurrence of specified material defaults or events, such as failure to
purchase the energy and pay when due, bankruptcy or insolvency, and revocation
of permits necessary to operate the facility. For the years ended December 31,
2004 and 2005, for accounting purposes under Mexican GAAP and U.S. GAAP, CEMEX
has considered this agreement as a long-term supply agreement and no liability
has been created, based on the contingent characteristics of CEMEX's obligation
and given that, absent a default under the agreement, CEMEX's obligations are
limited to the purchase of energy from, and the supply of fuel to, the plant.
In addition, as a result of the newly created strategic alliance with Ready Mix
USA, as mentioned in note 9A, after the third anniversary of the venture and for
a period of 25 years, the venture partner has an option to require CEMEX to
purchase its interest in the joint ventures. Considering the contingent nature
of this agreement and the absence of a present obligation at the balance sheet
date, CEMEX has not accrued any provision related to this contingency under both
Mexican and U.S. GAAP.
Variable Interest Entities
Effective March 15, 2004, CEMEX adopted Interpretation 46R (revised December
2003), Consolidation of Variable Interest Entities, an interpretation of ARB 51
("FIN 46R"). The interpretation addresses the consolidation by business
enterprises of variable interest entities ("VIEs"), which are defined in FIN 46R
as those that have one or more of the following characteristics: (i) entities
which equity investment at risk is not sufficient to finance their operations
without requiring additional subordinated financing support provided by any
parties, including the equity holders; and (ii) the equity investors lack one or
more of the following attributes: a) the ability to make decisions about the
entity's activities through voting or similar rights, b) the obligation to
absorb the expected losses of the entity, and c) the right to receive the
expected residual returns of the entity. Among others, entities that are deemed
to be a business according to FIN 46R, including operating joint ventures, need
not be evaluated to determine if they are VIEs under FIN 46R. Variable
interests, among other factors, may be represented by operating losses, debt,
contingent obligations or residual risks and may be assumed by means of loans,
guarantees, management contracts, leasing, put options, derivatives, etc. A
primary beneficiary is the entity that assumes the variable interests of a VIE,
or the majority of them in the case of partnerships, directly or jointly with
related parties, and is the entity that should consolidate the VIE. FIN 46R
applies to financial statements for periods ending after March 15, 2004. As
discussed in the preceding paragraph, CEMEX has an electricity supply long-term
contract (note 22F), through which, an international partnership, which built
and currently operates an electrical energy generating plant, sells to CEMEX,
starting in 2004, all the energy generated for a term of no less than 20 years.
Under FIN 46R, after analysis of the provisions of the agreements, CEMEX
believes that such partnership is not a VIE under the scope of the
interpretation, and, therefore, as of and for the years ended December 31, 2004
and 2005, CEMEX has not consolidated any asset, liability or operating results
of such partnership.
F-57
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
(v) Newly Issued Accounting Pronouncements under U.S. GAAP
o In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS 123R, Share-Based Payment ("SFAS 123R"), a revision of SFAS 123, which
establishes standards for the accounting of all share-based payment
transactions, with a primary focus on schemes in which an entity obtains
employee services in share-based payment transactions, also clarifies and
expands guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability, and attributing
compensation cost to reporting periods. SFAS 123R requires companies to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award and
eliminates the alternative to use APB 25's intrinsic value method of
accounting, permitted by SFAS 123 as originally issued (note 25(r)), under
which, upon compliance of certain rules, issuing stock options to employees
resulted in recognition of no compensation cost.
The cost under SFAS 123R for equity awards should be recognized over the
period during which an employee is required to provide service in exchange
for the award (usually the vesting period). In addition, for liability
awards, the cost should be determined by the changes in the estimated fair
value of the awards at each reporting date. The grant-date fair value, and
the fair value at the reporting date, for employee equity and liability
awards, respectively, will be estimated using option-pricing models, unless
observable market prices for the same or similar instruments are available.
SFAS 123R will be effective for CEMEX as of January 1, 2006 and will apply to
all awards classified as equity granted after the required effective date and
to awards modified, repurchased, or cancelled after that date, and to all
outstanding liability awards. The cumulative effect of initially applying
this statement, if any, will be recognized as of the required effective date.
As of the required effective date, entities that used the fair-value-based
method for either recognition or disclosure under SFAS 123 will apply SFAS
123R using a modified version of prospective application, under which,
compensation cost is recognized for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under SFAS 123 for either
recognition or pro forma disclosures. For periods before the required
effective date, entities may elect to apply a modified version of
retrospective application under which financial statements for prior periods
are adjusted on a basis consistent with the pro forma disclosures required
for those periods by SFAS 123.
In connection with the adoption of SFAS 123R in 2006, considering all the
outstanding liability awards, SFAS 123R may have a material impact in CEMEX's
net income under U.S. GAAP (see pro forma historical information in note
25(r)). As of the effective date of SFAS 123R, there will be no outstanding
unvested equity awards.
o In December 2004, the FASB issued SFAS 151, Inventory Costs ("SFAS 151"),
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Under SFAS 151, such
items will be recognized as current-period charges. In addition, SFAS 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 will be effective for CEMEX for inventory costs incurred on or after
January 1, 2006. CEMEX does not expect any material impact from the adoption
of this statement.
o In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets
("SFAS 153"), which eliminates an exception in APB 29 for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The exception provides that those exchanges should be measured
based on the recorded amount of the nonmonetary assets relinquished, rather
than on the fair values of the exchanged assets. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 will be effective
for CEMEX for nonmonetary asset exchanges occurring on or after January 1,
2006. CEMEX does not expect any material impact from the adoption of this
statement.
o In May 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections ("SFAS 154"), which establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements
specific to a newly adopted accounting principle. SFAS 154 will be effective
for CEMEX for all accounting changes and any error corrections occurring
after January 1, 2006.
o In September 2005, the EITF issued EITF Issue No. 04-13 Accounting for
Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13
provides guidance as to when purchases and sales of inventory with the same
counterparty should be accounted for as a single exchange transaction. EITF
04-13 also provides guidance as to when a nonmonetary exchange of inventory
should be accounted for at fair value. EITF 04-13 will be applied to new
arrangements entered into, and modifications or renewals of existing
arrangements occurring after January 1, 2007. The application of EITF 04-13
is not expected to have a significant impact on the CEMEX's financial
statements.
(w) Recent Developments (unaudited)
In January 2006, CEMEX acquired a grinding mill with a grinding capacity of
400,000 tons per year in Guatemala for approximately U.S.$17.4. CEMEX entered
into an agreement to purchase these operations in September 2005.
F-58
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
In January 2006, officials from the Mexican and U.S. governments reached an
agreement in principle that will bring an end to the longstanding dispute over
U.S. imports of Mexican cement (note 22C). Under the agreement, the U.S. and
Mexican cement industries will share unliquidated historical duties associated
with the antidumping order. CEMEX will receive approximately U.S.$100 in cash
from this settlement and will also eliminate approximately U.S.$65 in
provisions.
On March 2, 2006, CEMEX sold 4K Beton A/S, a Danish subsidiary, which operated
18 ready-mix concrete plants in Denmark, to Unicon A/S, a subsidiary of Cementir
Group, an Italian cement producer, for approximately (euro)22 million. As part
of the transaction, CEMEX purchased from Unicon A/S two companies engaged in the
ready-mix concrete and aggregates business in Poland for approximately (euro)12
million. These companies operate nine ready-mix concrete plants and one
aggregates quarry in Poland. CEMEX received net cash proceeds of approximately
(euro)6 million, after cash and debt adjustments, from this transaction.
On March 20, 2006, CEMEX agreed to terminate the operating lease on the Balcones
cement plant located in New Braunfels, Texas, prior to expiration and purchased
the Balcones cement plant for approximately U.S.$61.2.
On April 27, 2006, the annual stockholders' meeting approved: (i) an increase in
the variable common stock through the capitalization of retained earnings of up
to Ps6,718, issuing shares as a stock dividend for up to 720 million shares
equivalent to up 240 million CPOs, at a subscription price of U.S.$0.1330 per
CPO, or instead, stockholders may choose to receive U.S.$0.1330 per CPO in cash;
(ii) a further stock split, which CEMEX expect to occur in July 2006, by means
of which each of the existing series A shares will be surrendered in exchange
for two new series A shares, and each of our existing series B shares will be
surrendered in exchange for two new series B shares; and (iii) the change of the
legal and commercial name of CEMEX was changed to CEMEX, S.A.B. de C.V.,
Sociedad Anonima Bursatil de Capital Variable, that means a "public stock
corporation with variable capital". The new name will be in effect on July 1,
2006, the change in the name of CEMEX was made to comply with the requirements
of the new Mexican Securities Law that was enacted on December 28, 2005.
On May 4, 2006, CEMEX agreed to sell 24.9% of PT Semen Gresik to Indonesia-based
Rajawali Group for approximately U.S.$337 or U.S.$2.28 dollars per share.
According to the terms of the agreement, the purchaser's obligations are subject
to obtaining the approval of the Indonesian goverment and the fulfillment of
other conditions. On May 17, 2006, CEMEX received a letter from the Indonesian
government purporting to exercise its right of first refusal in respect of the
Gresik shares we agreed to sell to the Rajawali Group. No assurance can be given
either that the sale to the Rajawali Group will be consummated, or that the
Indonesian will purchase the Gresik shares, on the terms outlined above. In the
event this sale is consummated, CEMEX's remaining interest in Gresik will be
0.6%.
During May 2006, CEMEX and some of its subsidiaries in Mexico were notified by
the Mexican tax authorities of several tax assessments related to different tax
periods. These tax assessments are for an amount of approximately Ps3,793 as of
May 31, 2006. The tax assessments result primarily from: (i) disallowed
restatement of tax loss carryforwards in the same period in which they occurred,
and (ii) tax consecuences from investments in foreign subsidiaries. At this
preliminary stage in the proceedings, it is not possible to assess the
likelihood of an adverse result in these tax assessments for CEMEX.
In connection with the stock split mentioned above, a new CPO representing two
new series A shares and one new series B share will be delivered to each holder
of a CPO. The ratio of CPOs to ADSs will not change as a result of the stock
split; each ADS will represent ten (10) CPOs following the stock split,
accordingly, a new ADS will be delivered to each holder of an ADS to reflect the
two-for-one split. The proportional equity interest participation of existing
shareholders will not change as a result of the stock split. The financial data
set forth in this annual report have not been adjusted to give retroactive
effect to the stock split. Earnings per share, the average number of shares
outstanding, as well as the CPO numbers included throughout the financial
statements and related notes for the years ended December 31, 2003, 2004 and
2005, were not adjusted to make the effect of the stock split retroactive.
Had the per share amounts and the average number of shares been restated in
order to give retroactive effect to the stock split mentioned above, the pro
forma information would had been as follows:
For the years ended December 31, (unaudited)
2003 2004 2005 2005
------------ ----------- ------------ ----------
Pro forma per share information under Mexican GAAP:
Basic earnings per share..................................... Ps 0.38 0.70 1.08 U.S.$ 0.10
Diluted earnings per share................................... 0.37 0.70 1.08 0.10
Pro forma per share information under U.S. GAAP:
Basic earnings per share..................................... Ps 0.47 0.93 1.07 U.S.$ 0.10
Diluted earnings per share................................... 0.46 0.92 1.06 0.10
Pro forma number of shares (millions):
Basic average number of shares outstanding................... 18,912 19,974 20,756 -
Diluted average number of shares outstanding................. 19,348 20,078 20,820 -
F-59
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
(x) Guaranteed debt
In June 2000, CEMEX concluded the issuance of U.S.$200 aggregate principal
amount of 9.625% Exchange Notes due 2009 in a registered public offering in the
United States of America in exchange for U.S.$200 aggregate principal amount of
its then outstanding 9.625% Notes due 2009. The Exchange Notes are fully and
unconditionally guaranteed, on a joint and several basis, as to payment of
principal and interest by two of CEMEX's Mexican subsidiaries: CEMEX Mexico and
ETM (note 3C). These two companies, together with their subsidiaries, account
for substantially all of the revenues and operating income of CEMEX's Mexican
operations.
As mentioned in note 12C, as of December 31, 2004 and 2005, indebtedness of
CEMEX in an aggregate amount of U.S.$ 3,088 (Ps32,988) and U.S.$3,780
(Ps40,145), respectively, is fully and unconditionally guaranteed, on a joint
and several basis, by CEMEX Mexico and ETM.
As of December 31, 2003, 2004 and 2005, CEMEX owned a 100% equity interest in
CEMEX Mexico, and CEMEX Mexico owned a 100% equity interest in ETM at the end of
each of the three years.
For purposes of the accompanying condensed consolidated balance sheets, income
statements and statements of changes in financial position under Mexican GAAP,
the first column, "CEMEX," corresponds to the parent company issuer, which has
no material operations other than its investments in subsidiaries and affiliated
companies. The second column, "Combined guarantors", represents the combined
amounts of CEMEX Mexico and ETM on a Parent Company-only basis, after
adjustments and eliminations relating to their combination. The third column,
"Combined non-guarantors", represents the amounts of CEMEX's international
subsidiaries, CEMEX Mexico and ETM non-Guarantor subsidiaries, and other
immaterial Mexican non-guarantor subsidiaries of CEMEX. The fourth column,
"Adjustments and eliminations", includes all the amounts resulting from
consolidation of CEMEX, the Guarantors and the non-guarantor subsidiaries, as
well as the corresponding constant pesos adjustment as of December 31, 2005, for
the years ended December 31, 2003 and 2004 described below. The fifth column,
"CEMEX consolidated", represents CEMEX's consolidated amounts as reported in the
consolidated financial statements. The amounts presented under the line item
"investments in affiliates" for both the balance sheet and the income statement
are accounted for by the equity method.
As mentioned in note 3B, under Mexican GAAP, the financial statements of those
entities with foreign consolidated subsidiaries should be presented in constant
pesos as of the latest balance sheet presented, considering the inflation of
each country in which the entity operates, as well as the changes in the
exchange rate between the functional currency of each country vis-a-vis the
reporting currency (in this case, the Mexican peso). As a result of the
aforementioned, for comparability purposes the condensed financial information
of CEMEX, the "Combined Guarantors" and the "Combined non-guarantors" amounts
have been adjusted to reflect constant pesos as of December 31, 2005, using the
Mexican inflation index. Therefore, the corresponding inflation adjustment
derived from the application of the weighted average inflation factor in the
consolidated amounts is presented within the "Adjustments and eliminations"
column.
F-60
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
The condensed consolidated financial information is as follows:
Condensed consolidated balance sheets:
Adjustments
Combined Combined and CEMEX
As of December 31, 2004 CEMEX guarantors non-guarantors eliminations consolidated
------------------------------------------- -----------------------------------------------------------------------
Current assets............................ Ps 1,834 8,469 79,927 (69,380) 20,850
Investment in affiliates.................. 100,467 122,791 72,954 (280,239) 15,973
Other non-current accounts receivable..... 34,934 473 17,992 (49,667) 3,732
Net property, machinery and equipment..... 1,868 31,758 76,911 (7,834) 102,703
Intangible assets and deferred charges.... 4,259 6,313 90,248 (58,394) 42,426
------------ ------------- ------------- ------------ ------------
Total assets........................... 143,362 169,804 338,032 (465,514) 185,684
------------ ------------- ------------- ------------ ------------
Current liabilities....................... 10,628 28,844 44,156 (57,855) 25,773
Long-term debt............................ 47,670 38 28,643 (24,144) 52,207
Other non-current liabilities............. 1,407 36,438 17,872 (35,825) 19,892
------------ ------------- ------------- ------------ ------------
Total liabilities...................... 59,705 65,320 90,671 (117,824) 97,872
------------ ------------- ------------- ------------ ------------
Majority interest stockholders' equity.... 83,657 104,484 186,441 (290,925) 83,657
------------ ------------- ------------- ------------ ------------
Minority interest...................... - - 60,920 (56,765) 4,155
------------ ------------- ------------- ------------ ------------
Stockholders' equity under Mexican GAAP... 83,657 104,484 247,361 (347,690) 87,812
------------ ------------- ------------- ------------ ------------
Total liabilities and stockholders' equity Ps 143,362 169,804 338,032 (465,514) 185,684
------------ ------------- ------------- ------------ ------------
Adjustments
Combined Combined and CEMEX
As of December 31, 2005 CEMEX guarantors non-guarantors eliminations consolidated
------------------------------------------- ------------------------------------------------------------------------
Current assets............................ Ps 1,260 7,643 102,869 (67,523) 44,249
Investment in affiliates.................. 132,795 147,704 45,526 (317,102) 8,923
Other non-current accounts receivable..... 23,487 7,069 15,333 (38,254) 7,635
Net property, machinery and equipment..... 1,864 29,252 134,075 (136) 165,055
Intangible assets and deferred charges.... 3,121 6,534 55,341 (6,630) 58,366
------------- ------------- ------------ ------------- -------------
Total assets............................ 162,527 198,202 353,144 (429,645) 284,228
------------- ------------- ------------ ------------- -------------
Current liabilities....................... 7,261 47,312 35,024 (45,909) 43,688
Long-term debt............................ 50,426 65 52,467 (14,952) 88,006
Other non-current liabilities............. 496 20,533 46,098 (24,550) 42,577
------------- ------------- ------------ ------------- -------------
Total liabilities....................... 58,183 67,910 133,589 (85,411) 174,271
------------- ------------- ------------ ------------- -------------
Majority interest stockholders' equity.... 104,344 130,292 169,044 (299,336) 104,344
------------- ------------- ------------ ------------- -------------
Minority interest....................... - - 50,511 (44,898) 5,613
------------- ------------- ------------ ------------- -------------
Stockholders' equity under Mexican GAAP... 104,344 130,292 219,555 (344,234) 109,957
------------- ------------- ------------ ------------- -------------
Total liabilities and stockholders' equity Ps 162,527 198,202 353,144 (429,645) 284,228
------------- ------------- ------------ ------------- -------------
F-61
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Condensed consolidated income statements:
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2003 CEMEX guarantors non-guarantors eliminations consolidated
-------------------------------------------- -----------------------------------------------------------------------
Net sales.................................. Ps - 26,496 62,576 (7,027) 82,045
Operating income........................... (60) 3,673 4,445 8,607 16,665
Net comprehensive financing result......... (1,920) (3,256) 1,087 1,026 (3,063)
Other income (expense), net................ 4,741 (531) 3,550 (12,990) (5,230)
Total IT, BAT and ESPS..................... 858 409 (1,274) (1,214) (1,221)
Equity in income of affiliates............. 3,582 5,688 210 (9,082) 398
------------- ------------ ------------ ------------- -------------
Consolidated net income.................... 7,201 5,983 8,018 (13,653) 7,549
------------- ------------ ------------ ------------- -------------
Minority interest....................... - - 22 326 348
------------- ------------ ------------ ------------- -------------
Majority interest net income............... Ps 7,201 5,983 7,996 (13,979) 7,201
============= ============ ============ ============= =============
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2004 CEMEX guarantors non-guarantors eliminations consolidated
-------------------------------------------- -----------------------------------------------------------------------
Net sales.................................. Ps - 27,579 72,312 (12,829) 87,062
Operating income........................... (39) 3,779 4,535 11,508 19,783
Net comprehensive financing result......... 1,262 508 6,822 (7,168) 1,424
Other income (expense), net................ (1,208) (478) 6,047 (9,530) (5,169)
Total IT, BAT and ESPS..................... 313 365 (1,214) (1,741) (2,277)
Equity in income of affiliates............. 13,637 15,199 3,118 (31,526) 428
------------- ------------ ------------ ------------- -------------
Consolidated net income.................... 13,965 19,373 19,308 (38,457) 14,189
------------- ------------ ------------ ------------- -------------
Minority interest........................ - - 3,332 (3,108) 224
------------- ------------ ------------ ------------- -------------
Majority interest net income............... Ps 13,965 19,373 15,976 (35,349) 13,965
============= ============ ============ ============= =============
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2005 CEMEX guarantors non-guarantors eliminations consolidated
-------------------------------------------- -----------------------------------------------------------------------
Net sales.................................. Ps - 27,398 148,347 (13,036) 162,709
Operating income........................... (58) 3,761 12,968 9,738 26,409
Net comprehensive financing result......... (2,031) (493) 10,040 (4,916) 2,600
Other income (expense), net................ (768) (440) 5,829 (7,993) (3,372)
Total IT, BAT and ESPS..................... 635 482 (3,474) (1,198) (3,555)
Equity in income of affiliates............. 24,647 24,916 6,628 (55,263) 928
------------- ------------ ------------ ------------- -------------
Consolidated net income.................... 22,425 28,226 31,991 (59,632) 23,010
------------- ------------ ------------ ------------- -------------
Minority interest....................... - - (6,792) 7,377 585
------------- ------------ ------------ ------------- -------------
Majority interest net income............... Ps 22,425 28,226 38,783 (67,009) 22,425
============= ============ ============ ============= =============
F-62
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Condensed consolidated statements of changes in financial position:
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2003 CEMEX guarantors non-guarantors eliminations consolidated
--------------------------------------------- ----------------------------------------------------------------------
Operating activities:
Majority interest net income................ Ps 7,201 5,983 7,996 (13,979) 7,201
Adjustments to reconcile to resources
provided by operating activities............ (1,775) (3,407) 23,446 (7,639) 10,625
----------------------------------------------------------------------
Resources provided by operations......... 5,426 2,576 31,442 (21,618) 17,826
Net change in working capital............... 19,662 15,058 (45,017) 10,408 111
----------------------------------------------------------------------
Resources provided by operations, net.... 25,088 17,634 (13,575) (11,210) 17,937
Financing activities:
Bank loans and notes payable, net........... (12,594) (240) 10,833 122 (1,879)
Dividends paid.............................. (4,038) (6,123) 152 5,971 (4,038)
Issuance of common stock.................... 4,064 - - - 4,064
Repurchase of preferred stock by
subsidiaries................................ - - (8,036) 554 (7,482)
Others...................................... 811 (9,109) 2,952 9,332 3,986
----------------------------------------------------------------------
Resources used in financing activities... (11,757) (15,472) 5,901 15,979 (5,349)
Investing activities:
Property, machinery and equipment, net...... - (1,034) (3,601) 285 (4,350)
Acquisitions, net of cash acquired.......... (7,505) (2,160) 13,880 (5,149) (934)
Dividends received.......................... 5,605 - - (5,605) -
Minority interest........................... - - (933) 57 (876)
Deferred charges and others................. (11,728) 686 7,216 (3,485) (7,311)
----------------------------------------------------------------------
Resources used in investing activities... (13,628) (2,508) 16,562 (13,897) (13,471)
Change in cash and investments........... (297) (346) 8,888 (9,128) (883)
Cash and investments initial balance..... 415 2,071 3,545 (1,811) 4,220
------------- ------------ ------------- -------------- -------------
Cash and investments ending balance...... Ps 118 1,725 12,433 (10,939) 3,337
============= ============ ============= ============== =============
F-63
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2004 CEMEX guarantors non-guarantors eliminations consolidated
--------------------------------------------- ----------------------------------------------------------------------
Operating activities:
Majority interest net income................ Ps 13,965 19,373 15,976 (35,349) 13,965
Adjustments to reconcile to resources
provided by operating activities............ (11,214) (13,937) 14,111 23,160 12,120
----------------------------------------------------------------------
Resources provided by operations......... 2,751 5,436 30,087 (12,189) 26,085
Net change in working capital............... (888) 11,720 (9,656) (3,450) (2,274)
----------------------------------------------------------------------
Resources provided by operations, net.... 1,863 17,156 20,431 (15,639) 23,811
Financing activities:
Bank loans and notes payable, net........... (1,572) 61 (11,698) 9,307 (3,902)
Bank loans acquisition of RMC Group......... - - 9,019 (9,019) -
Appreciation warrants....................... (1,085) - - - (1,085)
Dividends paid.............................. (4,142) - (292) 292 (4,142)
Issuance of common stock.................... 4,351 - - - 4,351
Issuance (repurchase) of preferred stock by
subsidiaries................................ - - (2,695) 1,936 (759)
Others...................................... (556) (14,741) 4,914 8,633 (1,750)
----------------------------------------------------------------------
Resources used in financing activities... (3,004) (14,680) (752) 11,149 (7,287)
Investing activities:
Property, machinery and equipment, net...... - (671) (4,309) 1,023 (3,957)
Acquisitions, net of cash acquired.......... (1,687) (1,405) (192) 3,105 (179)
Investment in RMC Group..................... - - (9,019) 622 (8,397)
Dividends received.......................... 272 - - (272) -
Minority interest........................... - - (1,506) 104 (1,402)
Deferred charges and others................. 2,546 (76) (1,869) (2,870) (2,269)
----------------------------------------------------------------------
Resources used in investing activities... 1,131 (2,152) (16,895) 1,712 (16,204)
Change in cash and investments........... (10) 324 2,784 (2,778) 320
Cash and investments initial balance..... 118 1,725 12,433 (10,939) 3,337
------------- ------------ ------------- -------------- -------------
Cash and investments ending balance...... Ps 108 2,049 15,217 (13,717) 3,657
============= ============ ============= ============== =============
F-64
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2005 CEMEX guarantors non-guarantors eliminations consolidated
--------------------------------------------- ----------------------------------------------------------------------
Operating activities:
Majority interest net income................ Ps 22,425 28,226 38,783 (67,009) 22,425
Adjustments to reconcile to resources
provided by operating activities............ (22,497) (23,652) 11,847 48,531 14,229
----------------------------------------------------------------------
Resources provided by operations......... (72) 4,574 50,630 (18,478) 36,654
Net change in working capital............... (5,905) 20,135 (27,014) 12,430 (354)
----------------------------------------------------------------------
Resources provided by operations, net.... (5,977) 24,709 23,616 (6,048) 36,300
Financing activities:
Bank loans and notes payable, net........... 10,380 60 4,377 - 14,817
Dividends paid.............................. (4,864) - - - (4,864)
Issuance of common stock from reinvestment
of dividends................................ 4,537 9,088 (9,088) - 4,537
Issuance of common stock under stock option
plan........................................ 18 - - - 18
Others...................................... (911) (15,202) 4,903 5,639 (5,571)
----------------------------------------------------------------------
Resources used in financing activities... 9,160 (6,054) 192 5,639 8,937
Investing activities:
Property, machinery and equipment, net...... - (1,069) (1,188) - (2,257)
Acquisitions, net of cash acquired.......... (10,165) (16,747) 26,782 (85) (215)
Investment in RMC Group..................... - - (47,080) - (47,080)
Minority interest........................... - - (155) - (155)
Deferred charges and others................. 6,874 (136) 6,101 (5,639) 7,200
----------------------------------------------------------------------
Resources used in investing activities... (3,291) (17,952) (15,540) (5,724) (42,507)
Change in cash and investments........... (108) 703 8,268 (6,133) 2,730
Cash and investments initial balance..... 108 2,049 15,217 (13,717) 3,657
------------- ------------ ------------- -------------- -------------
Cash and investments ending balance...... Ps - 2,752 23,485 (19,850) 6,387
============= ============ ============= ============== =============
F-65
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
The tables below present consolidated balance sheets as of December 31, 2004 and
2005, and income statements and statements of changes in financial position for
each of the three-year periods ended December 31, 2005 for the Guarantors. Such
information presents in separate columns each individual Guarantor on a Parent
Company-only basis, consolidation adjustments and eliminations, and the combined
Guarantors. All significant related parties balances and transactions between
the Guarantors have been eliminated in the "Combined guarantors" column.
The amounts presented in the column "Combined guarantors" are readily comparable
with the information of the Guarantors included in the condensed consolidated
financial information. As previously described, amounts presented under the line
item "Investments in affiliates" for both the balance sheets and income
statements, include the net investment in affiliates accounted for by the equity
method. In addition, the Guarantors' reconciliation of net income and
stockholders' equity to U.S. GAAP are presented below:
Guarantors' Combined Balance Sheets:
December 31, 2004 Guarantors (Parent Company-only)
--------------------------------------------------------------
Adjustments Combined
CEMEX and
Assets Mexico ETM eliminations guarantors
------ --------------- -------------- ------------- --------------
Current Assets
Cash and investments............................... Ps 855 1,194 - 2,049
Trade accounts receivable, net..................... 98 - - 98
Other receivables and other current assets......... 794 412 (310) 896
Related parties receivables........................ 3,843 1,777 (1,846) 3,774
Inventories........................................ 1,652 - - 1,652
--------------- -------------- ------------- --------------
Total current assets............................ 7,242 3,383 (2,156) 8,469
--------------- -------------- ------------- --------------
Other Investments
Investments in subsidiaries and affiliates......... 142,391 30,400 (50,000) 122,791
Long-term related parties receivables.............. 149 35,123 (35,123) 149
Other investments.................................. 324 - - 324
--------------- -------------- ------------- --------------
Total other investments......................... 142,864 65,523 (85,123) 123,264
--------------- -------------- ------------- --------------
Property, machinery and equipment.................. 31,758 - - 31,758
--------------- -------------- ------------- --------------
Intangible assets and deferred charges............. 1,883 4,430 - 6,313
--------------- -------------- ------------- --------------
Total Assets.................................... Ps 183,747 73,336 (87,279) 169,804
=============== ============== ============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current maturities of long-term debt............... Ps 39 - - 39
Trade accounts payable............................. 767 - - 767
Other accounts payable and accrued expenses........ 1,402 309 (310) 1,401
Related parties payables........................... 28,410 73 (1,846) 26,637
--------------- -------------- ------------- --------------
Total current liabilities....................... 30,618 382 (2,156) 28,844
--------------- -------------- ------------- --------------
Total long-term debt............................... 38 - - 38
--------------- -------------- ------------- --------------
Other Noncurrent Liabilities
Deferred income taxes.............................. 7,808 75 - 7,883
Others............................................. 214 - - 214
Long-term related parties payables................. 40,585 22,879 (35,123) 28,341
--------------- -------------- ------------- --------------
Total other noncurrent liabilities.............. 48,607 22,954 (35,123) 36,438
--------------- -------------- ------------- --------------
Total Liabilities............................... 79,263 23,336 (37,279) 65,320
--------------- -------------- ------------- --------------
Stockholders' equity............................... 85,111 49,597 (49,597) 85,111
Net income......................................... 19,373 403 (403) 19,373
--------------- -------------- ------------- --------------
Total stockholders' equity...................... 104,484 50,000 (50,000) 104,484
--------------- -------------- ------------- --------------
Total Liabilities and Stockholders' Equity...... Ps 183,747 73,336 (87,279) 169,804
=============== ============== ============= ==============
F-66
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Guarantors' Combined Balance Sheets:
December 31, 2005 Guarantors (Parent Company-only)
--------------------------------------------------------------
Adjustments Combined
CEMEX and
Assets Mexico ETM eliminations guarantors
------ --------------- -------------- ------------- --------------
Current Assets
Cash and investments.............................. Ps 835 1,917 - 2,752
Trade accounts receivable, net.................... 262 - - 262
Other receivables and other current assets........ 681 567 (103) 1,145
Related parties receivables....................... 2,017 8,043 (8,043) 2,017
Inventories....................................... 1,467 - - 1,467
----------------------------------------------------------------
Total current assets.......................... 5,262 10,527 (8,146) 7,643
----------------------------------------------------------------
Other Investments
Investments in subsidiaries and affiliates........ 167,751 35,001 (55,048) 147,704
Long-term related parties receivables............. 14,351 26,550 (34,304) 6,597
Other investments................................. 452 20 - 472
----------------------------------------------------------------
Total other investments....................... 182,554 61,571 (89,352) 154,773
----------------------------------------------------------------
Property, machinery and equipment................. 29,252 - - 29,252
----------------------------------------------------------------
Intangible assets and deferred charges............ 2,105 4,429 - 6,534
----------------------------------------------------------------
Total Assets.................................. Ps 219,173 76,527 (97,498) 198,202
================================================================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current maturities of long-term debt.............. 72 - - 72
Trade accounts payable............................ 976 - - 976
Other accounts payable and accrued expenses....... 1,538 293 (103) 1,728
Related parties payables.......................... 52,579 - 8,043) 44,536
----------------------------------------------------------------
Total current liabilities..................... 55,165 293 (8,146) 47,312
----------------------------------------------------------------
Total long-term debt.............................. 65 - - 65
----------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income taxes............................. 6,684 273 - 6,957
Others............................................ 417 - - 417
Long-term related parties payables................ 26,550 20,913 (34,304) 13,159
----------------------------------------------------------------
Total other noncurrent liabilities............ 33,651 21,186 (34,304) 20,533
----------------------------------------------------------------
Total Liabilities............................. 88,881 21,479 (42,450) 67,910
----------------------------------------------------------------
Stockholders' equity.............................. 102,066 49,396 (49,396) 102,066
Net income........................................ 28,226 5,652 (5,652) 28,226
----------------------------------------------------------------
Total stockholders' equity.................... 130,292 55,048 (55,048) 130,292
----------------------------------------------------------------
Total Liabilities and Stockholders' Equity.... Ps 219,173 76,527 (97,498) 198,202
================================================================
F-67
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Guarantors' Combined Income Statements:
Guarantors (Parent Company-only)
---------------------------------------------------
Adjustments
and Combined
For the year ended December 31, 2003 CEMEX Mexico ETM eliminations guarantors
-------------- -------- ------------- ------------
Net sales................................................ Ps 26,496 - - 26,496
Cost of sales............................................ (9,518) - - (9,518)
---------------------------------------------------
Gross profit........................................ 16,978 - - 16,978
Total operating expenses............................ (13,304) - (1) (13,305)
--------------------------------------------------
Operating income................................. 3,674 - (1) 3,673
--------------------------------------------------
Net comprehensive financing result............... (4,428) 1,172 - (3,256)
--------------------------------------------------
Other income (expense), net.............................. (508) (23) - (531)
--------------------------------------------------
Income before IT, BAT, ESPS and equity in affiliates..... (1,262) 1,149 (1) (114)
--------------------------------------------------
Total IT, BAT and ESPS.............................. 487 (78) - 409
--------------------------------------------------
Income before equity in income of affiliates........ (775) 1,071 (1) 295
Equity in income of affiliates................... 6,758 815 (1,885) 5,688
--------------------------------------------------
Net income.......................................... Ps 5,983 1,886 (1,886) 5,983
==================================================
Guarantors (Parent Company-only)
------------------------------------------------------
Adjustments
and Combined
For the year ended December 31, 2004 CEMEX Mexico ETM eliminations guarantors
-------------- -------- ------------- ---------------
Net sales................................................ Ps 27,579 - - 27,579
Cost of sales............................................ (10,252) - - (10,252)
------------------------------------------------------
Gross profit........................................ 17,327 - - 17,327
Total operating expenses............................ (13,548) - - (13,548)
------------------------------------------------------
Operating income................................. 3,779 - - 3,779
------------------------------------------------------
Net comprehensive financing result............... 18 490 - 508
------------------------------------------------------
Other income (expense), net.............................. (419) (59) - (478)
------------------------------------------------------
Income before IT, BAT, ESPS and equity in affiliates..... 3,378 431 - 3,809
------------------------------------------------------
Total IT, BAT and ESPS.............................. 756 (391) - 365
------------------------------------------------------
Income before equity in income of affiliates........ 4,134 40 - 4,174
Equity in income of affiliates................... 15,239 363 (403) 15,199
-------------------------------------------------------
Net income.......................................... Ps 19,373 403 (403) 19,373
======================================================-
Guarantors (Parent Company-only)
-------------------------------------------------------
Adjustments
and Combined
For the year ended December 31, 2005 CEMEX Mexico ETM eliminations guarantors
-------------- -------- ------------- ----------------
Net sales................................................ Ps 27,398 - - 27,398
Cost of sales............................................ (10,548) - - (10,548)
-------------------------------------------------------
Gross profit........................................ 16,850 - - 16,850
Total operating expenses............................ (13,089) - - (13,089)
-------------------------------------------------------
Operating income................................. 3,761 - - 3,761
-------------------------------------------------------
Net comprehensive financing result............... (2,118) 1,625 - (493)
-------------------------------------------------------
Other income (expense), net.............................. (267) (173) - (440)
-------------------------------------------------------
Income before IT, BAT, ESPS and equity in affiliates..... 1,376 1,452 - 2,828
-------------------------------------------------------
Total IT, BAT and ESPS.............................. 679 (197) - 482
-------------------------------------------------------
Income before equity in income of affiliates........ 2,055 1,255 - 3,310
Equity in income of affiliates................... 26,171 4,397 (5,652) 24,916
-------------------------------------------------------
Net income.......................................... Ps 28,226 5,652 (5,652) 28,226
=======================================================
F-68
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Guarantors' Combined Statements of Changes in Financial Position:
Guarantors (Parent Company-only)
-------------------------------------------------------
Adjustments
and Combined
For the year ended December 31, 2003 CEMEX Mexico ETM eliminations guarantors
-------------- -------- ------------- ----------------
Operating activities
Net income Ps 5,983 1,886 (1,886) 5,983
Adjustments to reconcile to resources provided by
operating activities...................................... (5,396) 103 1,886 (3,407)
-------------- -------- ------------- ----------------
Resources provided by operating activities................ 587 1,989 - 2,576
Net change in working capital......................... 41,659 1,146 (27,747) 15,058
-------------- -------- ------------- ----------------
Net resources provided by operating activities........ 42,246 3,135 (27,747) 17,634
-------------- -------- ------------- ----------------
Financing activities
Bank loans and notes payable, net......................... (274) 35 (1) (240)
Dividends................................................. (6,123) - - (6,123)
Long-term related parties receivables and payables, net... (42,057) - 32,910 (9,147)
Other noncurrent assets and liabilities, net.............. 38 (7,012) 7,012 38
-------------- -------- ------------- ----------------
Resources used in financing activities.................... (48,416) (6,977) 39,921 (15,472)
-------------- -------- ------------- ----------------
Investing activities
Property, plant and equipment, net........................ (1,034) - - (1,034)
Investments in subsidiaries and affiliates................ 5,948 (1,096) (7,012) (2,160)
Deferred charges.......................................... 654 - - 654
Other investments......................................... 32 5,163 (5,163) 32
-------------- -------- ------------- ----------------
Resources used in investing activities................ 5,600 4,067 (12,175) (2,508)
-------------- -------- ------------- ----------------
Change in cash and investments........................ (570) 225 (1) (346)
Cash and investments initial balance.................. 1,404 667 - 2,071
-------------- -------- ------------- ----------------
Cash and investments ending balance................... Ps 834 892 (1) 1,725
============== ======== ============= ================
Guarantors (Parent Company-only)
-------------------------------------------------------
Adjustments
and Combined
For the year ended December 31, 2004 CEMEX Mexico ETM eliminations guarantors
-------------- -------- ------------- ----------------
Operating activities
Net income................................................ Ps 19,373 403 (403) 19,373
Adjustments to reconcile to resources provided by
operating activities...................................... (14,052) (288) 403 (13,937)
-------------- -------- ------------- ----------------
Resources provided by operating activities................ 5,321 115 - 5,436
Net change in working capital......................... 8,428 3,180 112 11,720
-------------- -------- ------------- ----------------
Net resources provided by operating activities........ 13,749 3,295 112 17,156
-------------- -------- ------------- ----------------
Financing activities
Bank loans and notes payable, net......................... 61 - - 61
Dividends................................................. - - - -
Long-term related parties receivables and payables, net... (12,673) 22,879 (24,993) (14,787)
Other noncurrent assets and liabilities, net.............. 46 - - 46
-------------- -------- ------------- ----------------
Resources used in financing activities.................... (12,566) 22,879 (24,993) (14,680)
-------------- -------- ------------- ----------------
Investing activities
Property, plant and equipment, net........................ (671) - - (671)
Investments in subsidiaries and affiliates................ (453) (25,834) 24,882 (1,405)
Deferred charges.......................................... (183) (38) - (221)
Other investments......................................... 145 - - 145
-------------- -------- ------------- ----------------
Resources used in investing activities................ (1,162) (25,872) 24,882 (2,152)
-------------- -------- ------------- ----------------
Change in cash and investments........................ 21 302 1 324
Cash and investments initial balance.................. 834 892 (1) 1,725
-------------- -------- ------------- ----------------
Cash and investments ending balance................... Ps 855 1,194 - 2,049
============== ======== ============= ================
F-69
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Guarantors' Combined Statements of Changes in Financial Position:
Guarantors (Parent Company-only)
-------------------------------------------------------
Adjustments
and Combined
For the year ended December 31, 2005 CEMEX Mexico ETM eliminations guarantors
-------------- -------- ------------- ----------------
Operating activities
Net income................................................ Ps 28,226 5,652 (5,652) 28,226
Adjustments to reconcile to resources provided by
operating activities...................................... (25,104) (4,200) 5,652 (23,652)
-------------- -------- ------------- ----------------
Resources provided by operating activities................ 3,122 1,452 - 4,574
Net change in working capital......................... 26,294 55 (6,214) 20,135
-------------- -------- ------------- ----------------
Net resources provided by operating activities........ 29,416 1,507 (6,214) 24,709
-------------- -------- ------------- ----------------
Financing activities
Bank loans and notes payable, net......................... 60 - - 60
Stockholders contribution................................. 9,088 - - 9,088
Long-term related parties receivables and payables, net... (14,035) (8,232) 7,085 (15,182)
Other noncurrent assets and liabilities, net.............. - (20) - (20)
-------------- -------- ------------- ----------------
Resources used in financing activities.................... (4,887) (8,252) 7,085 (6,054)
-------------- -------- ------------- ----------------
Investing activities
Property, plant and equipment, net........................ (1,069) - - (1,069)
Investments in subsidiaries and affiliates................ (23,363) 7,487 (871) (16,747)
Deferred charges.......................................... (117) (19) - (136)
Other investments......................................... - - - -
-------------- -------- ------------- ----------------
Resources used in investing activities................ (24,549) 7,468 (871) (17,952)
-------------- -------- ------------- ----------------
Change in cash and investments........................ (20) 723 - 703
Cash and investments initial balance.................. 855 1,194 - 2,049
-------------- -------- ------------- ----------------
Cash and investments ending balance................... Ps 835 1,917 - 2,752
============== ======== ============= ================
Guarantors--Cash and investments
At December 31, 2004 and 2005, ETM's temporary investments are primarily
comprised of CEMEX CPOs. In June 2004 and 2005, CEMEX issued 650,424 CPOs and
1,794,446 CPOs, respectively, through dividends to ETM amounting to Ps18 and
Ps60, respectively.
Guarantors--Trade receivables
During December 2002, CEMEX Mexico and one of its subsidiaries established sales
of trade accounts receivable program ("securitization program"). With this
program, these companies effectively transferred control, risks and benefits
related to some of the trade accounts receivable balances. As of December 31,
2004 and 2005, these balances amounted to Ps 1,778 and Ps1,663 from CEMEX
Mexico, respectively, and Ps 1,460 and Ps1,592 from its subsidiary,
respectively.
Guarantors--Investment in affiliates
At December 31, 2004 and 2005, of the Guarantors' total investment in
affiliates, which are accounted for under the equity method, Ps 122,539 and
Ps147,445, respectively, correspond to investments in non-guarantors, and Ps 252
in 2004 and Ps259 in 2005, are related to minority investments in third parties.
At December 31, 2004 and 2005, the main Guarantors' investments in
non-guarantors are in CEMEX Concretos, S.A. de C.V and CEMEX Internacional, S.A.
de C.V., which together integrate the ready-mix concrete operations and export
trading activities in Mexico; and CEDICE, which is the parent company of the
international operations of CEMEX.
Guarantors--Indebtedness
At December 31, 2004 and 2005, the Guarantors had total indebtedness of U.S.$6.7
(Ps77) and U.S.$13 (Ps137), respectively. At December 31, 2004 and 2005, the
average annual interest rate of this indebtedness was approximately 9.9% during
2004 and 2005. Of the total indebtedness of the Guarantors at December 31, 2005,
approximately U.S.$6.8 (Ps72) matures in 2006 and U.S.$6.1 (Ps.65) matures in
2007 and thereafter.
F-70
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Guarantors--Balances and transactions with related parties
Balances with related parties result primarily from (i) the sale and purchase of
cement and clinker to and from affiliates, (ii) the sale and/or acquisition of
subsidiaries' shares within the CEMEX group, (iii) the invoicing of
administrative and other services received or provided from and to affiliated
companies, and (iv) the transfer of funds between the Guarantors, their
respective parents and certain affiliates. The related parties balance detail is
as follows:
Guarantors Assets Liabilities
------ -----------
At December 31, 2004 Short-Term Long-Term Short-Term Long-Term
---------- --------- ---------- ---------
CEMEX, S.A. de C.V........................................... Ps 939 - - 28,341
CEMEX Central, S.A. de C.V................................... 1,385 - - -
CEMEX Concretos, S.A. de C.V................................. 247 - - -
Corporacion Gouda, S.A. de C.V............................... 131 - - -
Incalpa, S.A. de C.V. ..................................... . 644 - - -
Construmexcla, S.A. de C.V. ................................. - - 6,369 -
CEMEX Irish Investments Company Limited. .................... - - 4,852 -
CEMEX Trademarks Worldwide................................... - - 5,589 -
Servicios CEMEX Mexico, S.A. de C.V. ........................ - - 344 -
Inmobiliaria Rio la Silla, S.A. de C.V...................... - 149 73 -
Centro Distribuidor de Cemento, S.A. de C.V. ................ - - 2,697 -
Petrocemex, S.A. de C.V..................................... - - 4,208 -
CEMEX Internacional, S.A. de C.V............................. - - 312 -
Turismo CEMEX, S.A. de C.V.. ................................ - - 1,105 -
Others....................................................... 428 - 1,088 -
---------- --------- ---------- ---------
Ps 3,774 149 26,637 28,341
========== ========= ========== =========
Guarantors Assets Liabilities
------ -----------
At December 31, 2005 Short-Term Long-Term Short-Term Long-Term
---------- --------- ---------- ---------
Proveedora Mexicana de Materiales, S.A. de C.V. ........... Ps 845 - - -
CEMEX Concretos, S.A. de C.V. .............................. 617 6,500 - -
CEMEX, S.A. de C.V. ........................................ 314 - 13,159
CEMEX International Finance Co. ............................ - - 18,706 -
Arkio de Mexico S.A. de C.V. ............................... - - 6,746 -
CEMEX Irish Investments Company Limited. .................. - - 4,555 -
Petrocemex, S.A. de C.V.. .................................. - - 4,376 -
Centro Distribuidor de Cemento, S.A. de C.V. .............. - - 3,504 -
Turismo CEMEX, S.A. de C.V.. .............................. - - 1,320 -
CEMEX Central, S.A. de C.V.. .............................. - - 1,301 -
MexCement Holdings ....................................... - - 1,124 -
Profesionales en Logistica de Mexico S.A. de C.V. ......... - - 1,040 -
CEMEX Internacional, S.A. de C.V. .......................... - - 345 -
Inmobiliaria Rio la Silla, S.A. de C.V. .................... - 97 73 -
Others ..................................................... 241 - 1,446 -
---------- --------- ---------- ---------
Ps 2,017 6,597 44,536 13,159
========== ========= ========== =========
The principal transactions carried out with affiliated companies are as follows:
Years ended December 31,
-------------------------------------------------
Guarantors 2003 2004 2005
-------------- ------------- -------------
Net sales......................................................... Ps 3,964 4,693 5,605
Purchases......................................................... (1,422) (1,423) (1,476)
Selling and administrative expenses .............................. (8,872) (7,914) (6,786)
Financial expense................................................. (5,112) (2,916) (6,999)
Financial income ................................................. 371 890 2,032
Other expense, net ............................................... Ps 304 598 (571)
============== ============= =============
F-71
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Net sales--The Guarantors sell cement and clinker to affiliated companies in
arms-length transactions.
Purchases--The Guarantors purchase raw materials from affiliates in arms-length
transactions.
Selling and administrative expenses--CEMEX allocates part of its corporate
expense to the Guarantors, which also incur rental and trademark rights expenses
payable to CEMEX.
Financial income and expense is recorded in receivables from and payables to
affiliated companies as described above. Additionally, the Guarantors receive
financial income on their temporary investment position, invested in the
non-guarantor treasury company.
Guarantors--U.S. GAAP reconciliation of net income and stockholders' equity:
As discussed at the beginning of this note 25, the following reconciliation to
U.S. GAAP does not include the reversal of Mexican GAAP inflation accounting
adjustments, as these adjustments represent a comprehensive measure of the
effects of price level changes in the inflationary Mexican economy, which is
considered a more meaningful presentation than historical cost-based financial
reporting for both Mexican and U.S. accounting purposes. The other principal
differences between Mexican GAAP and U.S. GAAP and the effect on net income and
stockholders' equity are presented below, with an explanation of the
adjustments, as follows:
Years ended December 31,
-----------------------------------------------
2003 2004 2005
------------ --------------- ---------------
Net income reported under Mexican GAAP........................... Ps 5,983 19,373 28,226
Approximate U.S. GAAP adjustments:
1. Deferred income taxes and ESPS (note B)....................... (9) (557) 107
2. Other employees' benefits (note C)............................ 38 11 (171)
3. Inflation adjustment of machinery and equipment (note D)...... (127) (112) (188)
4. Other U.S. GAAP adjustments (note E).......................... (181) 1,195 1,065
5. Monetary position result (note F)............................. 122 188 103
------------ --------------- ---------------
Total approximate U.S. GAAP adjustments...................... (157) 725 916
------------ --------------- ---------------
Total approximate net income under U.S. GAAP................. Ps 5,826 20,098 29,142
============ =============== ===============
>
At December 31,
-------------------------------------
2004 2005
---------------- ----------------
Total stockholders' equity under Mexican GAAP.................... Ps 104,484 130,292
Approximate U.S. GAAP adjustments:
1. Effect of pushdown of goodwill, net (note A).................. 1,744 1,839
2. Deferred income taxes and ESPS (note B)....................... (3,346) (3,485)
3. Other employees' benefits (note C)............................ (92) (171)
4. Inflation adjustment for machinery and equipment (note D)..... 1,863 3,546
5. Other U.S. GAAP adjustments (note E).......................... 6,856 16,886
---------------- ----------------
Total approximate U.S. GAAP adjustments...................... 7,025 18,615
---------------- ----------------
Total approximate stockholders' equity under U.S. GAAP....... Ps 111,509 148,907
================ ================
Guarantors--Notes to the U.S. GAAP reconciliation:
A. Business Combinations
In 1989 and 1990, through an exchange of its shares with CEMEX, CEMEX Mexico
acquired substantially all its Mexican subsidiaries from CEMEX. The original
excess of the purchase price paid by CEMEX over the fair value of the net assets
of these subsidiaries was Ps 7,876, of which Ps 4,074 were recorded in ETM under
Mexican GAAP at the time of the acquisition. The net adjustment in the
Guarantors stockholders' equity reconciliation to U.S. GAAP arising from this
pushed-down goodwill, after eliminating the amounts recorded under Mexican GAAP,
was Ps 854 in 2004 and Ps1,175 in 2005.
In addition, during 1995, CEMEX acquired an additional 24.2% equity interest in
TOLMEX, S.A. de C.V. ("TOLMEX"), through a public exchange offer pursuant to
which CEMEX exchanged its own shares for TOLMEX's shares. TOLMEX merged during
1999 with other Mexican subsidiaries creating CEMEX Mexico. The excess of the
purchase price paid by CEMEX over the fair value of the net assets of TOLMEX was
Ps 1,002. The net adjustment in the Guarantors' stockholders' equity
reconciliation to U.S. GAAP arising from this pushed-down goodwill was Ps 890 in
2004 and Ps664 in 2005.
F-72
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
As mentioned in note 25(a), for purposes of the reconciliation to U.S. GAAP,
CEMEX adopted SFAS 142 and SFAS 144 in 2002. As a result of this adoption,
effective January 1, 2002, amortization ceased for goodwill under U.S. GAAP and,
therefore, beginning in 2002, goodwill amortization recorded under Mexican GAAP
is adjusted for purposes of the reconciliation of net income and stockholders'
equity.
B. Deferred income taxes and Employees' Statutory Profit Sharing
Deferred income taxes adjustment in the stockholders' equity reconciliation to
U.S. GAAP, at December 31, 2004 and 2005, represented expense of Ps 418 and
expense of Ps719, respectively. In addition, deferred ESPS adjustment to U.S.
GAAP was an expense of Ps 2,928 in 2004 and an expense of Ps2,811 in 2005.
C. Other employees' benefits
Under U.S. GAAP, post-employment benefits for former or inactive employees,
including severance payments which are not part of a specific event of
restructuring, are accrued over an employee's service life. Until December 31,
2004 under Mexican GAAP, severance payments, which were not part of a business
restructuring or a substitution for pension benefits, were recognized in
earnings in the period in which they were paid. Beginning January 1, 2005,
according to newly issued Mexican GAAP, severance payments should also be
accrued over the employee's service life according to actuarial computations, in
a manner similar to U.S. GAAP (note 14).
For the years ended December 31, 2003, 2004 and 2005, severance provisions
recorded for U.S. GAAP purposes resulted in income of Ps38, income of Ps11 and
expense of Ps9, respectively, with an accrual of Ps92 and Ps108 at December 31,
2004 and 2005, respectively. At December 31, 2005, the provision for severance
payments under U.S. GAAP amounted to approximately Ps108, approximately Ps101
higher that the provision accrued under Mexican GAAP. The difference between the
provision under U.S. GAAP and Mexican GAAP represents the cumulative initial
effect from the accounting change under Mexican GAAP, which was recognized as of
January 1, 2005 as part of the unrecognized net transition obligation (note 14),
net of the amortization expense recorded under Mexican GAAP during 2005 related
to such transition obligation.
In connection with the change from defined benefit scheme to defined
contribution scheme for a portion of the Company's employees in Mexico effective
January 10, 2006 (note 14), considering that such change was a material event
which occurred before the issuance of the financial statements, under Mexican
GAAP, CEMEX recognized at December 31, 2005, a nonrecurring net expense of
approximately Ps203 related to: 1) an event of settlement of obligations, which
represented an income of approximately Ps162; and 2) an event of curtailment,
which represented an expense of approximately Ps365. The results from the change
in the pension plans were determined using a methodology consistent with the
rules set forth by SFAS 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits". For
purposes of the reconciliation of net income to U.S. GAAP, according to the
provisions of SFAS 88, settlement events should be recognized in the year in
which the settlement occurred. As a result, in the reconciliation of net income
to U.S. GAAP, the settlement income of approximately Ps162 (Ps117 after tax)
recognized under Mexican GAAP was canceled against the provision of pensions and
other postretirement benefits under U.S. GAAP.
D. Inflation Adjustment of Machinery and Equipment
As previously mentioned in note 25(i), for purposes of the U.S. GAAP
reconciliation, fixed assets of foreign origin were restated using the inflation
factor arising from the Consumer Price Index ("CPI") of each country, and
depreciation is based upon the revised amounts.
E. Other U.S. GAAP adjustments
Subsidiary companies--The Guarantors have adjusted their investment and their
equity in the earnings of subsidiary companies for the share of the approximate
U.S. GAAP adjustments applicable to these affiliates. The net effect in the
stockholders' equity reconciliation to U.S. GAAP at December 31, 2004 was an
income of Ps 6,856 and an expense of Ps16,886 in 2005. The effect on the net
income reconciliation to U.S. GAAP was an expense of Ps 181 in 2003, and income
of Ps 1,195 in 2004 and Ps1,065 in 2005. From the U.S. GAAP adjustments to
subsidiary companies in the Guarantors' reconciliation of stockholders' equity,
expense of Ps 3,346 in 2004 and expense of Ps3,485 in 2005, are related to
deferred IT and deferred ESPS.
F. Monetary position result
Monetary position result of the U.S. GAAP adjustments is determined by (i)
applying the annual inflation factor to the net monetary position of the U.S.
GAAP adjustments at the beginning of the period, plus (ii) the monetary position
effect of the adjustments during the period, determined in accordance with the
CPI inflation factor for the period.
F-73
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Supplemental Guarantors' Cash Flow Information under U.S. GAAP
The classifications of cash flows under Mexican GAAP and U.S. GAAP are basically
the same in respect of the transactions presented under each caption. The nature
of the differences between Mexican GAAP and U.S. GAAP in the amounts reported is
primarily due to (i) the elimination of inflationary effects in the variations
of monetary assets and liabilities arising from financing and investing
activities, against the corresponding monetary position result in operating
activities, (ii) the elimination of exchange rate fluctuations resulting from
financing and investing activities, against the corresponding unrealized foreign
exchange gain or loss included in operating activities, and (iii) the
recognition in operating, financing and investing activities of the U.S. GAAP
adjustments.
For the Guarantors, the following table summarizes the cash flow items as
required under SFAS 95 provided by (used in) operating, financing and investing
activities for the years ended December 31, 2003, 2004 and 2005, giving effect
to the U.S. GAAP adjustments, excluding the effects of inflation required by
Bulletin B-10 and Bulletin B-15. The following information is presented, in
millions of pesos, on a historical peso basis and it is not presented in pesos
of constant purchasing power:
Years ended December 31,
----------------------------------
2003 2004 2005
--------- ---------- ---------
Net cash provided by
operating activities.................. Ps 6,970 17,388 27,827
Net cash provided by (used in)
financing activities.................. (5,886) 31 9,085
Net cash used in investing activities.... (1,561) (17,355) (36,909)
========== ========== =========
Net cash flow from operating activities reflects cash payments for interests and
income taxes as follows:
Years ended December 31,
----------------------------------
2003 2004 2005
--------- ---------- ---------
Interest paid............................ Ps 150 - -
Income taxes paid........................ - 1 23
========= ========== =========
Guarantors' non-cash activities are comprised of the following:
Dividends declared to CEMEX amounting to Ps6,460.0 in 2003 were recognized by
the Guarantors as accounts payable to CEMEX as of December 31, 2003.
Contingent liabilities of the Guarantors
As of December 31, 2004 and 2005, CEMEX Mexico and ETM guaranteed debt of CEMEX
in the amount of U.S.$ 3,088 (Ps32,988) and U.S.$3,780 (Ps40,145) (note 12C).
F-74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SCHEDULES
The Board of Directors and Stockholders
CEMEX, S.A. de C.V.:
Under the date of January 27, 2006, we reported on the consolidated balance
sheets of CEMEX, S.A. de C.V. and subsidiaries as of December 31, 2004 and 2005,
and the related consolidated statements of income, changes in stockholders'
equity and changes in financial position for each of the years ended December
31, 2003, 2004 and 2005, which are included in this annual report on Form 20-F.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules in the annual report. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Cardenas Dosal, S.C.
/s/ Leandro Castillo Parada
Monterrey, N.L. Mexico
January 27, 2006
S-1
SCHEDULE I
CEMEX, S.A. DE C.V. (PARENT COMPANY ONLY)
Balance Sheets
(Millions of constant Mexican Pesos as of December 31, 2005)
December 31,
--------------------------
Assets Note 2004 2005
----------- -----------
Current Assets
Cash and investments ............................................ Ps 108 -
Other accounts receivable........................................ C 1,014 761
Related parties accounts receivable.............................. H 712 499
----------- -----------
Total current assets......................................... 1,834 1,260
----------- -----------
Investments And Noncurrent Receivables
Investments in subsidiaries and affiliated companies............. D 100,467 132,795
Other investments and noncurrent accounts receivable............. 897 2,574
Long-term related parties accounts receivable.................... H 34,037 20,913
----------- -----------
Total investments and noncurrent accounts receivable......... 135,401 156,282
----------- -----------
Land and Buildings
Land............................................................. 1,691 1,691
Buildings........................................................ 434 434
Accumulated depreciation......................................... (257) (261)
----------- -----------
Total land and buildings..................................... 1,868 1,864
----------- -----------
Intangible Assets and Deferred Charges.............................. E 4,259 3,121
----------- -----------
Total Assets................................................. Ps 143,362 162,527
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Bank loans....................................................... G Ps 1,588 2,039
Current maturities of long-term debt............................. G 1,812 4,365
Other accounts payable and accrued expenses...................... F 674 452
Related parties accounts payable................................. H 6,554 405
----------- -----------
Total current liabilities.................................... 10,628 7,261
----------- -----------
Long Term Debt
Bank loans....................................................... G 9,529 17,967
Notes payable.................................................... G 15,020 16,511
Current maturities of long-term debt............................. G (1,812) (4,365)
Long-term related parties accounts payable....................... H 24,933 20,313
----------- -----------
Total long-term debt......................................... 47,670 50,426
----------- -----------
Other noncurrent liabilities................................. 1,407 496
----------- -----------
Total Liabilities............................................ 59,705 58,183
----------- -----------
Stockholders' Equity
Common stock-historical cost basis .............................. 62 64
Common stock-accumulated inflation adjustments................... 3,735 3,735
Additional paid-in capital....................................... 42,580 47,133
Deficit in equity restatement.................................... (80,958) (82,387)
Cumulative initial deferred income tax effects................... 1,208 1,208
Retained earnings................................................ 103,065 112,166
Net income....................................................... 13,965 22,425
----------- -----------
Total stockholders' equity................................... 83,657 104,344
----------- -----------
Total Liabilities and Stockholders' Equity .................. Ps 143,362 162,527
=========== ===========
See accompanying notes to Parent Company-only financial statements.
S-2
SCHEDULE I (Continued)
CEMEX, S.A. DE C.V. (PARENT COMPANY ONLY)
Statements of Income
(Millions of constant Mexican Pesos as of December 31, 2005, except for earnings per share)
---------------------------------------
Years ended December 31,
---------------------------------------
Note 2003 2004 2005
---------- ----------- ----------
Equity in income of subsidiaries and affiliates........................ 2,722 12,661 23,650
Rental income.......................................................... 299 287 273
License fees........................................................... 561 689 724
---------- ----------- ----------
Total revenues...................................................... H 3,582 13,637 24,647
---------- ----------- ----------
Administrative expenses................................................ (60) (39) (58)
---------- ----------- ----------
Operating income.................................................... 3,522 13,598 24,589
---------- ----------- ----------
Comprehensive financing result:
Financial expense................................................. (3,347) (2,685) (4,622)
Financial income.................................................. 3,333 1,540 1,592
Results from valuation and liquidation of financial instruments... 16 459 932
Foreing exchange result, net...................................... (2,788) 847 (779)
Monetary position result.......................................... 866 1,101 846
---------- ----------- ----------
Net comprehensive financing result.............................. (1,920) 1,262 (2,031)
---------- ----------- ----------
Other income (expense), net............................................ H 4,741 (1,208) (768)
---------- ----------- ----------
Income before income taxes.......................................... 6,343 13,652 21,790
Income tax benefit and business assets tax, net........................ K 858 313 635
---------- ----------- ----------
Net income.......................................................... 7,201 13,965 22,425
========== =========== ==========
Basic earnings per share............................................ L 0.76 1.40 2.16
Diluted earnings per share.......................................... L 0.74 1.39 2.15
========== =========== ==========
See accompanying notes to Parent Company-only financial statements.
S-3
SCHEDULE I (Continued)
CEMEX, S.A. DE C.V. (PARENT COMPANY ONLY)
Statements of Changes in Financial Position
(Millions of constant Mexican Pesos as of December 31, 2005)
---------------------------------------------------
Years ended December 31,
---------------------------------------------------
2003 2004 2005
--------------- --------------- ---------------
Operating activities
Net income......................................................... Ps 7,201 13,965 22,425
Adjustments to reconcile to resources provided by operating activities:
Depreciation of properties....................................... 6 7 4
Amortization of deferred charges and credits, net................ 347 355 128
Deferred income tax charged to results........................... 594 1,085 1,021
Equity in income of subsidiaries and affiliates.................. (2,722) (12,661) (23,650)
--------------- --------------- ---------------
Resources provided by (used in) operating activities........... 5,426 2,751 (72)
--------------- --------------- ---------------
Changes in working capital:
Other accounts receivable........................................ 447 (241) 253
Short-term related parties accounts receivable and payable, net.. 19,374 1,736 (5,936)
Other accounts payable and accrued expenses...................... (159) (2,383) (222)
--------------- --------------- ---------------
Net change in working capital................................ 19,662 (888) (5,905)
--------------- --------------- ---------------
Net resources provided by (used in) operating activities........ 25,088 1,863 (5,977)
--------------- --------------- ---------------
Financing activities
Proceeds from bank loans (repayments), net......................... (10,198) 5,883 8,889
Notes payable, net................................................. (2,396) (7,455) 1,491
Liquidation of optional instruments................................ - (1,085) -
Dividends paid..................................................... (4,038) (4,142) (4,864)
Issuance of common stock from stock dividend elections............. 4,017 4,282 4,537
Issuance of common stock under stock option programs............... 47 69 18
Disposal of shares under repurchase program........................ 420 - -
Other financing activities, net.................................... 391 (556) (911)
--------------- --------------- ---------------
Resources provided by (used in) financing activities........... (11,757) (3,004) 9,160
--------------- --------------- ---------------
Investing activities
Long-term related parties accounts receivable, net................. (11,210) 2,066 8,504
Net change in investment in subsidiaries........................... (7,505) (1,687) (10,165)
Dividends received................................................. 5,605 272 -
Deferred charges................................................... (52) 276 52
Other noncurrent accounts receivable............................... (466) 204 (1,682)
--------------- --------------- ---------------
Resources provided by (used in) investing activities........... (13,628) 1,131 (3,291)
--------------- --------------- ---------------
Increase (decrease) in cash and investments.................... (297) (10) (108)
Cash and investments at beginning of year...................... 415 118 108
--------------- --------------- ---------------
Cash and investments at end of year............................ Ps 118 108 -
=============== =============== ===============
See accompanying notes to Parent Company-only financial statements.
S-4
SCHEDULE I (Continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS
As of December 31, 2003, 2004 and 2005
(Millions of constant Mexican pesos as of December 31, 2005)
1. DESCRIPTION OF BUSINESS
CEMEX, S.A. de C.V. (CEMEX or the Company) is a Mexican holding company (parent)
of entities whose main activities are oriented to the construction industry,
through the production and marketing of cement, ready-mix concrete and
aggregates.
B. SIGNIFICANT ACCOUNTING POLICIES
B.1) BASIS OF PRESENTATION AND DISCLOSURE
The financial statements have been prepared in accordance with Generally
Accepted Accounting Principles in Mexico ("Mexican GAAP"), which recognize the
effects of inflation on the financial information.
The preparation of the Parent Company's financial statements considered, when
applicable, the same accounting policies listed in note 3 to CEMEX and
subsidiaries' consolidated financial statements included elsewhere in this
annual report.
In addition, this section includes references to other notes to the consolidated
financial statements, in those cases when information also refers to the Parent
Company.
B.2) RESTATEMENT OF COMPARATIVE FINANCIAL STATEMENTS
The restatement factors applied to the Parent Company's financial statements of
prior periods were determined using Mexican inflation.
Factor using
Mexican
inflation
---------------
2002 to 2003.................................................... 1.0387
2003 to 2004.................................................... 1.0539
2004 to 2005.................................................... 1.0300
---------------
C. OTHER ACCOUNTS RECEIVABLE
As of December 31, 2004 and 2005, other short-term accounts receivable of the
Parent Company consist of:
2004 2005
---------- ---------
Non-trade receivables.................................... Ps 236 225
Advances and valuation of derivative instruments (1)..... 403 53
Other refundable taxes................................... 375 483
---------- ---------
Ps 1,014 761
========== =========
(1) See notes 12 and 17 to our consolidated financial statements included
elsewhere in this annual report
D. INVESTMENTS IN SUBSIDIARIES AND AFFILIATES
As of December 31, 2004 and 2005, investments of the Parent Company in
subsidiaries and affiliated companies, accounted for by the equity method, are
as follows:
2004 2005
---------- ---------
Book value at acquisition date.......................... Ps 67,143 78,126
Revaluation by equity method............................ 33,324 54,669
---------- ---------
Ps 100,467 132,795
========== =========
S-5
SCHEDULE I (Continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS-(Continued)
As of December 31, 2003, 2004 and 2005
(Millions of constant Mexican pesos as of December 31, 2005)
E. INTANGIBLE ASSETS AND DEFERRED CHARGES
As of December 31, 2004 and 2005, intangible assets of indefinite life and
deferred charges of the Parent Company are summarized as follows:
2004 2005
---------- ---------
Intangible assets of indefinite useful life:
Goodwill................................................Ps 2,143 2,080
Accumulated amortization ............................... (193) (187)
---------- ---------
1,950 1,893
Deferred charges:
Deferred financial expenses............................. 203 163
Deferred taxes.......................................... 2,029 1,009
Others.................................................. 390 378
Accumulated amortization ............................... (313) (322)
---------- ---------
Ps 2,309 1,228
---------- ---------
4,259 3,121
========== =========
F. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other accounts payable and accrued expenses of the Parent Company as of December
31, 2004 and 2005 consist of:
2004 2005
---------- ---------
Accounts payable and accrued expenses..................Ps 1 1
Interests payable...................................... 212 256
Taxes payable.......................................... 178 190
Dividends payable...................................... 5 5
Valuation of derivative instruments (1)................ 278 -
---------- ---------
Ps 674 452
========== =========
(1) See notes 12 and 17 to our consolidated financial statements included
elsewhere in this annual report
Short-term provisions primarily consist of: (i) accruals for insurance payments
and (ii) accruals related to the portion of legal assessments to be settled in
short-term. Commonly, these amounts are revolving in nature and are to be
settled and replaced by similar amounts within the next 12 months.
G. SHORT-TERM AND LONG-TERM BANK LOANS AND NOTES PAYABLE
The maturities of long-term debt of the Parent Company as of December 31, 2005
are as follows:
Parent
----------
2007..............................................................Ps 2,930
2008.............................................................. 8,383
2009.............................................................. 11,776
2010.............................................................. 5,522
2011 and thereafter...............................................Ps 1,502
----------
30,113
==========
As of December 31, 2004 and 2005, 90% and 41%, respectively of the Parent
Company's short-term debt is denominated in dollars. Relating to long-term debt,
84% and 62% is denominated in dollars in 2004 and 2005, respectively. The
remaining debt, in both years, is primarily denominated in Mexican pesos.
In the Parent Company's balance sheet at December 31, 2004 and 2005, there were
short-term debt transactions, classified as long-term debt, for U.S.$350
(Ps3,717) and U.S.$125 (Ps1,328), respectively, due to the Company's ability and
the intention to refinance such indebtedness with the available amounts of
committed long-term lines of credit.
S-6
SCHEDULE I (Continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS-(Continued)
As of December 31, 2003, 2004 and 2005
(Millions of constant Mexican pesos as of December 31, 2005)
H. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The main balances of accounts receivable from and accounts payable of the Parent
Company with related parties as of December 31, 2004 and 2005 are as follows:
Assets Liabilities
2004 Short term Long term Short term Long term
----------- ------------ ----------- -----------
CEMEX Mexico, S.A. de C.V................................ Ps - 11,158 6,433 275
CEMEX International Finance Co........................... - - 62 20,538
Empresas Tolteca de Mexico, S.A. de C.V.................. 73 22,879 - -
CEMEX Irish Investments Company Limited.................. - - 23 3,981
Centro Distribuidor de Cemento, S.A. de C.V.............. - - 33 139
CEMEX Manila Investments B.V............................. 607 - - -
CEMEX Venezuela, S.A.C.A................................. 19 - - -
Others................................................... 13 - 3 -
----------- ------------ ----------- -----------
Ps 712 34,037 6,554 24,933
=========== ============ =========== ===========
Assets Liabilities
2005 Short term Long term Short term Long term
----------- ------------ ----------- -----------
CEMEX Mexico, S.A. de C.V................................ Ps - - 314 7,754
CEMEX International Finance Co........................... - - 44 8,833
Empresas Tolteca de Mexico, S.A. de C.V.................. - 20,913 - -
CEMEX Irish Investments Company Limited.................. - - 36 3,726
CEMEX UK Limited......................................... 461 - - -
CEMEX Venezuela, S.A.C.A................................. 30 - - -
Latin Asia Investments, Pte. Ltd......................... 5 - - -
Others................................................... 3 - 11 -
----------- ------------ ----------- -----------
Ps 499 20,913 405 20,313
=========== ============ =========== ===========
The main operations with related parties are:
Parent 2003 2004 2005
---------- --------- ----------
Rental income............................................ Ps 299 287 273
License fees............................................. 561 689 724
Financial expenses....................................... (861) (968) (1,984)
Management service expense............................... (1,549) (958) (837)
Financial income......................................... 3,330 1,533 1,586
Dividends received....................................... Ps 6,020 292 -
========== ========= ==========
I. STOCKHOLDERS' EQUITY AND COMPREHENSIVE NET INCOME (LOSS)
See note 15 to our consolidated financial statements included elsewhere in this
annual report.
J. EXECUTIVE STOCK OPTION PROGRAMS
See note 16 to our consolidated financial statements included elsewhere in this
annual report.
S-7
SCHEDULE I (Continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS-(Continued)
As of December 31, 2003, 2004 and 2005
(Millions of constant Mexican pesos as of December 31, 2005)
K. INCOME TAX (IT) AND BUSINESS ASSETS TAX (BAT)
The income tax law in Mexico provides that companies must pay either IT or BAT
depending on which amount is greater with respect to their Mexican operations.
Both taxes recognize the effects of inflation, although in a manner different
from Mexican GAAP. See note 18 to our consolidated financial statements included
elsewhere in this annual report.
The IT benefit (income), presented in the income statement is integrated as
follows:
2003 2004 2005
---------- --------- ----------
Received from subsidiaries................. Ps 1,452 1,398 1,656
Deferred IT................................ (594) (1,085) (1,021)
---------- --------- ----------
Ps 858 313 635
========== ========= ==========
CEMEX has accumulated IT loss carryforwards which, restated for inflation, can
be amortized against taxable income in the succeeding ten years according to
income tax law:
Year in which tax loss occurred Amount of Year of
carryforwards expiration
--------------- -------------
1998....................................... Ps 3,614 2008
2001....................................... 1,812 2011
2002....................................... 5,870 2012
2003....................................... 4,281 2013
2004....................................... 42 2014
2005....................................... 295 2015
---------------
Ps 15,914
===============
The Company must generate taxable income to preserve the benefit of the tax loss
carryforwards generated beginning in 2002.
The BAT Law establishes a 1.8% tax levy on assets, restated for inflation in the
case of inventory and fixed assets, and deducting certain liabilities. CEMEX,
S.A. de C.V. is a Parent Company, authorized by Mexican Tax Authorities to
consolidate for tax purposes in accordance with the Income Tax Law; as a result,
the Company is obliged in terms of the BAT law to calculate and file the
consolidated asset value for the exercise.
L. EARNINGS PER SHARE
See note 21 to our consolidated financial statements included elsewhere in this
annual report.
M. CONTINGENCIES AND COMMITMENTS
See note 22 to our consolidated financial statements included elsewhere in this
annual report.
S-8
SCHEDULE II
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
December 31, 2003, 2004 and 2005
(Millions of constant Mexican Pesos as of December 31, 2005)
Valuation and Qualifying Accounts as of December 31, 2003, 2004 and
2005, is a follows:
Description Balance at Charged to Balance at
beginning costs and end of
of period expenses Deductions Others (1) period
------------ ------------ ------------ ------------ -------------
Year ended December 31, 2003:
Allowance for doubtful accounts........... Ps 539 358 286 34 645
============ ============ ============ ============ =============
Year ended December 31, 2004:
Allowance for doubtful accounts........... 645 401 341 20 725
============ ============ ============ ============ =============
Year ended December 31, 2005:
Allowance for doubtful accounts........... 725 279 256 494 1,242
============ ============ ============ ============ =============
(1) The column "Others" includes the balances of allowance for doubtful
accounts assumed through business combination as of the acquisition date,
which for the year ended December 31, 2005 was approximately Ps462
calculated to the acquisition of RMC. In addition, this column includes the
effects of foreign currency translation and the inflation adjustment of the
initial balance in the restatement to constant pesos as of the end of the
same period.
S-9
EXHIBIT INDEX
-------------
Exhibit
No. Description
--------- -----------
1.1 Amended and Restated by-laws of CEMEX, S.A. de C.V. (a)
2.1 Form of Trust Agreement between CEMEX, S.A. de C.V., as founder
of the trust, and Banco Nacional de Mexico, S.A. regarding the
CPS. (b)
2.2 Amendment Agreement, dated as of November 21, 2002, amending the
Trust Agreement between CEMEX, S.A. de C .V., as founder of the
trust, and Banco Nacional de Mexico, S.A. regarding the CPOs. (c)
2.3 Form of CPO Certificate. (b)
2.4 Form of Second Amended and Restated Deposit Agreement (A and B
share CPOs), dated as of August 10, 1999, among CEMEX, S.A. de
C.V., Citibank, N.A. and holders and beneficial owners of
American Depositary Shares. (b)
2.5 Form of American Depositary Receipt (included in Exhibit 2.3)
evidencing American Depositary Shares. (b)
2.6 Form of Certificate for shares of Series A Common Stock of CEMEX,
S.A. de C. V. (b)
2.7 Form of Certificate for shares of Series B Common Stock of CEMEX,
S.A. de C.V. (b)
4.1 Note Purchase Agreement dated June 23, 2003, by and among CEMEX
Espana Finance, LLC, as issuer, CEMEX Espana, Sandworth Plaza
Holding B.V., Cemex Caracas Investments 13.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments B.V. and Cemex
Egyptian Investments B.V., as guarantors, and several
institutional purchasers named therein, in connection with the
issuance by CEMEX Espana Finance, LLC of U.S.$103 million
aggregate principal amount of Senior Notes due 2010, U.S.$96
million aggregate principal amount of Senior Notes due 2013,
U.S.$201 million aggregate principal amount of Senior Notes due
2015. (d)
4.2 $1,150,000,000 Term Loan Agreement, dated October 15, 2003, by
and among New Sunward Holding B.V. as borrower, CEMEX, S.A. de
C.V., CEMEX Mexico, S.A. de C.V. and Empresas Tolteca de Mexico,
S.A. de C.V. as guarantors, and the several lenders named
therein. (d)
4.3 Term and Revolving Facilities Agreement, dated as of March 30,
2004, by and among CEMEX Espana, as borrower, Sandworth Plaza
Holding B.V., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments E.V. and Centex
Egyptian Investments, E.V., as guarantors, Banco Bilbao Vizcaya
Argentaria, S.A. and Societe Generale, as mandated lead
arrangers, and the several banks and other financial institutions
named therein, as lenders, for an aggregate amount of
E250,000,000 and V19.308,000,000. (d)
4.4 (euro)250,000,000, (Y)19,308,000,000 Term and Revolving
Facilities Agreement, dated March 30, 2004, for CEMEX ESPANA,
S.A., as Borrower, CEMEX Caracas Investments B.V., CEMEX Caracas
II Investments B.V., CEMEX Egyptian Investments B.V., CEMEX
Manila Investments B.V. and Sandworth Plaza Holding B.V., as
Guarantors, arranged by Banco Bilbao Vizcaya Argentaria, S.A. and
Societe Generale, S.A., with Banco Bilbao Vizcaya Argentaria,
S.A. acting as Agent. (d)
4.5 CEMEX Espana Finance LLC Note Purchase Agreement, dated as of
April 15, 2004 for (Y)4,980,600,000 1.79% Senior Notes, Series
2004, Tranche 1, due 2010 and (Y)6,087,400,000 1.99% Senior
Notes, Series 2004, Tranche 2, due 2011. (e)
4.6 U.S.$800,000,000 Credit Agreement, dated as of June 23, 2004,
among CEMEX, S.A. de C.V., as Borrower and CEMEX Mexico, S.A. de
C.V. and Empresas Tolteca de Mexico, S.A. de C.V., as Guarantors
and Barclays Bank PLC as Issuing Bank and Documentation Agent and
ING Bank N.V. as Issuing Bank and Barclays Capital, the
Investment Banking division of Barclays Bank Plc as Joint
Bookrunner and ING Capital LLC as Joint Bookrunner and
Administrative Agent. (e)
4.7 U.S.$1,250,000,000 Term and Revolving Facilities Agreement, dated
September 24, 2004 for New Sunward Holding B.V., as Borrower,
CEMEX, S.A. de C.V., CEMEX Mexico, S.A. de C.V. and Empresas
Tolteca De Mexico, S.A. de C.V., as Guarantors, arranged by
Exhibit
No. Description
---------- ------------
Citigroup Global Markets Limited and Goldman Sachs International,
with Citibank International PLC acting as Agent. (e)
4.8 U.S.$3,800,000,000 Term and Revolving Facilities Agreement, dated
September 24, 2004 for CEMEX Espana, S.A., as Borrower, CEMEX
Espana, S.A., CEMEX Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Egyptian Investments B.V., CEMEX Manila
Investments B.V., CEMEX American Holdings B.V., as Guarantors,
arranged by Citigroup Global Markets Limited and Goldman Sachs
International with Citibank International PLC acting as Agent.
(e)
4.9 Implementation Agreement, dated September 27, 2004, by and
between CEMEX UK Limited and RMC Group p.l.c. (e)
4.10 Scheme of Arrangement, dated October 25, 2004, pursuant to which
CEMEX UK Limited acquired the outstanding shares of RMC Group
p.l.c. (e)
4.11 Asset Purchase Agreement by and between CEMEX, Inc. and
Votorantim Participacoes S.A., dated as of February 4, 2005. (e)
4.11.1 Amendment No. 1 to Asset Purchase Agreement, dated as of March
31, 2005, by and between CEMEX, Inc. and Votorantim Participacoes
S.A. (e)
4.12 (pound)1,000,000,000 Amended and Restated Term and Revolving
Credit Agreement, dated March 16, 2005, by and among RMC Group
Limited, CEMEX Espana, S.A., Cemex Caracas Investments B.V.,
Cemex Caracas II Investments B.V., Cemex Egyptian Investments
B.V., Cemex Manila Investments B.V., Cemex American Holdings B.V.
and Cemex Shipping B.V., as Original Guarantors, RMC Group
Limited, as Original Borrower, Banc of America Securities
Limited, BNPParibas, HSBC Investment Bank plc, the Royal Bank of
Scotland plc, West LB AG, London Branch, as Mandated Lead
Arrangers and the Royal Bank of Scotland plc, as Agent. (e)
4.13 U.S.$1,000,000,000 Term Credit Agreement, dated as of April 5,
2005, among CEMEX, S.A. de C.V., as Borrower, CEMEX Mexico, S.A.
de C.V., as Guarantor, Empresas Tolteca de Mexico, S.A. de C.V.,
as Guarantor, Barclays Bank PLC, as Administrative Agent,
Barclays Capital, the Investment Banking Division of Barclays
Bank plc, as Joint Lead Arranger and Joint Bookrunner, Citigroup
Global Markets Inc., as Documentation Agent, Joint Lead Arranger
and Joint Bookrunner, Barclays Bank plc, Citibank, N.A., and
Citibank, N.A., Nassau, Bahamas Branch as Lenders. (e)
4.14 U.S.$1,200,000,000 Term Credit Agreement, dated as of May 31,
2005, among CEMEX, S.A. de C.V., as Borrower, CEMEX Mexico, S.A.
de C.V., as Guarantor, Empresas Tolteca de Mexico, S.A. de C.V.,
as Guarantor, Barclays Bank PLC, as Administrative Agent,
Barclays Capital, the Investment Banking Division of Barclays
Bank PLC, as Joint Lead Arranger and Joint Bookrunner, and
Citigroup Global Markets Inc., as Documentation Agent, Joint Lead
Arranger and Joint Bookrunner. (f)
4.15 U.S.$700,000,000 Term and Revolving Facilities Agreement, dated
June 27, 2005, for New Sunward Holding B.V., as Borrower, CEMEX,
S.A. de C.V., CEMEX Mexico, S.A. de C.V. and Empresas Tolteca De
Mexico, S.A. de C.V., as Guarantors, arranged by Banco Bilbao
Vizcaya Argentaria, S.A., BNP Paribas and Citigroup Global
Markets Limited, as Mandated Lead Arrangers and Joint
Bookrunners, the several financial institutions named therein, as
Lenders, and Citibank, N.A., as Agent. (f)
4.16 Note Purchase Agreement, dated as of June 13, 2005, among CEMEX
Espana Finance LLC, as issuer, CEMEX Espana, Cemex Caracas
Investments B.V., Cemex Caracas II Investments B.V., Cemex Manila
Investments B.V., Cemex Egyptian Investments B.V., Cemex American
Holdings B.V. and Cemex Shipping B.V., as guarantors, and several
institutional purchasers, relating to the private placement by
CEMEX Espana Finance, LLC of U.S.$133,000,000 aggregate principal
amount of 5.18% Senior Notes due 2010, and U.S.$192,000,000
aggregate principal amount of 5.62% Senior Notes due 2015. (f)
4.17 Amended and Restated Limited Liability Company Agreement of CEMEX
Southeast LLC, dated as of July 1, 2005, among CEMEX Southeast
LLC, CEMEX Southeast Holdings, LLC, Ready Mix USA, Inc. and
CEMEX, Inc. (f)
Exhibit
No. Description
---------- ------------
4.17.1 Amendment No. 1 to Amended and Restated Limited Liability Company
Agreement of CEMEX Southeast LLC, dated as of September 1, 2005,
among CEMEX Southeast LLC, CEMEX Southeast Holdings, LLC, Ready
Mix USA, Inc. and CEMEX, Inc. (f)
4.18 Limited Liability Company Agreement of Ready Mix USA, LLC, dated
as of July 1, 2005, among Ready Mix USA, LLC, CEMEX Southeast
Holdings, LLC, Ready Mix USA, Inc. and CEMEX, Inc. (f)
4.18.1 Amendment No. 1 to Limited Liability Company Agreement of Ready
Mix USA, LLC, dated as of September 1, 2005, among Ready Mix USA,
LLC, CEMEX Southeast Holdings, LLC, Ready Mix USA, Inc. and
CEMEX, Inc. (f)
4.19 Asset and Capital Contribution Agreement, dated as of July 1,
2005, among Ready Mix USA, Inc., CEMEX Southeast Holdings, LLC,
and CEMEX Southeast LLC. (f)
4.20 Asset and Capital Contribution Agreement, dated as of July 1,
2005, among Ready Mix USA, Inc., CEMEX Southeast Holdings, LLC,
and Ready Mix USA, LLC. (f)
4.21 Asset Purchase Agreement, dated as of September 1, 2005, between
Ready Mix USA, LLC and RMC Mid-Atlantic, LLC. (f)
8.1 List of subsidiaries of CEMEX, S.A. de C.V. (f)
12.1 Certification of the Principal Executive Officer of CEMEX, S.A.
de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (f)
12.2 Certification of the Principal Financial Officer of CEMEX, S .A.
de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (f)
12.3 Certification of the Principal Executive Officer of CEMEX Mexico,
S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (f)
12.4 Certification of the Principal Financial Officer of CEMEX Mexico,
S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (f)
12.5 Certification of the Principal Executive Officer of Empresas
Tolteca de Mexico, S.A. de CV. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (f)
12.6 Certification of the Principal Financial Officer of Empresas
Tolteca de Mexico, S.A. de C.V. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (f)
13.1 Certification of the Principal Executive and Financial Officers
of CEMEX, S. 1. de C.V. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (f)
13.2 Certification of Principal Executive and Financial Officers of
CEMEX Mexico, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (f)
13.3 Certification of Principal Executive and Financial Officers of
Empresas Tolteca de Mexico, S.A. de C.V. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (f)
14.1 Consent of KPMG Cardenas Dosal, S.C. to the incorporation by
reference into the effective registration statements of CEMEX,
S.A. de C.V. under the Securities Act of 1933 of their report
with respect to the consolidated financial statements of CEMEX,
S.A. de C. V, which appears in this Annual Report on Form 20-F.
(f)
___________________________
(a) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form F-3 of CEMEX, S.A. de C.V. (Registration
No. 333-11382), filed with the Securities and Exchange Commission on
August 27, 2003
(b) Incorporated by reference to the Registration Statement on Font F-4 of
CEMEX, S .A. de C.V. (Registration No. 333-10682), tiled with the
Securities and Exchange Commission on August 10, 1999.
(c) Incorporated by reference to the 2002 annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on April 8,
2003.
(d) Incorporated by reference to the 2003 annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on May 11,
2004.
(e) Incorporated by reference to the 2005 annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on May 27,
2005.
(f) Filed herewith.