Annual Reports

  • 20-F (Apr 30, 2014)
  • 20-F (Apr 29, 2013)
  • 20-F (Apr 30, 2012)
  • 20-F (Jun 29, 2011)
  • 20-F (Jun 22, 2010)
  • 20-F (Jun 26, 2009)

 
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Empresas Ica Soc Contrladora 20-F 2006
FORM 20-F
Table of Contents

As filed with the Securities and Exchange Commission on July 17, 2006
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 20-F
 
 
For the Fiscal Year Ended December 31, 2005
 
Commission File Number 1-11080
 
 
 
 
EMPRESAS ICA, S.A. de C.V.
(Exact name of Registrant as specified in its charter)
 
(Translation of Registrant’s name into English)
 
Mexico
 
Mineria No. 145
Edificio Central
11800 Mexico City
Mexico
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
     
    Name of Each Exchange
Title of Each Class:
 
on Which Registered
 
Ordinary Shares, without par value
  New York Stock Exchange*
Ordinary Participation Certificates, or CPOs, each representing one Share
  New York Stock Exchange*
American Depositary Shares, evidenced by American Depositary Receipts, or
ADSs, each representing twelve CPOs
  New York Stock Exchange
 
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
None
 
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report: Shares of common stock, without par value:
 
402,657,260
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
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 o     No þ
 
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 þ     No o
 
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 þ           Accelerated Filer o          Non-accelerated Filer o
 
Indicate by check mark which financial statement item the registrant has elected to follow.  Item 17 o     Item 18  þ
 
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 o     No þ
 


 

 
 
                 
        Page
 
  Identity of Directors, Senior Management and Advisors   1
  Offer Statistics and Expected Timetable   1
  Key Information   1
  Information on the Company   18
  Unresolved Staff Comments   36
  Operating and Financial Review and Prospects   36
  Directors, Senior Management and Employees   59
  Major Shareholders and Related Party Transactions   70
  Financial Information   71
  The Offer and Listing   74
  Additional Information   77
  Quantitative and Qualitative Disclosures about Market Risk   85
  Description of Securities Other than Equity Securities   86
  Defaults, Dividend Arrearages and Delinquencies   87
  Material Modifications to the Rights of Security Holders and Use of Proceeds   87
  Controls and Procedures   87
  [Reserved]   87
  Audit Committee Financial Expert   87
  Code of Ethics   87
  Principal Accountant Fees and Services   88
  Exemptions from the Listing Standards for Audit Committees   88
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers   89
  Financial Statements   89
  Financial Statements   89
  F-1
Index to Dragados ICA Vialpa Financial Statements
  G-1
 EX-4.8: STOCK PURCHASE AGREEMENT
 EX-4.9: PARTICIPATION AGREEMENT
 EX-4.10: AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT
 EX-4.11: AMENDED AND RESTATED AIRPORT CONCESSION AGREEMENT
 EX-4.12: AMENDED AND RESTATED CONSORTIUM AGREEMENT
 EX-4.13: AMENDMENT NO. 1 TO AMENDED AND RESTATED CONSORTIUM AGREEMENT
 EX-8.1: SIGNIFICANT SUBSIDIARIES
 EX-12.1: CERTIFICATION
 EX-12.2: CERTIFICATION
 EX-13.1: CERTIFICATION


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PART I
 
 
Empresas ICA, S.A. de C.V., or ICA, is a corporation (sociedad anonima de capital variable) organized under the laws of the United Mexican States, or Mexico. Our principal executive offices are located at Mineria No. 145, Edificio Central, 11800 Mexico City, Mexico.
 
Item 1.   Identity of Directors, Senior Management and Advisors
 
Not applicable.
 
Item 2.   Offer Statistics and Expected Timetable
 
Not applicable.
 
Item 3.   Key Information
 
SELECTED FINANCIAL DATA
 
Our financial statements are prepared in accordance with generally accepted accounting principles in Mexico, or Mexican GAAP, which differ in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Note 28 to our financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of our net income and total stockholders’ equity.
 
We publish our financial statements in Mexican pesos. Pursuant to Mexican GAAP, our financial statements included in this report and financial data for all periods throughout this annual report, unless otherwise indicated, have been restated in constant Mexican pesos as of December 31, 2005.
 
This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for your convenience. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps.10.6275 to U.S.$1.00, the noon buying rate for Mexican pesos on December 30, 2005 as published by the Federal Reserve Bank of New York. On June 20, 2006 the Federal Reserve noon buying rate was Ps.11.46 to U.S.$1.00.
 
The term “billion” as used in this annual report means 1,000 million. Certain amounts in this annual report may not total due to rounding.
 
Unless otherwise noted herein, all share and per share data in this annual report have been adjusted for all periods presented to reflect the 6:1 reverse stock split that we undertook in December 2005. See “Item 4. Information on the Company — History and Development of the Company — Reverse Stock Split.”
 
References in this annual report to “UDI” are to Unidades de Inversion, a Mexican peso currency equivalent indexed for Mexican inflation. UDIs are units of account whose value in pesos is indexed to inflation on a daily basis, as measured by the change in the Mexican National Consumer Price Index, or NCPI. As of December 31, 2005, one UDI was equal to approximately Ps.3.637532.
 
Our financial statements were prepared giving effect to Bulletin B-10, Bulletin B-12, and Bulletin B-15 issued by the Mexican Institute of Public Accountants. Generally, Bulletin B-10 is designed to provide for the recognition


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of the effects of inflation by requiring us to record gains or losses in purchasing power from holding monetary liabilities or assets and to restate to constant Mexican pesos as of the date of the most recent balance sheet presented:
 
  •  non-monetary assets using the NCPI,
 
  •  alternatively non-monetary assets of foreign origin may be restated using the consumer price index of the country of origin applied to the historical cost of the asset denominated in the relevant foreign currency and then translated into Mexican pesos at the exchange rate in effect at the most recent balance sheet date, and
 
  •  non-monetary liabilities using the NCPI. Bulletin B-10 requires the restatement of all financial statements to constant Mexican pesos as of the date of the most recent balance sheet presented.
 
Bulletin B-12 requires that the statement of changes in financial position reconcile changes from the restated historical balance sheet to the current balance sheet. Bulletin B-15 allows that prior period financial statements be restated using a weighted average multiplier that reflects the NCPI for our Mexican operations and the inflation and currency exchange rate in the countries where our foreign subsidiaries operate for our foreign operations.
 
The difference between inflation accounting under Mexican GAAP and U.S. GAAP is not required to be included in the reconciliation to U.S. GAAP. See note 28 to our financial statements.
 
Note 28 to our audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to our company, together with a reconciliation to U.S. GAAP of net income and stockholders’ equity. As is described in note 28(a) to our audited consolidated financial statements, all of the financial information under U.S. GAAP in this annual report presented for years prior to 2005 has been restated to reflect the presentation of ICA Fluor Daniel, S. de R.L. de C.V. (“ICA-Fluor”) under the proportionate gross consolidation method. Previously, we presented ICA-Fluor as a consolidated subsidiary for purposes of our U.S. GAAP reconciliation. We have determined that ICA-Fluor should be presented using the proportionate gross consolidation method because we do not exercise unilateral control over this subsidiary. This restatement does not affect net income or stockholders’ equity under U.S. GAAP for the relevant periods. We continue to present ICA-Fluor as a consolidated subsidiary for purposes of Mexican GAAP.
 
In addition, as described in note 28(b) to our audited consolidated financial statements, on January 1, 2005, we adopted Mexican GAAP Bulletin D-3, “Labor Obligations,” which we refer to as Bulletin D-3. Bulletin D-3 relates to the recognition of the liability for severance payments due to termination of the work relationship for reasons other than restructuring and requires treatment similar to that required by U.S. GAAP accounting standard SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” which has been effective since 1994. As a result, we have restated our 2004 and 2003 U.S. GAAP reconciliation to recognize a liability for severance payments in those years in accordance with this accounting principle.


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The following tables present our selected consolidated financial information and that of our subsidiaries for each of the periods indicated. This information should be read in conjunction with, and is qualified in its entirety by reference to, our financial statements, including the notes to our financial statements.
 
                                                 
    2005     2005     2004     2003     2002     2001  
    (Millions
    (Thousands of Mexican pesos, except per share and per ADS data)  
    of U.S.
       
    dollars)(1)        
 
Income Statement Data:
                                               
Mexican GAAP:
                                               
Total revenues
  U.S. $ 1,732     Ps. 18,404,898     Ps. 13,118,073     Ps. 9,917,518     Ps. 9,028,330     Ps. 11,107,865  
Gross profit
    217       2,308,146       1,647,503       991,921       1,264,969       758,443  
Selling, general and administrative expense
    118       1,253,169       1,124,533       949,214       1,096,057       1,638,686  
Operating income (loss)
    99       1,054,977       522,970       42,707       168,912       (880,242 )
Financing cost, (income) net
    11       112,290       (12,461 )     385,663       492,692       580,278  
Other (income) expense, net(2)
    (14 )     (148,875 )     15,870       285,092       244,946       3,418,635  
Income tax(3)
    32       344,574       510,722       344,196       583,600       245,158  
Share in income (loss) of affiliated companies
    9       97,750       175,071       (173,312 )     (142,385 )     (63,365 )
Income (loss) from continuing operations(5)
    71       749,287       156,014       (1,148,866 )     (1,349,016 )     (5,161,892 )
Income (loss) from discontinued operations(5)
                                  295,664  
Consolidated net income (loss)
    71       749,287       156,014       (1,148,866 )     (1,349,016 )     (4,866,228 )
Net income (loss) of minority interest
    23       247,562       63,159       (38,849 )     146,957       212,647  
Net income (loss) of majority interest
    47       501,725       92,855       (1,110,017 )     (1,495,974 )     (5,078,876 )
Net earnings (loss) per share of majority interest from continuing operations(6)
          1.45       0.30       (9.59 )     (14.44 )     (49.19 )
Net earnings (loss) per share of majority interest from discontinued operations(6)
                                  0.16  
Net earnings (loss) per share of majority interest(6)
          1.45       0.30       (9.59 )     (14.44 )     (49.03 )
Net income (loss) per ADS of majority interest(6)
          8.67       1.80       (57.54 )     (86.64 )     (294.15 )
Diluted earnings (loss) per share of majority interest(6)
          1.45       0.30       (9.59 )     (14.44 )     (49.03 )
Diluted earnings (loss) per ADS of majority interest(6)
          8.67       1.80       (57.54 )     (86.64 )     (294.15 )
Weighted average shares outstanding (000s):
                                               
Basic(6)
          347,127       310,177       115,751       103,594       103,594  
Diluted(6)
          347,127       310,177       115,751       103,594       103,594  


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    2005     2005     2004     2003     2002     2001  
    (Millions
    (Thousands of Mexican pesos, except per share and per ADS data)  
    of U.S.
       
    dollars)(1)        
 
U.S. GAAP:
                                               
Total revenues(4)
    1,377       14,628,835       11,058,794       7,925,495       6,142,594       7,617,125  
Operating income (loss)(4)(8)
    74       784,942       481,841       (57,709 )     (363,135 )     (4,415,659 )
Income (loss) from continuing operations(4)(5)(9)
    44       463,365       (42,028 )     (1,133,735 )     (1,534,644 )     (4,405,269 )
Income (loss) from discontinued operations(4)(5)
                61,551       (26,116 )     94,469       (257,292 )
Consolidated net income (loss)
    44       463,365       19,523       (1,159,851 )     (1,440,175 )     (4,662,561 )
Basic earnings (loss) per share from:
                                               
Continuing operations(6)
          1.33       (0.14 )     (8.88 )     (13.07 )     (37.51 )
Discontinued operations(6)
                0.20       (0.20 )     0.80       (2.19 )
Basic income (loss) per share(6)
          1.33       0.06       (9.08 )     (12.26 )     (39.70 )
Basic earnings (loss) per ADS(6)
          8.01       0.38       (60.12 )     (83.41 )     (270.04 )
Diluted earnings (loss) per share(6)
          1.33       0.06       (9.08 )     (12.26 )     (39.70 )
Diluted loss per ADS(6)
          8.01       0.38       (60.12 )     (83.41 )     (270.04 )
Weighted average shares outstanding (000s):
                                               
Basic
          347,127       310,030       127,689       117,449       117,449  
Diluted
          347,510       310,030       127,689       117,449       117,449  
Balance Sheet Data:
                                               
Mexican GAAP:
                                               
Total assets
  U.S. $ 2,914     Ps. 30,971,021     Ps. 20,772,536     Ps. 16,526,345     Ps. 16,015,291     Ps. 21,045,764  
Long-term debt(10)
    940       9,988,703       6,370,129       3,338,653       4,431,634       4,444,988  
Capital stock
    696       7,395,435       9,060,586       8,554,092       6,762,949       6,883,878  
Total stockholders’ equity
    1,207       12,829,167       6,038,398       5,553,387       4,347,882       6,091,880  
U.S. GAAP:
                                               
Total assets
    2,757       29,303,207       19,137,347       15,310,597       14,510,881       18,781,357  
Long-term debt(10)
    940       9,988,703       6,572,396       3,496,181       4,428,608       4,363,510  
Capital stock
    696       7,395,435       9,060,585       8,825,705       7,082,044       7,208,679  
Total stockholders’ equity
    780       8,290,323       5,542,017       5,225,017       4,061,404       5,719,091  
Other Data:
                                               
Mexican GAAP:
                                               
Capital expenditures
    94       994,740       1,068,039       643,926       188,499       294,293  
Depreciation and amortization
    69       730,355       923,684       572,442       463,085       1,396,583  
Inflation Data:
                                               
Change in consumer price index
          3.33       5.19       5.19       3.97       5.70  
Restatement factor
          0.15       3.64       3.64       8.95       7.59  
 
 
(1) Except share and inflation data. Amounts stated in U.S. dollars as of and for the year ended December 31, 2005 have been translated at a rate of Ps.10.6275 = U.S.$1.00 using the Federal Reserve noon buying rate on December 30, 2005. See “— Exchange Rates.”
 
(2) Includes for 2005 gain of purchase and sales of investments of Ps. 79 million and other expense of Ps.53 million relating to gain from sale of clains rights. Includes for 2004 other expense of Ps.32 million relating to severance costs and a Ps.166 million reversal of an impairment charge related to a concession. Includes for 2003 other expense of Ps. 49 million relating to severance costs, Ps.126 million in costs associated with the curtailment of the pension plan and Ps.20 million in other expenses relating to a reversal of an impairment charge related to an investment in property, plant and equipment. Includes for 2002 other

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expense of Ps.129 million relating to severance costs, and other expense of Ps.86 million from the write-off of recoverable value-added taxes. Includes for 2001 other expense of Ps.3707 million relating to an impairment of an investment in property, plant and equipment, goodwill and severance costs. See, “Item 5. Operating and Financial Review and Prospects — Operating Result — Other Expenses, Net.”
 
(3) Effective January 1, 1999, we adopted Bulletin D-4 “Accounting for Income Tax, Tax on Assets and Statutory Employee Profit Sharing.”
 
(4) During 2004, 2003 and 2002, we sold our interest in several of our subsidiaries. Under U.S. GAAP, such sales would have been treated as discontinued operations. Accordingly, we have retroactively affected the U.S. GAAP income statement data for 2001 through 2003 for comparative purposes. For U.S. GAAP purposes, all financial information of our subsidiary ICA Flour Daniel, S. de R.L. de C.V. (“ICA-Fluor”) in this annual report has been restated to reflect the presentation of ICA-Fluor under the proportional consolidation method rather than as a consolidated subsidiary. In addition, as mentioned in Note 28 (b), the financial information from prior years has been restated to recognize the liability for severance payments as established in SFAS No. 112 “Employers” Accounting for Post-employment Benefits. Accordingly, we have retroactively affected the U.S. GAAP income statement data for 2001 through 2003 for comparative purposes. See note 28 to our financial statements.
 
(5) Our construction aggregates and manufacturing segments are reported as discontinued operations as a result of the sale of our interest in subsidiaries engaged in the construction aggregates segment in 2001 and the disposition of our manufacturing segment in 2000.
 
(6) Basic earnings (loss) per share and per ADS are based on the weighted average number of shares outstanding during each period and considering 12 shares per ADS. Diluted earnings (loss) per share and per ADS are calculated by giving effect to all potentially dilutive common shares outstanding during the period. See note 28 to our financial statements.
 
(7) Dividends per share and per ADS are based on the actual shares outstanding on the date the dividend was declared.
 
(8) There are differences in the classification of (i) certain expenses recorded under “other expenses (income)” as a result of severance costs, the write-off of value-added tax and the allowance and reversal for impairment of investments in concessions, property, plant and equipment and goodwill and (ii) statutory employee profit sharing. Under Mexican GAAP, these expenses are treated as non operating expenses and are not deducted in calculating operating income (loss), whereas under U.S. GAAP these expenses are treated as operating expenses and are deducted in calculating operating income (loss). Such amounts for 2005, 2004, 2003, 2002 and 2001 totaled Ps.(53) million, Ps.32 million, Ps.158 million, Ps.208 and Ps. 3,527 million, respectively. See note 28 to our financial statements.
 
(9) In 2002, we adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” Consequently, for purposes of our U.S. GAAP reconciliation, we no longer classify gains or losses on the early extinguishment of debt as an extraordinary item. The U.S. GAAP income statement data for 2001 has been retroactively affected for comparative purposes.
 
(10) Excluding current portion of long-term debt.


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The principal differences other than inflation accounting between Mexican GAAP and U.S. GAAP and the effect upon net income and total stockholders’ equity are presented below. See note 28 to our financial statements.
 
                                                 
    Year Ended December 31,  
    2005     2005     2004     2003     2002     2001  
    (Millions
    (Thousands of Mexican pesos)  
    of U.S.
       
    dollars)(1)        
 
Reconciliation of net income:
                                               
Net income (loss) of majority reported under Mexican GAAP
  U.S.$ 47     Ps. 501,725     Ps. 92,855     Ps. (1,110,017 )   Ps. (1,495,974 )   Ps. (5,078,876 )
U.S. GAAP adjustments for:
                                               
B-15 effect
                2,948       (52,373 )     47,028       246,080  
Deferred income taxes
    5       48,391       (3,794 )     41,158       43,843       (9,773 )
Deferred statutory employee profit sharing
                            (52,917 )     (26,207 )
Capitalization of financing costs
          1,534       66,928       36,495       16,945       (11,911 )
Restatement for inflation on foreign sourced fixed assets
          (4,305 )     (14,754 )     (30,576 )     (6,679 )     (58,557 )
Accrual for severance payments
    1       5,573       (18,536 )     (19,804 )            
Gain on sale of foreign subsidiaries
                                  243,056  
Exchange loss from Argentine subsidiary
                            27,225       (27,225 )
Compensation cost on stock option plan
          (1,745 )     (2,332 )                  
Impairment reversal
    1       5,455       (163,450 )     (21,006 )            
Effect of adjustment to labor obligations liability
                            (20,419 )     (20,419 )
Reversal of compensation cost recognized in Mexican GAAP upon exercise of option
            3,935                            
Fair value interest rate cap
    (6 )     (59,828 )     59,828                    
Minority interest applicable to above adjustments
    (4 )     (37,370 )     (170 )     (3,728 )     773       81,271  
                                                 
Net income (loss) under GAAP
    44       463,365       19,523       (1,159,851 )     (1,440,175 )     (4,662,561 )
                                                 
Reconciliation of stockholders equity
                                               
Total stockholders equity reported under Mexican GAAP
    1,207       12,829,167       6,038,397       5,533,387       4,485, 938       6,285,312  
B-15 effect
                191,734       261,080       (141,025 )     (304,532 )
Less minority interest in consolidated subsidiaries included as stockholders equity under Mexican GAAP
    (406 )     (4,310,567 )     (512,960 )     (457,629 )     (171,858 )     (175,474 )
U.S. GAAP adjustments for:
                                               
Effect on retained earnings from:
                                               
Deferred income taxes
    (190 )     (2,017,211 )     (2,065,602 )     (2,061,808 )     (2,102,966 )     (2,148,201 )
Deferred statutory employee profit sharing
    (21 )     (223,764 )     (223,764 )     (223,764 )     (223,764 )     (169,167 )
Restatement for inflation on foreign sourced fixed assets
    (20 )     (216,836 )     (212,531 )     (197,777 )     (167,201 )     (160,311 )
Capitalization of financing costs
    (5 )     (51,461 )     (52,995 )     (119,923 )     (156,418 )     (173,901 )
Accrual for severance payments
    (7 )     (77,165 )     (82,738 )     (64,202 )     (43,783 )     (23,364 )
Gain on sale of foreign subsidiaries
    24       250,774       250,774       250,774       250,773       250,774  
Exchange loss from Argentinean subsidiary
                                  (28,090 )
Fair value of interest rate cap
                59,828                    
Impairment reversal
    (17 )     (179,001 )     (184,456 )     (21,006 )            


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    Year Ended December 31,  
    2005     2005     2004     2003     2002     2001  
    (Millions
    (Thousands of Mexican pesos)  
    of U.S.
       
    dollars)(1)        
 
Reversal of compensation cost recognized in Mexican GAAP upon exercise of option
          3,935                          
Effect on insufficiency from restatement of capital related to:
                                               
Deferred income taxes
    148       1,571,690       1,602,450       1,591,834       1,594,000       1,597,871  
Deferred statutory employee profit sharing
    7       78,572       78,572       78,572       78,572       78,572  
Restatement for inflation on foreign sourced fixed assets
    20       210,792       210,792       210,792       210,792       242,057  
Gain on sale of foreign subsidiaries
    (24 )     (250,774 )     (250,774 )     (250,774 )     (250,774 )     (250,774 )
Compensation cost on stock option plan
          (1,745 )                        
Adjustment for excess of additional minimum liability
    2       15,995                          
Cumulative effect for D-4 adoption
    47       502,556       502,556       502,556       502,555       502,556  
Minority interest applicable to above adjustments
    15       155,366       192,734       192,903       196,563       195,763  
                                                 
Stockholders’ equity under U.S. GAAP
  U.S.$ 780     Ps. 8,290,323     Ps. 5,542,017     Ps. 5,225,015     Ps. 4,061,404     Ps. 5,719,091  
                                                 
 
 
Mexico has had a free market for foreign exchange since 1991. In December 1994, the Mexican Central Bank (Banco de Mexico) implemented a floating foreign exchange rate regime under which the Mexican peso is allowed to float freely against the U.S. dollar and other currencies. The Mexican Central Bank will intervene directly in the foreign exchange market only to reduce what it deems to be excessive short-term volatility. The Mexican Central Bank conducts open market operations on a regular basis to determine the size of Mexico’s monetary base. Changes in Mexico’s monetary base have an impact on the exchange rate. In addition, the Mexican Central Bank uses its ability to increase or decrease reserve requirements of financial institutions to effect monetary policy. If the reserve requirement is increased, financial institutions will be required to allocate more funds to their reserves, causing the amount of available funds in the market to decrease and interest rates to increase. The opposite happens if reserve requirements are lowered. Through this mechanism, the Mexican Central Bank can impact both interest rates and foreign exchange rates.
 
In recent years, the Mexican Central Bank has conducted monetary policy independent from the political branches of the Mexican federal government. There can be no assurance that the Mexican government will maintain its current policies with respect to the Mexican peso or that the Mexican peso will not depreciate significantly in the future. In the event of shortages of foreign currency, there can be no assurance that foreign currency would continue to be available to private-sector companies or that foreign currency needed by us to service foreign currency obligations would continue to be available without substantial additional cost.

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The following table sets forth, for the periods indicated, the high, low, average and period-end, noon buying rate in New York City for cable transfers in Mexican pesos published by the Federal Reserve Bank of New York, expressed in Mexican pesos per U.S. dollar. The rates have not been restated in constant currency units.
 
                                 
    Exchange Rate(1)  
Year Ended December 31,
  Period End     Average(1)     High     Low  
 
2001
    9.16       9.33       9.97       8.95  
2002
    10.43       9.75       10.46       9.00  
2003
    11.24       10.85       11.41       10.11  
2004
    11.15       11.31       11.63       10.80  
2005
    10.63       10.87       11.41       10.41  
 
 
(1) Average of exchange rates on the last day of each month.
 
                 
    Exchange Rate  
    High     Low  
 
2005
               
December
    10.77       10.41  
2006
               
January
    10.64       10.44  
February
    10.53       10.43  
March
    10.95       10.46  
April
    11.16       10.86  
May
    11.29       10.84  
June (through June 20)
    11.46       11.28  
July (through July 7)
    11.18       11.03  
 
On July 7, 2006, the Federal Reserve noon buying rate was Ps.11.03 to U.S.$1.00.
 
For a discussion of the effects of fluctuations in the exchange rates between the Mexican peso and the U.S. dollar, see “Item 10. Additional Information — Exchange Controls.”


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RISK FACTORS
 
Risks Related to Our Operations
 
 
In March 2003, the Mexican Federal Electricity Commission (Comision Federal de Electricidad, or CFE) awarded a U.S.$748 million (subsequently increased to U.S.$814 million) contract for the engineering, procurement and construction of the El Cajon hydroelectric project to Constructora Internacional de Infraestructura, S.A. de C.V., or CIISA, a consortium in which two of our subsidiaries hold a combined 75% interest. The terms of the contract require that the contractor secure financing for its project costs and limit disbursements during the construction phase to 80% of the cash cost of the certified work performed. Because the CFE will pay for the project upon completion, and the financing obtained by CIISA will cover only the project’s cash costs, we do not expect this project to generate any significant cash flow to us until completion, which is currently expected to occur in 2007. However, because we recognize revenues from our construction projects under the percentage of completion accounting method, the El Cajon hydroelectric project represented a material portion of our revenues in recent years, and is expected to continue to generate a material portion of our revenues in 2006. The El Cajon hydroelectric project generated Ps.4,117, Ps.3,069 million and Ps.922 million of revenue, or 22%, 28% and 9% of total revenue, in 2005, 2004 and 2003, respectively. The El Cajon hydroelectric project is expected to continue to represent a substantial portion of our receivables and our indebtedness. At December 31, 2005, we had Ps.7,529 million in contract receivables and Ps.6,110 million of debt on our balance sheet relating to the El Cajon hydroelectric project. See note 7 to our financial statements.
 
We have recognized revenue from the El Cajon project based on the percentage of completion method of accounting, which relies on certain estimates and assumptions. Since a substantial majority of the project’s revenues and costs have been earned as of June 2006, any decrease in the revenues expected to be earned from the project would likely have a material impact on our operating profit in 2006 and 2007, since the costs corresponding to those revenues have already been substantially or fully incurred.
 
 
Our subsidiary CIISA is required to post a performance bond or a letter of credit for the benefit of CFE equal to 10% of the value of the work to be performed each calendar year. CIISA obtained the U.S.$30 million letter of credit required for 2004, the U.S.$30 million letter of credit for 2005, and the U.S.$10 million letter of credit for 2006 and is required to obtain a U.S.$1 million letter of credit for 2007. The letters of credit for any given year must be obtained by December 31 of the preceding year. As owners of 75% of CIISA, we are required to obtain 75% of the aforementioned letters of credit, with the balance to be provided by the other shareholders of CIISA. In addition, we may be required to contribute additional capital to finance the portion of cash costs that are not disbursed by the CFE. In June 2006, we obtained a U.S.$60 million bank loan to finance the additional capital that we may be required to contribute to CIISA.
 
CIISA obtained permanent financing for the El Cajon hydroelectric project in the first quarter of 2004, consisting of a U.S.$452.4 million syndicated loan and a U.S.$230 million bond. The syndicated loan and bond contain various restrictive covenants typical for project financing. The permanent financing required that CIISA obtain U.S.$26 million in letters of credit to be used as collateral for the financing. The terms of the syndicated loan also include a U.S.$53 million contingent facility that can be drawn upon to cover increases in the cost of the project or if CFE requests that additional works be done on the project, and a U.S.$28 million cost-overrun facility that can be drawn upon to cover cost-overruns. If CIISA does not meet certain minimum financial ratios based on a percentage of certified work completed on the project, disbursements under the cost-overrun facility are contingent upon CIISA obtaining additional letters of credit. There can be no assurance that CIISA will not be required to obtain additional letters of credit in the future or, if so required, that it will be able to obtain such letters of credit. Additionally, in 2007 CIISA will be required to post a two-year quality guaranty for the power generation units and related works on the El Cajon hydroelectric project in the amount of U.S.$12 million if the guaranty is in the form of a bond or U.S.$6 million if the guaranty is in the form of a letter of credit.


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Under the terms of the El Cajon contract, we are required to bear the risk of any increases in the cost of raw materials from the time we entered into the contract, other than those which under Mexican law applicable to public works contracts are a consequence of general, unforeseeable economic circumstances that are out of the parties’ control. Market prices for steel rods and steel slabs, which are the steel products predominately used in our construction of the El Cajon hydroelectric project, are currently approximately 50% and 35%, respectively, above the market prices that were prevailing at the time the bid for the project was prepared. On May 18, 2004, the Mexican Comptroller’s Office (Secretaria de la Funcion Publica) issued a decree recognizing that the aforementioned increase in steel prices constituted a general, unforeseeable economic circumstance that was out of the control of the government’s contractors (including our subsidiary CIISA). The Comptroller’s Office decree authorized government agencies that are party to construction contracts affected by the increase in steel prices to amend their existing construction contracts to account for the extraordinary price increase.
 
Based on the authority granted by the decree, CIISA and CFE entered into an amendment to the El Cajon contract, which increased the total amount CIISA will be paid upon completion of the project by approximately U.S.$43 million, plus value added tax, the sum of which is equivalent to approximately 5.7% of the contract amount. We will, however, be required to finance the additional costs associated with the increase in steel prices until the completion of the El Cajon contract. We have used the U.S.$53 million contingent facility obtained as part of the project’s permanent financing to finance the additional costs associated with the increase in the price of steel. We may be required to use the U.S.$28 million receivables facility to finance any additional costs associated with steel price increases, which we may use only when the ratio of accumulated certifications to accumulated disbursements is greater than 1.2:1.0. There can be no assurance that we will be able to obtain additional sources of funding to finance the increase in the cost of steel, or that the failure to obtain such financing will not have a material adverse effect on our financial condition or results of operations.
 
 
Our performance historically has been tied to Mexican public-sector spending on infrastructure facilities and to our ability to bid successfully for such contracts. Mexican public-sector spending, in turn, generally has been dependent on the state of the Mexican economy. In the past, public sector spending has tended to decrease in election years, and we expect this will occur in 2006. A decrease in public-sector spending as a result of a deterioration of the Mexican economy, changes in Mexican governmental policy, or for other reasons are likely to have an adverse effect on our financial condition and results of operations.
 
 
The market for construction services in Mexico is highly competitive. As a result of the integration of the Mexican economy into the global economy, we must compete with foreign construction companies on most of the industrial and infrastructure projects on which we bid in Mexico. We believe that competition from foreign companies has adversely affected the Mexican construction industry’s operating margins, including our own, as foreign competition has driven down pricing and allowed sponsors of many infrastructure construction and industrial construction projects to require contractors to provide construction on a “turnkey” basis, which increase our financial risks. Many of our foreign competitors have better access to capital and greater financial and other resources, which affords them a competitive advantage in bidding for such projects. See “Item 4. Information on the Company — Business Overview — Description of Business Segments — Industrial Construction.”
 
 
Under our accounting procedures, we measure and recognize a large portion of our revenues and profits under the percentage of completion accounting methodology. This methodology allows us to recognize revenues and profits ratably over the life of a construction contract without regard for the timing of receipt of cash payment by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred. The


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effect of revisions to revenues and estimated costs is recorded when the amounts are known and can be reasonably estimated, and these revisions can occur at any time and could be material. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenues and profits.
 
 
In recent years we have faced substantial constraints on our liquidity. Our expected future sources of liquidity include cash flow from our construction activities, third party financing to fund our projects’ capital requirements. There can be no assurance that we will be able to continue to generate liquidity from any of these sources.
 
We continue to face liquidity constraints as a result of additional financing needs for new projects that require full or partial financing and guarantees in the form of letters of credit and continuing financing needs from our current projects. There can be no assurance we will not face similar liquidity constraints in the future. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.”
 
 
We believe that our ability to finance construction projects in different ways has enabled us to compete more effectively in obtaining such projects. Providing financing for construction projects, however, increases our capital requirements and exposes us to the risk of loss of our investment in the project. We seek to compensate for this risk by entering into financing arrangements only on terms intended to provide us with a reasonable return on our investment. There can be no assurance that we will be able to realize these objectives.
 
 
Historically, a majority of our construction business was conducted under unit price contracts, which contain an “escalation” clause that permits us to increase unit prices to reflect the impact of increases in the costs of labor, materials and certain other items due to inflation. These unit price contracts allow flexibility in adjusting the contract price to reflect work actually performed and the effects of inflation. More recently, however, our construction contracts have been increasingly fixed price or not-to-exceed contracts, under which we are committed to provide materials or services at fixed unit prices, including our two major raw material requirements — cement and steel. Fixed price and not-to-exceed contracts shift the risk of any increase in our unit cost over our unit bid price to us. See “Item 4. Information on the Company — Business Overview — Description of Business Segments — Construction — Contracting Practices.”
 
In recent years, we have experienced significant losses in several projects due to risks assumed by us in fixed price and not-to-exceed contracts, and we may face similar difficulties in the future. For example, a number of our construction contracts specify fixed prices for a number of raw materials and other inputs necessary for the construction business, including steel, asphalt, cement, construction aggregates, fuels and various metal products, increased prices of which can negatively affect our results.
 
Prices for various steel products increased significantly between 2003 and 2006, which we believe has primarily been the result of substantially increased economic activity in China and, in 2006, a strike by a miners union at one of Mexico’s largest domestic producers of iron ore.
 
Under the terms of many of our fixed price contracts, we have been required to bear the cost of the increases in the cost of steel and other raw materials from the time we entered into the contracts, which has adversely affected our results of operations. We do not enter into long-term purchase contracts for cement or steel and, instead, rely on purchases from various suppliers. In addition, there has been an increase in the price of copper products, which we estimate increased our expenses by approximately U.S.$5 million during the period from August 2004 to March 2006. Although we are negotiating for the recognition of the increase in the cost of copper, there can be no assurance that we will be successful in recovering any portion of this cost increase. In the future, we may be adversely affected increases in the prices of other raw materials used in our projects.


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We may also run into other construction and administrative cost-overruns, including as a result of incorrect contract specifications that we are unable to pass on to the customer. We expect that, because of conditions attendant to financing arrangements, future concession-related, infrastructure and industrial construction contracts may not permit an adjustment of the contract price for additional work done due to incorrect project specifications. See “Item 5. Operating and Financial Review and Prospects — Operating Results — Construction — Civil Construction.”
 
 
As of March, 31 2006, we had total cash and short term investments of Ps.6,194 million (expressed in constant pesos as of March 31, 2006), as compared to Ps.6,264 million as of December 31, 2005, Ps.3,545 million as of December 31, 2004 and Ps.3,895 million as of December 31, 2003. As of March 31, 2006, we held 70% of our total cash and short-term investments through less-than-wholly owned subsidiaries (30% in Grupo Aeroportuario del Centro Norte, S.A. de C.V., or GACN, 31% in ICA-Fluor, 8% in CIISA and 1% in Rodio Cimentaciones Especiales S.A. and Kronsa Internacional S.A., our Spanish construction subsidiaries, which we refer to as Rodio/Kronsa). The remainder of our total cash and short-term investments (Ps.1,871 million (expressed in constant pesos as of March 31, 2006)) was held at the parent company or in other operating subsidiaries. The use of cash and cash equivalents by GACN, ICA-Fluor, CIISA or Rodio/Kronsa requires the consent of the other shareholders, which are Nacional Financiera, S.N.C. in the case of GACN, the Fluor Corporation, in the case of ICA-Fluor, La Peninsular Compañia Constructora, S.A. de C.V., Power Machines-ZTL, LMZ, Electrosila and Energomachtexport S.A. in the case of CIISA and Soletanche Bachy Group, in the case of Rodio/Kronsa. At March 31, 2006, we had unrestricted access to Ps.1,592 million of our cash and cash equivalents compared to Ps.2,079 million in December 31, 2005.
 
 
In recent years, we have suffered recurring losses. We reported an operating loss of Ps.632 million in 2001, and net losses of Ps.1,149 million in 2003, Ps.1,349 million in 2002 and Ps.4,866 million in 2001. In 2005 and 2004, we reported both operating income and net income. Our long term profitability is dependent in significant part on our ability to implement more selective contracting practices and other productivity improvements, as well as various factors outside of our control, such as Mexican public sector spending on infrastructure, the demand for construction services, the cost of materials such as steel and cement, prevailing financing conditions and availability, and exchange and interest rates. There can be no assurance that we will be able to effectively implement more selective contracting practices and other productivity improvements, obtain financing on favorable terms, or that these various factors will not have an adverse effect on our financial condition or results of operations.
 
 
As of March 31, 2006, a portion of our assets were pledged to issuers of letters of credit and under other credit arrangements, including Ps.167 million of cash and cash equivalents. These assets are pledged to a number of Mexican banks, including: Banco Nacional de Comercio Exterior, S.N.C., or Bancomext, Banco Mercantil del Norte, S.A., or Banorte, WestLB, AG, Norddeutsche Landesbank Girozentrale and Inversora Bursatil, S.A. de C.V., Casa de Bolsa, Grupo Financiero Inbursa, or Casa de Bolsa Inbursa. The assets we have pledged include: dividends payable to us by Aeroinvest S.A. de C.V., or Aeroinvest (an affiliate that indirectly holds interests in airport concessions); construction machinery and equipment owned by Ingenieros Civiles Asociados, S.A. de C.V. (a construction subsidiary); cash held by Constructoras ICA, S.A. de C.V., or CICASA (a subsidiary holding company); a portion of the cash held by ICA-Fluor; the portion of cash flow that represents free cash flow from Corredor Sur and Acapulco tunnel and an office building located at Mineria No. 130, Mexico City. We expect that most of the assets securing letters of credit will remain pledged until the letters of credit secured by these assets expire. As a result of these arrangements, our ability to dispose of pledged assets requires the consent of these banks and our ability to incur further debt (whether secured or unsecured) is limited.


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Historically, our clients have required us to obtain bonds to secure, among other things, bids, advance payments and performance. In recent years, however, our clients, including CFE with the El Cajon hydroelectric project and Petroleos Mexicanos, or Pemex, with the Package II of the Minatitlan project, have been increasingly requiring letters of credit and other forms of guarantees to secure such bids, advance payments and performance. In light of our current financial condition and our recent losses, we have found it increasingly difficult to obtain the performance bonds or letters of credit necessary to perform the large infrastructure projects that historically have generated a substantial majority of our revenues. Because we have pledged assets to Bancomext, Banorte and Casa de Bolsa Inbursa in order to secure letters of credit from each of these banks, our ability to provide additional letters of credit and other forms of guarantees secured with assets is limited, which may impact our ability to participate in projects in the future.
 
 
We engage in engineering and construction activities for large facilities where design, construction or systems failures can result in substantial injury or damage to third parties. We have been and may in future be named as a defendant in legal proceedings where parties may make a claim for damages or other remedies with respect to our projects or other matters. These claims generally arise in the normal course of our business. When it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. In addition, even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or, if covered by insurance but subject to a high deductible, could result in a significant loss for us, which may reduce our profits and cash available for operations.
 
 
From 1994 to 2002, our strategy had been to place greater emphasis on our international operations in order to compensate for the lower level of construction activity in Mexico following the December 1994 Mexican peso devaluation and the resulting economic crisis in Mexico. We pursued this strategy through acquisitions of foreign companies, such as CPC S.A., or CPC, our Argentine subsidiary, as well as through the direct involvement by our Civil Construction and Industrial Construction segments in foreign projects, such as the Corredor Sur highway concession in Panama and the Malla Vial street network refurbishment project in Colombia. To date, our foreign projects in Latin America have generated mixed results. We had losses on projects such as the Malla Vial street network refurbishment project in Colombia, the construction of a segment of the light rail system in Puerto Rico, the construction of the San Juan Coliseum in Puerto Rico and the construction of the AES power project in the Dominican Republic. As a result of these losses, we have sought to be more selective in our involvement in international operations, and are placing limits on international operations based on risks related to the project’s location, the client and the risks inherent to particular projects. However, there can be no assurance we will be successful in these efforts.
 
 
In recent years, we have increasingly been required to meet minimum equity requirements or certain financial ratios in order to bid on large public infrastructure projects. For example, Pemex, Mexico’s state-owned oil company, has increasingly required that companies that submit bids for certain of its public projects meet minimum equity requirements. Similarly, Mexico City’s government has increasingly required that companies submitting bids for its public works projects meet certain minimum financial ratios. Although we have historically been able to comply with such requirements, there can be no assurance that we will be able to do so in the future, or that the failure to do so would not have an adverse effect on our financial condition and results of operations.


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The amount of backlog is not necessarily indicative of our future revenues related to the performance of such work. Although backlog represents only business that is considered to be firm, there can be no assurance that cancellations or scope adjustments will not occur. As of March 31, 2006, Ps.365 million or 2.8% of our construction backlog was related to the El Cajon hydroelectric project, which we expect to complete in 2007, Ps.1,407 million, or 10% of our construction backlog was related to various construction projects that are part of a new terminal at the Mexico City International Airport, which we expect to complete in 2006, and Ps.5,661 million or 43% of our construction backlog was related to a contract with Pemex for the reconfiguration of Package II of the Minatitlan refinery, including auxiliary services, wastewater treatment and integration works at the facility, which we expect to complete in 2008. We refer to this project as Package II of the Minatitlan refinery project. We cannot assure you that we will secure contracts equivalent in scope and duration to replace the backlog. See “Item 5. Operating and Financial Review and Prospects — Operating Results — Construction — Construction Backlog.”
 
 
In certain instances, we have guaranteed completion of a project by a scheduled acceptance date or achievement of certain acceptance and performance testing levels. However, there is a risk that adherence to these guarantees may not be possible. The failure to meet any such schedule or performance requirements could result in costs that exceed projected profit margins, including fixed-amount liquidated damages up to a certain percentage of the overall contract amount and/or guarantees for the entire contract amount.
 
There can be no assurance that the financial penalties stemming from the failure to meet guaranteed acceptance dates or achievement of acceptance and performance testing levels would not have an adverse effect on our financial condition and results of operations.
 
 
Our return on any investment in a highway, bridge, tunnel or wastewater treatment plant concession is based on the duration of the concession, in addition to the amount of usage revenues collected, debt service costs and other factors. Traffic volumes, and thus toll revenues, are affected by a number of factors including toll rates, the quality and proximity of alternative free roads, fuel prices, taxation, environmental regulations, consumer purchasing power and general economic conditions. The level of traffic on a given highway also is influenced heavily by its integration into other road networks. Given these factors, there can be no assurance that our return on any investment in a highway, bridge, tunnel or wastewater treatment plant concession will match estimates contained in the relevant concession agreement.
 
 
In December 2005, we directly and indirectly acquired an interest in 44.94% of the shares of GACN in a series of transactions, which increased our interest in GACN to 47.2%. We now operate 13 concessioned airports in Mexico through GACN. We began to consolidate GACN’s balance sheet as of December 31, 2005 and its results of operations as of January 1, 2006. The acquisition of the additional interest in GACN exposes us to risks associated with airport operations.
 
GACN operates its airports under concessions, the terms of which are regulated by the Mexican government. The aeronautical fees charged to airlines and passengers are, like most airports in other countries, regulated. These regulations may limit GACN’s flexibility in airport operations, which could have a material adverse effect on its business, results of operations, prospects and financial condition. In addition, several of the regulations applicable to GACN’s operations and that affect its profitability are authorized (as in the case of our master development programs) or established (as in the case of our maximum rates) by the Ministry of Communications and Transportation for five-year terms. There can be no assurance that this price regulation system will not be amended in a manner that would cause additional sources of our revenues to be regulated or that the Mexican government will not terminate or reaquire the concessions under which GACN operates its airports. In addition, if


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GACNs exceed maximum revenue rates determined by the Mexican government at any airport, it could be subject to sanctions.
 
The September 11, 2001 terrorist attacks and recent international conflicts and health epidemics have had a severe impact on the international air travel industry, including reducing passenger travel We have experienced increased costs of security enhancements required by government regulations following events such as those that occurred on September 11, 2001 and may be exposed to uninsured liabilities as a result of terrorist activity. These developments have adversely affected GACN’s business and may continue to do so in the future.
 
 
On April 18, 1991, the former owners of a portion of the land comprising the Ciudad Juárez International Airport initiated legal proceedings against its owner Aeropuertos y Servicios Auxiliares to reclaim the land, alleging that it was invalidly transferred to the Mexican government. The claimants have also sought monetary damages of U.S.$120 million. After the incorporation of GACN and the Ciudad Juarez Airport by the Mexican Government in preparation for its privatization, the plaintiffs extended the claim against GACN and the Ciudad Juarez Airport. Although a Mexican court has ordered us to return the disputed land to the claimants, this order has been stayed pending our appeal. In the event that the court order were executed, our concession to operate the Ciudad Juarez Airport would become invalid. In 2005, the Ciuadad Juárez International Airport represented approximately 5% of GACN’s revenue. We have been advised by our Mexican counsel that the invalidation of our Ciudad Juárez concession would not affect the validity of our remaining airport concessions and the Mexican federal government would be obligated to indemnify us against any monetary damages awarded to the claimants; however, there can be no assurance that the definitive resolution of the matter in favor of the claimants would not have a material adverse impact on our results of operations.
 
 
 
In the past, Mexico has experienced adverse economic conditions, including high levels of inflation. See “Item 4. Information on the Company — History and Development of the Company — Public Sector Spending and the Mexican Economy.” If the Mexican economy were to experience a recession or if inflation and interest rates increase significantly, our business, financial condition and results of operation could be adversely affected.
 
 
Substantially all of our construction revenues are earned under contracts whose prices are denominated in U.S. dollars, while the majority of our raw materials, a portion of our long-term indebtedness (8% at December 31, 2005) and a substantial portion of our day-to-day expenses, including employee compensation, are denominated in Mexican pesos. As a result, an appreciation of the Mexican peso relative to the U.S. dollar would decrease our dollar revenues when expressed in Mexican pesos. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods, due to the translation of the financial results of our foreign subsidiaries, such as CPC and Rodio/Kronsa.
 
We do not hedge our exposure to the U.S. dollar with respect to the Mexican peso and other currencies. Our debt service cost can increase if the peso depreciates. A severe devaluation or depreciation of the Mexican peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated indebtedness or obligations in other currencies. We cannot assure you that the Mexican Central Bank will maintain its current policy with respect to the peso. In addition, while the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange control policies in the future. Currency fluctuations may have an adverse effect on our financial condition, results of operations and cash flows in future periods.


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The market value of securities of Mexican companies may be, to varying degrees, affected by economic and market conditions in other countries. Although economic conditions in these countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. For example, in the second half of 1998 and in early 1999, prices of Mexican securities were adversely affected by the economic crises in Russia and Brazil.
 
 
We are a Mexican corporation and a substantial portion of our operations and assets are located in Mexico. As a result, our business, financial condition and results of operations may be affected by the general condition of the Mexican economy, the devaluation of the Mexican peso as compared to the U.S. dollar, price instability, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico over which we have no control.
 
The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Mexican governmental actions concerning the economy and state-owned enterprises could have a significant effect on Mexican private sector entities in general, and us in particular, and on market conditions, prices and returns on Mexican securities, including our securities.
 
Mexico’s President Vicente Fox has encountered strong opposition to a number of his proposed reforms in both the Chamber of Deputies and the Senate, where opposition forces have frequently joined to block his initiatives. Although the Mexican economy has exhibited signs of improvement, general economic sluggishness continues. This continuing sluggishness in the Mexican economy, combined with recent political events, has slowed economic reform and progress. In elections in 2003 and 2004, the political party of President Fox, the Partido Acción Nacional, or the National Action Party, lost additional seats in the Mexican congress, as well as state governorships. The increased party opposition and legislative gridlock arising out of the elections could further hinder President Fox’s ability to implement his economic reforms.
 
Presidential and federal congress elections in Mexico were held in July 2006. Under Mexican law, President Fox cannot run for re-election. The electoral process could lead to further friction among political parties and the executive branch officers, which could potentially cause additional political and economic instability. Additionally, once the new President and representatives are elected, there could be significant changes in laws, public policies and government programs, which could have a material adverse effect on the Mexican economic and political situation which, in turn, may adversely affect our business, financial condition and results of operations.
 
National politicians are currently focused on the 2006 elections and crucial reforms regarding fiscal and labor policies, gas, electricity, social security and oil have not been and may not be approved. The effects on the social and political situation in Mexico of the 2006 presidential elections and presidential succession, could adversely affect the Mexican economy including the stability of its currency, which in turn could have a material adverse effect on our business, financial condition and results of operations, as well as market conditions and prices for our securities.
 
 
There may be less or different publicly available information about issuers of securities in Mexico than is regularly published by or about issuers of securities in certain countries with more developed capital markets. In addition, accounting and other reporting principles and standards may differ substantially from those results that would have been obtained using other principles and standards such as U.S. GAAP.
 
 
 
If we issue new shares for cash as part of a capital increase, we generally must grant our stockholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to


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purchase shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of ADSs, Ordinary Participation Certificates, or CPOs, or shares in the United States to exercise any preemptive rights in any future capital increase unless:
 
  •  we file a registration statement with the Securities and Exchange Commission with respect to that future issuance of shares, or
 
  •  the offering qualifies for an exemption from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act.
 
At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the Securities and Exchange Commission and any other factors that we consider important to determine whether we will file such a registration statement.
 
There can be no assurance that we will file a registration statement with the Securities and Exchange Commission to allow holders of ADSs in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, sales by the depository of preemptive rights and distribution of the proceeds from such sales to you, the ADS holders, is not possible.
 
 
As of February 14, 2006, our management, as a group, beneficially owned approximately 10.84% of our total shares outstanding (7.95% of our shares are beneficially held by Bernardo Quintana I. and 2.89% of our shares are held by our management through the management trust). See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders.”
 
Actions by our management with respect to the disposition of the shares and ADSs they beneficially own, or the perception that such action may occur, may adversely affect the trading price of the shares on the Mexican Stock Exchange and the market price of our ADSs and shares.
 
 
Holders of ADSs and the underlying CPOs are not entitled to vote the shares underlying such ADSs or CPOs. Such voting rights are exercisable only by the CPO trustee, which is required to vote all such shares in the same manner as the holders of a majority of the shares that are not held in the CPO trust and that are voted at the relevant meeting. As a result, holders of ADSs or CPOs will not be entitled to exercise minority rights to protect their interests and are affected by decisions taken by significant holders of our shares that may have interests different from those of holders of ADSs and CPOs.


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This annual report contains forward-looking statements. We may from time to time make forward-looking statements in our periodic reports to the Securities and Exchange Commission on Forms 20-F and 6-K, in our annual report to shareholders, in offering circulars and prospectuses, in press releases and other written materials, and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others. This annual report contains forward-looking statements. Examples of such forward-looking statements include:
 
  •  projections of operating revenues, net income (loss), earnings per share, net income (loss) per share, capital expenditures, dividends, cash flow, capital structure or other financial items or ratios;
 
  •  statements of our plans, objectives or goals, including those related to anticipated trends, competition and regulation;
 
  •  statements about our future economic performance or that of Mexico or other countries in which we operate; and
 
  •  statements of assumptions underlying such statements.
 
Words such as “believe,” “could,” “may,” “will,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
 
Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, some of which are discussed under “Risk Factors,” include cancellations of significant construction projects included in backlog, material changes in the performance or terms of our concessions, additional costs incurred in projects under construction, developments in legal proceedings, limitations on our access to sources of financing on competitive terms, changes to our liquidity, economic and political conditions and government policies in Mexico or elsewhere, inflation rates, exchange rates, regulatory developments, customer demand and competition. We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.
 
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments.
 
Item 4.   Information on the Company
 
 
Our business began in 1947 with the incorporation of Ingenieros Civiles Asociados, S.A., which provided construction services for infrastructure projects for the Mexican public sector. Our registered office is located at Mineria No. 145, Edificio Central, 11800 Mexico, D.F., Mexico, telephone (52-55) 5272-9991.
 
According to data from the Mexican Chamber of the Construction Industry (Camara Mexicana de la Industria de la Construccion) and the INEGI, we are the largest engineering, procurement and construction company in Mexico based on our relative share of the total revenues of the formal construction sector in Mexico, and are the largest provider in Mexico of construction services to both public and private-sector clients. We are engaged in a full range of construction and related activities, involving the construction of infrastructure facilities, as well as industrial, urban and housing construction. In addition, we are engaged in the development and marketing of real estate, the construction, maintenance and operation of airports, highways, bridges and tunnels and in the management and operation of water supply systems and solid waste disposal systems under concessions granted by governmental authorities.
 
Since 1947, we have greatly expanded and diversified our construction and related businesses. In the past, our business strategy had been to strengthen and expand our core construction business, while diversifying our sources


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of revenue. In particular, the Mexican economic crisis triggered by the peso devaluation in 1994 led us to seek new growth opportunities in related businesses in Mexico and in construction businesses outside of Mexico, notably Latin America. In recent years, however, we have redefined our business focus to emphasize our construction business, which in 2004 accounted for approximately 88% of our revenues. As a result, we started our non-core divestment program, under which we have sold non-core assets, and used the proceeds from such sales to pay corporate debt. In addition, we intend to discontinue our commercial real estate operations through the sale of our real estate assets, and to increase our participation in the low-income housing development business.
 
Unless the context otherwise requires, the terms “us,” “we” and “ICA” as used in this annual report refer to Empresas ICA, S.A. de C.V. and its consolidated subsidiaries. We are a holding company that conducts all of our operations through subsidiaries. The references herein to segments or sectors are to combinations of various subsidiaries that have been grouped together for management or financial reporting purposes.
 
 
On August 10, 2005 we sold 90,622,491 newly-issued shares at a price of Ps.27.00 per share through the Mexican Stock Exchange and to institutional investors outside of Mexico. Sixty-five percent of the shares were placed through the Mexican Stock Exchange and thirty-five percent of the shares were placed with institutional investors outside Mexico, including to certain qualified institutions in the United States in an offering exempt from registration under Section 4(2) of the U.S. Securities Act of 1933, as amended. We received total proceeds of Ps.2,447 million, before expenses. Of the net proceeds from this offering, as of May 31, 2006, we have used:
 
  •  Ps.1,693 million for the acquisition of the 44.94% interest in GACN;
 
  •  Ps.221 million as working capital for El Cajon and other projects in the civil construction segment;
 
  •  Ps.113 million for land reserve acquisitions in the Housing segment;
 
  •  Ps.94 million for payment of fees and commissions in connection with the issuance;
 
  •  Ps.56 million for an equity investment in the Irapuato — La Piedad highway concession;
 
  •  Ps.48 million for corporate uses; and
 
  •  the balance (Ps.222 million) is reserved for general corporate purposes.
 
 
On December 12, 2005 we completed a one-for-six reverse stock split in which holders of our ordinary shares received newly issued ordinary shares at a ratio of six old ordinary shares for one new ordinary share. The exchange ratio of ordinary shares and ordinary participation certificates, or CPOs, remained 1:1. Simultaneously with the reverse stock split applicable to our ordinary shares, we amended the terms of the deposit agreement relating to our American Depositary Shares, or ADSs, such that the exchange ratio of CPOs to ADSs was changed to 12:1 from 6:1. The combination of these transactions resulted in the equivalent of a one-for-twelve reverse split for our ADSs.
 
Unless otherwise noted herein, all share and per share data in this annual report have been adjusted to reflect he reverse stock split for all periods presented.
 
 
In December 2005, we directly and indirectly acquired 44.94% of the shares of GACN in a series of transactions. First, we acquired an additional 59.6% interest in Servicios de Tecnologia Aeroportuaria, or SETA, bringing our total ownership interest in SETA to 74.5%. SETA is the strategic shareholder of GACN and owns 15% of GACN. Second, we purchased a 36% direct interest in GACN from the Mexican government. As a result of these transactions, we control, directly and through our investment in SETA, a 51% interest in GACN. The aggregate U.S.$289.8 million purchase price was funded using U.S.$164.8 million in cash on hand, which we obtained from the August 2005 equity offering described above and U.S.$125 million from an 18-month bridge financing provided by West LB and Nord LB.


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Our capital spending program is focused on the acquisition, upgrading and replacement of property, plant and equipment required for our projects.
 
The following table sets forth our capital spending for each year in the three-year period ended December 31, 2005.
 
                                 
    Year Ended December 31,  
    2005     2005     2004     2003  
    (Millions of
    (Millions of Mexican pesos  
    U.S. dollars)        
 
Construction:
                               
Civil
  U.S.$ 16     Ps. 173     Ps. 747     Ps. 472  
Industrial
    14       148       166       60  
CPC and Rodio
    9       96       120       25  
                                 
Total
  U.S. $ 39     Ps. 417     Ps. 1,033     Ps. 557  
Infrastructure
    50       534       27       34  
Housing
    2       25       1       10  
Corporate and Other Operations
    2       19       7       43  
                                 
Total
  U.S.$ 93     Ps. 995     Ps. 1,068     Ps. 644  
                                 
 
Aggregate capital spending decreased to Ps.993 million in 2005, from Ps.1,068 million in 2004. The decrease in aggregate capital spending in 2005 primarily reflected a substantial decrease in capital spending in the Construction segments (to Ps.417 million in 2005 from Ps.1,033 million in 2004), which was partially offset by an increase in capital spending in the Infrastructure segment (to Ps.534 million in 2005 from Ps.27 million in 2004). The significant decrease in investment in the Construction segments was mainly attributable to lower investing requirements for the El Cajon project and the use of operating leases for construction equipment, rather than purchasing such equipment. The significant increase in investment in the Infrastructure segment was mainly attributable to our acquisition of a greater interest in GACN.
 
Aggregate capital spending substantially increased to Ps.1,068 million in 2004, from Ps.644 million in 2003. The substantial increase in aggregate capital spending in 2004 primarily reflected increased investment in the Construction segments (to Ps.1,033 in 2004 from Ps.557 in 2003), which was partially offset by decreased investment in the Infrastructure, the Corporate and Other Operations and the Housing segments. The significant increase in investment in the Construction segments was mainly attributable to increased investment needed for the El Cajon hydroelectric project and the revamping of marine platform manufacturing sites used by the Industrial Construction segment.
 
In addition, our net investment in and loans to unconsolidated affiliates was Ps.46 million in 2005, Ps.58 million in 2004 and Ps.78 million in 2003.
 
In 2005, our investments in unconsolidated affiliates mainly related to a Ps.28 million investment in GEOICASA, a joint venture between Lotes y Fraccionamientos, S.A. de C.V. (subsidiary of GEO, S.A. de C.V.) and us in the entry-level home building market. In 2004, our investments in unconsolidated affiliates mainly related to the Dravica Consortium, or Dravica, which is the consortium for the construction of the Caruachi hydroelectric dam in Venezuela in which we own a 49% interest.
 
 
Our non-core asset divestment program was approved by our board of directors in 1999 and ratified by our shareholders in 2000. We expect to complete this program in 2006. As part of our non-core asset divestment program, we created a working group that reports to our chief financial officer, and that oversees major divestitures across our business segments. The working group’s responsibilities include coordinating the efforts of our various internal business segments and our legal and finance departments, as well as supervising any external advisors or


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brokers who are required for a particular transaction. Prior to any sale of an asset, we conduct a due diligence investigation in order to assess such asset’s condition and to prepare the asset for sale. Depending on the size and characteristics of the asset to be sold, we may retain qualified brokers or financial advisors to participate in the process of valuating the asset, identifying potential buyers for the asset, negotiating the sale of the asset and closing the transaction. Our executive committee approves all sales within the non-core asset divestment program. Since its inception in 1999, our non-core asset divestiture program has resulted in net proceeds to us of U.S.$781 million. There can be no assurance that we will be able to continue to generate liquidity from asset sales, particularly given the relatively few non-core assets that remain available for sale.
 
In 2005, we sold our majority interest in Consorcio Internacional del Medio Ambiente, S.A. de C.V., or CIMA, for Ps.306 million (U.S.$27 million), our remaining 20% interest in a tourism real estate development company in Cabo del Sol for U.S.$1 million and several real estate properties for U.S.$8.8 million. As of December 31, 2005 we had approximately U.S.$39 million of divestitures pending.
 
In 2006, we sold several real estate properties for U.S.$1.1 million.
 
 
Our performance historically has been tied to Mexican public-sector spending on infrastructure and industrial facilities. Mexican public-sector spending, in turn, has been generally dependent on the state of the Mexican economy and accordingly has varied significantly in the past. See “Item 3 — Risk Factors — Risks Related to Our Operations — Our performance is tied to Mexican public-sector spending on infrastructure and industrial facilities.” Mexico’s gross domestic product increased by 3% in 2005, compared to a 4.4% increase in 2004. The average interest rates on 28-day Mexican treasury notes were 9.2% in 2005, 6.8  % in 2004 and 6.3% in 2003. Inflation was 3.3% in 2005, 5.2% in 2004 and 4.0% in 2003.
 
According to INEGI, construction activity increased by 3.3% in 2005, 6.1% in 2004 and 3.3% in 2003, in each case in real terms as compared to the prior year, representing 3.8%, 3.9% and 3.8% of Mexico’s gross domestic product in those years, respectively. In 2005, according to data published by the Mexican Central Bank, Mexican public-sector spending on infrastructure projects was substantially the same in real terms as in 2004.
 
 
Our operations are divided into six segments:
 
  •  Civil Construction,
 
  •  Industrial Construction,
 
  •  CPC-Rodio,
 
  •  Infrastructure (formerly Infrastructure Operations),
 
  •  Housing, and
 
  •  Corporate and Other Operations.
 
Our construction and related activities include three segments: Civil Construction, Industrial Construction and CPC-Rodio. In all three construction segments, we provide a full range of services, including feasibility studies, conceptual design, engineering, procurement, project and construction management, construction, maintenance, technical site evaluations and other consulting services. In 2005 and 2006, we realigned our segments to reflect changes in our business. Since January 1, 2005, our real estate operations have been included in our Corporate and Other Operations segment and our housing construction operations have been reported as the Housing segment. As of January 1, 2006, we renamed our Infrastructure Operation segment the Infrastructure segment and created two divisions: Airports and Other.
 
Historically, substantially all of our construction services were performed in connection with projects developed and financed by third parties. However, in recent years governments and government agencies, including the Mexican government and Mexican state-owned enterprises, have significantly reduced their spending on the


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development of infrastructure and industrial facilities and have sought, instead, to stimulate private investment in such facilities. Accordingly, we are increasingly required to participate in arranging the financing for the construction of infrastructure facilities and to invest equity or provide other financing for such projects. Competition has also increased due in part to the ability of many foreign competitors to obtain financing on more attractive terms. In recent years, we have experienced strong demand for infrastructure projects in which we are required to obtain financing, especially in projects for the construction of highways, railroads, power plants, hydroelectric projects, water storage facilities and oil drilling platforms and refineries, which is reflected in the higher volume of work we have recently undertaken on public sector projects.
 
 
 
Our construction business is divided into Civil Construction, Industrial Construction and CPC-Rodio.
 
 
Historically, a majority of our construction business was conducted under unit price contracts, which contain an “escalation” clause that permits us to increase unit prices to reflect the impact of increases in the costs of labor, materials and certain other items due to inflation. Under this form of contract, while a total price is quoted, the construction project is broken down into its various constituent elements, such as excavation volume, square footage of built-up area, footage of pipes to be laid, and a price per unit is established for each such element. Where the amount of work required to complete the contract (i.e., the amount of each constituent element) is greater than the amount quoted in the contract due to incorrect specifications or changes in specifications, we are entitled to an increase in the contract price on the basis of the quantity of each element actually performed, multiplied by its unit price. These unit price contracts allow flexibility in adjusting the contract price to reflect work actually performed and the effects of inflation.
 
In recent years, however, our construction contracts have been increasingly of the fixed price or not-to-exceed type, which generally do not provide for adjustment except under certain circumstances for inflation or as a result of errors in the contract’s specifications, or mixed price contracts in which a portion of the contract is at fixed price and the rest at unit prices. Examples of mixed price projects in which we are currently involved include the El Cajon hydroelectric project in the Civil Construction segment and the Minatitlan contract with Pemex in the Industrial Construction segment. Fixed price, not-to-exceed and mixed price contracts collectively accounted for approximately 48% of our construction backlog as of December 31, 2005, 65% of our construction backlog as of December 31, 2004 and 80% of our construction backlog as of December 31, 2003. While we have entered into a large number or contracts with unit pricing in the last two years, we believe that fixed pricing contracts are more prevalent in the construction market and the contracts that we enter into in the future will reflect this shift to fixed price contracts. We expect that, because of conditions attendant to financing arrangements, future concession-related, infrastructure and industrial construction contracts, the adjustment of the contract price for additional work done due to incorrect contract specifications will be restricted.
 
We earn a significant portion of our construction revenues under contracts whose prices are denominated in currencies other than Mexican pesos, substantially all of which are of the fixed price, mixed price or not-to-exceed type. Approximately 41% of the contracts awarded to us in 2005 (based on the contract amount) were foreign currency-denominated. Approximately 43% of our construction backlog as of December 31, 2005 represented foreign currency-denominated contracts. Substantially all of our foreign-currency denominated contracts are denominated in U.S. dollars, except for contracts entered into by our CPC-Rodio segment, which are denominated in other currencies, principally Euros.
 
In 2004, we established a committee, which is comprised of a number of our legal and finance executives, to supervise our decisions to bid on new construction projects based upon a number of criteria, including the availability of multilateral financing for potential projects, the availability of rights of way, the adequacy of project specifications, the customer’s financial condition and the political stability of the host country, if the project is outside of Mexico. Currently, our policy requires that all construction projects with expected revenues above a specified threshold be reviewed and approved by this committee.


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We obtain new contracts for new projects either through a process of competitive bidding or through negotiation. Generally, the Mexican government and its agencies and instrumentalities may not award a construction contract unless it has been awarded through a public bidding process conducted in accordance with the Public Works and Related Services Law (Ley de Obras Publicas y Servicios Relacionados con las Mismas). Public sector construction contracts may only be awarded without a public bidding process under very limited circumstances, such as where the amount involved is low, the project must be completed on an emergency basis, or technology or special patents are required. Accordingly, the majority of the contracts for new projects awarded to us from Mexican public-sector clients are awarded through competitive bidding. Most contracts for new projects awarded to us by private-sector and foreign government clients are also the result of a bidding process.
 
The competitive bidding process poses two basic risks: we may bid too high and lose the bid or bid too low and adversely affect our gross margins. The volume of work generally available in the market at the time of the bid, the size of our backlog at that time, the number and financial strength of potential bidders, whether the project requires the contractor to contribute equity or extend financing to the project, the availability of equipment and the complexity of the project under bid are all factors that may affect the competitiveness of a particular bidding process. Direct negotiation (as opposed to competitive bidding) generally tends to represent a more certain method of obtaining contracts and to result in better gross margins.
 
In addition to contracts for new projects, increases in the scope of work to be performed in connection with existing projects are an important source of revenue for us. In 2005, increases in scope of work accounted for Ps.1,508 million, or 8.2%, of our revenue. Contracts for such work are not typically put up for bid, but are negotiated by the client with the existing contractor.
 
In determining whether to bid for a project, we take into account, apart from the cost (including the cost of financing) and potential profit, efficient usage of machinery, the relative ease or difficulty of obtaining financing, geographic location, project-specific risks, current and projected backlog of work to be performed, our particular areas of expertise and our relationship with the client. Although we prefer to bid for larger projects in which we believe our size gives us a competitive advantage, beginning in 1995, due to a decline in demand for large infrastructure projects in Mexico, we began to participate in smaller projects, such as bridge construction, drainage work and highway repaving and improvements.
 
As is customary in the construction business, from time to time we employ sub-contractors for particular projects, such as specialists in electrical, hydraulic and electromechanical installations. We are not dependent upon any particular sub-contractor or group of sub-contractors.
 
 
The principal competitive factors in each construction segment, in addition to price, are performance and the ability to provide the engineering, planning, financing and management skills necessary to complete a project in a timely fashion.
 
The market for construction services in Mexico and elsewhere is highly competitive. In the Civil Construction and Industrial Construction segments, competition is relatively more intense for infrastructure and industrial construction projects outside Mexico.
 
In our Civil Construction segment, we compete primarily with Brazilian, Spanish and Mexican companies, including Constructora Norberto Odebrecht, S.A., Camargo Correa, S.A., Andrade Gutierrez, S.A., Fomento de Construcciones y Contratas, S.A., NECSO Entrecanales Cubiertas, S.A., Dragados y Construcciones, S.A. and Impulsora del Desarrollo Economico de America Latina, or IDEAL, Carso Infraestructura y Construcciones, S.A. de C.V. or CICSA, Compañía Contratista Nacional , S.A. de C.V or Coconal, Gutsa Construcciones, S.A. de C.V. or Gutsa, TRADECO Infraestructura, S.A. de C.V. and La Nacional Compañía Constructora.
 
In our Industrial Construction segment, we compete with Mexican, Brazilian, Argentine and Japanese companies, including Constructora Norberto Oderbrecht, S.A., Dragados y Construcciones, S.A., Techint, S.A. de C.V. (Mexico), Duro Felguera Mexico, S.A. de C.V., Mitsubishi, Swecomex, S.A. de C.V., CMM and Grupo R.


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In our Infrastructure segment, we compete primarily with Mexican and Spanish companies, including Fomento de Construcciones y Contratas, S.A., OHL, S.A. (Mexico), IDEAL, Grupo Acciona, La Nacional Compañía Constructora, Construccion Aplicada, S.A. de C.V. and OMEGA Construcciones, S.A. de C.V.
 
We believe that our proven track record in Mexico and our experience and know-how have allowed us to maintain our leadership position in the Mexican construction market. In recent years, the sponsors of many infrastructure construction and industrial construction projects throughout the world, including in Mexico, have required contractors to provide construction on a “turnkey” basis. Many of our foreign competitors have better access to capital and greater financial and other resources and we have been increasingly experiencing significant competition in Mexico from Brazilian, Japanese, Spanish and, to a lesser extent, other European construction companies in recent years. The CPC-Rodio segment faces substantial competition in Argentina and Spain from large construction companies that operate in those markets, as well as from smaller, specialized construction companies that provide the same services offered by CPC-Rodio.
 
 
The principal raw materials we require for our construction operations are cement, construction aggregates and steel. In our Civil Construction segment, raw materials accounted for Ps.804 million, or 13%, of our costs of sales in 2005, Ps.581 million, or 14%, of our cost of sales in 2004 and Ps.332 million, or 17%, of our cost of sales in 2003. In our Industrial Construction segment raw materials accounted for Ps.3,097 million, or 46%, of our costs of sales in 2005, Ps.1,519 million, or 37%, of our cost of sales in 2004 and Ps.1,404 million, or 37%, of our cost of sales in 2003.
 
We have developed relationships with national providers that have reduced costs and delivery time, and have improved our overall control of our supply of raw materials. However, the prices of the principal raw materials used in our construction operations have experienced periods of volatility. For example, prices for various steel products increased significantly between 2003 and 2005, which we believe has primarily been the result of substantially increased economic activity in China. We primarily use steel in the form of steel rods and steel slabs in our construction projects. A number of our construction contracts, including the El Cajon construction contract, specify fixed prices per ton of steel for a variety of steel products. Prices for steel re-bars and steel i-beams peaked in February 2004 and November 2004, respectively. Under the terms of these contracts, we have generally been required to bear the cost of the increases in the cost of steel from the time we entered into the contracts. For example, since their peaks, prices for steel re-bars and steel i-beams have fluctuated, and remain approximately 95% and 100%, respectively, above the market price upon which the El Cajon bid was prepared.
 
Under the terms of the El Cajon contract, we are required to bear the risk of any increases in the cost of raw materials from the time we enter into the contract, other than those which under Mexican law applicable to public works contracts are a consequence of general, unforeseeable economic circumstances that are out of the parties’ control. On May 18, 2004, the Mexican Comptroller’s Office (Secretaría de la Función Pública) issued a decree recognizing that the aforementioned increase in steel prices constituted a general, unforeseeable economic circumstance that was out of the control of the government’s contractors (including CIISA and ICA-Fluor). The Comptroller’s Office decree authorized government agencies that are party to construction contracts affected by the increase in steel prices to amend their existing construction contracts to account for the extraordinary price increase. Based on the authority granted by the decree, CIISA and CFE entered into an amendment to the El Cajon contract, which increased the total amount CIISA will be paid upon completion of the project by approximately U.S.$43 million equivalent to approximately 5.7% of the contract amount. There has been an increase in the price of copper products, which is expected to increase our expenses in 2006 by approximately U.S.$5 million. Although we are in negotiations with the client for the recognition of the cost increase, there can be no assurance that we will be successful in recovering any portion of this cost increase.
 
 
Our Civil Construction segment focuses on infrastructure projects in Mexico, including the construction of roads, highways, transportation facilities (such as mass transit systems), bridges, dams, hydroelectric plants, tunnels, canals and airports, as well as on the construction, development and remodeling of large multi-storied


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urban buildings, including office buildings, multiple-dwelling housing developments and shopping centers. Our Civil Construction segment has also pursued opportunities in other parts of Latin America, the Caribbean, Asia and the United States. Our Civil Construction segment performs activities such as demolition, clearing, excavation, de-watering, drainage, embankment fill, structural concrete construction, concrete and asphalt paving, and tunneling.
 
The Civil Construction segment’s projects are usually large and complex and require the use of large construction equipment and sophisticated managerial and engineering techniques. Although our Civil Construction segment is engaged in a wide variety of projects, our projects generally involve contracts whose terms range from two to five years.
 
We have played an active role in the development of Mexico’s infrastructure and have completed large infrastructure facilities and constructed buildings throughout Mexico and Latin America. Among the facilities and buildings we have constructed from our incorporation in 1947 until 2004:
 
  •  the Apulco, Comedero, El Novillo, El Caracol, Cajon de Peña, Tomatlan, Infiernillo, Chicoasen, El Guineo, El Cobano, Jicalan, Falcon, Huites and Aguamilpa dams;
 
  •  the Guadalajara-Colima, Mazatlan-Culiacan, Leon-Lagos-Aguascalientes, Guadalajara-Tepic, Mexico City Morelia-Guadalajara, Cuernavaca-Acapulco, Oaxaca-Sola de Vega and Torreon-Saltillo concessioned highways and the Tehuacan-Oaxaca federal highway;
 
  •  the Chihuahua-Pacifico railway system;
 
  •  the Mexico City sewage system;
 
  •  16 of the 58 existing airports in Mexico and two airports outside Mexico (the Tocumen Panama international airport in Panama and the Philip S.W. Goldson international airport in Belize);
 
  •  a portion of the National University of Mexico campus (Universidad Nacional Autonoma de Mexico);
 
  •  numerous hotels, including the Maria Isabel Sheraton, Nikko, Paraiso Radisson Mexico City, Presidente Chapultepec, Camino Real in Puerto Vallarta, two Sheratons in Cancun and one in each of Ixtapa and Huatulco, Westin Regina in Los Cabos and a Loews in the Dominican Republic;
 
  •  lines one through nine, A and part of B of the Mexico City subway system; and
 
  •  the Chiapas Bridge.
 
The most important projects under construction by the Civil Construction segment during 2005 included:
 
  •  the El Cajon hydroelectric project;
 
  •  various construction projects that are part of a new terminal at the Mexico City International Airport;
 
  •  the Iztapalapa Hospital in Mexico City;
 
  •  the Toluca Airport;
 
  •  the Tejocotal — Nuevo Necaxa highway; and
 
  •  the Federal Justice building in Cholula, Mexico.
 
The Civil Construction segment’s contract awards in 2005 totaled approximately Ps.4,852 million (approximately U.S.$457 million). There were no contracts awarded outside Mexico in 2005 to the Civil Construction segment.
 
In March 2003, CFE awarded a U.S.$748 million (subsequently increased to U.S.$814 million) contract for the engineering, procurement and construction of the El Cajon hydroelectric project to CIISA, a consortium, in which two of our subsidiaries hold a combined 75% interest. The El Cajon hydroelectric project is located in the state of Nayarit, and is comprised of civil construction, electromechanical and ancillary work including the procurement, engineering, construction, transportation, testing, start-up and commissioning of two 375 megawatt turbo generating units. The El Cajon hydroelectric project is Mexico’s first engineering, procurement and construction contract for the complete construction of a hydroelectric project under Mexico’s public works financing program. The terms


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of the contract require that the contractor secure financing for its project costs. CFE will pay for the project upon completion, and the financing obtained by CIISA will cover only a portion of the project’s cash costs. The project is unlikely to generate any significant cash flow to us until completion, which is currently expected to occur in 2007. We recognized Ps.4,117 million and Ps.3,069 million of revenue from the El Cajon hydroelectric project in each of 2005 and 2004, which accounted for approximately 58% and 44% of the Civil Construction segment’s revenues in those years. At December 31, 2005, we had Ps.7,529 million in contract receivables and Ps.6,097 million of debt on our balance sheet relating to the El Cajon hydroelectric project.
 
During 2005 and the early part of 2006, we were required to invest an aggregate of Ps.400 million of additional capital in CISSA to finance undisbursed portions of the project’s cash costs, which increased our ownership percentage in CISSA from 61% to 75%. We may be required to contribute additional capital to CIISA to finance the project’s cash costs. We expect to fund such capital contributions with bank financing. This increase reflects dilution of the ownership percentage of our partners, rather than transfers of interests in CIISA from our partners to us.
 
In the past, our Civil Construction segment pursued infrastructure projects in Central and South America and the Caribbean, and may continue to do so on a more limited basis in the future. Projects in these areas ranged from construction of a section of the subway system in Santiago, Chile to the construction of a natural gas pipeline system in Argentina and the Caruachi hydroelectric dam in Venezuela. Our largest non-Mexican project during 2005 was maintenance and repair work on an oil pipeline for the Caño Limon project in Colombia. In 2005, less than 1% of our revenues in the Civil Construction segment were attributable to construction activities outside Mexico.
 
 
Our Industrial Construction segment focuses on the engineering, procurement, construction, design and commissioning of large manufacturing facilities such as power plants, chemical plants, petrochemical plants, fertilizer plants, pharmaceutical plants, steel mills, paper mills, drilling platforms and automobile and cement factories.
 
Relationship with ICA-Flour.  In 1993, we sold a 49% interest in our industrial construction subsidiary to Fluor Daniel Mexico, S.A., or Fluor, a subsidiary of The Fluor Corporation, forming ICA-Fluor. Since 1993, we have owned 51% of ICA-Fluor. Shareholder resolutions require the approval of a simple majority of ICA-Fluor’s shareholders, except for decisions relating to matters such as capital increases, changes to ICA-Fluor’s bylaws, dividend payments and a sale of all or substantially all of the assets of ICA-Fluor. We and Fluor are each entitled to appoint an equal number of members of ICA-Fluor’s board of directors and executive committee. Historically, we have designated the chief executive officer of ICA-Fluor. In addition, we and Fluor have agreed that ICA-Fluor will be the exclusive means for either party to provide construction, procurement, project management, start-up and maintenance services to the production and pipeline, power plant, petrochemical, industrial, environmental services, mining, chemicals and plastics and processing markets within Mexico, Central America, and the Caribbean. This agreement will terminate upon a sale by Fluor or us of any of our shares in ICA-Fluor or, following a breach of any of the ICA-Fluor agreements, one year after payment of any damages due to the non-breaching party in respect of this breach. We believe that our alliance with Fluor provides us with a wider range of business opportunities in the industrial construction markets in and outside Mexico, as well as access to technology and know-how which give us a competitive advantage in these markets.
 
In the past decade, over one-half of the work performed by the Industrial Construction segment has been for the Mexican public sector, CFE and Pemex, and new contracts entered into by ICA — Fluor are increasingly oil and gas-based projects and services for Pemex. During 2005, 61% of the Industrial Construction segment’s revenues were derived from work performed for the public sector and Pemex. Clients of the Industrial Construction segment’s Mexican operations range from state-owned enterprises, such as Pemex Exploracion y Construccion, Pemex Gas y Petroquimica Basica, Pemex Refinacion and Pemex Petroquimica to private-sector clients, such as Sempra Energy Resources, Transalta Campeche, PPG, Enertek, Avantel (a joint venture between MCI and Banco Nacional de Mexico), Alestra (a joint venture between AT&T, Grupo Alfa and Valores Industriales), Navistar, Iberdrola Energia Altamira S.A. de C.V., AES Elsta B.C. & Co., C.V., BASF Mexicana, S.A. de C.V., AES Andres, Snamprogetti, Cementos El Salvador, Linde A.G. and Compañia de Nitrogeno Cantarell (an international consortium among BOC Holdings, Linde, Marubeni Corporation and Westcoast Energy Inc.), Iberdrola Energia del


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Golfo, S.A. de C.V. Iberdrola Energia La Laguna, S.A. de C.V. Terminal de LNG de Altamira, S.A. de C.V. Ishikawajima-Harima Heavy Industries Co, Ltd, Dowell Schlumberger de Mexico, S.A. de C.V.
 
Typical Projects.  Projects in our Industrial Construction segment typically involve sophisticated engineering techniques and require us to fulfill complicated technical and quality specifications. Our Industrial Construction segment contracts are mainly U.S. dollar-denominated, fixed price contracts.
 
Among the principal projects we have completed in the Industrial Construction segment recently are:
 
  •  the Pemex sulfur recovery plant in Chiapas;
 
  •  the Transalta Campeche combined cycle power plant;
 
  •  a combined cycle thermoelectric power plant for Altamira III and IV;
 
  •  the La Laguna combined cycle thermoelectric power plant in Durango; and
 
  •  a liquefied natural gas storage tanks for IHI in Altamira, Tamaulipas.
 
The Industrial Construction segment’s contract awards in 2005 totaled approximately Ps.1,322 million (approximately U.S.$124 million) and included projects such as:
 
  •  the Invista (PET) plastic (Polyethylene Terephthalate) manufacturing plant in Queretaro; and
 
  •  the Reynosa IV cryogenic plant.
 
The most important projects under construction by the Industrial Construction segment during 2005 included:
 
  •  the reconfiguration of Package II of the Minatitlan refinery project;
 
  •  the Altamira V power plant;
 
  •  four drilling platforms for Pemex; and
 
  •  the Reynosa III and IV cryogenic plants
 
In October 2004, our subsidiary, ICA-Fluor, entered into a contract with Pemex for the reconfiguration of Package II of the Minatitlan refinery project, including auxiliary services, wastewater treatment and integration works at the facility. Package II of the Minatitlan refinery project was valued at Ps.7,671 million at December 31, 2005. We expect to complete this project in 2008. The project was awarded pursuant to a mixed price contract in which a portion of the contract involves fixed prices and the balance unit prices. ICA-Fluor will receive payment from Pemex for construction services over the life of the contract, as we reach certain contractual milestones. ICA-Fluor posted a guarantee in the amount of U.S.$70 million for the value of certain works to be completed on Package II of the Minatitlan refinery project, which was obtained through an unsecured letter of credit.
 
Turnkey Projects.  During the past decade, the Industrial Construction segment has experienced a shift toward private sector investment. In recent years, certain clients, including Mexican state-owned enterprises such as CFE and Pemex, have required that projects sponsored by them be constructed on a turnkey basis with financing arranged by the parties constructing the project. Accordingly, bids for such projects must be complete packages, including, among other things, engineering, construction, financing, procurement and industrial elements. As a result of the increased complexity of the projects, bids are frequently submitted by consortia. Our ability to win these bids is affected by the relative strengths and weaknesses of our partners in the consortia and the ability of each consortium to obtain financing. In 2003, we entered into a single consortium with Schlumberger AG in connection with a contract to develop the Chicontepec oil field for Pemex, which we expect to complete in December 2006.
 
Typical of turnkey projects in this segment is the nitrogen plant for Pemex’s Cantarell oil and natural gas field in Campeche. The plant was built pursuant to a 15-year build-own-operate-transfer contract and was awarded by Pemex to a consortium consisting of BOC Holdings, Linde, Marubeni Corporation, Westcoast Energy Inc. and ICA-Fluor. The consortium members contributed approximately 30% of the project’s total budget. The remainder was temporarily funded through bridge loans and refinanced on December 27, 1999 through a U.S.$381 million loan from the Export-Import Bank of Japan. ICA-Fluor provided a U.S.$29.7 million loan to the consortium, corresponding to approximately 3% of the project’s total budget of U.S.$1 billion. We, along with Linde, provided


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engineering, procurement and construction services to the project. The plant has a total generation capacity of 600 million standard cubic feet of high purity, high pressure nitrogen per day, which makes it the largest nitrogen generation facility in the world. The plant became operational in 2000. Other recent turnkey projects have included a cogeneration power plant for Enertek, an oxygen plant for Altos Hornos de Mexico, a silica plant for PPG, a cryogenic gas processing and cooling facility for Pemex, a cement plant for Cementos Apasco, a combined cycle power plant for AES Andres, a combined cycle power plant for Sempra, a combined cycle power plant for Transalta and a combined cycle power plant for Iberdrola.
 
 
The CPC-Rodio segment consists of our Spanish and Argentine operations.
 
Our Spanish operations consist of Rodio, (a sub-soil construction subsidiary) and Kronsa (a subsidiary that constructs specialized support piles). We own Rodio/Kronsa through FRAMEX, an intermediary holding company that owns 100% of each of Rodio and Kronsa. We own 50% of FRAMEX and the remaining 50% interest is owned by the Soletanche Bachy Group. Rodio and Kronsa are each governed by a board of directors that is jointly appointed, in equal number, by the Soletanche Bachy Group and us, and we appoint the president of the board of each of Rodio and Kronsa. The officers of each of Rodio and Kronsa are appointed by the board to manage day-to-day operations.
 
Rodio/Kronsa was founded in the 1930s and specializes in all forms of sub-soil construction, including the construction of tunnels, underpasses and retaining walls. Most of Rodio’s contracts are of the unit price variety. Because of the nature of its work, Rodio/Kronsa is often hired as a subcontractor. Sub-soil construction involves substantial risk due to the uncertainty of subsurface conditions and the possibility of flooding. We believe that these risks are mitigated by the fact that third parties develop the designs for most of Rodio’s projects. Kronsa constructs specialized support piles for use in the construction industry. Kronsa also constructs retaining walls. The principal market for Rodio/Kronsa is Spain, although Rodio/Kronsa has performed work in various foreign countries, including Russia and several Latin American countries and has subsidiaries in Portugal and Central America.
 
Among the principal projects Rodio/Kronsa have completed between 1973 and 2004 were:
 
  •  sounding, drilling and various works for the Almendra dam in Salamanca, Spain, the Alcantara dam in Caceres, Spain, and the El Atazar Dam in Madrid, Spain;
 
  •  construction work for the MetroSur subway system in Madrid, Spain;
 
  •  sounding, drilling and various works for the Hatillo Dam in the Dominican Republic; and
 
  •  the foundations for housing projects in Spain.
 
In 2005, the most important projects constructed by Rodio/Kronsa were:
 
  •  construction work for the M-30 highway in Madrid, Spain;
 
  •  structural repair work for the Santaella channel;
 
  •  the foundation for Chamartin highway overpass in Madrid, Spain;
 
  •  various construction works for the subway system in Madrid, Spain; and
 
  •  the foundations for housing projects in Spain.
 
In each of 2003, 2004 and 2005, CPC, contributed less than 1% of the CPC-Rodio segment’s revenues, and its activities have been limited to a single project.
 
 
Backlog in the engineering and construction industry is a measure of the total dollar value of accumulated signed contracts at a moment in time.


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The following table sets forth, at the dates indicated, our backlog of construction contracts.
 
                                 
    As of December 31,  
    2005     2005     2004     2003  
    (Millions of
    (Millions of Mexican pesos)  
    U.S. dollars)        
 
Construction
                               
Civil
  U.S. $ 412     Ps. 4,379     Ps. 6,369     Ps. 8,013  
Industrial
    801       8,510       14,286       4,453  
CPC-Rodio
    76       804       696       383  
                                 
Total
  U.S. $ 1,289     Ps. 13,693     Ps. 21,351     Ps. 12,849  
                                 
 
Our backlog does not include the backlog of joint venture companies created for specific construction projects and in which we have a minority interest (such as the Caruachi hydroelectric plant in Venezuela). As of December 31, 2005, these joint venture companies had no backlog.
 
We were awarded contracts totaling Ps.7,084 million (approximately U.S.$667 million) in 2005. See note 8 to our financial statements. Three projects represented approximately two-thirds of our backlog at December 31, 2005. Package II of the Minatitlan refinery project accounted for Ps.6,294 million, or 46% of our total backlog as of December 31, 2005. This project is currently in the initial stages of construction. In addition, we are continuing work on the El Cajon hydroelectric project. As of December 31, 2005, the El Cajon hydroelectric project accounted for Ps.1,012 million, or 7%, of our construction backlog. We have also begun work on various construction projects that are part of a new terminal at the Mexico City International Airport, which we expect to complete in 2006 and that accounted for approximately Ps.1,921 million, or 14% of our backlog as of December 31, 2005. We expect to complete these projects during 2006.
 
In 2004, we entered into a contract for the construction of Package II of the Minatitlan project and recorded Ps.7,671 million of backlog in 2004 associated with this project. Our backlog in 2004 reflected the full value of this contract, which resulted in significant increase in our backlog in 2004, as compared to 2003 and 2005.
 
As of December 31, 2005, approximately 5.9% of construction backlog was attributable to construction projects outside Mexico and public sector projects represented approximately 81.6% of our total backlog. At December 31, 2005, contracts with a value exceeding U.S.$500 million accounted for 46% of our total backlog, contracts with a value ranging from U.S.$50 million to U.S.$500 million accounted for 8% of our total backlog, and contracts with a value of less than U.S.$50 million accounted for 46% of our total backlog.
 
The amount of backlog is not necessarily indicative of our future revenues related to the performance of such work. Although backlog represents only business that is considered to be firm, there can be no assurance that cancellations or scope adjustments will not occur.
 
In certain instances, we have guaranteed completion by a scheduled acceptance date or achievement of certain acceptance and performance testing levels. Failure to meet any such schedule or performance requirements could result in costs that exceed projected profit margins, including penalties of up to 20% of the contract price. Fixed price, not-to-exceed and mixed price contracts collectively accounted for approximately 48% of our construction backlog as of December 31, 2005. See “Item 5. Operating and Financial Review and Prospects — Operating Results — Construction — Construction Backlog.”
 
 
As of January 1, 2006, we renamed our Infrastructure Operations segment the Infrastructure segment and divided the segment into to two divisions: the Airports division and the Other division. We began to consolidate GACN’s balance sheet as of December 31, 2005 and its results of operations as of January 1, 2006 and report this financial data in our Airports division.
 
We also participate in three operating concessioned highways (the San Martin-Tlaxcala-El Molinito highway and the Irapuato — La Piedad highway in Mexico and the Corredor Sur highway concession in Panama), one operating concessioned tunnel (the Acapulco tunnel) and in the management and operation of a water treatment


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plant in Ciudad Acuña and water supply systems, waste management and disposal services (through an unconsolidated joint venture with Veolia Environment and Fomento de Construcciones y Contratas). The financial data for these concessions is reported in our Other division.
 
Airport division
 
In December 2005, we directly and indirectly acquired 44.94% of the shares of GACN in a series of transactions. First, we acquired an additional 59.6% interest in SETA bringing our total ownership interest in SETA to 74.5%. SETA is the strategic shareholder of GACN and owns 15% of GACN. Second, we purchased a 36% direct interest in GACN from the Mexican government. As a result of these transactions, we control, directly and through our investment in SETA, a 51% interest in GACN. The aggregate U.S.$289.8 million purchase price was funded using U.S.$164.8 million in cash on hand and U.S.$125 million from an 18-month bridge financing provided by West LB and Nord LB.
 
On June 13, 2006, we exercised an option to acquire an additional 2% interest in GACN. We expect to close the acquisition during the third quarter of 2006.
 
Pursuant to GACN’s bylaws, SETA has the right to appoint and remove GACN’s chief executive officer, chief financial officer, chief operating officer and its commercial director and to elect three members of GACN’s board of directors. SETA also has the right to veto certain actions requiring approval of GACN’s stockholders (including the payment of dividends, the amendment of GACN’s bylaws and the amendment of its right to appoint certain members of GACN’s senior management). A Mexican trust established by Nacional Financiera, S.N.C., or NAFIN, a Mexican national credit institution and development bank owned and controlled by the Mexican government, is the remaining shareholder in GACN and currently holds 49% of its outstanding capital stock. NAFIN is acting as trustee of this trust pursuant to the instructions of the Ministry of Communications and Transportation.
 
Through GACN, we operate 13 airports in the Central North region of Mexico pursuant to concessions granted by the Mexican government, including the Monterrey airport, which accounted for approximately for 43% of GACN’s revenues in 2005. The airports serve a major metropolitan area (Monterrey), three tourist destinations (Acapulco, Mazatlán and Zihuatanejo), two border cities (Ciudad Juárez and Reynosa) and seven regional centers (Chihuahua, Culiacán, Durango, San Luis Potosí, Tampico, Torreón and Zacatecas). All of the airports are designated as international airports under Mexican law, meaning that they are all equipped to receive international flights and maintain customs, refueling and immigration services managed by the Mexican government.
 
The substantial majority of the Airport division’s revenues are derived from providing tariff-regulated services, which generally are related to the use of airport facilities by airlines and passengers. For example, approximately 81% of GACN’s total revenues in 2005 was earned from tariff-regulated services. Changes in revenues from aeronautical services are principally driven by the passenger and cargo volume at the airports. Revenues from aeronautical services are also affected by the maximum rates the subsidiary concessionaires are allowed to charge under the price regulation system established by the Ministry of Communications and Transportation. The maximum rate system of price regulation that applies to aeronautical revenues is linked to the traffic volume (measured in workload units) at each airport; thus, increases in passenger and cargo volume generally permit greater revenues from aeronautical services.
 
The Airport division also derives revenue from non-aeronautical activities, which principally relate to the commercial, non-aeronautical activities carried out at the airports, such as the leasing of space in terminal buildings to restaurants and retailers. Revenues from non-aeronautical activities are not subject to the system of price regulation established by the Ministry of Communications and Transportation. Thus, non-aeronautical revenues are principally affected by the passenger volume at the airports and the mix of commercial activities carried out at the airports. While we believe aeronautical revenues will continue to represent a substantial majority of future total revenues, we anticipate that the future growth of revenues from commercial activities will exceed the growth rate of this division’s aeronautical revenues.


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The following table provides summary data for each of the 13 airports for the year ended December 31, 2005:
 
                                         
    Year Ended December 31, 2005  
    Terminal
                      Revenues per
 
    Passengers
                      Terminal
 
Airport
  Number           Revenues           Passenger(1)  
    (In millions)     %     (Millions of pesos)     %     (pesos)  
 
Metropolitan:  
                                       
Monterrey International Airport
    4.66       44 %     584.93       43 %     125.52  
                                         
Tourist destinations:  
                                       
Acapulco International Airport
    0.88       8 %     114.98       9 %     130.63  
Mazatlán International Airport
    0.80       8 %     110.06       8 %     137.61  
Zihuatanejo International Airport
    0.61       6 %     72.69       5 %     119.37  
                                         
Total tourist destinations
    2.29       22 %     297.73       66 %     130.07  
                                         
Border cities:  
                                       
Ciudad Juárez International Airport
    0.61       6 %     69.63       5 %     113.78  
Reynosa International Airport
    0.15       1 %     16.50       1 %     112.82  
                                         
Total border city destinations
    0.76       7 %     86.13       6 %     113.59  
                                         
Regional:  
                                       
Culiacán International Airport
    0.60       6 %     93.15       7 %     155.26  
Chihuahua International Airport
    0.77       7 %     78.66       6 %     102.27  
Durango International Airport
    0.21       2 %     27.23       2 %     126.69  
San Luis Potosí International Airport
    0.23       2 %     38.44       3 %     164.56  
Tampico International Airport
    0.40       4 %     52.21       4 %     129.84  
Torreón International Airport
    0.37       4 %     49.77       4 %     132.88  
Zacatecas International Airport
    0.30       3 %     37.88       3 %     127.48  
                                         
Total regional destinations
    2.89       27 %     377.34       28 %     130.50  
                                         
TOTAL:
    10.60       100.00 %     1,346.12       100.00 %     127.01  
                                         
 
 
(1) Revenues per terminal passenger are calculated by dividing the total revenues for each airport by the number of terminal passengers for each airport.
 
Other division
 
Highway, Bridge and Tunnel Concessions
 
To promote the development of Mexico’s infrastructure without burdening the public sector’s resources and to stimulate private-sector investment in the Mexican economy, the Mexican government began in 1989 actively to pursue a policy of granting concessions to private parties for the construction, maintenance and operation of highways, bridges and tunnels. A highway concession is a license of specified duration, granted by a federal, state or municipal government to finance, build, establish, operate and maintain a public means of communication or transportation. Mexican state and municipal governments and the governments of certain foreign countries award concessions for the construction, maintenance and operation of infrastructure facilities.
 
Our return on any investment in a highway, bridge or tunnel concession is based on the duration of the concession, in addition to the amount of toll revenues collected, operation and maintenance costs, debt service costs and other factors. Traffic volumes, and thus toll revenues, are affected by a number of factors including toll rates, the quality and proximity of alternative free roads, fuel prices, taxation, environmental regulations, consumer purchasing power and general economic conditions. The level of traffic on a given highway also is influenced heavily by its integration into other road networks.


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The following table sets forth certain information regarding the highway, bridge and tunnel concessions in which we currently participate:
 
                                                         
                                  Concessionaire’s
       
                            % of
    Net Investment in
    % Total
 
                Concession
          Construction
    Concession
    Investment
 
          Date of
    Term
    % Ownership of
    Performed
    (Millions of
    Provided by
 
Concession
  Kilometers     Concession     (Years)     Concessionaire(1)     by ICA     Mexican pesos)(2)     ICA(3)  
 
San Martin-Tlaxcala-El Molinito highway
    25.5       1991       25.5       20 %     10 %   Ps. 20       4 %
Acapulco tunnel
    2.9       1994       40.0       100       100       660        
Corredor Sur highway (Panama)
    19.5       1995       30.0       100       100       2,223       68  
Irapuato — La Piedad highway
    74.32       2005       20.0       100       100       14       14  
 
 
(1) Does not take into account the Mexican federal or local governments’ “sub-equity” contributions.
 
(2) Represents each concessionaire’s investment in the applicable concession, net of depreciation and revaluation of assets. For a description of the revaluation of assets, see note 12 to our financial statements.
 
(3) Represents the percentage of the total gross investment in each concession (including the government’s sub-equity contributions) provided by us whether in the form of equity, debt or in-kind contributions.
 
(4) Net investment does not reflect certain development costs, expenses associated with our negotiations with the Panamanian Ministry of Public Works and certain other costs. See “— Corredor Sur.”
 
San Martin-Tlaxcala-El Molinito.  The San Martin-Tlaxcala-El Molinito concessioned highway began operating in September 1991. During 2005, the concessionaire’s revenues were sufficient to cover its operating expenses as well as financing costs on its indebtedness.
 
Acapulco Tunnel.  In 1994, the state of Guerrero granted us a 25-year concession for the construction, operation and maintenance of a 2.9 km tunnel connecting Acapulco and Las Cruces, which we completed in 1996. On November 15, 2002, the term of the concession was extended fifteen years, bringing the total length of the concession to 40 years.
 
On June 30, 2005, a trust organized by our subsidiary Tuneles Concesionados de Acapulco, S.A. de C.V., or TUCA, issued and sold Ps.800 million in notes (Certificados Bursátiles) due 2022, which are listed on the Mexican Stock Exchange. These notes accrue interest at TIIE (the Mexican interbank rate), plus 2.95%. The notes are recourse solely to the trust, which has been assigned the Acapulco Tunnel’s tolls and toll collection rights. After repaying all outstanding debt of TUCA, Ps.66 million to Banco Nacional de Obras y Servicios Publicos, S.N.C. and Ps.206 million of TUCA’s ordinary participation certificates, we received approximately Ps.456 million from the sale of these notes, which was used for general corporate purposes.
 
Corredor Sur.  In 1995, the Panamanian Ministry of Public Works awarded ICA Panamá, S.A., our wholly-owned subsidiary, a 30-year concession for the construction, operation and maintenance of the Corredor Sur highway, a four-lane, 19.8 kilometer highway. The first segment of the highway opened in August 1999 and the final segment opened in February 2000.
 
On May 17, 2005, a trust organized by our subsidiary ICA Panama issued U.S.$150 million of its 6.95% notes due 2025. Payments of principal and interest on the notes will be made from the Corredor Sur highway’s operations. The notes are recourse solely to the trust, which has been assigned the right to payment from the tolls. The net proceeds from the placement of the notes (approximately U.S.$134.9 million) were principally used to repay 100% of the project’s outstanding indebtedness (including a payment of U.S.$51.2 million in respect of outstanding indebtedness to the IFC) and to fund certain reserve accounts as required under the terms of the concession’s financing. The balance of the proceeds from the placement of the notes was used to repay a portion of our indebtedness and for other corporate purposes.
 
See “Item 8. Financial Information — Legal and Administrative Proceedings — Legal Proceedings — Corredor Sur.”


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The Irapuato-La Piedad Highway.  In August 2005, the Mexican Ministry of Transport and Communications awarded us a 20-year concession for the construction, operation and maintenance of the Irapuato-La Piedad Highway. The 74.3 kilometer Irapuato — La Piedad highway will be a toll-free road under the Public/Private Partnership Structure (PPP). Recovery of our investment will be accomplished through a two-part integrated quarterly payment made by the Ministry of Transport and Communication. We will be paid (1) a fixed payment for highway availability and (2) a shadow tariff based on traffic volume. The improvements to the highway are scheduled to be completed in July 2007.
 
Water Distribution and Water Treatment Concessions.  We commenced construction of the Acuña water treatment plant in November 1998. The plant started commercial operations in October 2000, and we received our first payment in February 2001. The Acuña water treatment plant is currently operating at its full installed capacity (250 liters per second) and an increase in capacity is under negotiation. During 2005, the concessionaire’s revenues were sufficient to cover its operating expenses as well as financing costs on its indebtedness.
 
We are currently negotiating with the concession grantor to change the tariff scheme for the Acuña water treatment plant. Currently, we receive approximately Ps.6.85 per cubic meter of water we treat at the plant, and we treat approximately 250 liters per second. We are negotiating with the concession grantor to increase the volume of water treated at the Acuña water treatment plant to 400 liters per second in exchange for reducing the tariff associated with the plant to Ps.4.50 per cubic meter treated. If negotiations are successful, we will be required to invest approximately U.S.$1 million to increase the capacity of the plant to 440 liters per second.
 
 
Beginning on January 1, 2005, our real estate operations are reported as part of the Corporate and Other Operations segment and our housing operations are reported as the Housing segment.
 
In 2005, we participated in several new housing development projects, including: Balam-Ku in Cancun, Arboledas San Ramon in Veracruz and Paseos del Molino in Leon. During 2005, 2004 and 2003, we sold 4,408, 2,997 and 1,883 houses, respectively. As of December 31, 2005, our housing division owned 54 hectares of land reserved for the construction of 4,588 housing units, had agreements with partners to develop 72 hectares of land for the construction of 4,914 housing units and had negotiated the acquisition of 114 hectares of land for the construction of 6,107 units.
 
New housing construction in Mexico has increased steadily since President Fox took office through several governmental initiatives, which have improved the conditions for both developers and prospective buyers of housing. From 2000 to 2005, the number of mortgage credits granted to new house buyers increased 44% from 332,000 housing units in 2000 to 477,000 housing units in 2004. In addition, the recent incorporation of the Mexican Federal Mortgage Corporation (Sociedad Hipotecaria Federal) has made it easier for people to finance purchases and construction of homes in Mexico. Accordingly, through ViveICA, our housing subsidiary, we intend to acquire additional land for the construction of approximately 30,000 housing units over the next several years as a part of our strategy to establish a greater presence in the Mexican home-building sector. In addition, we are currently exploring the possibility of acquiring a housing construction business similar in size to ours.
 
 
As of January 1, 2005, our real estate operations are included in our Corporate and Other Operations segment. Results of operations in our Corporate and Other Operations segment mainly reflect the sale of commercial and housing lots in Queretaro and corporate expenses.
 
 
Revenues from foreign operations accounted for approximately 13% of our revenues in 2005, as compared to 20% and 24% in 2004 and 2003, respectively.


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The following table sets forth our revenues by geographic area for each of the years in the three-year period ended December 31, 2005.
 
                                                 
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of
          (Millions of
          (Millions of
       
    Mexican
    (Percent of
    Mexican
    (Percent of
    Mexican
    (Percent of
 
    pesos)     Total)
    pesos)     Total)
    pesos)     Total)
 
 
Mexico
  Ps. 15,885       86 %   Ps. 10,429       79 %   Ps. 7,547       76 %
Spain
    2,308       13       2,434       19       2,002       20  
United States
                4             85       1  
Other Latin American countries
    280       1       258       2       555       5  
Inter-segment eliminations
    (68 )           (7 )           (270 )     (2 )
                                                 
Total
  Ps. 18,405       100 %   Ps. 13,118       100 %   Ps. 9,919       100 %
                                                 
 
Approximately 6% of our backlog as of December 31, 2005 related to projects outside Mexico (as compared to 3% as of December 31, 2004) and approximately 43% of our backlog as of December 31, 2005 was denominated in foreign currencies (principally U.S. dollars) (as compared to 72% as of December 31, 2004).
 
As a result of the December 1994 Mexican peso devaluation and the resulting economic crisis, our strategy had been to place greater emphasis on our international operations. We pursued this strategy through acquisitions of foreign companies, such as Rodio, CPC and Kronsa, as well as through the direct involvement of the Civil Construction and Industrial Construction segments in foreign projects, such as the Corredor Sur highway concession in Panama and the Malla Vial street network refurbishment project in Colombia. Our strategy of becoming more involved in foreign projects presented greater risks than those typically faced in Mexican projects. For example, foreign projects may be more difficult to supervise due to their greater distances from our principal operations. Foreign projects require familiarity with foreign legal requirements and business practices. In contrast to domestic infrastructure projects, foreign projects also typically do not allow us to benefit from our reputation and relationships with Mexican government officials and private-sector individuals. Over the last few years we have revised this strategy, and have decided to concentrate on our Mexican operations and participate in other countries on a case by case basis. Although we are still active abroad, we have sought to be more selective when bidding for international projects. To date, our foreign projects have generated mixed results. See “Item 5. Operating and Financial Review and Prospects — Operating Results.”
 
 
Our Mexican operations are subject to both Mexican federal and state laws and regulations relating to the protection of the environment. At the federal level, the most important of these environmental laws is the Mexican General Law of Ecological Balance and Environmental Protection, or the Ecological Law (Ley General de Equilibrio Ecologico y Proteccion al Ambiente). Under the Ecological Law, rules have been promulgated concerning water pollution, air pollution, noise pollution and hazardous substances. Additionally, the Mexican federal government has enacted regulations concerning the import, export and handling of hazardous materials and bio-hazardous wastes. Specifically, the Monterrey waste treatment plant that is owned by one of our equity investees is subject to certain bio-hazardous waste regulations, which specify collection, storage and disposal techniques for bio-hazardous waste, including blood samples, syringes and other hospital and clinic waste. The Mexican federal agency in charge of overseeing compliance with the federal environmental laws is the Ministry of the Environment and Natural Resources (Secretaria de Medio Ambiente y Recursos Naturales). The Ministry of the Environment and Natural Resources has the authority to enforce Mexican federal environmental laws. As part of its enforcement powers, the Ministry of the Environment and Natural Resources can bring administrative and criminal proceedings against companies that violate environmental laws, and has the power to close non-complying facilities. We believe that we are in substantial compliance with Mexican federal and state environmental laws. Changes in Mexican federal or state environmental laws could require us to make additional investments to remain in compliance with such environmental laws. Changes in the interpretation or enforcement of Mexican federal or state environmental


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laws could cause our operations to cease to be in compliance with such laws. Any such event could have an adverse effect on our financial condition and results of operations.
 
Since 1990, Mexican companies have been required to provide the Ministry of the Environment and Natural Resources with periodic reports regarding their production facilities’ compliance with the Ecological Law and the regulations thereunder. These reports are required to include information with respect to environmental protection controls and the disposal of industrial waste. We have provided the information required by these reports to the Ministry of the Environment and Natural Resources. There are currently no material legal or administrative proceedings pending against us with respect to any environmental matter in Mexico, and we do not believe that continued compliance with the Ecological Law or Mexican state environmental laws will have a material adverse effect on our financial condition or results of operations, or will result in material capital expenditures or materially adversely affect our competitive position. However, in the future, the financing institutions providing credit for future projects could require us to comply with international environmental regulations that may be more restrictive than Mexican environmental regulations.
 
 
The following table sets forth our significant subsidiaries as of December 31, 2005, including the principal activity, country of incorporation, ownership interest and, if different, percentage of voting power held by us:
 
                         
    Principal
  Country of
  Ownership
  Voting
Subsidiary
 
Activity
 
Incorporation
  Interest   Power Held
 
Constructoras ICA, S.A. de C.V. 
  Construction   Mexico     100 %     100 %
Controladora de Operaciones de Infraestructura, S.A. de C.V. 
  Real estate and concessions   Mexico     100       100  
Promotora e Inversora ADISA, S.A. de C.V. 
  Real estate and heavy construction   Mexico     100       100  
Controladora de Empresas de Vivienda, S.A. de C.V. 
  Housing development   Mexico     100       100  
ICATECH Corporation
  International holding company   United States     100       100  
Rodio/KronsaCimentaciones Especiales, S.A. 
  Sub-soil construction   Spain     50       50  
Ingenieros Civiles Asociados, S.A. de C.V. 
  Heavy and urban construction   Mexico     100       100  
ICA — Fluor Daniel, S. de R.L. de C.V. 
  Industrial construction   Mexico     51       51  
ICA Panama, S.A. 
  Highway construction concessionaire   Mexico     100       100  
Constructora Internacional de Infraestructura, S.A. de C.V. 
  Consortium for the construction of the El Cajon hydroelectric project   Mexico     75       75  
Grupo Aeropotuario del Centro Norte, S.A. de C.V. 
  Airport operations   Mexico     47       51 *
 
 
* Directly and through our interest in SETA.


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Approximately 83% of our assets and properties are located in Mexico, with the balance in the United States, Europe and other Latin American countries. At December 31, 2005, the net book value of all land (excluding real estate inventories) and buildings, machinery and equipment and concessions was approximately Ps.10,246 million (approximately U.S.$964 million). Beginning in 2002, as part of a strategy to better utilize our capital resources, we sold a substantial portion of the machinery used in our construction projects. We currently lease machinery from vendors.
 
Our principal executive offices, which we own, are located at Mineria No. 145, 11800, Mexico City, Mexico. Our telephone number is (52-55) 5272-9991. In January 2002, we sold an office building located at Viaducto Rio Becerra No. 27, Mexico City, to a third party and began renting it from the buyer.
 
We believe that all our facilities are adequate for our present needs and suitable for their intended purposes.
 
Item 4A.   Unresolved Staff Comments
 
None.
 
Item 5.   Operating and Financial Review and Prospects
 
The following discussion should be read in conjunction with our financial statements and the notes thereto. Our financial statements have been prepared in accordance with Mexican GAAP, which differ in significant respects from U.S. GAAP. Note 28 to our financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of net loss and total stockholders’ equity. Under Bulletin B-10, financial data for all periods in our financial statements and throughout this annual report have been restated in constant Mexican pesos as of December 31, 2005.
 
U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps.10.6275 to U.S.$1.00, the noon buying rate for Mexican pesos on December 30, 2005, as published by the Federal Reserve Bank of New York.
 
Our operations are divided into six segments: Civil Construction, Industrial Construction, CPC-Rodio, Infrastructure, Housing, and Corporate and Other Operations. Beginning on January 1, 2005, our real estate operations are in our Corporate and Other Operations segment and our housing construction operations are reported as the Housing segment. As of January 1, 2005, we renamed our Infrastructure Operation segment the Infrastructure segment and created two divisions: Airports and Other.
 
OPERATING RESULTS
 
 
 
We are a Mexican company principally engaged in construction and construction-related activities. As a result, our results of operations are substantially affected by developments in Mexico and Mexican public spending on large infrastructure projects. Our results of operations also vary from period to period based on the mix of projects under construction, and the contract terms relating to those projects.
 
We reported net losses in 2003 and 2002 principally due to a combination of lower public-sector spending on infrastructure in Mexico, losses incurred on several large projects (such as the San Juan Coliseum in Puerto Rico) and lower margins due to increased competition. Responding to these losses, in recent years we have sought to improve our contracting practices and to reduce our expenses through better cost controls. Our operating results improved considerably in 2004 and 2005, reflecting a higher volume of work (principally relating to the El Cajon hydroelectric project).
 
After several years of experiencing net losses, we realized net income of majority interest of Ps.502 million in 2005 and Ps.93 in 2004. Our return to profitability has improved our liquidity position. In addition, we refinanced certain of our indebtedness on more favorable terms in the second quarter of 2005. Specifically, we refinanced


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Ps.270 million of our debt relating to the Acapulco Tunnel and U.S.$51 million of our debt relating to Corredor Sur. We also repaid all of the outstanding debt of Empresas ICA, S.A. de C.V., our holding company (U.S.$44 million), and the outstanding amount under the Inversora Bursatil S.A. de C.V., Casa de Bolsa Inbursa, secured credit facility (Ps.368 million), which allowed us to obtain the release of the assets pledged to the lender under this credit facility. We believe that these refinancings, which have provided us with U.S.$106 million in cash for future investments, have strengthened our financial condition.
 
In December 2005, we directly and indirectly acquired interests in 44.94% of the shares of GACN in a series of transactions. First, we acquired an additional 59.6% interest in SETA, bringing our total ownership interest in SETA to 74.5%. SETA is the strategic shareholder of GACN and owns 15% of GACN. Second, we purchased a 36% direct interest in GACN from the Mexican government. As a result of these transactions, we control, directly and through our investment in SETA, a 51% interest in GACN. The aggregate U.S.$289.8 million purchase price was funded using U.S.$164.8 million in cash on hand, which we obtained from the August 2005 equity offering, and U.S.$125 million from an 18-month bridge financing provided by West LB and Nord LB. We are currently exploring options for refinancing this bridge loan.
 
We began to consolidate GACN on our balance sheet as of December 31, 2005 and its results of operations as of January 1, 2006.
 
Revenue
 
The following table sets forth the revenues (after elimination of interdivisional revenues) of each of our segments for each of the years in the three-year period ended December 31, 2005. See note 27 to our financial statements.
 
                                                 
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of
          (Millions of
          (Millions of
       
    Mexican
    (Percentage
    Mexican
    (Percentage
    Mexican
    (Percentage
 
    pesos)     of Total)
    pesos)     of Total)
    pesos)     of Total)
 
 
Revenues
                                               
Construction
                                               
Civil
  Ps. 7,044       38 %   Ps. 4,560       35 %   Ps 2,226       22 %
Industrial
    7,552       41       4,611       35       4,215       43  
CPC-Rodio
    2,331       13       2,435       19       2,049       21  
                                                 
Total
    16,927       92       11,606       89       8,490       86  
                                                 
Infrastructure
    374       2       398       3       510       5  
Housing
    1,088       6       903       8       651       7  
Corporate and Other operations
    16             211             266       2  
                                                 
Total
  Ps. 18,405       100 %   Ps. 13,118       100 %   Ps. 9,917       100 %
                                                 
 
Total revenues increased by 40% to Ps.18,405 million in 2005, from Ps.13,118 million in 2004. This increase was primarily attributable to a 46% increase in revenues from the construction segments. The increase in construction revenues during 2005 was mainly the result of work performed by the Civil and Industrial Construction segments on the El Cajon hydroelectric project, Package II of the Minatitlan refinery, the Altamira V energy plant, the Shell liquid natural gas terminal, marine drilling platforms in the Ku-Maloob-Zaap oil fields, the Reynosa III cryogenic plant, the Tejocotal Ì Nuevo Necaxa toll road and the Chicontepec oil field.
 
Total revenues increased by 32% to Ps.13,118 in 2004, from Ps.9,917 million in 2003. This increase was primarily attributable to the 37% increase in revenues from the Construction segments and a 29% increase in revenue in our Real Estate and Housing segment. The increase in construction revenues in 2004 was mainly the result of work executed for the El Cajon hydroelectric project, the Iztapalapa hospital in Mexico City, the Toluca airport and several projects undertaken by Rodio/Kronsa in Spain. The increase in revenue from the Real Estate and


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Housing segment was primarily a result of a 31% increase in the number of houses that were built and sold by the Housing division of the Real Estate and Housing segment.
 
 
We recorded selling, general and administrative expenses of Ps.1,253 million in 2005, an 11% increase from Ps.1,125 million in 2004, which was a 18.5% increase from Ps.949 in 2003. The increase in selling, general and administrative expenses in each year was due primarily to the increased overhead attributable to the increased volume of work in our Construction and Housing segments.
 
 
The following table sets forth operating income or loss of each of our segments for each of the years in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Operating Income (Loss)
                       
Construction
                       
Civil
  Ps. 544     Ps. 277     Ps. (1 )
Industrial
    562       40       (102 )
CPC-Rodio
    86       89       81  
                         
Total
    1,192       406       (22 )
                         
Infrastructure
    126       50       51  
Housing
    114       84       15  
Corporate and Other Operations
    (377 )     (17 )     (1 )
                         
Total
  Ps. 1,055     Ps. 523     Ps. 43  
                         
Operating margin
    5.7 %     4.0 %     0.4 %
                         
 
Operating income reflects interest expense attributable to the El Cajon hydroelectric project and the construction of a drilling platform for Pemex, which is reported as cost of sales in the Civil Construction and the Industrial Construction segments. During 2005, 2004 and 2003, Ps.453 million, Ps.261 million and Ps.156, respectively, of cost of sales in the Civil Construction segment consisted of financing costs related to the El Cajon hydroelectric project.
 
 
 
The following table sets forth the revenues and operating income of the Civil Construction segment for each of the years in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Revenues
  Ps. 7,044     Ps. 4,560     Ps. 2,323  
Operating income
    466       277       (1 )
Operating margin
    6.6 %     6.1 %     (0.01 %)
 
Revenues.  The Civil Construction segment’s revenues increased by 54% to Ps.7,044 million in 2005 from Ps.4,560 million in 2004. This increase mainly reflected the increase in work performed at the El Cajon hydroelectric project, which represented Ps.4,117 million of the segment’s revenue in 2005, compared to Ps.3,069 million in 2004. To a lesser extent, the increase in this segment’s revenues also reflected an increased


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volume of work performed on other projects, including the Tejocotal-Nuevo Necaxa section of the Mexico-Tuxpan highway, the general hospital in Cancun, the reconstruction of the Hotel Moon Palace in Cancun and the Federal Justice building in Cholula.
 
In 2004, the Civil Construction segment’s revenues increased by 96% to Ps.4,560 million from Ps.2,323 million in 2003, due to the increase in work at the El Cajon hydroelectric project, and, to a lesser extent, increased work performed on the Tuxpam highway and the Toluca airport. Revenues derived from foreign operations represented 1% of the Civil Construction segment’s revenues in 2005, 1% of the Civil Construction segment’s revenues in 2004 and 11% of the Civil Construction segment’s revenues in 2003.
 
Operating Income.  Operating income for the Civil Construction segment increased by 75% to Ps.466 million in 2005 from Ps.311 million in 2004. This increase was due mainly to the increase in revenues described above. In addition, the value of the El Cajon hydroelectric contract increased by U.S.$43 million in the first half of 2005 as a result of an amendment compensating us for direct and financing costs associated with increases in the price of steel. This additional amount is payable upon completion of the project, together with all other amounts payable under the contract. The total value of the amended contract is approximately U.S.$806 million.
 
In 2004, the Civil Construction segment’s Ps.277 million operating income reflected the increase in work level in 2004 and the effect of higher operating margins in our new contracts. In 2003, our client for the San Juan Coliseum project retained 10% of each payment to us to cover contingencies associated with the completion of the coliseum, including completion delays. In November 2003, we waived our right to recover such retained funds in exchange for a release from other liability associated with the San Juan Coliseum, other than payments alleged to be owed to certain third parties. As of December 31, 2003, the Civil Construction segment reserved Ps.16 million for expected operating losses on completed projects in Puerto Rico. In 2004 we applied the provisioned losses. The Civil Construction segment’s 2003 operating loss was largely attributable to the contingencies related to the San Juan Coliseum.
 
Financing costs related to the El Cajon hydroelectric project represented Ps.453 million of the cost of sales of the Civil Construction segment during 2005, Ps.261 million of this segment’s cost of sales during 2004 and Ps.156 million of this segment’s cost of sales during 2003.
 
 
The following table sets forth the revenues and operating income (loss) of our Industrial Construction segment for each of the years in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Revenues
  Ps. 7,552     Ps. 4,611     Ps. 4,215  
Operating income (loss)
    494       40       (102 )
Operating margin
    6.5 %     0.9 %     (2.4 )%
 
Revenues.  The Industrial Construction segment’s revenues increased by 64% to Ps.7,552 million in 2005, from Ps.4,611 million in 2004. This increase primarily reflected a higher volume of work performed, as more projects were in an advanced stage of construction. The projects that contributed most to revenues in the 2005 period were Package II of the Minatitlan refinery project, the Altamira V power plant, marine drilling platforms for the Ku-Maloob-Zaap oil fields, the Reynosa III cryogenic plant in Tamaulipas and the liquefied natural gas terminal for Shell.
 
The Industrial Construction segment’s revenues increased by 9% to Ps.4,611 million in 2004, from Ps.4,215 million in 2003. This increase primarily reflected the increase in our contract volume during 2004 and was primarily attributable to increased work for Pemex and the Mexican government, which accounted for 51% of our contracting volume in 2004.
 
Operating Income.  The Industrial Construction segment had operating income of Ps.494 million in 2005, compared to operating income of Ps.40 million in 2004. This improvement was primarily due to the increase in


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revenues described above and lower bid preparation expenses in 2005 compared to 2004. Bid preparation expenses were Ps.39 million in 2005 compared to Ps.179 million in 2004.
 
The Industrial Construction segment had operating income of Ps.40 million in 2004, as compared to an operating loss of Ps.102 million in 2003, primarily due to the absence of cost overruns in 2004 that we experienced in 2003 in connection with startup and commissioning of the Altamira III & IV combined cycle plants for Iberdrola, the Campeche thermoelectric plant for Iberdrola and in the AES Andres power plant in the Dominican Republic.
 
 
The following table sets forth the revenues and operating income of our CPC-Rodio segment for each of the years in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Revenues
                       
CPC
    23       1       47  
Rodio/Kronsa
  Ps. 2,308     Ps. 2,435     Ps. 2,002  
                         
Total
  Ps. 2,331     Ps. 2,436     Ps. 2,049  
                         
Operating income
                       
CPC
  Ps. (11 )   Ps. 2     Ps. (9 )
Rodio/Kronsa
    107       106       90  
                         
Total
  Ps. 96     Ps. 104     Ps. 81  
                         
Operating margin
    3.7 %     4.3 %     3.96 %
                         
 
Revenues.  The CPC-Rodio segment’s revenues decreased by 4% to Ps.2,331 million in 2005 from Ps.2,436 million in 2004. This change in each year was primarily due to a decrease in the volume of construction work performed by Rodio/Kronsa.
 
Operating Income.  The CPC-Rodio segment’s operating income decreased by 17% to Ps.96 million in 2005 from Ps.104 million in 2004. Operating income decreased as a result of relatively lower margins in projects under construction as well as the decrease in revenues.
 
The CPC-Rodio segment recorded operating income of Ps.104 million in 2004, as compared to operating income of Ps.81 million in 2003. Operating income increased modestly from 2003 to 2004, in spite of the substantial increase in revenues, due to increased competition faced by Rodio/Kronsa in Spain, which eroded operating margins.
 
CPC has been adversely affected by the Argentine economic crises. As a result, we have substantially reduced the scope of CPC’s operations. On January 21, 2004, Techint assumed CPC’s rights and obligations under the contract for the construction of the Caracoles-Punta Negra hydroelectric project. CPC is currently operating at the minimum level required to complete its last outstanding project.
 
 
Backlog at December 31, 2005 decreased to Ps.13,693 million compared to Ps.21,351 million at December 31, 2004, primarily due to lower levels of backlog associated with the Package II of the Minatitlan Project due to the significant volume of work performed on this project during 2005, which was partially offset by several new project awards, the most significant of which included:
 
  •  various construction projects that are part of a new terminal at the Mexico City International Airport for Ps.1,921 million, which we expect to complete in 2006;


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  •  the Tejocotal-Nuevo Necaxa section of the Mexico-Tuxpan highway for Ps.635 million, which we expect to complete in September 2006;
 
  •  the Reynosa IV cryogenic plant in Tamaulipas for Ps.389 million, which we expect to complete in August 2006;
 
  •  the Alvaro Obregon hospital in Mexico City for Ps.295 million, which we expect to complete in 2006;
 
  •  the reconstruction of the Moon Palace Hotel in Cancun for Ps.196 million, which we expect to complete in 2006
 
  •  the Taxqueña traffic interchange in Mexico City for Ps.195 million, which we expect to complete 2006;
 
  •  the Arriaga-Ocozocuautla highway in Chiapas for Ps.184 million, which we expect to complete in 2006;
 
  •  the Invista (PET) plastic (Polyethylene Terephthalate) manufacturing plant in Queretaro for Ps.180 million, which we expect to complete in 2006; and
 
  •  The petrochemical plant in Altamira, Tamaulipas for Ps. 1,148 million, which we expect to complete in December 2007.
 
Three projects represented approximately two-thirds of our backlog at December 31, 2005. Package II of the Minatitlan refinery project accounted for Ps.6,294 million, or 46% of our total backlog as of December 31, 2005. This project is currently on the initial stages of execution. In addition, we are continuing work on the El Cajon hydroelectric project. As of December 31, 2005, the El Cajon hydroelectric project accounted for Ps.1,012 million, or 7%, of our construction backlog. We have also begun work on various construction projects that are part of a new terminal at the Mexico City International Airport, which we expect to complete in 2006 and that accounted for approximately Ps.1,921 million, or 14% of our backlog as of December 31, 2005. We expect to complete these projects during 2006. As of December 31, 2005, approximately 5.9% of construction backlog was attributable to construction projects outside Mexico and public sector projects represented approximately 81.6% of our total backlog.
 
 
The following table sets forth the revenues and operating results of our Infrastructure segment for each year in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Revenues
  Ps. 374     Ps. 398     Ps. 510  
Operating income
    50       50       51  
Operating margin
    13.4 %     12.6 %     10.0 %
 
Revenues.  The Infrastructure segment’s revenues decreased to Ps.374 million in 2005 compared to Ps.398 million in 2004 and Ps.510 million in 2003, reflecting the sale of Simex (a subsidiary that specialized in the development and integration of electronic systems, including vehicle registration systems for tollbooths) in March 2004, as well as other divestments made in the second half of 2004.
 
Operating Income.  The Infrastructure segment reported operating income of Ps.50 million in 2005 as compared to operating income of Ps.50 million in 2004. Operating income remained stable from 2003 to 2005, principally due to an improvement in margins which more than offset the decline in revenues in each period. Revenues from Corredor Sur and Acapulco Tunnel, which have higher margins than the overall segment, represented a larger portion of this segment’s revenues in 2005. Selling, general and administrative expenses also decreased in 2005 compared to 2004 due to our expense reduction effort. The Infrastructure segment reported operating income of Ps.50 million in 2004 as compared to operating income of Ps.51 in 2003, primarily due to improved results from the Corredor Sur project which was more than offset by the overall decrease in revenue.


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The following table sets forth the revenues and results of operations of our Housing segment for each year in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Revenues
  Ps. 1,088     Ps. 903     Ps. 651  
Operating income
    92       84       15  
Operating margin
    8.5 %     9.3 %     2.3 %
 
Revenues.  Housing is being reported as an independent segment as of January 1, 2005, and results of operations for 2004 and 2003 have been reclassified to facilitate comparison. The Housing segment’s revenues increased by 20% to Ps.1,088 million in 2005, from Ps.903 million in 2004. We sold 4,408 units in 2005 compared to 2,997 units sold in 2004. The increase in units sold was due to the implementation of a new growth strategy, which has led to the construction of larger projects, improvements in our commercialization and marketing process and to a lesser extent, a change in our revenue recognition policy. Beginning in January 2005, revenue is recorded when the buyer’s mortgage has been approved.
 
The Housing segment’s revenues increased 39% from Ps.651 million in 2003 to Ps.903 million in 2004, primarily due to an increase in the number of units sold. In 2004, we sold 2,997 houses, as compared to 2,289 houses sold in 2003.
 
Operating Income.  The Housing segment’s operating income increased to Ps.92 million in 2005, from Ps.84 million in 2004 and Ps.15 million in 2003. The increases in 2005 and 2004 were primarily attributable to the increase in the number of units we built and sold in each period, as described above.
 
 
During the past several years, as part of our non-core asset divestiture program, we have sold substantially all of the assets in our Corporate and Other Operations segment. In August 2004, we divested Alsur, our grain warehouse business. We commenced reporting our real estate operations, which were formerly included in the Real Estate and Housing segment in this segment as of January 1, 2005. To facilitate comparison, we have reclassified real estate operations within this segment for 2004 and 2003.
 
The following table sets forth the revenues and operating loss of the Corporate and Other Operations segment for each year in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Revenues
  Ps. 16     Ps. 211     Ps. 107  
Operating loss
    (89 )     (11 )     (1 )
 
Revenues.  This segment’s revenues increased from Ps.107 million in 2003 to Ps.211 million in 2004 and decreased to Ps.16 million in 2005 primarily as a consequence of the absence of revenues of Alsur and losses from sale below book value of Real estate.
 
Operating Income.  The Corporate and Other Operations segment had an operating loss of Ps.89 million in 2005, compared to operating loss of Ps.11 million in 2004 and operating loss of Ps.1 million in 2003. The larger operating loss in 2005 was mainly due to the decrease in revenues resulting from the sale of Alsur. All parent company level expenses are recorded in this segment, which resulted in net losses for each of 2005, 2004 and 2003.


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The following table sets forth the components of our comprehensive financing results for each year in the three-year period ended December 31, 2005.
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (Millions of Mexican pesos)  
 
Interest expense(1)
  Ps. 448     Ps. 320     Ps. 554  
Interest income
    (349 )     (244 )     (144 )
Exchange (gain) loss, net
    6       (29 )     66  
Loss (gain) on monetary position
    6       (60 )     (90 )
                         
Financing (income) cost, net
  Ps. 112     Ps. (12 )   Ps. 386  
                         
 
 
(1) Does not include interest expense attributable to the El Cajon hydroelectric project and the drilling platforms for Pemex for which we obtained bank loans to finance working capital. Interest expense on these projects is reported as a part of cost of sales in Civil and Industrial Construction. During 2005, 2004 and 2003, Ps.453 million, Ps.261 million and Ps.156 million of cost of sales in the Civil Construction segment consisted of financing costs related to the El Cajon hydroelectric project, respectively.
 
We reported net comprehensive financing costs of Ps.112 million in 2005, as compared to net contribution to income from financing activities of Ps.12 million in 2004 and net comprehensive financing costs of Ps.386 million in 2003. The change in net comprehensive financing costs from 2004 to 2005 was mainly due to refinancing expenses associated with the issuance of the Corredor Sur notes and the Acapulco Tunnel notes, such as interest expense and the recognition of deferred costs related to the placement of bonds and non-amortizable costs related to the issuance of the new debt, including the cost of the derivatives to fix the interest rate for the maturity of the debt. The change in 2005 also reflected losses on foreign exchange and from monetary position in 2005, as compared to gains from these items in 2004. The improvement in the net comprehensive financing cost in 2004 was due to a decrease in interest expense, an increase in interest income, and the realization of an exchange gain, instead of the exchange loss we experienced in 2003.
 
We accrued interest expense of Ps.448 million in 2005, as compared to interest expense of Ps.320 million in 2004 and Ps.554 million in 2003. The increase in interest expense in 2005 was primarily attributable to refinancing expenses related to Corredor Sur and the Acapulco Tunnel, which together accounted for Ps.180 million of non-recurring costs. The increase in non-recurring costs was partially offset by a decrease in the average interest rate on our consolidated debt in 2005, which was 7.3%. The decrease in interest expense in 2004 was primarily attributable to a reduction in the average interest rates on our consolidated debt, from 10.51% in 2003 to 7.68% in 2004, which was partially offset by an increase of Ps.2,415 million in the total amount of consolidated debt outstanding in 2004, as a result of the financing for the El Cajon hydroelectric project.
 
Interest income increased from Ps.144 million in 2003 to Ps.244 million in 2004 and further increased to Ps.349 million in 2005, primarily due to our increased cash position. The increase in interest income in 2005 and 2004 was primarily due to the unused cash balance of notes issued to finance the El Cajon hydroelectric project.
 
The gain or loss on monetary position reflects the effects of inflation, as measured by the NCPI, on our net monetary position. The gain on monetary position in 2003 and 2004 reflected our net monetary liability position in those years. Our loss on monetary position in 2005 reflected our net monetary asset position in that year.
 
We reported a foreign exchange loss of Ps.6 million in 2005, as compared to a foreign exchange gain of Ps.29 million in 2004 and a foreign exchange loss of Ps.66 million in 2003. The gains and losses on foreign exchange in these periods reflected the relative trading prices of the Mexican peso versus the U.S. dollar.
 
Our total debt increased to Ps.10,463 million at December 31, 2005, compared to Ps.7,655 million at December 31, 2004, as a result of increased debt for the El Cajon hydroelectric project, debt associated with the GACN acquisition and the refinancing indebtedness for the Corredor Sur highway and Acapulco Tunnel which was partially offset by the repayment in full of our corporate debt (equivalent to U.S.$44 million) during the first six


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months in 2005 with proceeds from divestments and from the incurrence of new debt for Corredor Sur. At December 31, 2004, our corporate debt (which we define as debt at the parent company level) totaled Ps.882 million. Excluding the debt of the El Cajon hydroelectric project, our total debt increased by Ps.1,574 million from Ps.2,780 million at December 31, 2004 to Ps.4,354 million at December 31, 2005.
 
At December 31, 2005, 91% of our total debt was denominated in currencies other than Mexican pesos, principally U.S. dollars or, in the case of debt related to projects of Rodio, euros. We may in the future incur additional non-peso denominated indebtedness. Declines in the value of the Mexican peso relative to such other currencies will both increase our interest costs and result in foreign exchange losses. In other cases an increase in the value of the Mexican peso relative to such other currencies will have the opposite effect.
 
 
In 2005, our net other income was Ps.149 million, compared with net other expenses of Ps.16 million in 2004. The improvement in 2005 was principally due a net gain of Ps.39 million related to the sale of our 40% equity in CIMA and a net gain of Ps.53 million related to the reversal of contingency reserves created for the sale of divested subsidiaries during previous periods. These gains were partially offset by losses incurred in connection with the sale of property, plant and equipment.
 
In 2004, we experienced net other expenses of Ps.16 million, compared with net other expenses of Ps.285 million in 2003. During 2004, our net other expenses included a gain of Ps.70 million resulting from the sale of our shares in Alsur, ICAOTA and Autopistas Concesionadas del Centro, S.A. de C.V. and a Ps.161 million profit from the Acapulco Tunnel resulting from the reversal of a previous impairment charge. These sources of income were partially offset by Ps.32 million of severance charges, a loss of Ps.4 million incurred in the sale of property, plant and equipment and an allowance of Ps.55 million for impairment in value in Alsur and DEPRISA. See note 24 to our financial statements.
 
In 2003, net other expenses primarily resulted from Ps.126 million in provisions associated with the curtailment of our pension plan, a Ps.94 million loss from the sale of shares (primarily associated with our sale of shares of SETA), Ps.50 million of employee severance payments, and a Ps.32 million loss from the sale of fixed assets.
 
 
In 2005, we recorded a net tax provision of Ps.345 million, which reflected a current income tax expense of Ps.89 million, a deferred income tax expense of Ps.152 million and an expense of Ps.104 million reflecting a change in the valuation allowance, which resulted from our estimation that we may be unable to benefit from certain tax loss carryforwards and asset tax credits available to us in the period granted by Mexican law for the recovery of such tax carryforwards. In 2005, the statutory employee profit sharing expense equaled Ps.95 million, which reflected a current statutory employee profit sharing expense of Ps.80 million and a deferred statutory employee benefit of Ps.15 million.
 
In 2004 we recorded a net tax provision of Ps.511 million, which reflected a current income tax expense of Ps.93 million, deferred income tax expense of Ps.55 million, a charge related to the change in statutory tax rate of Ps.85 million, and an expense of Ps.277 million reflecting an increase in the valuation allowance. The increase in valuation allowance resulted from a writedown of losses we have carried forward based on our estimation that we may be unable to benefit from certain tax carryforwards within the period granted by Mexican law for the recovery of such tax carryforwards. In 2004, statutory employee profit sharing expense equaled Ps.28 million, which was composed of an statutory employee profit sharing expense of Ps.60 million and a deferred statutory employee benefit of Ps.32 million. See note 20 to our financial statements.
 
In 2003, we recorded a net tax provision of Ps.348 million, which reflected a current income tax expense of Ps.13 million, deferred income tax expense of Ps.56 million, and an expense of Ps.275 million reflecting an increase in the valuation allowance, which resulted from our estimation that we may be unable to benefit from certain tax carryforwards available to us in the period granted by Mexican law for the recovery of such tax carryforwards. In


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2003, statutory employee profit sharing expense equaled Ps.3 million, which was composed of an statutory employee profit sharing benefit of Ps.3 million and a deferred statutory employee expense of Ps.6 million.
 
The statutory tax rate in Mexico has been reduced from 34% for 2003 to 33% for 2004 and 30% for 2005 and will be further reduced by one percentage point each year until reaching 28% in 2007. See note 20 to our financial statements. Generally, the differences between effective tax rates and statutory tax rates are due to differences between taxable and financial accounting income or loss, including, to an important extent, those relating to the recognition of profit or loss on construction contracts that tend to fluctuate significantly from year to year. Income taxes payable on revenues from the El Cajon hydroelectric project are deferred until we receive payment from the CFE upon completion of the project in 2007.
 
As of December 31, 2005, we had Ps.2,772 million in consolidated net operating loss carryforwards and Ps.2,034 million in consolidated asset tax credits available. See note 20 to our financial statements.
 
 
We reported net income from our equity interest in unconsolidated affiliates of Ps.98 million in 2005, compared to Ps.175 million in 2004 and a loss of Ps.173 million in 2003. The decrease in 2005 was primarily due to the absence of income from Dravica (our affiliate participating in the Caruachi hydroelectric project in Venezuela) and income from our holdings in SETA, CIMA and Dicomex (we began consolidating SETA January 1, 2006). The improvement in 2004 was primarily due to gains from Dravica, which resulted from a settlement with the project’s client in the amount of $43 million to reflect additional construction costs, and gains from our holdings in CIMA and Dicomex. The losses in 2003 were primarily the result of losses incurred by Dravica in connection with the Caruachi hydroelectric project in Venezuela.
 
 
We reported net income before minority interest of Ps.749 million in 2005, compared to net income before minority interest of Ps.156 million in 2004 and a net loss before majority interest of Ps.1,149 million in 2003. The improvement in 2005 was primarily attributable to our increased work volume and a decrease in our selling, general and administrative expenses as a percentage of our net revenues, which were partially offset by an increase in comprehensive financing cost of Ps.125 million. In 2004, the improvement was primarily attributable to Ps.523 million of operating income and income in unconsolidated affiliated companies of Ps.175 million, which were offset by an income tax expense of Ps.511 million. In 2003, the loss was primarily attributable to Ps.386 million of financing expenses, Ps.348 million of tax provisions (including employee profit sharing), Ps.285 million of other expenses (including a provision for the curtailment of the pension plan of Ps.126 million) and Ps.173 million of losses in unconsolidated affiliated companies.
 
Net income of minority interest was Ps.248 million in 2005, which primarily reflected gains in construction activities. Net income of minority interest was Ps.63 million in 2004, which primarily reflected gains in the construction segment. Net loss of minority interest was Ps.39 million in 2003.
 
 
In 2005, we revised the accounting treatment of our industrial construction subsidiary ICA-Fluor under U.S. GAAP. For U.S. GAAP purposes , we have applied the gross proportionate consolidation method to the ICA-Fluor joint venture. To permit comparability, our U.S. GAAP reconciliation for prior periods has been restated. This change in accounting did not affect our net income or stockholders’ equity under U.S. GAAP for prior periods. We continue to consolidate ICA-Fluor for purposes of Mexican GAAP, as we have in the past.
 
The principal differences between Mexican GAAP and U.S. GAAP that affect our net income and majority stockholders’ equity relate to the accounting treatment of the following items:
 
  •  Capitalization of financing costs;
 
  •  Restatement for inflation on foreign sourced fixed assets;


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  •  Reversal of an impairment charges;
 
  •  Financial instruments;
 
  •  Compensation cost on stock option plan;
 
  •  Severance payments; and
 
  •  Deferred income tax and deferred statutory employee profit-sharing.
 
Pursuant to Mexican GAAP, our consolidated financial statements also recognize certain effects of inflation in accordance with Bulletin B-10 and Bulleting B-12, except for the restatement of foreign-sourced fixed assets from January 1, 1998. These effects have not been reversed in our reconciliation with U.S. GAAP. For a more detailed description of the differences between Mexican GAAP and U.S. GAAP as they affect our net income (loss) and total stockholders’ see Note 28 to our audited consolidated financial statements.
 
Accounting Policies and Estimates
 
We prepare our financial statements in accordance with Mexican GAAP, and we use International Financial Reporting Standards, or IFRS, issued by the International Accounting Standards Board, or IASB, and U.S. GAAP as a complement if needed (in cases where Mexican GAAP is silent on an issue), which requires us to make estimates that affect the amounts recorded for assets, liabilities, income and expenses in our financial statements. The Company has implemented control procedures to ensure that its accounting policies are timely and adequately applied. Even though such estimates are based on the knowledge, judgment and experience of our management, actual results may differ. The principal accounting policies involving the use of estimates which substantially affect the Company’s financial statements for the year ended December 31, 2005 are:
 
 
As part of the planning process before commencing any project, we review the principal obligations and conditions of the specific contract for the purpose of (i) reasonably estimating the projected revenue; (ii) reasonably estimating the costs to be incurred in the project; (iii) reasonably estimating the gross profit of the project; and (iv) identifying the rights and obligations of the parties involved. Based on that analysis, we determine the applicability of the most appropriate accounting recognition method.
 
The decision of whether or not to participate in a project is made collectively with representatives of the technical, legal, financial and administrative areas, which covers the analysis of the customer’s economic solvency and moral standing, the legal framework, the availability of resources, the technological complexity and construction procedures, the obligations and rights assumed, the economic, financial and geological risks, and the possibility of their being mitigated, as well as the casuistic analysis of each contract. Our policy is to avoid contracts with material risks, unless such risks may be mitigated or transferred to the customers, suppliers and/or subcontractors.
 
Generally our construction contracts are of two kinds: unit price and lump sum or guaranteed maximum price. In unit price contracts the customer generally assumes the risks of inflation, exchange-rate and price increases for the materials used in the contracts. Under a unit price contract, once the contract is signed, the parties agree upon the price for each unit of work. However, unit price contracts normally include escalation clauses whereby the Company retains the right to increase the unit price of such inputs as a result of inflation, exchange-rate variations or price increases for the materials, if any of these risks increases beyond a percentage specified in the contract.
 
In lump sum contracts, guaranteed maximum price contracts, or those where there are no escalation clauses whereby we undertake to provide materials or services at fixed unit prices required for a project, generally we absorb the risk related to inflation, exchange-rate fluctuations or price increases for materials. These risks are mitigated as follows: (i) when the bid tender is prepared, such risks are included in determining the costs of the project based on the application of certain economic variables which are provided by recognized firms specializing in economic analysis; (ii) contractual arrangements are made with the principal suppliers, among which advance payments are made to ensure that the cost of the materials remains the same during the contract term; and (iii) the exchange-rate risk is mitigated by contracting suppliers and subcontractors in the same currency as that in which the customer contract is executed.


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At the outset of a project, we implement a plan, which is periodically updated during the course of construction. The plan includes the description of the construction procedures, the critical execution route, the allocation and timeliness of the resources required taking into consideration the risk of any delivery delays which may result in penalties and the project’s cash flow forecast. We use this plan, together with periodic percentage-of-completion reports approved by the customer, to determine the accounting recognition method for a project and obtain financing for the project.
 
In both unit price and lump sum contracts, we generally transfer risks related to performance guarantees to subcontractors whom we hire to manufacture the equipment upon which the performance of the project depends.
 
Our construction contracts are accounted for using the percentage-of-completion method in accordance with Mexican GAAP, which is similar to the methods established under U.S. GAAP pursuant to Accounting Research Bulletin 45, “Accounting for Long-term Construction-Type Contracts” and Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The percentage-of-completion method allows for the verification of project performance in a timely fashion and adequate presentation of the legal and economic substance of the contracts. Our construction contracts take into account estimated costs and revenues to date as contract activity progresses. The estimates are based on the terms, conditions and specifications of the contracts, and on the plans and forecasts made by us in order to ensure the inclusion of all costs attributable to the project.
 
Use of the percentage-of-completion method is conditioned upon the determination of the following factors under the construction contract: (i) the total amount of revenues to be earned; (ii) our legal and economic right to receive payment for the work performed as the contract is executed; (iii) the construction budget and total cost to be incurred; and (iv) the total profit we expect to recognize. The construction contracts in which we participate are typically governed by the civil law of the jurisdictions, which recognizes a contractor’s right to receive payment for work performed. In addition, we structure the terms of our contracts to support the entitlement of payments in order to have enforceable rights to justify the use of the percentage-of-completion method.
 
In calculating the profit from a project, the base revenue estimate comprises the net of: (i) the initial amount established in the contract; (ii) additional work orders requested by the customer; (iii) the value of the update adjustments agreed in the contract; (iv) the decrease in the original contract value; (v) claims; and (vi) ending or performance bonuses as of the date on which they are effectively approved.
 
In calculating the profit from a projects, the base cost estimate considers: (i) the costs directly related to the specific contract, including materials, labor, subcontracting costs, manufacturing and supply costs of equipment derived from independent workshops; (ii) indirect costs related to the specific contract, including payroll of technical and administrative personnel, construction site camps and related expenses, quality control and inspection, internal and external contract supervision, insurance costs, costs of financing, depreciation and amortization, and repairs and maintenance; and (iii) any other costs that may be transferred to the customer under the contract terms. We exclude (i) general administrative expenses not included under any form of reimbursement in the contract; (ii) selling expenses; (iii) research and development costs; (iv) expenses not considered reimbursable under the contract; and (v) the depreciation of machinery and equipment not used in the specific contract even though it is available on hand for a specific contract (when the contract does not allow a revenue for such item). Work performed in independent workshops and construction in-progress are also excluded costs until received or used, and are treated as assets.
 
Construction contract cost estimates are based on assumptions that may differ from actual costs during the life of the project. We review our estimates on a quarterly basis, taking into account such factors as increases in the price of construction materials, amount of work to be performed, inflation, currency devaluations, changes in contract specifications due to adverse conditions, contract penalty provisions, and the rejection of costs by our customers, among others. If, as a result of our evaluation, we conclude that the estimated total project cost exceeds expected revenues, we record a provision for estimated losses at the project’s termination, in the period in which such losses are determined. Estimated revenues and costs may be affected by future events. Any change in such estimates may have an adverse effect on our financial condition and results of operations.
 
When accounting for self-financed construction projects in which the construction contract’s value includes revenues from both the construction of the project and from the project’s financing, the net comprehensive financing cost incurred for project development is included as part of the construction contract’s costs. Consequently, a


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substantial variation in construction costs or financing costs may generate a change in the construction project’s estimated result.
 
A construction contract that covers multiple construction sites is treated as multiple construction projects when: (i) separate proposals are created for each site, (ii) independent conditions are established in the contract for each site and (iii) the income, costs and margin of profit of each one of site can be independently identified.
 
A group of contracts or with one or more clients must be treated like a single construction project when: (i) the contract group has been negotiated as a package, (ii) the contracts are so intimately related that they must be considered together when determining profit margins and (iii) the contracts are preformed simultaneously or in a continuous sequence.
 
When we work on construction projects with other contractors, we include the value of contracts in our backlog for which we have a majority participation and otherwise control the leadership of the project.
 
 
Because of the size and scope of our construction projects, our customers are generally of recognized solvency and standing. If we experience collection problems as a contract is performed, we typically suspend work until the situation is resolved and payment is assured. Generally, we experience an aging of between 30 and 60 days in accounts receivable for completed work. Under Mexican GAAP, our policy is not to recognize a provision for accounts receivable on contracts that do not require the customer to pay for the work as it is performed, but only when the project is terminated.
 
 
We value our long-lived assets at their restated historical cost in accordance with Bulletin B-10. We calculate depreciation of our fixed assets, such as property, plant and equipment, based on their remaining useful life. We calculate amortization, as in the case of our investment in concessions, over the duration of such concession. We periodically evaluate the impairment of long-lived assets. If the restated values of our long-lived assets exceed their recoverable value, we write-down the asset to its recoverable value.
 
Up to December 31, 2003, according to Bulletin B-10, the recoverable value equals the net sum of forecasted nominal revenues, costs and expenses. In March 2003, the Mexican Institute of Public Accountants issued new Bulletin C-15, “Impairment in the Value of Long Lived Assets and their Disposal,” which we refer to as C-15, which was effective as of January 1, 2004. C-15 establishes new rules for the calculation and recognition of impairment losses for long-lived assets and their reversal. It also provides guidance as to indicators of possible impairment in the carrying amount of tangible and intangible long-lived assets in use, including goodwill. The calculation of such losses requires the determination of the recoverable value, which is now defined as the greater of the net selling price of a cash-generating unit and its value in use, which is the present value of discounted future net cash flows.
 
Our estimates for forecasted revenues related to traffic volume, which we primarily use in connection with vehicle counting in the case of our highway concessions, are based on population growth estimates and on the economic conditions in the area surrounding the concessioned highway. Our calculations also take into account temporal decreases in vehicle use as a result of tariff increases and the impact of our marketing strategies that are aimed at generating higher revenues. Our estimates may be based on assumptions that differ from the actual units of use.
 
Recognition of the loss from impairment under U.S. GAAP differs from that established by C-15. Under U.S. GAAP, SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets” requires that, in the presence of certain events and circumstances, we review long-lived assets for impairment. An impairment loss under SFAS No. 144 is calculated as the difference between the fair value and the carrying value of the long-lived asset. However, an impairment loss is only recognized when it is determined that the long-lived asset is not recoverable. A long-lived asset is not recoverable when the estimated future undiscounted cash flows expected to result from the use of the asset are less than the carrying value of the asset.


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A provision or benefit for income tax is recorded in the results of the year in which such tax expense or benefit is incurred. Deferred income tax assets and liabilities are recognized for temporary differences derived from comparing the book and tax values of assets and liabilities, plus any future benefits resulting from tax loss carryforwards. The resulting deferred tax provision or benefit is reflected in our statement of operations. A deferred tax liability is recorded when there is a charge to results, and a deferred tax asset is recorded in the event of a credit to results.
 
The calculation and recognition of deferred taxes and the related valuation allowance requires the use of estimates, which may be affected by the amount of our future taxable income, the assumptions relied on by our management and our results of operations.
 
We periodically evaluate the fairness of deferred tax assets or liabilities based on historical tax results and estimated tax profits, among others. The method used to determine deferred taxes is similar to that established in FASB No. 109. A valuation allowance is recorded for any deferred tax assets that, in the opinion of our management, are not probable of being realized. Any change in our estimates may have an effect on our financial condition and results of operations.
 
 
Set forth below are the results derived from the application of the aforementioned policies and their effects on our financial statements for the years ended December 31, 2005 and 2004:
 
 
Our financial statements as of December 31, 2005 and 2004 include provisions of Ps.2 million and Ps.34 million, respectively, for estimated losses upon project termination related to projects that were expected to be substantially completed during 2006 and 2005, respectively. As of December 31, 2005 and 2004, our financial statements include an allowance for doubtful accounts of Ps.172 million and Ps.172 million, respectively. Reserves and provisions were recorded based on our best estimates and current circumstances. If these circumstances change, we may need to modify the amount of reserves and provisions we have recorded.
 
 
In 2005 we recorded a net tax provision of Ps.345 million, which reflected a current income tax expense of Ps.89 million, a deferred income tax expense of Ps.152 million and a change in valuation allowance of Ps.104 million. As of December 31, 2005, we had a net deferred tax asset of Ps.761 million, including deferred tax liabilities of Ps.3,112 million and creditable asset tax of Ps.974 million . As of December 31, 2005, a valuation allowance for tax loss carryforwards and asset tax credits of Ps.692 million was recorded because we believe that the period granted by Mexican law for the recovery of such amounts may expire before such tax loss carryforwards and tax on asset credits are recovered. If these circumstances were to change, we may be required to increase or decrease the valuation allowance. We compute the amortization of our tax credits using the forecast of income based on our business plan.
 
In 2004, we recorded a net tax provision of Ps.511 million, which reflected a current income tax expense of Ps.93 million, deferred tax expense of Ps.56 million and a deferred income tax expense of Ps.85 million reflecting tax rate variations and an increase in the valuation allowance of Ps.275 million.
 
 
As part of our non-core asset divestment program, the accounting values of assets held for sale, which consisting of real property inventories, property, plant and equipment and certain investments in concessions, were adjusted during the fourth quarter of 2001 based on their estimated recoverable value. Likewise, the estimated recoverable value of investments in concessions was based on projected and discounted cash flows of future operating income, which were made by an independent expert.


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No adjustment to the book value of assets was made in 2005. During 2004 our management reviewed the estimate of the recoverable value of the concessions considering the present value of future cash flows and, as a result of this review, we reversed a loss for impairment of the value of some of our assets related to the Acapulco Tunnel concession that were recorded in 2001. This reversal resulted in revenues of Ps.161 million, which were recorded in Other revenues on our income statement for the year ended December 31, 2004.
 
Recently Issued Accounting Standards
 
 
As of May 31, 2004, the Mexican Institute of Public Accountants, or IMCP, formally transferred the function of establishing and issuing financial reporting standards to the Mexican Board for Research and Development of Financial Reporting Standards, or CINIF, consistent with the international trend of requiring this function be performed by an independent entity.
 
Accordingly, the task of establishing bulletins of Mexican GAAP and circulars issued by the IMCP was transferred to CINIF, who subsequently renamed standards of Mexican GAAP as Financial Reporting Standards (Normas de Información Financiera or “NIFs”), and determined that NIFs encompass (i) new bulletins established under the new function; (ii) any interpretations issued thereon; (iii) any Mexican GAAP bulletins that have not been amended, replaced or revoked by the new NIFs; and (iv) International Financial Reporting Standards, or IFRS that are supplementary guidance to be used when Mexican GAAP does not provide primary guidance.
 
One of the main objectives of CINIF is to achieve greater concurrence with IFRS. To this end, it began reviewing the theoretical concepts contained in Mexican GAAP and established a Conceptual Framework, which we refer to as the CF, to support the development of financial reporting standards and to serve as a reference in resolving issues arising in the accounting practice. The CF consists of eight financial reporting standards, which comprise the NIF-A series. The NIF-A series, together with NIF B-1, were issued on October 31, 2005. Their provisions are effective for years beginning January 1, 2006, superseding all existing Mexican GAAP series A bulletins.
 
The new NIFs are:
 
  •  NIF A-1 Structure of Financial Reporting Standards;
 
  •  NIF A-2 Fundamental Principles;
 
  •  NIF A-3 Users’ Needs and Financial Statement Objectives;
 
  •  NIF A-4 Qualitative Characteristics of Financial Statements;
 
  •  NIF A-5 Basic Elements of Financial Statements;
 
  •  NIF A-6 Recognition and Valuation;
 
  •  NIF A-7 Presentation and Disclosure;
 
  •  NIF A-8 Supplementary Standards to Mexican GAAP; and
 
  •  NIF B-1 Accounting Changes.
 
The most significant changes established by these standards are:
 
  •  NIF A-3 requires the inclusion of a statement of cash flows in a company’s financial statements as well as a statement of changes in financial position.
 
  •  NIF A-5 created a new classification for revenues and expenses: ordinary and not ordinary. Ordinary revenues and expenses are derived from transactions or events that are within the normal course of business or that are inherent in the entity’s activities, whether frequent or not; revenues and expenses classified as not ordinary refer to unusual transactions and events, whether frequent or not.
 
  •  NIF A-7 requires the presentation of comparative financial statements for at least the preceding period. Through December 31, 2004, the presentation of prior years’ financial statements was optional. The


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financial statements must disclose the authorized date for their issuance, and the name of the officer or administrative body authorizing the related issuance.
 
  •  NIF B-1 establishes that changes in particular standards, reclassifications and correction of errors must be recognized retroactively. Consequently, basic financial statements presented on a comparative basis with the current year that might be affected by the change, must be adjusted as of the beginning of the earliest period presented.
 
We have not fully assessed the effects of adopting these new standards on the presentation of our financial statements.
 
 
In November 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4,” or SFAS No. 151. SFAS No. 151 amends the guidance in Accounting Research Bulletin, or ARB, No. 43, “Inventory Pricing,” to clarify the accounting for abnormal costs related to idle facility expense, freight, handling costs and spoilage. SFAS No. 151 requires that these costs and expenses be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as previously defined under ARB No. 43. In addition, SFAS No. 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not anticipate the adoption of this new accounting principle will have a material effect on our financial position, results of operations or cash flows.
 
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payments,” or SFAS 123R. This statement eliminates the option to apply the intrinsic value measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” to stock compensation awards issued to employees. Rather, 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. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award — the requisite service period (usually the vesting period). SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. SFAS 123R will be effective for our fiscal year ending December 31, 2006. We do not anticipate the adoption of this new accounting principle will have a material effect on our financial position, results of operations or cash flows.
 
In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions — an amendment of FASB Statements No. 66 and 67”, which we refer to as SFAS 152. SFAS 152 amends FASB SFAS No. 66, “Accounting for Sales of Real Estate,” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in the American Institute of Certified Public Accountants’, or AICPA, Statement of Position, or SOP, 04-2, “Accounting for Real Estate Time-Sharing Transactions” and amends FASB SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to state the guidance of (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. SFAS 152 is effective for financial statements for fiscal years beginning after June 15, 2005. We do not anticipate the adoption of this new accounting principle will have a material effect on our financial position, results of operations or cash flows.
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,” or SFAS 153, which amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception 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. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not anticipate the adoption of this new accounting principle will have a material effect on our financial position, results of operations or cash flows.


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In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3,” or SFAS 154. SFAS requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless impracticable. The statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used and redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. The new standard is effective for accounting changes made in fiscal years beginning after December 15, 2005. We do not anticipate the adoption of this new accounting principle will have a material effect on our financial position, results of operations or cash flows.
 
In November 2005, the FASB issued Financial Staff Position, or FSP, FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which nullifies certain requirements of Emerging Issues Task Force Issue , or EITF, No. 03-1, The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments” and supersedes EITF Abstracts Topic No. D-44, “Recognition of Other-Than-Temporary Impairment Upon the Planned Sale of a Security whose Cost Exceeds Fair Value.” The guidance in this FSP shall be applied to reporting periods beginning after December 15, 2005. We do not expect the adoption of this guidance will have a material effect on our financial position, results of operations or cash flows.
 
At the September 29 and 30, 2004 and November 17 and 18, 2004 meetings of the Emerging Issues Task Force, or the EITF, the EITF discussed Issue 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,” or EITF 04-10. EITF 04-10 concludes that a company, when determining if operating segments that do not meet the quantitative thresholds of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” or SFAS No. 131, should be aggregated, may aggregate such operating segments only if aggregation is consistent with the objective and basic principle of SFAS No. 131, that they have similar economic characteristics, and that the segments share a majority of the aggregation criteria listed in (a) through (e) of paragraph 17 of SFAS No. 131. The consensus in EITF 04-10 was adopted in 2005, but did not have any effect on our operating segments.
 
At the September 15, 2005 meeting of the EITF, the EITF discussed Issue 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty,” or EITF 04-13. At the meeting, it was agreed that in situations in which an inventory transaction is legally contingent upon the performance of another inventory transaction with the same counterparty, the two transactions are deemed to have been entered into are in contemplation of one another and would be considered a single exchange transaction subject to Accounting Principles Board Opinion 29, “Accounting for Nonmonetary Transactions.” The Task Force also stated indicators of when a purchase transaction and a sales transaction would not be considered as entered into in contemplation of one another, and thus, may have the ability to be recorded as separate purchases and sales. EITF 04-13 is effective for new arrangements entered into, or modifications or renegotiations of existing arrangements, beginning in the first annual reporting period beginning after March 15, 2006. We have not yet determined the effects of adoption of EITF 04-13 on our financial position, results of operations or cash flows.
 
At its June 2005 meeting, as modified by its September 2005 meeting, the EITF discussed Issue 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination,” or EITF 05-6, and concluded on the appropriate amortization periods for leasehold improvements either acquired in a business combination or which were not preexisting and were placed in service significantly after, and not contemplated at, the beginning of the lease term. This Issue is effective for leasehold improvements (that are within the scope of this Issue) that are purchased or acquired in reporting periods beginning after June 29, 2005. We do not anticipate the adoption of EITF 05-6 will have a material effect on our financial position, results of operations or cash flows.


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LIQUIDITY AND CAPITAL RESOURCES
 
 
Our principal uses of funds in 2005 were:
 
  •  Ps.1,338 million for the repayment of amounts outstanding under our credit agreement with Casa de Bolsa Inbursa;
 
  •  U.S.$289.8 million for our acquisition the 59.6% interest in SETA and the 36% interest in GACN;
 
  •  Ps.133 million for working capital in the Civil Construction segment; and
 
  •  Ps.294 million for acquisition of land reserve in the Housing segment.
 
Our principal sources of funds in 2005 were:
 
  •  Ps.2,447 million of net proceeds from the issuance of our equity interests in August 2005;
 
  •  U.S.$125 million from a bridge loan for the acquisition of GACN;
 
  •  U.S.$84 million of the net proceeds from the Corredor Sur financing;
 
  •  Ps.663 million of net proceeds from the Acapulco Tunnel financing; and
 
  •  Ps.306 million (U.S.$27 million) of proceeds from sale of the majority of our interest (40% of our initial position of 50%) in CIMA.
 
Our expected future sources of liquidity include cash flow from our Civil Construction, Industrial Construction and Infrastructure segments, third party financing for our construction and housing projects and the continuation of our non-core asset divestment program, as well as the divestment of certain other assets related to our core operations that are obsolete or no longer useful to us, such as construction machinery and equipment. There can be no assurance that we will be able to continue to generate liquidity from these sales.
 
As of March 31, 2006, we had net working capital (current assets less current liabilities) of Ps.6,257 million. We had net working capital of Ps.4,687 million as of December 31, 2005 as compared to net working capital of Ps.1,705 million as of December 31, 2004 and a net working capital of Ps.1,109 million as of December 31, 2003. Our net working capital as of December 31, 2005 and March 31, 2006 included Ps.1,720 million and Ps.1,874 million, respectively, of net working capital from GACN, which we began to consolidate on December 31, 2005. The increase in net working capital from December 31, 2004 to December 31, 2005 was primarily attributable to the consolidation of GACN, an increase in our cash position and a reduction in short-term debt, which was partially offset by a decrease in other account receivables. The increase in net working capital from December 31, 2003 to December 31, 2004 was primarily attributable to an increase in current contract receivables, an increase in cost and estimated earnings in excess of billings on uncompleted contracts, an increase in other receivables, and a decrease in the current portion of long-term debt. These increases were partially offset by a decrease in cash and cash equivalents, an increase in notes payable, an increase in trade accounts payable and an increase in advances from customers’ accounts. We believe that our working capital is sufficient to meet our requirements in connection with work we currently intend to carry out in the near future.
 
Our cash and cash equivalents were Ps.6,264 million as of December 31, 2005, as compared to Ps.3,545 million as of December 31, 2004 and Ps.3,894 million as of December 31, 2003. Of our cash and cash equivalents as of December 31, 2005, Ps.1,657 million was attributable to GACN, which we began to consolidate on December 31, 2005. At December 31, 2005, we had a current ratio (current assets over current liabilities) of 1.64, as compared to a current ratio of 1.22 at December 31, 2004. As of March 31, 2006, we had a current ratio of 1.52.
 
Cash and cash equivalents at year-end 2005 included:
 
  •  Ps.1,657 million of cash and cash equivalents (representing 26% of our cash and cash equivalents) held by GACN;


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  •  Ps.1,589 million of cash and cash equivalents (representing 25% of our cash and cash equivalents) held by ICA-Fluor;
 
  •  Ps.559 million of cash and cash equivalents (representing 9% of our cash and cash equivalents) held by CIISA;
 
  •  Ps.106 million of cash and cash equivalents (representing 1.7% of our cash and cash equivalents) held by Rodio.
 
The use of cash and cash equivalents by GACN, ICA-Fluor or Rodio/Kronsa requires the consent of the other shareholders in each such subsidiary, which are Nacional Financiera, S.N.C. in the case of GACN, the Fluor Corporation in the case of ICA-Fluor and the Soletanche Bachy Group in the case of Rodio.
 
We generated Ps.1,055 million from operating activities during 2005, as compared to Ps.523 million in 2004 and Ps.43 in 2003.
 
The terms of the El Cajon contract require that CIISA secure financing for its project costs. Because CFE will pay for the project upon completion, and the financing obtained by CIISA will cover only the project’s cash costs, we do not expect this project to generate any significant cash flow to us until completion, which is currently expected to occur in 2007. However, because we recognize revenues from our construction projects under the percentage of completion accounting method, the El Cajon hydroelectric project represented a material portion of our revenues in recent years, and is expected to continue to generate a material portion of our revenues in 2006. The El Cajon hydroelectric project generated Ps.4,117 million, Ps.3,069 million and Ps.922 million of revenue, or 22%, 23% and 9% of total revenue, in 2005, 2004 and 2003, respectively. The El Cajon hydroelectric project is expected to represent a substantial portion of our receivables and our indebtedness. At December 31, 2005, we had Ps.7,529 million in contract receivables and Ps.6,097 million of debt on our balance sheet relating to the El Cajon hydroelectric project.
 
As of March 31, 2006, some of our assets were pledged to support letters of credit and other credit operations, including Ps.63.5 million and U.S.$9.7 million of cash and cash equivalents. We have pledged some of our assets to a number of Mexican banks, including Banco Nacional de Comercio exterior, S.N.C. or Bancomext, Banco Mercantil del Norte S.A. or Banorte, WestLB, AG, Norddeutsche Landesbank Girozentrale and Inversora Bursatil, S.A. de C.V., in order to secure letters of credit from some of these banks and credit operations from others. The assets we have pledged include: dividends payable to us by Aeroinvest; construction machinery and equipment owned by Ingenieros Civiles Asociados, S.A. de C.V.; cash held by CICASA; a portion of the cash held by ICA-Fluor; the portion of cash flow that represents free cash flow from Corredor Sur and from the Acapulco tunnel and an office building located at Mineria No. 130, Mexico City. We expect that most of the assets securing letters of credit will remain pledged until the letters of credit secured by these assets expire. At March 31, 2006, we had unrestricted access to Ps.1,592 million of our cash and cash equivalents, compared to Ps.2,079 million at December 31, 2005.
 
 
On August 10, 2005 we sold 90,622,491 newly-issued shares at a price of Ps.27.00 per share through the Mexican Stock Exchange and to institutional investors outside of Mexico. 65% of the shares were placed through the Mexican Stock Exchange and thirty-five percent of the shares were placed with institutional investors outside Mexico, including to certain qualified institutions in the United States in an offering exempt from registration under Section 4(2) of the U.S. Securities Act of 1933, as amended. We received total proceeds of Ps.2,447 million, before expenses. Of the net proceeds from this offering, as of May 31, 2006, we have used:
 
  •  Ps.1,693 million for the acquisition of our 44.94% interest in GACN described below;
 
  •  Ps.221 million as working capital for El Cajon and other projects in the civil construction segment;
 
  •  Ps.113 million for land reserve acquisitions in the Housing segment;
 
  •  Ps.94 million for payment of fees and commissions in connection with the issuance;
 
  •  Ps.56 million for an equity investment in the Irapuato — La Piedad highway concession;


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  •  Ps.48 million for corporate uses; and
 
  •  the balance (Ps.222 million) is reserved for general corporate purposes.
 
 
We utilize a number of project financing structures to raise the capital necessary to build projects. We historically financed our construction operations primarily through advances from customers. Increasingly, we have been required to arrange construction-phase financing. This has typically been done through bank financing. As these construction projects near completion, we typically seek to arrange longer-term financing to repay the short-term borrowings, either through the issuance of our own long-term debt or through the securitization of revenues from these projects. For example, in 2004, we replaced the bridge financing for the El Cajon hydroelectric project with a U.S.$452.4 million syndicated loan and a U.S.$230 million bond. Our ability to arrange financing for the construction of infrastructure facilities is dependent on many factors, including the availability of financing in the credit market.
 
We typically provide a portion of the equity itself and our investment is returned over time once the project is completed. Generally, we contribute equity to a project by accepting deferred payment of a portion of its construction contract price. Concessions represent a similar approach to financing public-sector projects through the private sector. In certain projects, such as the Cantarell nitrogen plant, we provided debt financing in lieu of equity. In other projects, such as the El Cajon hydroelectric project, which are financed as part of the Mexico’s public works financing program, which is known in Mexico as the PIDIREGAS program, payment of the construction cost is deferred until the project is operational. Due to the nature of most infrastructure projects, which typically involve long-term operations, we recover our equity or debt contribution, and in cases like the El Cajon hydroelectric project receive payment under the contract, after the construction phase is completed. Depending on the requirements of each specific infrastructure project, we typically seek to form a consortium with entities that have expertise in different areas and that can assist us in obtaining financing from various sources. See “Item 3. Key Information — Business Overview — Infrastructure.” We anticipate that future revenues will depend significantly on our ability directly or indirectly to arrange financing for the construction of infrastructure projects.
 
In addition to providing equity capital to our project construction subsidiaries, we arrange third party financing in the form of loans and debt securities to finance the obligations of our projects. The revenues and receivables of the project are typically pledged to lenders and securityholders to secure the indebtedness of the project. Recourse on the indebtedness is typically limited to the subsidiary engaged in the project.
 
We believe that our ability to finance construction projects has enabled us to compete more effectively in obtaining such projects. Providing financing for construction projects, however, increases our capital requirements and exposes us to the risk of loss of our investment in a project. We attempt to compensate for this risk by entering into financing arrangements on terms generally intended to provide us with a reasonable return on our investment. We have implemented a policy to be more selective in choosing projects where we expect to recover our investment and earn a reasonable rate of return. However, there can be no assurance that we will be able to realize these objectives.
 
 
Our total debt to equity ratio was 0.82 to 1 at December 31, 2005, 1.31 to 1.0 at December 31, 2004 and 1.0 to 1.0 at December 31, 2003. The improvement in the debt to equity ratio from December 31, 2004 to December 31, 2005 mainly reflected the August 2005 equity sale, the proceeds of which were used to repay indebtedness, the debt refinancing transactions described above and the increase in net income we experienced in 2005. The deterioration in the debt to equity ratio from December 31, 2003 to December 31, 2004 mainly reflected the increase in long-term debt for the financing of El Cajon hydroelectric project. See note 18 to our financial statements.
 
As of December 31, 2005, approximately 69% of our consolidated revenues and 91% of our indebtedness were denominated in foreign currencies, mainly U.S. dollars. Decreases in the value of the Mexican peso relative to the U.S. dollar will increase the cost in Mexican pesos of our debt service obligations with respect to our U.S. dollar


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denominated indebtedness. A depreciation of the Mexican peso relative to the U.S. dollar will also result in foreign exchange losses as the Mexican peso value of our foreign currency denominated indebtedness is increased. We currently do not have any financial instruments in place to hedge for foreign currency risk. Several of our subsidiaries have a reduced exposure to the foreign currency risk because a higher percentage of their revenues are denominated in U.S. dollars.
 
Certain of our subsidiaries, such as GACN, CIISA and ICA Panama, and unconsolidated affiliates have entered into debt and other agreements containing restrictive covenants that limit the ability of such subsidiaries and affiliates to pay us dividends. These restrictive covenants generally do not restrict our operating subsidiaries such as Ingenieros Civiles Asociados and ViveICA. See note 15 to our financial statements.
 
In 2005, our debt service obligations (principal and interest) totaled Ps.2,431 million for debt denominated in pesos and U.S dollars. As of December 31, 2005, our net debt (interest paying debt less cash and cash equivalents) was Ps.4,199 million.
 
 
CIISA obtained permanent financing for the El Cajon hydroelectric project in the first quarter of 2004, consisting of a U.S.$452.4 million syndicated loan and a U.S.$230 million bond. The syndicated loan and bond contain various restrictive covenants typical for project financing. The permanent financing required that CIISA obtain U.S.$26 million in letters of credit to be used as collateral for the financing. The terms of the syndicated loan also include a U.S.$53 million contingent facility that can be drawn upon to cover increases in the cost of the project or if CFE requests that additional works be done on the project, and a U.S.$28 million cost-overrun facility that can be drawn upon to cover cost-overruns. Disbursements under the cost-overrun facility are contingent upon CIISA obtaining additional letters of credit, if CIISA does not meet certain minimum financial ratios based on a percentage of certified work completed on the project. There can be no assurance that CIISA will not be required to obtain additional letters of credit in the future or, if so required, that it will be able to obtain such letters of credit. Additionally, in 2007 CIISA will be required to post a two-year quality guaranty for the power generation units and related works on the El Cajon hydroelectric project in the amount of U.S.$6 million. CIISA is a special purpose subsidiary, which was created to construct the El Cajon hydroelectric project. We and the other shareholders of CIISA have agreed to guarantee certain obligations of CIISA under the project contracts, including the financing documents, subject to certain limitations in the event of an early termination of the public works contract for the project.
 
 
On May 17, 2005, a trust organized by our subsidiary ICA Panama issued U.S.$150 million of its 6.95% notes due 2025. Payments of principal and interest on the notes will be made from the Corredor Sur highway’s operations. The notes are recourse solely to the trust, which has been assigned the right to payment from the tolls. The net proceeds from the placement of the notes (approximately U.S.$134.9 million) were principally used to repay 100% of the project’s outstanding indebtedness (including a payment of U.S.$51.2 million in respect of outstanding indebtedness to the IFC) and to fund certain reserve accounts as required under the terms of the concession’s financing. The balance of the proceeds from the placement of the notes was used to repay a portion of our parent company indebtedness and for other corporate purposes.
 
 
On June 30, 2005, a trust organized by our subsidiary TUCA issued and sold Ps.800 million in notes (Certificados Bursátiles) due 2022, which are listed on the Mexican Stock Exchange. These notes accrue interest at TIIE (the Mexican interbank rate), plus 2.95%. The notes are recourse solely to the trust, which has been assigned the Acapulco Tunnel’s tolls and toll collection rights. After repaying all outstanding debt of TUCA, Ps.66 million to Banco Nacional de Obras y Servicios Publicos, S.N.C. and Ps.206 million of TUCA’s ordinary participation certificates, we received approximately Ps.456 million from the sale of these notes, which was used for general corporate purposes.


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In connection with the GACN acquisition, on December 22, 2005, our subsidiary Aeroinvest obtained a bridge loan from West LB and Nord LB in the amount of U.S.$125 million. The bridge loan is guaranteed by our holding company, Empresas ICA. Interest is payable on the loan at the rate of LIBOR plus 2.35%. So long as there are amounts outstanding under the loan, Aeroinvest is obligated to comply with certain affirmative and negative covenants, including maintenance of an interest service coverage ratio (as defined in the credit agreement) of 1.20:1.00. We are currently exploring options to refinance this bridge loan.
 
 
In the third quarter of 2002, we restructured Ps.155 million of our debt with BBVA Bancomer by entering into three new secured loan agreements. During 2005, we repaid the total outstanding amount of these secured loans using the proceeds from the sale of real estate in Hermosillo and Queretaro and a portion of the proceeds from the capital increase in 2003 and 2004.
 
During 2004, we transferred payment obligations of two of our subsidiaries to Ingenieros Civiles Asociados, S.A. de C.V. in connection with amounts owed to Caterpillar, Inc. A U.S.$3.7 million obligation was transferred from Dravica to ICA, S.A. de C.V. and a U.S.$1.8 million obligation was transferred from ICA Panama to ICA, S.A. de C.V. In each case the terms and conditions of the obligations remained the same. On May 25, 2005, we repaid U.S.$2 million of the amount owed to Caterpillar. As of March 31, 2006, there were no amounts outstanding owed to Caterpillar.
 
As of December 31, 2005, we had outstanding Ps.106 million of other long-term debt associated with financial leases for construction equipment and Ps.77 million of other long-term indebtedness related to a loan maturing in September 2008 that is secured by shares of SISSA Coahuila, S.A. de C.V., which is the remaining amount outstanding from the financing for the construction of the waste-water treatment plant.
 
 
In the first quarter of 2005, we repaid in full and obtained the release of pledged assets in connection with a ten-year secured credit agreement with Casa de Bolsa Inbursa. At December 31, 2004, Ps.1,338 million had been outstanding under this facility. The loan’s initial interest rate was 14.5% and increased by 90 basis points each year up to a maximum interest of 22.6%.
 
 
From February 1999 through December 2005, we sold U.S.$781 million of assets including U.S.$37 million in 2005. A substantial portion of these assets were sold as part of a non-core asset divestment program.
 
In 2005, we sold:
 
  •  our majority interest in CIMA for Ps.306 million (U.S.$27 million);
 
  •  several real estate properties in the amount of U.S.$8.8 million; and
 
  •  our remaining 20% interest in a tourism real estate development company in Cabo del Sol for U.S.$1 million.
 
We may from time to time repurchase our outstanding equity securities if market conditions and other relevant considerations make such repurchases appropriate. The amount that we may use to repurchase our securities, is authorized annually by our shareholders meeting.
 
Historically our clients have required us to issue bonds to secure, among other things, bids, advance payments and performance. In recent years, our clients have been increasingly requiring letters of credit and other forms of guarantees to secure such bids, advance payments and performance. We are currently in contact with issuers of letters of credit, but we cannot guarantee that we will be able to obtain all of the letters of credit required for our normal operations.


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In recent years, our liquidity has also been adversely affected by the length of our average collection period for accounts receivable. Our average collection period for accounts receivable (including El Cajon) considered net of value added tax was 230 days as of the first quarter of 2006, which is a 17% increase from the first quarter of 2005 primarily as a result of an increase in the short term account receivables as result of an increase in the volume of work performed during 2005.
 
 
We do not engage in any off-balance sheet arrangements that have or that we believe are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
Contractual Obligations
 
The following tables set forth our contractual obligations and commercial commitments by time remaining to maturity.
 
As of December 31, 2005, the scheduled maturities of our contractual obligations, including accrued interest, were as follows:
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
Contractual Obligations
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (Millions of Mexican pesos)  
 
Long-term debt obligations
  Ps. 9,989     Ps.       Ps. 7,622     Ps. 73     Ps. 2,294  
Current portion of long term debt obligation
    40       40                    
Operating lease obligations
    209       19       57       95       38  
                                         
Total
  Ps. 10,238     Ps. 59     Ps. 7,679     Ps. 168     Ps. 2,332  
                                         
 
As of December 31, 2005, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:
 
                                         
    Amount of Commitment Expiration per Period  
    Total
                         
    Amounts
    Less Than
                Over
 
Other Commercial Obligations
  Committed     1 Year     1-3 Years     4-5 Years     5 Years  
    (Millions of Mexican pesos)  
 
Standby letters of credit
  Ps. 1,454     Ps.     Ps. 1,454     Ps.     Ps.  
Guarantees(1)
    9,356             9,356              
                                         
Total commercial commitments
  Ps. 10,810     Ps.  —     Ps. 10,810     Ps.  —     Ps.  —  
                                         
 
 
(1) Consist principally of bonds delivered to guarantee bids, advance payments and performance.


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Item 6.   Directors, Senior Management and Employees
 
DIRECTORS AND SENIOR MANAGEMENT
 
Management of our business is vested in our board of directors. Our bylaws provide that the board of directors will consist of the number of directors and alternate directors elected by our shareholders at the annual ordinary general meeting. In April 2005, our bylaws were amended to provide for the election of our directors in three classes, each to serve for 3 years, with one third of the directors being elected at each annual meeting of our stockholders. Our current board of directors was elected on April 21, 2005, in three classes, with terms designed to provide a transition to the staggered term arrangement provided by the bylaws; however, at a shareholder meeting on April 6, 2006, the directors whose term expired on December 31, 2005 were extended for an additional year. Alternate directors are authorized to serve on the board of directors in place of directors who are unable to attend meetings or otherwise participate in the activities of the board of directors. The President of the board of directors must be a Mexican national. We offer no service contracts for our directors providing benefits upon termination of employment. The board of directors currently consists of 16 members, of which ten are outside (i.e. non-management) directors. Nine of our directors are independent directors within the meaning of the Mexican Securities Market Law. They are as follows:
 
                         
          Years as
       
Name
 
Position
    Director     Age  
 
Bernardo Quintana I.(2)
    President       28       64  
Jorge Borja Navarrete(2)
    Director       20       63  
Jose Luis Guerrero Alvarez(2)
    Director       16       62  
Lorenzo H. Zambrano Treviño(1)(3)
    Director       14       62  
Sergio F. Montaño Leon(2)
    Director       14       58  
Emilio Carrillo Gamboa(1)(4)
    Director       10       68  
Alberto Escofet Artigas(1)(3)(4)
    Director       10       72  
Luis Fernando Zarate Rocha(2)
    Director       8       62  
Carlos Abedrop Davila(1)(3)(4)
    Director       7       86  
Jorge Aguirre Quintana(2)
    Director       7       58  
Juan Claudio Salles Manuel(1)(3)(4)(5)
    Director       3       69  
Esteban Malpica Fomperosa(1)(3)(4)
    Director       3       56  
Angeles Espinoza Yglesias(1)(3)(4)
    Director       2       63  
Elmer Franco Macias(1)(3)(4)
    Director       2       65  
Alberto Mulas Alonso(1)(3)(4)
    Director       2       45  
Arturo Olvera Vega(1)(3)(4)
    Director       1       39  
 
 
(1) Director whose term expires on December 31, 2006.
 
(2) Director whose term expires on December 31, 2007.
 
(3) Independent directors within the meaning of the Mexican Securities Market Law.
 
(4) Independent directors within the meaning of Rule 10A-3 under the Securities Exchange Act of 1934, as amended.
 
(5) Audit committee financial expert, within the meaning of section 407 of the Sarbannes-Oxley Act of 2002.
 
Listed below are the names, responsibilities and prior business of our directors and senior management:
 
Bernardo Quintana I. has been a member of our board of directors since 1978. Mr. Quintana has been our President since December 1994. Previously, Mr. Quintana was the Director of Investments for Banco del Atlantico, Vice President of ICA Tourism and Urban Development and our Executive Vice President. Mr. Quintana is currently a board member of several Mexican companies including Sanborns, Cementos Mexicanos and Telmex. Mr. Quintana is also a member of Mexico’s National Counsel of Businessmen, is


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chairman of the board of trustees of the Universidad Nacional Autonoma de Mexico and the Fundacion ICA. Mr. Quintana holds a degree in civil engineering from the Universidad Nacional Autonoma de Mexico and an MBA from the University of California at Los Angeles.
 
Jorge Borja Navarrete has been a member of our board of directors since 1986. Mr. Borja is our Executive Vice President in charge of overseeing ICA-Fluor, our Industrial Construction segment. Mr. Borja has been with our company over 36 years. Mr. Borja holds a civil engineering degree from the Universidad Nacional Autonoma de Mexico and an MBA from the University of California at Los Angeles.
 
Jose Luis Guerrero Alvarez has been a member of our board of directors since 1990. Mr. Guerrero is our Executive Vice President and Chief Financial Officer. For the past 26 years Mr. Guerrero has held various positions in our finance, administrative, divestment, real estate, manufacturing and business development areas. Before joining us, Mr. Guerrero was the Planning Director at Combinado Industrial Sahagun, the Technical Director at Roca Fosforica Mexicana and held various other positions in Mexico and abroad. Mr. Guerrero holds a diploma D’Ingenieur I.S.M.C.M. from Institut Superieur des Materiaux et de la Construction Mechanique of Paris, France. M.S. and a Ph.D. in Engineering from the University of Illinois at Urbana-Champaign.
 
Lorenzo H. Zambrano Treviño has been a member of our board of directors since 1992. Mr. Zambrano is the Chairman of the board and Chief Executive Officer at CEMEX, S.A. de C.V. Mr. Zambrano is currently a board member of FEMSA, Alfa, Cydsa, Vitro and Televisa. Mr. Zambrano holds a B.S. in mechanical and industrial engineering from the Instituto Tecnologico y de Estudios Superiores de Monterrey and an M.B.A. from Stanford University.
 
Sergio F. Montaño Leon has been a member of our board of directors since 1992, and is currently our Executive Vice President in charge of overseeing administration. Mr. Montaño has been with us since 1972, and has worked in the administrative and finance areas. Previously, Mr. Montaño worked at various Mexican companies, including Trebol and Cerveceria Moctezuma, S.A. where he held different administrative positions. Mr. Montaño holds a bachelor’s degree in public accounting from the Universidad Nacional Autonoma de Mexico.
 
Emilio Carrillo Gamboa has been a member of our board of directors since 1996. Mr. Carrillo served as the President of Telmex from 1975-1987, and as Mexico’s ambassador to Canada from 1987-1989. Mr. Carrillo is presently a senior partner of Bufete Carrillo Gamboa, and is chairman of the board of directors of Holcim-Apasco, a non-listed company and the Mexico Fund, a company listed on the NYSE. He is also member of the board of the following publicly traded companies: Grupo Modelo, Grupo Mexico, Southern Peru Copper Corporation, Kimberly Clark de Mexico and San Luis Corporation. He also serves on the boards of directors of the following non-listed companies: Bank of Tokio — Mitsubishi (Mexico), Gasoductos de Chihuahua, and Innova. Mr. Carrillo holds a law degree from the Universidad Nacional Autonoma de Mexico, and continued his legal education at Georgetown University Law Center.
 
Alberto Escofet Artigas has been a member of our board of directors since 1996. Mr. Escofet has been Chief Executive Officer of Alesco Consultores, S.A. de C.V. since 1991. Previously, Mr. Escofet served as Mexico’s Undersecretary of Energy and Undersecretary of Mines and Industry in the Ministry of Energy. Mr. Escofet has also been the Chief Executive Officer of Uranio Mexicano, Compañia de Luz y Fuerza del Centro and the CFE. Mr. Escofet is a member of the board of directors of Constructora y Perforadora Latina. Mr. Escofet holds a B.S. in mechanical and industrial engineering from the Universidad Nacional Autonoma de Mexico.
 
Luis Fernando Zarate Rocha has been a member of our board of directors since 1997. Mr. Zarate oversees the Housing sector and is also in charge of the operations of SETA, the airport operator in which we have a minority interest, and oversees business development. Mr. Zarate has been with our company for over 36 years and has worked on various heavy construction projects, in infrastructure projects and in our business development department. Mr. Zarate is also a member of the board of directors of Fundacion ICA. Mr. Zarate holds a B.S. in civil engineering from Universidad Nacional Autonoma de Mexico, where he has been a professor of engineering since 1978.


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Carlos Abedrop Davila has been a member of our board of directors since 1999. Mr. Abedrop served as President and member of the board of directors of Banco del Atlantico from 1964 to 1982. Mr. Abedrop has served as President of the Camara Nacional de Comercio de la Ciudad de Mexico, the Asociacion de Banqueros de Mexico and the Fundacion Mexicana para la Salud. Mr. Abedrop holds a bachelor’s degree in economics from the Universidad Nacional Autonoma de Mexico.
 
Jorge Aguirre Quintana has been a member of our board of directors since 2001. Mr. Aguirre is our Vice President in charge of overseeing civil construction. Previously Mr. Aguirre was the project director on the Cantarell nitrogen project and the construction director in our Industrial Construction segment. Mr. Aguirre holds a civil engineering degree from the Universidad Nacional Autonoma de Mexico.
 
Juan Claudio Salles Manuel has been a member of our board of directors since April of 2003. Mr. Salles is a founding partner of the Salles Sainz — Grant Thornton, S.C., which specializes in financial consulting and financial statements auditing. Prior to working at Salles — Sainz Grant Thornton, Mr. Salles was a partner at Ruiz Urquiza y Cia, S.C. Mr. Salles is currently a member of the Mexican Institute of Public Accountants, and had previously served as the President of its national executive committee. Mr. Salles is also the President of the Advisory Committee of the Mexican Academy of Integral Performance Audit (Academia Mexicana de Auditoria Integral al Desempeño). Previously, Mr. Salles was also a member of the executive committee of the International Federation of Accountants. Mr. Salles holds a bachelor’s degree in public accounting from the Universidad Nacional Autonoma de Mexico, where he has been a professor since 1962.
 
Esteban Malpica Fomperosa has been a member of our board of directors since April 2003. Mr. Malpica is currently a member of the board of directors of Kimberly Clark de Mexico, S.A. de C.V., El Puerto de Liverpool, S.A. de C.V., Grupo Herdez, S.A. de C.V. and Grupo Gruma, S.A. de C.V. Since April 2004, Mr. Malpica has been a managing director of Praemia, S.C. From 1995 to 2001 he was a member of the executive committee at Banamex, From 1991 to 1994 Mr. Malpica was president of Acciones y Valores, S.A. de C.V. From 1992 to 1995, he was a vice-president of the Mexican Stock Exchange and chairman of the board of directors of the Mexico Equity & Income Fund. Mr. Malpica is a Certified Public Accountant with a degree from the Escuela de Contaduria of the Universidad Iberoamericana. He also holds an MBA from Notre Dame University.
 
Angeles Espinoza Yglesias has been a member of our board of directors since April 2004. Mrs. Espinoza is the President of Fundacion Amparo. Mrs. Espinoza is a member of the State Council on Culture and the Arts (Consejo Estatal para la Cultura y las Artes) in the state of Puebla and a director of the Historic Center (Centro Historico) of the city of Puebla. Mrs. Espinoza is a member of the board of directors and the finance and planning committee of Casa de Bolsa Inbursa, the board of directors and the finance and planning committee of Telmex, S.A. de C.V. and a member of the Latin America Advisory Committee at Harvard University.
 
Elmer Franco Macias has been a member of our board of directors since April 2004. Mr. Franco has occupied different positions within the INFRA Group, where he began working in 1958. Mr. Franco holds a B.S. in electrical engineering from Universidad Nacional Autonoma de Mexico, concluded studies in Industrial Relations — Human resources from the Universidad Iberoamericana and has participated in management programs at the Instituto Panamericano de Alta Direccion de Empresas (IPADE).
 
Alberto Mulas Alonso has been a member of our board of directors since April 2004. Mr. Mulas is the managing director of CReSE Consultores, S.C., a consulting firm that specializes in strategy, finance and corporate governance. Mr. Mulas’s experience derives from his work as an investment banker with Bankers Trust, JP Morgan, Lehman Brothers and Donaldson, Lufkin & Jenrette, having been responsible for the Mexican operations of the last two entities. Mr. Mulas has also worked for the administration of President Vicente Fox until December 2002 as Undersecretary of Urban Development and Housing, and then as the Commissioner of the National Housing Development Commission (Comisionado Nacional de Fomento a la Vivienda). Mr. Mulas is currently a director of Bancomext, the Sociedad Hipotecaria Federal, Consorcio Cydsa and Cintra, S.A. de C.V. Mr. Mulas holds a chemical engineering degree from Universidad Iberoamericana and has an MBA from Wharton Business School, University of Pennsylvania.


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Arturo Olvera Vega has been a member of our board of directors since April 2005. Mr. Olvera is currently employed as a director of the Carlyle Group. From 1996 to 2004, Mr. Olvera worked as the Director of Project Development at Banobras. He has also held positions in the Ministry of Agriculture and Water Resources, the Ministry of Finance and Public Credit, and the Ministry of Programming and Budget. He is a graduate from the ITAM in Mexico and holds an MBA from the University of California at Los Angeles.
 
 
Our executive officers currently are as follows:
 
             
        Years as
 
Name
 
Current Position
  Executive Officer  
 
Bernardo Quintana I
  President     28  
Jorge Borja Navarrete
  Executive Vice President, Industrial Construction     20  
Jose Luis Guerrero Alvarez
  Executive Vice President, Finance     16  
Sergio F. Montaño Leon
  Executive Vice President, Administration     16  
Luis Fernando Zarate Rocha
  Vice President, Housing     11  
Jorge Aguirre Quintana
  Vice President, Civil Construction     7  
Luis Carlos Romandia Garcia
  General Counsel     1  
 
Luis Carlos Romandia Garcia has been our general counsel since May 2005 and has been secretary of our board of directors since 1995. Mr. Romandia has been employed by us since 1977 and has served as a lawyer for several of our subsidiaries during his tenure. Mr. Romandia holds a degree in law from the Universidad Nacional Autonoma de Mexico.
 
 
For the year ended December 31, 2005, the aggregate compensation of our directors and executive officers paid or accrued in that year for services in all capacities was approximately Ps.104 million. We pay non-management directors Ps.40,000 net of taxes and management directors Ps.20,000 net of taxes for each board meeting, executive committee meeting or audit committee meeting they attended.
 
 
Generally members of senior and middle management currently become eligible for bonuses after five years of service. Cash performance bonuses are paid to eligible members of management by the subsidiaries that employ them.
 
The compensation committee recommends the amount of the performance-based bonuses to the board of directors. We have adopted the following policy regarding the calculation of the performance bonus:
 
  •  in years in which income is 6% or less of our net worth, no bonuses will be paid,
 
  •  in years in which income is greater than 6% of our net worth, up to 25% of the amount by which income exceeds 6% of net worth may be paid as bonuses.
 
Income for these purposes means income from all sources (including extraordinary items) before income taxes, employees’ statutory profit sharing and the bonus itself. Net worth for these purposes is our net worth as at the end of the year for which the bonus is being calculated, without giving effect to that bonus. This formula is subject to change by the board of directors, provided that all outside directors approve any such change.
 
A substantial portion of the shares beneficially owned by our directors and executive officers, along with other shares owned by our management, are owned through a trust, which we refer to as the management trust. The management trust is supervised by a technical committee, referred to as the technical committee, which consists of members of our board of directors. The technical committee has broad discretionary authority over the corpus of


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this trust, including voting power over the shares contained therein and the conditions governing withdrawal of such shares. The technical committee is authorized to modify the terms of the management trust.
 
Bonuses are paid into the management trust and may be used by the technical committee to purchase shares, for the account of the bonus recipient. All dividends paid with respect to shares in the management trust are also deposited in the management trust. Cash dividends are, at the discretion of the technical committee, distributed to participants in the management trust or used to purchase shares at prevailing market prices for the benefit of the participants. Upon leaving us, participants in the management trust are entitled to receive the shares representing such participant’s interest in periodic installments. The management trust may, but is not required to, purchase the shares constituting such installments. All dividends received with respect of the shares owned by any former employee are paid to such former employee.
 
As described above, members of management that leave us are entitled to receive, in annual installments, the shares credited to their accounts in the management trust. Certain exceptions may be made to these rules from time to time to permit employees leaving us to receive their shares on an accelerated basis.
 
 
On March 31, 2000, we adopted a stock option plan pursuant to which our officers and senior-management were entitled to annual stock options. Options were granted based on a percentage of the grantees’ annual base salary.
 
The stock option plan was terminated on April 16, 2004. Although we do not expect to grant stock options going forward, we expect to honor the stock options that were granted under the stock option plan at an exercise price of Ps.22.50.
 
Set forth below are the original number of ordinary shares and the number of shares as adjusted for our December 2005 reverse stock split, the grant date and the expiration date of all options outstanding as of December 31, 2005, which have an exercise price of Ps.22.50.
 
                         
    Original
    As Adjusted
       
Option Grant Date
  Number of Shares     Number of Shares     Expiration Date  
 
April 24, 2000
    9,273,163       1,545,527       April 24, 2007  
April 23, 2001
    9,323,417       1,553,902       April 23, 2008  
April 25, 2002
    8,087,866       1,347,977       April 25, 2009  
April 29, 2003
    7,663,088       1,277,181       April 29, 2010  
 
Options vest over a three-year period beginning on the first anniversary of the grant date, and are exercisable until the seventh anniversary of the grant date. Options may be exercised at any time after vesting and are not transferable.
 
These options are held by our officers and directors.
 
There were no forfeited options in 2005 or 2004 and 219,499 forfeited options in 2003 with a weighted average exercise price of Ps.3.83 (on a pre-reverse split basis). During 2005, 7,154,729 options (ion a pre-reverse split basis) were exercised. As of December 31, 2005, after giving effect to the December 2005 reverse stock split, we had 2,967,686 options outstanding with a weighted average exercise price of Ps.22.50.
 
Under Mexican GAAP, the granting of these options has no effect on our results of operations, cash flow or financial condition. Under U.S. GAAP, the granting of these options may give rise to future non-cash compensation expenses.
 
 
In 2004, we implemented a plan that is aimed at reducing the amount of executive compensation that we pay. As part of this plan, we terminated a number of our executives, after making required severance payments. We subsequently rehired a number of these executives at a reduced base salary. In 2004, we expensed approximately Ps.257 million (nominal value) of severance payments. Of this amount, approximately Ps.187 million (nominal


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value) was attributable to severance payments made to senior management. We expect that the implementation of this plan will result in future cost savings. No terminations were made in 2005.
 
 
On December 30, 2005, Mexico’s Federal Congress enacted a new federal statute that, upon its effectiveness 180 days from its enactment, will amend and restate the existing Mexican Securities Market Law in its entirety. The new Mexican Securities Market Law enhances disclosure requirements and corporate governance standards for Mexican listed companies through the refinement of existing concepts (such as the functions, duties and liabilities of management, directors and audit committees) and the introduction of new concepts, such as corporate practices committees (comprised, in the case of companies such as us, of independent directors), institutional investors and safe harbors from public offering requirements. The new law also provides minority shareholders of Mexican listed companies with improved information rights and legal remedies. In order to comply with the new legal regime applicable to and governing public issuers in Mexico upon the effectiveness of the new Mexican Securities Law, we will be required to amend our by-laws, modify our audit committee and form a corporate practices committee, both of which will be required to consist exclusively of independent board members. These amendments must be implemented within 180 days following the effectiveness of the new law. The following summary does not give effect to these amendments.
 
 
Our bylaws provide that the executive committee of the board of directors may generally exercise the powers of the full board of directors. The executive committee is elected from among the directors by the shareholders. Currently, the executive committee is composed of Bernardo Quintana, Jorge Borja Navarrete, Jose Luis Guerrero Alvarez, Sergio Montaño Leon, Luis Fernando Zarate Rocha, Jorge Aguirre Quintana, Emilio Carrillo Gamboa, Alberto Escofet Artigas, Juan Claudio Salles Manuel and Alberto Mulas Alonso. Quirico Gerardo Seriña Garza is the executive committee’s secretary.
 
 
The compensation committee is responsible for reviewing and advising the board of directors with respect to management compensation (including bonus arrangements). The members of the compensation committee are Jorge Borja Navarrete, Jose Luis Guerrero Alvarez, Sergio F. Montaño Leon, Luis Fernando Zarate Rocha and Jorge Aguirre Quintana. Luis Carlos Romandia Garcia is the compensation committee’s secretary.
 
 
We have a three-member audit committee, which is composed of directors elected by the shareholders. The members of the audit committee are Emilio Carrillo Gamboa, Juan Claudio Salles Manuel and Alberto Mulas Alonso. Currently all members of our audit committee are independent as such term is defined under the Mexican Securities Market Law and Rule 10A-3 of the Securities Exchange Act of 1934, as amended.
 
Our audit committee operates pursuant to a written charter adopted by the audit committee and approved by our board of directors. Pursuant to our bylaws and Mexican law, our audit committee submits an annual report regarding its activities to our board of directors. The duties of the audit committee include: (i) reviewing and opining on all related-party transactions; (ii) recommending hiring of third party experts to opine in respect of related party transactions; (iii) periodically evaluating our internal control mechanisms to verify compliance with the corporate governance standards to which we are subject;; (iv) periodically evaluating our internal control mechanisms; (v) recommending independent auditors to our board of directors; (vi) establishing guidelines for the hiring of employees or former employees of our independent auditors; (vii) preparing an annual report in respect of its activities and submit it to the board of directors; (viii) periodically evaluating our reports filed before the Mexican National Banking and Securities Commission, the Mexican Stock Exchange, the Securities and Exchange Commission and New York Stock Exchange; and (ix) establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters controls. The audit


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committee is empowered to hire independent counsel and other advisors, as it deems necessary to carry out its duties, including the review of related-party transactions.
 
 
On April 21, 2005, at an extraordinary shareholders’ meeting, we amended our bylaws in order to restrict the purchase of shares that would result in change of control without the prior approval of our board of directors or an extraordinary shareholders’ meeting.
 
Pursuant to our amended bylaws, significant acquisitions of shares of our capital stock and changes of control require prior approval of 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 5% or more of our shares. Any acquisition of shares of our capital stock representing more than 15% or more of our capital stock by a person or group of persons requires the purchaser to make a public offer for the greater of:
 
  •  the percentage of shares sought, or
 
  •  10 percent of the total shares.
 
The request for authorization to our board of directors must specify, among other things, (i) the number of shares intended to be purchased, (ii) the identity of the person or persons intending to acquire shares, (iii) the purpose of the acquisition and whether the purpose is to acquire control, (iv) whether the purchaser is our competitor and (v) the source of the funds to be used for the purchase. Our board of directors is required to respond to the request within a sixty-day period, but may decide to submit the request to our shareholders. Our board of directors, or our shareholders at a shareholders’ meeting, must take into account financial, economic, market and business terms of the acquisition offer.
 
If the tender offer is oversubscribed, shares sold will be allocated on a pro rata basis among the selling shareholders. If the authorized purchase of shares is for the intent of acquiring control of us, the purchaser must make an offer to purchase 100 percent of the shares.
 
The public offer to purchase must be made at the same price for all shares. The offer price is required to be highest of:
 
  •  the book value of the shares,
 
  •  the highest closing price on the Mexican Stock exchange during the 365 days preceding the date of the authorization, or
 
  •  the highest price paid at any time by the persons intending to purchase the shares.
 
Notwithstanding the foregoing, the board of directors may authorize that the public offer be made at a different price, which may be based the prior approval of the audit committee and an independent valuation.
 
These provisions do not apply in cases of transfer of shares as a result of death, the repurchase or amortization of shares, subscription of shares in exercise of preferential rights, or transfers of shares by us or our subsidiaries, or by a person who maintains effective control over us.
 
These amendments were submitted to the Mexican National Banking and Securities Commission and became effective on May 24, 2005.
 
The amendments to our bylaws also provide for staggered classes for the election of directors. We believe that having a staggered board will protect the plans and long-term decisions of our management and board of directors. Directors will be elected for three years, and one-third will be elected each year. This system does not interfere with minority rights to nominate directors.
 
In accordance with the Securities Markets Law, our bylaws were modified to establish that at least 25% of our board members must be independent as defined in the Mexican Securities Market Law. The majority of our board members must be Mexican nationals.
 
As of April 21, 2005, our legal name was changed to Empresas ICA, S.A. de C.V.


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Prior to the date on which the new Mexican Securities Law became effective, we were required to have at least one statutory auditor, who was elected by our shareholders at the annual general shareholders’ meeting. The statutory auditor reported to our shareholders at our annual shareholders’ meeting regarding the accuracy of the financial information presented to our shareholders by the board of directors and generally monitors our affairs. The statutory auditor received quarterly reports from the board of directors regarding material aspects of our affairs, including our financial condition. The last statutory auditor was Joaquin Gomez Alvarez and the alternate statutory auditor was Ramon Arturo Garcia Chavez. Since the effectiveness of the new Mexican Securities Law on June 28, 2006, the supervisory functions fulfilled by the statutory auditor have been fulfilled by the Board of Directors.
 
NYSE Corporate Governance Comparison
 
Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Mexican corporation with shares listed on the Mexican Stock Exchange. Our corporate governance practices are governed by our bylaws, the Mexican Securities Market Law and the regulations issued by the Mexican National Banking and Securities Commission. We also comply on a voluntary basis with the Mexican Code of Best Corporate Practices (Codigo de Mejores Practicas Corporativas) as indicated below, which was created in January 2001 by a group of Mexican business leaders and was endorsed by the Mexican Banking and Securities Commission. On an annual basis, we file a report with the Mexican Banking and Securities Commission and the Mexican Stock Exchange regarding our compliance with the Mexican Code of Best Corporate Practices.
 
The table below discloses the significant differences between our corporate governance practices and the NYSE standards.