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Empresas Ica Soc Contrladora 20-F 2006 Documents found in this filing: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:
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
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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.
Not applicable.
Not applicable.
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:
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.
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4
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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.
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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.
7
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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.
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:
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:
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.
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:
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.
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:
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 most important projects under construction by the Civil
Construction segment during 2005 included:
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 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 most important projects under construction by the Industrial
Construction segment during 2005 included:
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:
In 2005, the most important projects constructed by Rodio/Kronsa
were:
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.
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:
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:
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.
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:
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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.
None.
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.
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.
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.
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.
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.
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:
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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.
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.
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.
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.
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:
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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:
The most significant changes established by these standards are:
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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.
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:
Our principal sources of funds in 2005 were:
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:
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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:
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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:
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:
As of December 31, 2005, the scheduled maturities of other
commercial commitments, including accrued interest, were as
follows:
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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:
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:
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:
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.
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 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:
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.
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