20-F 1 d524133d20f.htm FORM 20-F Form 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

Commission file number: 001-11080

Empresas ICA, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

 

The ICA Corporation   United Mexican States
(Translation of registrant’s name into English)   (Jurisdiction of incorporation or organization)

Blvd. Manuel Avila Camacho 36

Col. Lomas de Chapultepec

Del. Miguel Hidalgo

11000 Mexico City

Mexico

(Address of principal executive offices)

Victor Bravo Martin

Blvd. Manuel Avila Camacho 36

Col. Lomas de Chapultepec

Del. Miguel Hidalgo

11000 Mexico City

Mexico

(5255) 5272 9991 x 3653

victor.bravo@ica.com.mx

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Name of each exchange on which registered

Ordinary Shares

Ordinary Participation Certificates, or CPOs, each

representing one Ordinary Share

American Depositary Shares, or ADSs, evidenced by

American Depositary Receipts, each representing four

CPOs

 

New York Stock Exchange, Inc.*

New York Stock Exchange, Inc.*

New York Stock Exchange, Inc.

 

* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: N/A

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: 607,357,582 Ordinary Shares

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  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  þ

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  þ

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  ¨                 Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP  ¨    IFRS  þ    Other   ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page   

Item 1. Identity of Directors, Senior Management and Advisors

     1   

Item 2. Offer Statistics and Expected Timetable

     1   

Item 3. Key Information

     1   

A. Selected Financial Data

     1   

B. Risk Factors

     4   

C. Forward-Looking Statements

     17   

Item 4. Information on the Company

     18   

A. History And Development Of The Company

     18   

B. Business Overview

     20   

C. Organizational Structure

     37   

D. Property, Plant And Equipment

     37   

Item 4A. Unresolved Staff Comments

     38   

Item 5. Operating and Financial Review and Prospects

     38   

A. Operating Results

     39   

B. Liquidity And Capital Resources

     61   

C. Trend Information

     73   

D. Off-Balance Sheet Arrangements

     73   

E. Tabular Disclosure Of Contractual Obligations

     73   

Item 6. Directors, Senior Management and Employees

     74   

A. Directors And Senior Management

     74   

B. Compensation

     77   

C. Board Practices

     79   

D. Employees

     80   

E. Share Ownership

     80   

Item 7. Major Shareholders and Related Party Transactions

     81   

A. Major Shareholders

     81   

B. Related Party Transactions

     82   

Item 8. Financial Information

     82   

A. Legal And Administrative Proceedings

     82   

B. Dividends

     85   

C. Significant Changes

     85   


Table of Contents

Item 9. The Offer and Listing

     85   

A. Trading

     85   

Item 10. Additional Information

     87   

A. Memorandum And Articles Of Incorporation

     87   

B. Material Contracts

     93   

C. Exchange Controls

     93   

D. Taxation

     93   

E. Documents On Display

     95   

Item 11. Quantitative and Qualitative Disclosures about Market Risk

     95   

Item 12. Description of Securities Other than Equity Securities

     97   

Item 13. Defaults, Dividend Arrearages and Delinquencies

     99   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     99   

Item 15. Controls and Procedures

     99   

Item 16. [Reserved]

     101   

Item 16A. Audit Committee Financial Expert

     101   

Item 16B. Code of Ethics

     101   

Item 16C. Principal Accountant Fees and Services

     101   

Item 16D. Exemptions from the Listing Standards for Audit Committees

     101   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     102   

Item 16F. Changes in Registrant’s Certifying Accountant

     102   

Item 16G. Corporate Governance

     102   

Item 16H. Mine Safety Disclosure

     105   

Item 17. Financial Statements

     106   

Item 18. Financial Statements

     106   

Item 19. Exhibits

     106   

Index to Empresas ICA, S.A.B. and Subsidiaries Consolidated Financial Statements

     F-1   


Table of Contents

PART I

Introduction

Empresas ICA, S.A.B. de C.V. is a corporation (sociedad anonima bursatil de capital variable) organized under the laws of the United Mexican States, or Mexico. Our principal executive offices are located at Blvd. Manuel Avila Camacho 36, Col. Lomas de Chapultepec, Del. Miguel Hidalgo, 11000, Mexico City, Mexico. Unless the context otherwise requires, the terms “us,” “we,” “our Company” and “ICA” as used in this annual report refer to Empresas ICA, S.A.B. de C.V. and its consolidated subsidiaries. The term “EMICA” as used in this annual report refers to Empresas ICA, S.A.B. de C.V. on a stand-alone basis. EMICA is a holding company that conducts all of its operations through subsidiaries that perform civil and industrial construction and engineering, engage in real estate, home development and mining services activities and operate infrastructure facilities, including airports, toll roads and water treatment systems. The references herein to segments or sectors are to combinations of various subsidiaries that have been grouped together for management or financial reporting purposes.

 

Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not applicable.

 

Item 3. Key Information

A. SELECTED FINANCIAL DATA

Our consolidated financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

We publish our consolidated financial statements in Mexican pesos. References in this annual report to “dollars,” “U.S.$” or “U.S. dollars” are to United States dollars. References to “Ps.” or “pesos” are to Mexican pesos. This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for your convenience. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 12.86 to U.S.$ 1.00, the exchange rate determined by reference to the free market exchange rate as reported by Banco Nacional de Mexico, S.A., or Banamex, as of December 31, 2012.

The term “billion” as used in this annual report means 1,000 million. Certain amounts in this annual report may not sum due to rounding.

Financial Data

The following table present our selected consolidated financial information for or as of each of the periods or dates indicated, and have been derived in part from our audited consolidated financial statements. This information should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements, including the notes to our consolidated financial statements. Prior year results relating to our consolidated statements of comprehensive income for the years ended December 31, 2011 and 2010 have been retroactively adjusted to reflect the results of a significant portion of our affordable housing business (in our Housing segment), which we agreed to sell in December 2012, as a discontinued operation.

 

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     As of and for the year ended December 31,  
     2012     2012     2011     2010  
     (Millions of
U.S.
dollars)(1)
    (Thousands of Mexican pesos, except share, per
share and per ADS data)
 

Comprehensive Income Data:

        

Total revenues

     3,696        47,542,838        40,481,120        32,007,805   

Gross profit

     530        6,822,614        6,078,384        4,424,031   

General expenses

     280        3,601,966        3,098,889        2,438,762   

Other (income) expense, net (2)

     (36     (460,494     (494,692     30,268   

Operating income

     286        3,681,142        3,474,187        1,955,001   

Financing cost, net

     81        1,048,011        3,459,782        1,308,483   

Share in results of associated companies

     6        75,967        (29,863     (79,618

Income tax expense (benefit)

     54        694,227        (56,576     151,264   

Income from continuing operations

     145        1,862,937        100,844        574,872   

(Loss) income from discontinued operations, net

     (12     (155,433     1,689,445        396,040   

Consolidated net income

     133        1,707,504        1,790,289        970,912   

Other comprehensive income

     (68     (866,444     644,431        (346,971

Total comprehensive income

     65        841,060        2,434,720        623,941   

Consolidated net income attributable to noncontrolling interest

     45        577,865        310,000        341,458   

Consolidated net income attributable to controlling interest

     88        1,129,639        1,480,289        629,454   

Basic and diluted earnings per share of controlling interest from continuing operations

     —          2.120        (0.331     0.360   

Basic and diluted earnings per share of controlling interest from discontinued operations

     —          (0.256     2.675        0.611   

Basic and diluted earnings per share of controlling interest from consolidated net income(3)

     —          1.864        2.344        0.971   

Basic and diluted earnings per ADS of controlling interest from consolidated net income(3)

     —          7.456        9.376        3.884   

Weighted average shares outstanding (000s):

        

Basic and diluted(3)

     —         606,233        631,588        648,183   

Statement of Financial Position Data:

        

Total assets

     8,451        108,687,778        98,888,073        72,535,639   

Long-term debt(4)

     3,176        40,841,672        30,320,024        26,029,040   

Capital stock

     651        8,370,958        8,334,043        8,950,796   

Additional paid-in capital

     548        7,043,377        7,091,318        7,085,536   

Total stockholders’ equity

     1,606        20,661,710        20,824,102        19,329,951   

Other Data:

        

Capital expenditures

     500        6,431,960        6,469,765        8,085,395   

Depreciation and amortization

     76        979,886        1,261,140        1,191,713   

 

  (1) Except share, per share, per ADS and inflation data. Amounts stated in U.S. dollars as of and for the year ended December 31, 2012 have been translated at a rate of Ps. 12.86 to U.S.$ 1.00 using the Banamex free market exchange rate on December 31, 2012.
  (2) For 2012, includes principally Ps. 436 million as a result of the revaluation of certain investment property, and Ps. 24 million in gain on sales of property, plant and equipment. For 2011, includes principally Ps. 467 million in gain on sales of investments and Ps. 6 million in gain on sales of property, plant and equipment. For 2010, includes principally losses on sales of equipment of Ps. 21 million and losses on sales of investments of Ps. 10 million.

 

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  (3) Basic earnings per share and per ADS are based on the weighted average number of shares outstanding during each period and are calculated assuming a ratio of four shares per ADS. Diluted earnings (loss) per share and per ADS are calculated by giving effect to all potentially dilutive common shares outstanding during the period. The dilutive effect of our potential ordinary shares does not have a material effect on our determination of earnings per share; thus, diluted earnings per share approximates basic earnings per share for the years ended December 31, 2012, 2011 and 2010.
  (4) Excluding current portion of long-term debt and net of commissions.

Exchange Rates

The following table sets forth, for the periods indicated, the high, low, average and period-end, free-market exchange rate between the peso and the U.S. dollar, expressed in pesos per U.S. dollar. The data provided in this table is based on noon buying rates published by the Federal Reserve Bank of New York for cable transfers in Mexican pesos. The Federal Reserve Bank of New York discontinued the publication of foreign exchange rates on December 31, 2008, and therefore, the data provided for the periods beginning January 1, 2009 are based on the rates published by the U.S. Federal Reserve Board in its H.10 Weekly Release of Foreign Exchange Rates. The average annual rates presented in the following table were calculated using the average of the exchange rates on the last day of each month during the relevant period. All amounts are stated in pesos. We make no representation that the Mexican peso amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all.

 

     Exchange Rate  

Year Ended December 31,

   High      Low      Period End      Average(1)  

2008

     13.94         9.92         13.83         11.21   

2009

     15.41         12.63         13.06         13.58   

2010

     13.19         12.16         12.38         12.62   

2011

     14.25         11.51         13.95         12.43   

2012:

     14.37         12.63         12.96         13.15   

October

     13.09         12.71         13.09         12.90   

November

     13.25         12.92         12.92         13.06   

December

     13.01         12.72         12.96         12.87   

2013:

           

January

     12.79         12.59         12.73         12.70   

February

     12.88         12.63         12.78         12.72   

March

     12.80         12.32         12.32         12.50   

April (through April 19)

     12.34         12.07         12.23         12.21   

 

  (1) Average of month-end rates or daily rates, as applicable.

Source: Federal Reserve Bank of New York and the U.S. Federal Reserve Board.

In recent decades, the Mexican Central Bank has consistently made foreign currency available to Mexican private-sector entities (such as us) to meet their foreign currency obligations. Nevertheless, in the event of shortages of foreign currency, we cannot assure you that foreign currency would continue to be available to private-sector companies or that foreign currency needed by us to service foreign currency obligations or to import goods could be purchased in the open market without substantial additional cost.

Fluctuations in the exchange rate between the peso and the U.S. dollar will affect the U.S. dollar value of securities traded on the Mexican Stock Exchange (Bolsa Mexicana de Valores), and, as a result, will likely affect the market price of our American Depository Shares, or ADSs. Such fluctuations will also affect the U.S. dollar conversion by The Bank of New York, the depositary for our ADSs, of any cash dividends paid by us in pesos.

On April 19, 2013, the exchange rate was Ps. 12.23 per U.S.$ 1.00, according to the U.S. Federal Reserve Board. The above rates may differ from the actual rates used in the preparation of the financial statements and the other financial information appearing in this Form 20-F.

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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B. RISK FACTORS

Risks Related to Our Operations

Our performance is tied to Mexican public sector spending on infrastructure facilities.

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. 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 can have an adverse effect on our financial condition and results of operations. Beginning in the second half of 2008 and due to the impact of the credit crisis and turmoil in the global financial system, the rate of awards of infrastructure projects in Mexico was slower than contemplated under the National Infrastructure Program, although we did see an increase in contracting in 2010 and 2011 for our company. Federal elections were held in Mexico on July 2, 2012. Enrique Peña Nieto of the political party known as the Partido Revolucionario Institucional, or PRI, obtained a plurality of the vote and assumed office on December 1, 2012. Although the PRI won a plurality of the seats in the Mexican Congress, no party succeeded in securing a majority in either chamber of the Mexican Congress. The absence of a clear majority by a single party is likely to continue at least until the Congressional election in 2015. In the period leading up to and following the change in presidential administration, the number of large public sector construction contracts the Mexican government offered for public bidding decreased. Although we expect the rate of awards to begin to increase in 2013, we cannot provide any assurances that the rate of awards will increase. These and other delays, including delays in payment, can also result from any new administration at the federal, state or local level reviewing the terms of project contracts granted by the previous administration or pursuing different priorities than the previous administration. Additionally, the Mexican government may face budget deficits that prohibit it from funding proposed and existing projects or that cause it to exercise its right to terminate our contracts with little or no prior notice. We cannot provide any assurances that economic and political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition or results of operation.

In addition, 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, as well as on market conditions, prices and returns on Mexican securities, including our securities. In the past, economic and other reforms have not been enacted because of legislative gridlock. However, the Mexican congress has modified tax laws more frequently than other areas of the law. Additionally, in 2012 Mexico passed a new labor law for the first time since 1991, which results in certain important changes, including the creation of new models for contracting employees and new protections on part time wages, revisions to currently existing profit sharing rules and an expansion of justifiable reasons for terminating employees for cause, including for sexual harassment and other abuses. The timing and scope of such modifications are unpredictable, which can adversely affect our ability to manage our tax or other planning and, as a result, negatively affect our business, financial condition and results of operation.

The global credit crisis and unfavorable general economic and market conditions of recent years may negatively affect our liquidity, business and results of operations, and may affect a portion of our client base, subcontractors and suppliers.

The effect of a continued economic crisis and related turmoil in the global financial system on the economies in which we operate, our clients, our subcontractors, our suppliers and us cannot be predicted. It could lead to reduced demand and lower prices for construction projects, air travel and our related businesses. See “— Our performance is tied to Mexican public sector spending on infrastructure facilities.” In response to current market conditions, clients may choose to make fewer capital expenditures, to otherwise slow their spending on or cancel our services, to delay payments (which may in turn cause us to pay our providers more slowly) or to seek contract terms more favorable to them. Furthermore, any financial difficulties suffered by our subcontractors or suppliers could increase our costs or adversely impact project schedules.

Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers. Credit rating agencies have also become more stringent in their debt rating requirements. Continued disruption of the credit markets could adversely affect our suppliers’, clients’ (particularly our private sector clients’) and our own borrowing capacities, which could, in turn, adversely affect the continuation and expansion of our projects because of contract cancellations or suspensions, project delays (as delays in our supply chain can in turn affect our deliverables) or payment delays or defaults by our clients, which could result in the need to foreclose on our rights to collateral. See “— We may have difficulty obtaining the letters of credit and performance bonds that we require in the normal course of our operations.” Our ability to expand our business would be limited if, in the future, we were unable to access or increase our existing credit facilities on favorable terms or at all. These disruptions could negatively affect our liquidity, business and results of operations.

 

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Competition from foreign and domestic construction companies may adversely affect our 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 compete with foreign construction companies for most of the industrial and infrastructure projects on which we bid in Mexico and on certain civil construction projects as well. We believe that competition from foreign companies has reduced and may continue to reduce the Mexican construction industry’s operating margins, including our own, as foreign competition has driven down pricing. Furthermore, our foreign competitors may have better access to capital and greater financial and other resources, which would afford them a competitive advantage in bidding for such projects.

Foreign competition also allows sponsors such as government agencies for infrastructure construction and industrial construction projects to require contractors to provide construction on a “turnkey” basis, which increases our financial risks.

Our use of the percentage-of-completion method of accounting for construction contracts could result in a reduction of previously recorded profits.

Under our accounting policies, we measure and recognize a large portion of our revenues and profits under the percentage-of-completion accounting methodology for construction contracts. This methodology allows us to recognize revenues and profits ratably over the life of a construction contract, without regard to the timing of receipt of cash payments, by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred. The effect of revisions to estimated costs, and thus revenues, is recorded when the amounts are known and can be reasonably estimated. 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 and inherent in the nature of our industry, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded profits.

Our future revenues will depend on our ability to finance and bid for infrastructure projects.

In recent years we have been increasingly required to contribute equity to and arrange financing for construction projects. We believe that our ability to finance construction projects through various financial arrangements has enabled us to compete more effectively in obtaining such projects. We are currently undertaking various construction and infrastructure projects that involve significant funding commitments and minimum equity requirements. Our policy is not to bid for projects that have significant financing requirements without prior funding commitments from financial institutions. However, we cannot assure you that we will obtain financing on a timely basis or on favorable terms. The financing requirements for public construction contracts may range from a term of months to the total construction period of the project, which may last several years. Providing financing for construction projects, however, increases our capital requirements and exposes us to the risk of loss of our investment in the project. In particular, uncertainty and tightening in the global credit markets, including developments related to the global economic crisis, may adversely affect our ability to obtain financing. Our inability to obtain financing for any of these projects could have a material adverse effect on our financial condition and results of operation. Additionally, EMICA (our parent company) has increasingly been required to give parent guarantees as a form of credit enhancement for debt of our subsidiaries, as well as to accept take-out financing clauses (where the debtor commits to either incur or cause the project company to incur permanent or long-term indebtedness in order to refinance short-term project indebtedness) and clauses which, if invoked, typically require EMICA to pay additional amounts under a loan agreement as may be necessary to compensate a lender for any increase in costs to such lender as a result of a change in law, regulation or directive.

We have faced, and may continue to face, liquidity constraints.

In recent years we faced substantial constraints on our liquidity due to financing requirements for new projects. Our expected future sources of liquidity include cash flow from our construction activities, asset sales and third party financing or raising capital to fund our projects’ capital requirements. We cannot assure you that we will be able to continue to generate liquidity from any of these sources.

Our indebtedness could adversely affect our financial condition and results of operations.

We continue to face large funding 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. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

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Our outstanding consolidated indebtedness to banks, financial institutions and others was Ps. 51,767 million as of December 31, 2012. This indebtedness may constrain our ability to raise incremental financing or increase the cost at which we could raise any such financing and increase our annual interest expense. We cannot assure you that our business will generate cash in an amount sufficient to enable it to service its debt or to fund its other liquidity needs, which may adversely affect our overall performance. We may need to refinance all or a portion of our debt, on or before maturity. We cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms.

In addition, the indentures under which we issued U.S.$ 500 million and U.S.$ 350 million of notes at the holding company level in February 2011 and July 2012, respectively, and facility agreements with certain commercial banks contain, and any future indebtedness we incur may contain, various covenants and conditions that limit our ability and the ability of certain of our subsidiaries to, among other things: incur or guarantee additional debts; create liens; enter into transactions with affiliates; and merge or consolidate with other companies. As a result of these covenants, we are limited in the manner in which we conduct our business and may be unable to engage in certain business activities. We believe we are currently in compliance with all our restrictive covenants.

We may have difficulty raising additional capital in the future on favorable terms, or at all, which could impair our ability to operate our business or achieve our growth objectives.

In the event that our cash balances and cash flow from operations, together with borrowing capacity under our credit facilities, becomes insufficient to make investments or acquisitions or provide necessary additional working capital in the future, we could require additional financing from other sources. Our ability to obtain such additional financing will depend in part upon prevailing capital market conditions, as well as conditions in our business and our operating results, and those factors may affect our efforts to arrange additional financing on terms that are satisfactory to us. The market volatility in recent years has created downward pressure on stock prices and credit capacity for certain issuers, often without regard to those issuers’ underlying financial strength, and for financial market participants generally. If adequate funds are not available, or are not available on acceptable terms, as could be the case if market disruptions occur, our ability to access the capital markets could be adversely affected, and we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges. We could also seek to partner with competitors with more access to cash or financing, which could build our competitors’ experience and weaken our competitive position relative to them.

Under our construction contracts, we are increasingly required to assume the risk of inflation, increases in the cost of raw materials and errors in contract specifications, which could jeopardize our profits and liquidity.

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. In recent years, however, our construction contracts, and construction contracts throughout the industry, 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 the past we experienced significant losses 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 various raw materials and other inputs necessary for the construction business, including steel, asphalt, cement, construction aggregates, fuels and various metal products. Increased prices of these materials can negatively affect our results if we are unable to transfer the risk to the client. 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 raw materials from the time we entered into the contracts, which has adversely affected our results of operations and liquidity. While we may enter into long term contracts with certain providers of cement for the life of some of our larger projects, and currently with a steel provider for several projects, we have generally relied on purchases from various suppliers. Prices for various steel products increased significantly between 2003 and 2008, we believe due in part to a decrease in production because of the global financial crisis, but stabilized beginning in 2009 and continuing through 2012. Although we seek to negotiate for the recovery of the increase in the cost of raw materials in our contracts whenever possible, we cannot assure you that we will be successful in recovering any portion of these cost increases, which will negatively affect our operating margins.

 

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We may also experience 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 and, as a result, our operating margins and liquidity would be negatively affected. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Construction—Civil Construction.”

Our increasing participation in projects outside Mexico involves greater risks than those typically faced in Mexican projects and could jeopardize our profits.

To date, our foreign projects in Latin America and elsewhere have generated mixed results. We have experienced significant losses on projects in Latin America and elsewhere in the past. As a result of these losses, we have sought to be more selective in our involvement in international operations. However, there can be no assurance we will be successful in these efforts. Based on the number of international contracts currently in place and past experience as well as our increasing evaluation of new opportunities and new regions for expansion, there is a risk that future profits could be jeopardized.

Our operations in markets outside of Mexico expose us to several risks, including risks from changes in foreign currency exchange rates, interest rates, inflation, governmental spending, social instability and other political, economic or social developments that may materially reduce our net income.

Our hedging contracts may not effectively protect us from financial market risks and may negatively affect our cash flow.

Our activities are exposed to various financial market risks (such as risks related to interest rates, exchange rates and prices). One strategy we use to attempt to minimize the potential negative effects of these risks on our financial performance is to enter into derivative financial instruments to hedge our exposure to such risks with respect to our recognized and forecasted transactions and our firm commitments.

We have entered into various types of hedges, including with respect to foreign currency exposure, and other trading derivative instruments for the terms of some of our credit facilities with the objective of reducing the uncertainties resulting from interest rate and exchange rate fluctuations. To date, our derivative financial instruments have had mixed results. Their marked-to-market valuation as of December 31, 2012 increased our derivative liabilities by Ps. 700 million and increased our derivative assets by Ps. 176 million.

The contract amounts for our derivative financial instruments are generally based on our estimates of cash flows for a project as of the date we execute the derivative. As actual cash flows may differ from estimated cash flows, we cannot assure you that our derivative financial instruments will protect us from the adverse effects of financial market risks. See “—Risks Related to Mexico and Other Markets in Which We Operate—Appreciation or depreciation of the Mexican peso relative to the U.S. dollar, other currency fluctuations and foreign exchange controls could adversely affect our financial condition and results of operations.” The use of derivative financial instruments may also generate obligations for us to make additional cash payments, which would negatively affect our liquidity. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Derivative Financial Instruments.”

A substantial percentage of our cash and cash equivalents are held through less-than-wholly owned subsidiaries or joint ventures, or in reserves, that restrict our access to them.

As of December 31, 2012, we had total cash and cash equivalents of Ps. 8,413 million, of which Ps. 2,759 million was restricted, as compared to Ps. 6,055 million of restricted cash as of December 31, 2011. Restricted cash is presented as a separate line item in our statement of financial position. As of December 31, 2012, we held 38% of our consolidated cash and cash equivalents (including restricted cash) through less-than-wholly owned subsidiaries or in joint ventures (15% in the ICA-Fluor proportionately consolidated joint venture with Fluor Daniel Mexico, S.A., or Fluor, a subsidiary of the Fluor Corporation, 14% in the Airports segment, 5% in reserves to secure financing for projects like the Aqueduct II water supply project, the Nuevo Necaxa—Tihuatlan highway project, the El Realito aqueduct project and the Agua Prieta water treatment project, 1% in our Spanish construction subsidiary Grupo Rodio Kronsa, or Rodio Kronsa, 1% in San Martin Contratistas Generales, S.A., or San Martin, our Peruvian construction business, and 1% in Los Portales, S.A., or Los Portales, our real estate business in Peru). Approximately Ps. 5,219 million, the remainder of our total cash and cash equivalents as of December 31, 2012, was held in our parent company EMICA or in other operating subsidiaries.

Some uses of cash and cash equivalents by certain of our less than wholly-owned subsidiaries requires the consent of the other shareholders or partners, as applicable, of such subsidiary or joint venture, which is the Fluor Corporation, in the case of ICA-Fluor; Soletanche Bachy France S.A.S, in the case of Rodio Kronsa; FCC Construccion, S.A., in the case of both the Nuevo Necaxa—Tihuatlan highway and the Aqueduct II water supply project; Fomento de Construcciones y Contratas S.A. and Constructora Meco S.A. in the case of the Panama Canal (PAC-4) expansion project; Aqualia Gestion Integral del

 

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Agua, S.A., Aqualia Infraestructuras, S.A. and Servicios de Agua Trident, S.A. de C.V., in the case of our concessionaire for the El Realito water supply system; and LP Holding, S.A., in the case of Los Portales. In the case of these entities, the consent of our partners or other shareholders is only required with respect to the use of cash and cash equivalents outside of normal budgeted operations. The budget for normal operations is set by the board of directors of each of these entities, which are comprised of equal numbers of members appointed by us and the other partner or shareholder. While the cash held in these entities is not destined for a specific use or set aside as a compensating balance, the requirements for its use could limit our access to liquid resources or limit us from freely deciding when to use cash and cash equivalents outside of normal operations. Additionally, a portion of our cash and cash equivalents are held in reserves established to secure financings. These resources form part of our restricted cash as presented in our statement of financial position. At December 31, 2012, Ps. 2,617 million, or 31%, of our cash and cash equivalents were held in reserves established to secure financings, including any related expenses, in connection with the following projects: the Acapulco Tunnel, the Kantunil–Cancun tollroad, the Rio Verde–Ciudad Valles highway, the Nuevo Necaxa–Tihuatlan highway, the La Piedad bypass, the Mitla-Tehuantepec highway and the Agua Prieta water treatment plant. The reserve requirements of such financings could also limit our access to liquid resources and limit our ability to decide when to use our cash and cash equivalents.

Some of our assets are pledged under financing arrangements.

Portions of our assets are pledged to a number of banks under credit arrangements, including: Banco Santander (Mexico), S.A., Banco Inbursa, S.A. Institucion de Banca Multiple, Grupo Financiero Inbursa, Ban de Credito del Peru, BBVA Bancomer, HSBC Panama, Scotiabank Peru, Banco Mercantil del Norte, S.A., Grupo Financiero Banorte, Banco Nacional de Mexico, S.A., Integrante del Grupo Financiero Banamex, Banco del Bajio, S.A., Banco Nacional de Obras y Servicios Publicos, S.N.C., Institucion de Banca de Desarrollo, Bancolombia, S.A., and Interamerican Credit Corporation. The assets we have pledged include: (i) collection rights under the La Yesca hydroelectric construction contract; (ii) construction machinery and equipment owned by Ingenieros Civiles Asociados, S.A. de C.V. (a construction subsidiary); (iii) real property of ViveICA under various bridge loan agreements to finance real estate development; (iv) collection rights over the tolls for the Kantunil—Cancun highway and the Acapulco Tunnel; (v) our collection rights under the Mexico-Pachuca highway construction contract; (vi) our toll collection rights on the Mitla-Tehuantepec highway project in Oaxaca, (vii) our collection rights from construction and non-penitentiary services under our two SPC contracts, (viii) toll collection rights over the Autovia Urbana Sur project, which is the construction of the second level of Periferico Sur highway in Mexico City and (ix) certain of our shares with respect to such shares, in Aeroinvest S.A. de C.V., or Aeroinvest. We generally pledge assets, such as collection or dividend rights, of each of our financed concession projects, including notably our shares of Autovia Necaxa-Tihuatlan, S.A. de C.V., or Auneti, our subsidiary that operates the Nuevo Necaxa-Tihuatlan highway, our shares in RCO, the operator of the first package of FARAC tollroads, Aguas Tratadas del Valle de Mexico, S.A. de C.V., our subsidiary that operates the Atotonilco water treatment project, our shares of Autopista Naucalpan Ecatepec, S.A.P.I. de C.V., or ANESA, the contractor for the Rio de los Remedios-Ecatepec toll highway project, the collection rights of the Rio de Los Remedios project, our interest in Aquos El Realito, S.A. de C.V., our subsidiary that operates the El Realito aqueduct in San Luis Potosi, as well as our 50% interest in Los Portales, a real estate subsidiary located in Peru, as well and our shares in San Martin Contratistas Generales, S.A., or San Martin, a construction company also in Peru. In general, assets securing credit arrangements will remain pledged until the arrangements 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.

We may have difficulty obtaining the letters of credit and performance bonds that we require in the normal course of our operations.

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 the Mexican Federal Electricity Commission (Comision Federal de Electricidad), the Mexican Ministry of Communication and Transportation, and Petroleos Mexicanos, or Pemex, and foreign clients, have increasingly required letters of credit and other forms of guarantees to secure such bids, to advance payments and to guarantee performance. In the past we have found it difficult to obtain the performance bonds or letters of credit necessary to perform the large infrastructure projects in Mexico and abroad that historically have generated a substantial majority of our revenues. We cannot assure you that in the future we will not find it difficult to obtain performance bonds or letters of credit, particularly because, as a result of the credit crisis, many lenders and guarantors have reduced the amount of credit they extend and in some cases have stopped extending credit. Our ability to provide additional letters of credit and other forms of collateralized guarantees is limited, which may impact our ability to participate in projects in the future.

 

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The nature of our engineering and construction business exposes us to potential liability claims and contract disputes, which may reduce our profits.

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 or our clients. We have been and may in the future be named as a defendant in legal proceedings where third parties or our clients 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 a 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.

We have increasingly been required to meet minimum equity requirements, financial ratios or more stringent experience requirements and obtain transaction ratings in order to bid on large public infrastructure projects, which could reduce our ability to bid for potential projects.

In recent years, we have increasingly been required to meet minimum equity requirements, certain financial ratios or more stringent experience requirements (particularly in international biddings) and obtain transaction ratings on our financial proposals from a recognized rating agency 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 minimum financial ratios. The levels and types of ratios vary substantially. Although we have historically been able to comply with such requirements, we cannot assure you that we will be able to do so in the future. If we do not meet such requirements, it could impair our ability to bid for potential projects, which would have an adverse effect on our financial condition and results of operations.

Our business may evolve through mergers, acquisitions or divesetitures which may pose risks or challenges.

Our Board of Directors and management may from time to time engage in discussions regarding possible strategic transactions, including merger, acquisition or divestment transactions with third parties and other alternatives, for the purpose of strengthening our position. However, there can be no assurance that we will be able to successfully identify, negotiate and complete any such strategic transactions. In addition, if we complete a strategic transaction, the implementation of such transaction will involve risks, including the risks that we will not realize the expected benefits of such transaction, that we may be required to incur non-recurring costs or other charges and that such transaction may result in a change in control. In addition, certain strategic transactions must be approved by our stockholders or Board of Directors, depending upon their materiality, and may require, among other things, approval from governmental agencies.

The success of our joint ventures depends on the satisfactory performance by our joint venture partners of their joint venture obligations. The failure of our joint venture partners to perform their joint venture obligations could impose on us additional financial and performance obligations that could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture.

We enter into various joint ventures, associations and other strategic alliances and collaborations as part of our engineering, procurement, construction and infrastructure businesses, including RCO, ICA-Fluor, Rodio Kronsa, Los Portales, and ACTICA Sistemas S. de R.L. de C.V., as well as project-specific joint ventures, including for the Autovia Urbana Sur expressway, the Eastern Discharge Tunnel and the Atotonilco water treatment project. The success of these and other joint ventures depends, in part, on the satisfactory performance by our joint venture partners of their joint venture obligations. If our joint venture partners fail to satisfactorily perform their joint venture obligations as a result of financial or other difficulties, the joint venture may be unable to adequately perform or deliver its contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture. We cannot assure you that our business partnerships or joint ventures will be successful in the future.

If we are unable to form teaming arrangements, our ability to compete for and win certain contracts may be negatively impacted, especially in bids located outside of Mexico.

In both the private and public sectors, either acting as a prime contractor, a subcontractor or as a member of a team, we may join with other firms to form a team to compete for a single contract, especially in projects located outside of Mexico, where we may seek local experience, or involving a more complex technical and/or financial structure. Because a team can

 

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offer stronger combined qualifications than a firm standing alone, these teaming arrangements can be important to the success of a particular contract bid process or proposal. The failure to maintain such relationships in certain markets, such as the government market, may impact our ability to win work.

Our backlog of construction contracts is not necessarily indicative of our future revenues.

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, we cannot assure you that cancellations, failure to collect or scope adjustments will not occur. We cannot assure you that we will secure contracts equivalent in scope and duration to replace the current backlog or that the current backlog will perform as expected. See “Item 5. Operating and Financial Review and Prospects — Operating Results — Construction — Construction Backlog.”

We face risks related to project performance requirements and completion schedules, which could jeopardize our profits.

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. Additionally, under certain Mexican laws, public officials may be held personally liable for decisions made in their professional capacities, and as a result officials who oversee our projects may not make decisions, such as executing change orders, required for progress of our projects. The failure to meet any schedule or performance requirements for any reason 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. We cannot assure you 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 our investment in a concession project may not meet the originally estimated returns.

Our return on any investment in any concession (including highway, social infrastructure, tunnel or wastewater treatment concessions) is based on the duration of the concession and the amount of capital invested, in addition to the amount of usage revenues collected, debt service costs and other factors. For example, 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. Usually concession and Public-Private Partnership, or PPP, contracts provide that the grantor of the contract shall deliver the right-of-way to the project land in accordance with the construction schedule. If the grantor fails to deliver such rights-of-way on time, we may incur additional investments and delays at the start of operations, and therefore we may need to seek the modification of the concession or PPP contract. We cannot assure you that we will reach an agreement as to the amendment of any such contracts or that the grantor will honor its obligations thereunder. Particularly for new projects in which we take on construction risk, overruns of budgeted costs may create a higher capital investment base than expected, and therefore a lower return on capital. Given these factors, we cannot assure you that our return on any investment in a concession will meet the estimates contemplated in the relevant concession or PPP contract.

Governments may terminate our concessions under various circumstances, some of which are beyond our control.

Our concessions are among our principal assets, and we would be unable to continue the operations of a particular concession without the concession right from the granting government. A concession may be revoked by a government for certain prescribed reasons pursuant to the particular title and the particular governing law, which may include failure to comply with development and/or maintenance programs, temporary or permanent halt in our operations, failure to pay damages resulting from our operations, exceeding our maximum authorized rates or failure to comply with any other material term of a concession.

In particular, the Mexican government may also terminate a concession at any time through reversion, if, in accordance with applicable Mexican law, it determines that it is in the public interest to do so. The Mexican government may also assume the operation of a concession in the event of war, public disturbance or threat to national security. In addition, in the case of a force majeure event, the Mexican government may require us to implement certain changes in our operations. In the event of a reversion of the public domain assets that are the subject of our concessions, the Mexican government under Mexican law is generally required to compensate us for the value of the concessions or added costs. Similarly, in the event of an assumption of our operations, other than in the event of war, the government is required to compensate us and any other affected parties for any resulting damages. Other governments often have similar provisions in their concession contracts and applicable law. We cannot assure you that we would receive such compensation on a timely basis or in an amount equivalent to the value of our investment in a concession and lost profits.

 

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Our failure to recover adequately on claims or change orders against project owners for payment could have a material adverse effect on us.

We occasionally bring claims against project owners for additional costs that exceed the contract price or for amounts not included in the original contract price, including change orders. These types of claims occur due to matters such as owner-caused delays, increased unit prices or changes from the initial project scope that result, both directly and indirectly, in additional costs. Often, these claims can be the subject of lengthy arbitration, litigation or third-party expert proceedings, and it can be difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. With respect to change orders in particular, we may agree on the scope of work to be completed with a client without agreeing on the price, and in this case we may be required to use a third-party expert to set the price for the change order. We do not have control over such third-party experts and they may make price determinations that are unfavorable to us. As of December 31, 2012, we had Ps. 1,483 million of allowance for doubtful accounts related to contract and trade receivables, including an allowance for doubtful accounts in the Civil Construction segment related to the Line 12 of the Mexico City metro system project. See “Item 8. Financial Information—Legal and Administrative Proceedings—Line 12 of the Mexico City Metro.” A failure to promptly recover on these types of claims and change orders could have a material adverse effect on our liquidity and financial condition.

Our continued growth requires us to hire and retain qualified personnel.

Over the past years, the demand for employees who engage in and are experienced in the services we perform has continued to grow as our customers have increased their capital expenditures and the use of our services. The continued growth of our business is dependent upon being able to attract and retain personnel, including engineers, corporate management and craft employees, who have the necessary and required experience and expertise. Competition for this kind of personnel is intense. Difficulty in attracting and retaining these personnel could reduce our capacity to perform adequately in present projects and to bid for new ones.

We maintain a workforce based upon current and anticipated workloads. If we do not receive future contract awards or if these awards are delayed, we may incur significant costs.

Our estimates of future performance depend on, among other matters, whether and when we will receive certain new contract awards. While our estimates are based upon our good faith judgment, these estimates can be unreliable and may frequently change based on newly available information. In the case of large-scale domestic and international projects where timing is often uncertain, it is particularly difficult to predict whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size with our contract needs. If an expected contract award is delayed or not received, Mexican labor law requirements could cause us to incur costs resulting from reductions in workforce or redundancy of facilities that would have the effect of reducing our profits.

Risks Related to Our Airport Operations

Our Airport segment’s operating income and net income are dependent on our subsidiary GACN, and GACN’s revenues are closely linked to passenger and cargo traffic volumes and the number of air traffic movements at its airports.

We operate 13 concessioned airports in Mexico through GACN. As of December 31, 2012, we controlled shares representing approximately 58.63% of GACN’s capital stock. Our interest in GACN exposes us to risks associated with airport operations.

In 2012, GACN represented 6.5% of our consolidated revenues and 31.2% of our operating income. GACN’s airport concessions from the Mexican government are essential to GACN’s contribution to revenues and operating income. Any adverse effect on GACN would have an adverse effect on our operating results.

Historically, a substantial majority of GACN’s revenues have been derived from aeronautical services, and GACN’s principal source of aeronautical services revenues is passenger charges. Passenger charges are payable for each passenger (other than diplomats, infants, transfer and transit passengers) departing from the airport terminals we operate, collected by the airlines and paid to GACN. In 2012, 2011 and 2010, passenger charges represented 55.8%, 54.4% and 50.0%, respectively, of GACN’s total revenues. GACN’s revenues are thus closely linked to passenger and cargo traffic volumes and the number of air traffic movements at its airports. These factors directly determine GACN’s revenues from aeronautical services and indirectly determine its revenues from non-aeronautical services. Passenger and cargo traffic volumes and air traffic movements depend in part on many factors beyond our control, including economic conditions in Mexico, the U.S. and the world, the political situation in Mexico and elsewhere in the world, high incidences of crime, particularly related to drug trafficking, throughout Mexico but especially in the northern cities, the attractiveness of GACN’s airports relative to that of other competing airports, fluctuations in petroleum prices (which can have a negative impact on traffic as a result of

 

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fuel surcharges or other measures adopted by airlines in response to increased fuel costs) and changes in regulatory policies applicable to the aviation industry. International conflicts and health epidemics, such as the Influenza A(H1N1) epidemic, have negatively affected the frequency and pattern of air travel worldwide. Generally all of our airports were negatively affected by reductions in the volume of passengers, the A(H1N1) virus and the exit from the Mexican market of five airlines in less than a year. In addition, Mexicana de Aviacion, Click Mexicana and Mexicana Link (collectively known as Grupo Mexicana) ceased operations during the third quarter of 2010. These suspensions adversely impacted the recovery of air traffic volumes in all of our airports, although total passenger traffic in 2012 and 2011 increased as compared to 2010. The future occurrence or worsening of any of such developments going forward would adversely affect GACN’s business, and in turn, our business. Any decreases in passenger and cargo traffic volumes and the number of air traffic movements to or from our airports as a result of these factors could adversely affect GACN’s business, results of operations, prospects and financial condition, thereby negatively affecting our overall results.

Terrorist attacks have had a severe impact on the international air travel industry, and terrorist attacks and other international events have adversely affected GACN’s business and may do so in the future.

As with all airport operators, GACN is subject to the threat of terrorist attack. The terrorist attacks on the United States on September 11, 2001 had a severe adverse impact on the air travel industry, particularly on U.S. carriers and on carriers operating international service to and from the United States. Airline traffic in the United States fell precipitously after the attacks. GACN’s terminal passenger volumes declined 5.8% in 2002 as compared to 2001. Any future terrorist attacks involving one of GACN’s airports, whether or not involving aircraft, will likely adversely affect our business, results of operations, prospects and financial condition. Among other consequences, airport operations would be disrupted or suspended during the time necessary to conduct rescue operations, investigate the incident and repair or rebuild damaged or destroyed facilities, and our future insurance premiums would likely increase. In addition, GACN’s insurance policies do not cover all losses and liabilities resulting from terrorism. Any future terrorist attacks, whether or not involving aircraft, will likely adversely affect GACN’s business, results of operations, prospects and financial condition.

Because a substantial majority of GACN’s international flights involve travel to the U.S., it may be required to comply with security directives of the U.S. Federal Aviation Authority, in addition to the directives of Mexican aviation authorities. Security measures taken to comply with future security directives or in response to a terrorist attack or threat could reduce passenger capacity at GACN’s airports due to increased passenger screening and slower security checkpoints, as well as increase our operating costs, which would have an adverse effect on GACN’s business, results of operations, prospects and financial condition.

Other international events such as the conflicts in the Middle East and public health crises such as the Severe Acute Respiratory Syndrome, or SARS, crisis and the Influenza A(H1N1) crisis have, in the past, negatively affected the frequency and pattern of air travel worldwide. Because GACN’s revenues are largely dependent on the level of passenger traffic in its airports, any general increase of hostilities relating to reprisals against terrorist organizations, further conflict in the Middle East, outbreaks of health epidemics such as SARS or Influenza A(H1N1), or other international events of general concern (and any related economic impact of such events) could result in decreased passenger traffic and increased costs to the air travel industry and, as a result, could cause a material adverse effect on GACN’s business, results of operations, prospects and financial condition.

Increases in fuel prices could adversely affect GACN’s business and results from operations.

While there was a decline in 2012, international fuel prices, which represent a significant cost for airlines using GACN’s airports, have increased in recent years. Increases in previous years in airlines costs were among the factors leading to cancellations of routes, decreases in frequencies of flights, and in some cases even contributed to filings for bankruptcy by some airlines (such as Alma and Aladia). For other airlines, such as Avolar and Aerocalifornia, such increased costs may have contributed to the denial of extensions of their concessions by the Mexican regulatory authorities for failure to satisfy security, service, coverage and quality requirements.

GACN provides a public service regulated by the Mexican government and its flexibility in managing its aeronautical activities is limited by the regulatory environment in which it operates.

GACN operates its airports under concessions, the terms of which are regulated by the Mexican government. As with most airports in other countries, GACN’s aeronautical fees charged to airlines and passengers are regulated. In 2012, 2011 and 2010, approximately 67.8%, 67.0% and 64.2%, respectively, of GACN’s total revenues were earned from regulated services, which are subject to price regulation under its maximum rates. These regulations may limit GACN’s flexibility in operating its aeronautical activities, which could have a material adverse effect on its business, results of operations, prospects or financial condition. In addition, several of the regulations applicable to GACN’s operations and that affect its

 

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profitability are authorized (as in the case of its master development programs) or established (as in the case of its maximum rates) by the Ministry of Communications and Transportation for five-year terms. Except under limited circumstances, we generally do not have the ability to unilaterally change GACN’s obligations (such as the investment obligations under its master development programs or the obligation under its concessions to provide a public service) or increase its maximum rates applicable under those regulations should passenger traffic or other assumptions on which the regulations were based change during the applicable term. In addition, we cannot assure you that this price regulation system will not be amended in a manner that would cause additional sources of GACN’s revenues to be regulated, which could limit GACN’s flexibility in setting prices for additional sources of revenues that are not currently subject to any restriction.

We cannot predict how the regulations governing our Airports segment will be applied.

Many of the laws, regulations and instruments that regulate our airport business were adopted or became effective in 1999, and there is only a limited history that would allow GACN to predict the impact of these legal requirements on GACN’s future operations. In addition, although Mexican law establishes ranges of sanctions that might be imposed should GACN fail to comply with the terms of one of its concessions, the Mexican Airport Law (Ley de Aeropuertos) and its regulations or other applicable law, we cannot predict the sanctions that are likely to be assessed for a given violation within these ranges. We cannot assure you that GACN will not encounter difficulties in complying with these laws, regulations and instruments.

Morever, when determining GACN’s maximum rates for the next five-year period (covering 2016 through 2020), the Ministry of Communications and Transportation may be subject to significant pressure from different entities (for example, the Mexican Federal Competition Commission (Comision Federal de Competencia) and the carriers operating at GACN’s airports) to modify GACN’s maximum rates, which may reduce the profitability of our airport business. We cannot assure you that the laws and regulations governing our airport business, including the rate-setting process and the Mexican Airport Law, will not change in the future or be applied or interpreted in a way that could have a material adverse effect on GACN’s business, results of operations, prospects and financial condition.

On December 14, 2011, a bill was introduced in Mexico’s Congress to amend the Mexican Airport Law. The bill proposes that the Ministry of Communications and Transportation gain additional authority to plan and apply the standards, policies and programs for the Mexican airport system, to oversee the proper operation of civil aviation in Mexico and to establish rules for airport service providers and the general basis for flight schedules, so as to guarantee the competitiveness of Mexico’s airports. The bill has been approved by the Senate (Senado de la Republica) and the House of Deputies (Camara de Diputados), and the amendments to the Mexican Airport Law set forth therein will become effective once the Senate has approved the final draft of the amendments and ordered that they be published in the Mexican Official Gazette of the Federation (Diario Oficial de la Federacion).

The Mexican government could grant new or expanded concessions that compete with our airports and could have an adverse effect on our revenues.

The Mexican government could grant additional or expanded concessions to operate existing government managed airports or authorize the construction of new airports, which could compete directly with our airports. Any competition from other such airports could have a material adverse effect on GACN’s business and results of operations. Under certain circumstances, the grant of a concession for a new or existing airport must be made pursuant to a public bidding process. In the event that a competing concession is offered in a public bidding process, we cannot assure you that we would participate in such process, or that we would be successful if we did participate.

Our operations depend on certain key airline customers, and the loss of or suspension of operations of one or more of them could result in a loss of a significant amount of our revenues.

Of the total aeronautical revenues generated at GACN’s airports in 2012, Aerovias de Mexico, S.A. de C.V., or Aeromexico, and its affiliates accounted for 31.2%, VivaAerobus represented 17.8% and Interjet represented 15.8%. In recent years, discount carriers, charter carriers, low-cost carriers and other new market entrants have represented a growing proportion of the Mexican commercial airline market. In 2012, passengers traveling on discount, charter and low-cost carriers, such as VivaAerobus, Interjet and Volaris accounted for approximately 50.0% of GACN’s commercial aviation passenger traffic.

AMR Corporation, the parent company of American Airlines and American Eagle, generated 3.4% of the sum of GACN’s aeronautical and non-aeronautical revenues from January 1, 2012, to December 31, 2012, of which American Airlines accounted for 3.2% and American Eagle accounted for 0.2%. As a percentage of GACN’s total passenger traffic, AMR Corporation generated 3.1%, of which American Airlines accounted for 2.1% and American Eagle accounted for 1.0% during the same period.

 

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On November 29, 2011, AMR Corporation announced that AMR Corporation and certain of its U.S.-based subsidiaries filed voluntary petitions for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York. The same day, the U.S. Bankruptcy Court for the Southern District of New York granted approval of a series of motions to help facilitate American Airlines and American Eagle’s continued normal business operations throughout the reorganization process. AMR Corporation was granted the exclusive right to propose its own plan of reorganization. On February 14, 2013, AMR Corporation and US Airways announced that they had signed an agreement to merge.

Grupo Mexicana, which comprises Mexicana de Aviacion, Click Mexicana, and Mexicana Link, operated 24 routes at 12 of GACN’s 13 airports in July 2010, prior to the bankruptcy filing by Mexicana de Aviacion.

On August 3, 2010, Mexicana de Aviacion announced that it filed for bankruptcy protection (concurso mercantil) before the 11th Federal District Court in Mexico City and that it also sought bankruptcy protection in the United States. On August 27, 2010, Grupo Mexicana announced the indefinite suspension of operations of Mexicana de Aviacion, Click Mexicana, and Mexicana Link. Click Mexicana and Mexicana Link’s insolvency petitions were accepted in conciliary phase on November 16, 2010.

During the first six months of 2010, Grupo Mexicana generated 16.6% of GACN’s total passenger traffic, of which 7.6% was accounted for solely by Mexicana de Aviacion. Grupo Mexicana generated 17.3% of GACN’s domestic passenger traffic, including 7.2% from Mexicana de Aviacion. In terms of international traffic, Grupo Mexicana generated 13.1% of GACN’s traffic, of which Mexicana de Aviacion accounted for 9.3%. Grupo Mexicana generated 12.2% of GACN’s revenues during the first six months of 2010, of which Mexicana de Aviacion accounted for 5.9%.

As of April 18, 2013, the total amount owed to us by Grupo Mexicana amounted to approximately Ps. 145,881 thousand. As of December 31, 2012, we had recognized and recorded a corresponding provision of Ps. 145,881 under costs of services. We have not charged any further amount or generated any interest on the amount owed ever since. In subsequent bankruptcy proceedings, Mexican courts have ordered the separation of a total of approximately Ps. 132,628 thousand in passenger charges in our favor from the bankruptcy proceedings of Mexicana de Aviacion, ClickMexicana and MexicanaLink and ordered the airlines to pay us or to declare it legally impossible to execute the payment. To date, we have not received any portion of the amount due to us. There can be no assurance that these amounts will be recovered from Grupo Mexicana, representing a cash flow risk.

None of GACN’s contracts with its airline customers obligate them to continue providing service from GACN’s airports, and we can offer no assurance that, if any of GACN’s key customers reduced their use of GACN’s airports, competing airlines would add flights to their schedules to replace any flights no longer handled by GACN’s principal airline customers. Our business and results of operations could be adversely affected if we do not continue to generate comparable portions of our revenue from our key customers.

Due to increased competition, higher fuel prices and the general decrease in the demand consequent to the global volatility in the financial and exchange markets and economic crisis, many airlines are operating in adverse conditions. Further increases in fuel prices or other adverse economic developments could cause one or more of GACN’s principal carriers to become insolvent, cancel routes, suspend operations or file for bankruptcy. All such events could have a material adverse effect on GACN’s results of operations.

The operations of GACN’s airports may be affected by the actions of third parties, which are beyond our control.

As is the case with most airports, the operation of GACN’s airports is largely dependent on the services of third parties, such as air traffic control authorities, airlines and providers of catering and baggage handling. GACN is also dependent upon the Mexican government or entities of the government for provision of services, such as electricity, supply of fuel to aircraft, air traffic control and immigration and customs services for international passengers. The disruption or stoppage of taxi or bus services at one or more of GACN’s airports could also adversely affect GACN’s operations. We are not responsible for and cannot control the services provided by these parties. Any disruption in, or adverse consequence resulting from, their services, including a work stoppage, financial difficulties or other similar event, may have a material adverse effect on the operation of GACN’s airports and on GACN’s results of operations.

Risks Related to Mexico and Other Markets in Which We Operate

Adverse economic conditions in Mexico may adversely affect our financial condition or results of operations.

A substantial portion of our operations is conducted in Mexico and is dependent upon the performance of the Mexican economy. As a result, our business, financial condition and results of operations may be affected by the general condition of the Mexican economy, over which we have no control. See “Item 4. Information on the Company—History and

 

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Development of the Company—Public Sector Spending and the Mexican Economy.” In the past, Mexico has experienced economic crises, caused by internal and external factors, characterized by exchange rate instability (including large devaluations), high inflation, high domestic interest rates, economic contraction, a reduction of international capital flows, a reduction of liquidity in the banking sector and high unemployment rates. We cannot assume that such conditions will not return or that such conditions will not have a material adverse effect on our business, financial condition or results of operations.

Mexico experienced a period of slow growth from 2001 through 2003, primarily as a result of the downturn in the U.S. economy. In 2007, GDP grew by approximately 3.3% and inflation declined to 3.8%. In 2008, GDP grew by approximately 1.8% and inflation reached 6.5%. Mexico entered into a recession beginning in the fourth quarter of 2008, and in 2009 GDP fell by approximately 6.5% and inflation was 3.6%. In 2010, GDP grew 5.5% and inflation reached 4.4%. In 2011, GDP grew 3.9% and inflation declined to 3.8%. In 2012, GDP grew 3.9% and inflation decreased to 3.6%.

Mexico also has, and is expected to continue to have, high real and nominal interest rates as compared to the United States. The annualized interest rates on 28-day Cetes averaged approximately 7.7%, 5.4%, 4.4%, 4.2% and 4.2% for 2008, 2009, 2010, 2011 and 2012 respectively. As of December 31, 2012, 67% of our debt is denominated in Mexican pesos, and we may continue to incur peso-denominated debt for our projects in Mexico for which the source of repayment of financing is in Mexican pesos. To the extent that we incur peso-denominated debt in the future, it could be at high interest rates.

If the Mexican economy experiences another recession, if inflation or interest rates increase significantly or if the Mexican economy is otherwise adversely impacted, our business, financial condition or results of operations could be materially and adversely affected.

Appreciation or depreciation of the Mexican peso relative to the U.S. dollar, other currency fluctuations and foreign exchange controls could adversely affect our financial condition and results of operations.

A substantial portion of our construction revenues and a substantial portion of our debt, including U.S.$ 500 million of our senior notes due 2021 and U.S.$ 350 million of our senior notes due 2017, are denominated in U.S. dollars, while the majority of our raw materials, a portion of our long-term indebtedness and a substantial portion of our purchases of machinery and 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.

Beginning in the second half of 2008, the Mexican peso substantially depreciated against the U.S. dollar, falling from a Federal Reserve Bank of New York noon buying rate for Mexican pesos of Ps. 10.37 on July 2, 2008 to Ps. 13.83 on December 31, 2008 and Ps. 14.21 on March 31, 2009, a depreciation of approximately 37%. The Mexican peso stabilized and partially recovered in 2010, when the noon buying rate was Ps. 12.30 per U.S.$ 1.00 on March 31, 2010 and Ps. 12.38 per U.S.$ 1.00 on December 31, 2010. In 2011, there was a significant depreciation in the Mexican peso against the U.S. dollar, and the noon buying rate increased to Ps. 13.95 on December 30, 2011, representing a depreciation of approximately 13%. The Mexican peso has since partially recovered, and the noon buying rate was Ps. 12.23 per U.S.$ 1.00 on April 19, 2013. Fixed price and not-to-exceed contracts require us to bear the risk of fluctuation in the exchange rate between the Mexican peso and other currencies in which our contracts, such as financing agreements, are denominated or which we may use for purchases of supplies, machinery or raw materials, day-to-day expenses or other inputs. 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. 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. We cannot assure you that the Mexican Central Bank will maintain its current policy with respect to the peso. Currency fluctuations may have an adverse effect on our financial condition, results of operations and cash flows in future periods. Such effects include foreign exchange gains and losses on assets and liabilities denominated in U.S. dollars, fair value gains and losses on derivative financial instruments, and changes in interest income and interest expense. These effects can be more volatile than our operating performance and our cash flows from operations. See “–Risks Related to Our Operations–Our hedging contracts may not effectively protect us from financial market risks and may negatively affect our cash flow.”

 

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Security risks may negatively affect our business, including our housing division, as well as our user-number based projects located in regions with increased insecurity.

Home sales in our low-income housing division depend substantially on purchasers’ access to credit through the Institution for Worker’s Housing (Instituto Nacional de la Vivienda para los Trabajadores, or Infonavit), a public funding agency. An increase in drug-related offenses and other crime has led to higher vacancy rates in housing developments in the northern border states of Mexico. As a result, it is possible that Infonavit may restrict grants or disbursements of housing credit in northern cities.

Likewise, projects located in regions with recently increased insecurity may affect the revenues of projects based on number of users, such as our toll road, tunnel and airport concessions. In addition, the results of operations of our Sonora and Jalisco SPC detention center projects may be negatively affected in periods of increased insecurity.

Developments in other countries could adversely affect the Mexican economy, our business, financial condition or results of operations and the market value of our securities.

The Mexican economy, the business, financial condition or results of operations of Mexican companies and 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 other countries may differ significantly from economic conditions in Mexico, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers. In recent years, economic conditions in Mexico have become increasingly correlated with economic conditions in the United States as a result of NAFTA and increased economic activity between the two countries. In the second half of 2008, the prices of both Mexican debt and equity securities decreased substantially as a result of the prolonged decrease in the United States securities markets. This general correlation continued in 2011 and 2012, even as both securities markets trended upward. Adverse economic conditions in the United States, the termination of NAFTA or other related events could have a material adverse effect on the Mexican economy. The Mexican debt and equities markets also have been adversely affected by ongoing developments in the global credit markets. We cannot assure you that events in other emerging market countries, in the United States or elsewhere will not materially adversely affect our business, financial condition or results of operations.

Corporate disclosure in Mexico may differ from disclosure regularly published by or about issuers of securities in other countries, including the United States.

A principal objective of the securities laws of the United States, Mexico, and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with highly developed capital markets, including the United States.

Risks Related to our Securities and our Major Shareholders

You may not be entitled to participate in future preemptive rights offerings.

In a public offering, pursuant to Article 53 of the Mexican Securities Market Law, we are not required to grant preemptive rights to any holders of our ADSs, Ordinary Participation Certificates, or CPOs, or shares. We are not required by law to undertake our capital increases using public offerings.

If we issue new shares for cash in a private offering, as part of a capital increase, we must grant our stockholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to purchase shares in these circumstances are known as preemptive rights. However, we are not legally required to grant holders of ADSs, CPOs or shares in the United States any preemptive rights in any future private offering.

To allow holders of ADSs in the United States to participate in a private preemptive rights offering, we would have to file a registration statement with the Securities and Exchange Commission or conduct an offering that qualified for an exemption from the registration requirements of the Securities Act of 1933, as amended. We cannot assure you that we would do so. 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, as well as any other factors that we consider important to determine whether we will file such a registration statement. 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.

 

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The significant share ownership of our management and members of our Board of Directors, coupled with their rights under the bylaws, may have an adverse effect on the future market price of our ADSs and shares.

As of December 31, 2012, the total beneficial shareholding of our directors and executive officers (including shares held in a management trust) was approximately 63,841,165, or 10.5%, of our outstanding shares. This total included shares beneficially owned by the Chairman of our Board of Directors, Bernardo Quintana Isaac, or his family, including Alonso Quintana (our Chief Executive Officer, and a member of our Board of Directors), Diego Quintana (responsible for investments in our Industrial Construction division and all partnerships and a member of our Board of Directors), and Rodrigo Quintana (our General Counsel), comprising approximately 6.4% of our outstanding shares. Additionally, the management trust held 24,600,561, or 4.1%, of our outstanding shares (including 0.91% shares included in the total of beneficial ownership by the Quintana family). Another trust controlled by our management, the foundation trust, held 8,318,499, or 1.4%, of our shares. See “Item 6. Directors and Senior Management—Share Ownership,” “—Compensation—Management Bonuses” and “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

Actions by our management and Board of Directors 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 or the ADSs on the New York Stock Exchange.

Holders of ADSs and CPOs are not entitled to vote.

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.

C. FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. We may from time to time make forward-looking statements in our periodic reports to the Securities and Exchange Commission on Forms 20-F and 6-K, in our annual report to shareholders, in offering circulars and prospectuses, in press releases and other written materials, and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others. This annual report contains forward-looking statements. Examples of such forward-looking statements include:

 

   

projections of operating revenues, net income (loss), earnings per share, capital expenditures, dividends, cash flow, capital structure or other financial items or ratios;

 

   

statements of our plans, objectives or goals, including those related to anticipated trends, competition, regulation, government housing policy and rates;

 

   

statements about our future performance or economic conditions in Mexico or other countries in which we operate; and

 

   

statements of assumptions underlying such statements.

Words such as “believe,” “could,” “may,” “will,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, some of which are discussed under “Risk Factors,” include cancellations of significant construction projects included in backlog, material changes in the performance or terms of our concessions, additional costs incurred in projects under construction, failure to comply with covenants contained in our debt agreements, developments in legal proceedings, unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms, changes to our liquidity, economic and political conditions and government policies in Mexico or elsewhere, changes in capital markets in general that may affect policies or attitudes towards lending to Mexico or Mexican companies, changes in inflation rates, exchange rates, regulatory developments, customer demand, competition and tax and other laws affecting ICA’s businesses. 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.

 

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Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments.

 

Item 4. Information on the Company

A. HISTORY AND DEVELOPMENT OF THE COMPANY

We are a sociedad anonima bursatil de capital variable incorporated as Empresas ICA, S.A.B. de C.V. under the laws of Mexico. Our business began in 1947 with the incorporation of Ingenieros Civiles Asociados, S.A. de C.V., which provided construction services for infrastructure projects for the Mexican public sector. Our registered office is located at Blvd. Manuel Avila Camacho 36, Col. Lomas de Chapultepec, Del. Miguel Hidalgo, 11000 Mexico City, Mexico, telephone (52-55) 5272-9991.

Based on data from the Mexican Chamber of the Construction Industry (Camara Mexicana de la Industria de la Construccion) and the INEGI (Instituto Nacional de Estadistica, Geografia e Informatica), 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, social infrastructure 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 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 of revenue. 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. After a protracted construction crisis in Mexico, in 1999 we started our non-core divestment program, under which we sold non-core assets, and used the proceeds from such sales to pay corporate debt. We concluded that non-core divestment program in 2006. Subsequently, we redefined our business focus to emphasize our construction business, which in 2012 and 2011 accounted for approximately 82.3% and 83.8%, respectively, of our revenues. We are again exploring strategic divestments, including of our real estate assets.

We have also increased our participation in construction-related businesses both in Mexico and in foreign markets, such as infrastructure operations, housing development and, as of 2012, mining services, as part of our strategy to minimize the effect of business and macroeconomic cycles in the construction industry. The strategy to pursue projects in foreign markets will continue to be an ongoing practice in future years.

Capital Spending

Our capital spending program is focused on the acquisition, upgrading and replacement of property, plant and equipment as well as investments in infrastructure concessions required for our projects.

The following table sets forth our capital spending for each year in the three-year period ended December 31, 2012. Capital spending in the following table includes amounts invested for property, plant and equipment as well as for acquisitions of real estate inventories. Acquisitions of real estate inventories are included in operating activities in our consolidated statements of cash flows, for which reason the table below does not represent capital expenditures as reported in our consolidated statements of cash flows.

 

     Year Ended December 31,  
     2012      2012      2011      2010  
     (Millions of
U.S. dollars)
     (Millions of Mexican pesos)  

Construction:

           

Civil

   U.S.$  33         Ps. 424         Ps. 854         Ps. 888   

Industrial

     12         154         44         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     45         578         898         928   

Airports

     29         376         388         626   

Concessions

     180         2,319         1,603         2,239   

Housing

     241         3,105         3,561         4,255   

Corporate and Other

     4         54         20         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   U.S.$  499         Ps. 6,432         Ps. 6,470         Ps. 8,085   

 

 

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Aggregate capital spending decreased 0.6% in 2012 as compared to 2011. The decrease in aggregate capital spending in 2012 primarily reflected decreased spending in our Civil Construction and Housing segments. The decreased spending in our Civil Construction segment was primarily due to certain of our projects having entered the mature phases of construction in 2012, with their related capital investments (such as investments in major equipment) having been made in prior years. In our Housing segment, our capital spending decreased due to an overall deceleration during 2012. The decreased spending in our Civil Construction segment was partially offset by increased capital spending primarily in our Industrial Construction and Concessions segments, which in turn was principally due to a ramp up related to our new Barranca Larga-Ventanilla concession and the extension of our Kantunil-Cancun Highway concession.

Our principal capital expenditures currently in progress include Ps. 2,319 million in investments in our Concessions segment. All of such principal expenditures are geographically located in Mexico and funded through third party financings, including proceeds from our 2011 and 2012 notes offerings and our 2009 equity offering. Third party financing, other than our 2011 and 2012 senior notes offerings and 2009 equity offering, is typically structured through project finance vehicles and, to a lesser extent, through corporate term loan financing.

Capital expenditures in 2012 related to our Housing segment include Ps. 3,105 million of real estate inventories, which include land and projects under construction. Capital spending related to our Housing segment was Ps. 3,561 million in 2011.

On May 24, 2012, we entered into an agreement to acquire a 51% share in Peru’s leading mining sector construction company, San Martin. The purchase price of the acquisition was determined by using a complex earn out formula, which includes San Martin’s EBITDA from 2012 through 2014 as one of the factors. The purchase price is payable over a five year period and could range from U.S.$ 18 million, including the initial payment and the payment to be made at the end of the earn out period, to a maximum of US$ 123 million. The estimated range is between U.S.$ 80 and U.S.$ 100 million, based on our reasonable projections of our future performance.

Divestitures

In August 2011, we entered into a share purchase agreement to sell the company which held our Corredor Sur tollroad concession, ICA Panama, S.A., to Empresa Nacional de Autopistas, S.A., or ENA, a corporation owned by the Government of Panama, for U.S.$ 420 million. The transaction was completed on August 24, 2011. Simultaneously with the completion of the sale, we repaid approximately U.S.$ 154 million of Corredor Sur’s outstanding debt.

In addition, in September 2011 we completed the sale of our Queretaro–Irapuato and Irapuato–La Piedad highway concessions, operated under the PPP mechanism, to our affiliate RCO in exchange for cash and an increased shareholding in RCO from 13.6% to 18.7%. In addition, RCO assumed the existing debt related to the concession projects. We continue to operate and provide maintenance services to these highways.

On December 3, 2012, we announced that we signed an agreement with Servicios Corporativos Javer S.A.P.I. de C.V., or Javer, for Javer to acquire the assets and operating liabilities related to 20 affordable housing development projects being developed through our ViveICA subsidiary. We expect to receive newly issued shares of stock representing approximately 23% ownership stake in Javer, as well as a Ps. 600 million cash payment to repay bank debt related to the assets and the assumption by Javer of Ps. 400 million in accounts payable. ICA will become Javer’s third largest shareholder, with two board seats. The transaction is expected to close during the second quarter of 2013, subject to customary closing conditions for a real property asset sale. As of December 31, 2012, these housing assets were classified as held for sale, valued at their fair value, in our consolidated statement of financial position. Their results of operations were classified as discontinued operations, presented retrospectively for 2011 and 2010, in our consolidated statements of comprehensive income.

Public Sector Spending and the Mexican Economy

Our performance and results of operations historically have been tied to Mexican public sector spending on infrastructure and industrial facilities. Mexican public sector spending, in turn, has generally been dependent on the state of the Mexican economy and accordingly has varied significantly in the past. Mexico’s gross domestic product grew 1.5% overall in 2008, fell by approximately 6.5% in 2009 and grew 5.5% in 2010. In 2011, GDP increased 3.9%. In 2012, GDP

 

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increased 3.9%. The average interest rates on 28-day Mexican treasury notes were 4.2% in 2012, 4.2% in 2011 and 4.4% in 2010. Inflation was 3.6% in 2012, 3.8% in 2011 and 4.4% in 2010.

According to the INEGI, GDP of the Mexican construction sector, in real terms as compared to the prior year, decreased 3.3% in 2012, increased 4.6% in 2011 and remained flat at 0.0% in 2010, and represented 6.2%, 6.3% and 6.3% of Mexico’s total gross domestic product in those years, respectively. According to data published by the Mexican Ministry of Finance and Public Credit, the average annual budgetary investment in infrastructure was 6.2% of GDP during 2012, and 6.4% during the period between 2008 and 2012.

In 2007, former President Felipe Calderon unveiled his National Infrastructure Program for 2007 to 2012, which was designed to expand Mexico’s infrastructure, accelerate Mexico’s economic growth and make the Mexican economy more internationally competitive.

In February 2008, the Federal Government announced the creation of the National Infrastructure Fund (Fondo Nacional de Infraestructura) within the National Public Works and Services Bank (Banco Nacional de Obras y Servicios Publicios, S.N.C., or Banobras). The government stated that it intended to use the National Fund for Infrastructure to counteract effects of the credit crisis and related turmoil in the global financial system by providing financing, including guarantees, for important projects. The initial funding of Ps. 44 billion for the National Fund for Infrastructure came from the privatization of the first package of tollroads offered by the Fideicomiso de Apoyo y Rescate de Autopistas Concesionadas, or FARAC, in 2007. In 2012, Banobras extended an historic record volume of credit totaling Ps. 67.5 billion under this program, almost 20% higher than the credit granted in 2011. In the last five years, Banobras has granted more than Ps. 211 billion to finance infrastructure projects. Although the progress of the National Infrastructure Program has not been as rapid as originally announced, particularly in the areas of energy, ports, and railways, we have seen the rate of awards increase in water treatment and water supply and continued progress in highways. One of the beneficiaries of the National Fund for Infrastructure lending from Banobras development bank is our Barranca Larga-Ventanilla project, which in November 2012 was the recipient of a Ps. 1,213 million loan from this program.

The Mexican Association of Civil Engineers (Colegio de Ingenieros Civiles de Mexico, or CICM) proposed a new National Infrastructure Plan for the period 2013 to 2018, which is expected to be the basis for Mexican President Enrique Peña Nieto’s infrastructure platform. The new program is expected to invest approximately U.S.$ 415 billion, representing 5.7% of Mexico’s gross domestic product, in over 1,000 projects in the transportation, water management, energy and urban development sectors. Energy is the sector where most of the budget (approximately 64%) is expected to be allocated, and investment in highways is expected to represent approximately an additional U.S.$ 17 billion, or 4.1% of the proposed new program’s investment commitment. The program proposes to generate 3.9 million jobs and to contribute to Mexico’s economic development.

B. BUSINESS OVERVIEW

In 2012 our operations were divided into the following six segments:

 

   

Civil Construction,

 

   

Industrial Construction,

 

   

Concessions,

 

   

Airports,

 

   

Housing, and

 

   

Corporate and Other.

In January 2013, we discontinued the horizontal housing business line, because it no longer represents a significant or strategic business line. Therefore, as of January 1, 2013, the remaining operations in our Housing segment will be grouped together with our Corporate and Other Segment, as such operations do not qualify for separate segment reporting. Also effective January 1, 2013, we will no longer proportionally consolidate ICA-Fluor. See Note 4 to our consolidated financial statements. Commencing in 2013 as well, we will no longer report our Industrial Construction operations as a segment.

Our construction business is comprised of Civil Construction and Industrial Construction segments. In both 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.

 

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Historically, substantially all of our construction services were performed in connection with projects developed and financed by third parties. However, the current industry trend is that governments and government agencies, including the Mexican government and Mexican state-owned enterprises, have significantly changed their spending practices on traditional 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. We have experienced strong demand (and expect to continue experiencing 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, prisons, 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.

Description of Business Segments

Construction

Our construction business is divided into the Civil Construction and Industrial Construction segments. In 2012, our construction business, comprised of the two construction segments, accounted for 82.3% of our revenues.

Contracting Practices

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 traditional 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 type or not to exceed type, which generally do not provide for adjustment of pricing 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 La Yesca hydroelectric project in the Civil Construction segment and the clean fuels projects with Pemex and the Ethelyne XXI plant in the Industrial Construction segment. Fixed price, not-to-exceed and mixed price contracts collectively accounted for approximately 53% of our construction backlog as of December 31, 2012, 83% of our construction backlog as of December 31, 2011 and 86% of our construction backlog as of December 31, 2010. We believe that fixed price contracts are more prevalent in the construction market and the contracts that we enter into in the future may reflect this shift to fixed price contracts. Additionally, we expect that, because of conditions attendant to financing arrangements, future concession-related, infrastructure and industrial construction contracts may restrict the adjustment of the contract price for additional work done due to incorrect contract specifications.

However, under Mexican law, traditional public works contracts provide for the price adjustment of certain components, regardless of whether the contract is fixed price or mixed price. Under a traditional public works mechanism, the counterparty pays us periodically (often monthly) as our work is certified over the term of the contract and we do not finance the project.

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 38% of our contract awards in 2012 (based on the contract amount) were foreign-currency denominated. Approximately 33% of our construction backlog as of December 31, 2012 was denominated in foreign currencies. Substantially all of our foreign-currency denominated contracts are denominated in U.S. dollars, except for contracts entered into by our Rodio Kronsa subsidiary and certain other foreign projects, which are denominated in other currencies such as euros, Peruvian soles, Costa Rica colones and Colombian pesos.

Our policy requires that a committee review and approve all construction projects and concessions with construction components expected to generate material revenues. The committee supervises 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.

 

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We obtain new contracts for new projects either through a process of competitive bidding or through negotiation. Generally, the Mexican Federal Public Administration and its agencies may only award construction contracts 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). However, public sector construction contracts may be awarded without a public bidding process under limited circumstances, such as: (i) in response to certain emergencies, including those relating to public health and safety as well as environmental disasters; (ii) when the project to be executed will be performed exclusively for military purposes or if the bidding process could jeopardize national security; (iii) when a publicly-bid contract has been rescinded due to breach by the winning contractor; (iv) when a public bidding process is declared void due to a lack of offers that comply with the bidding guidelines or prices or inputs are unacceptable, provided that the conditions of contracting are the same as those originally published; or (v) when there is a proven strategic alliance between the government and the contractor in order to promote technological innovation in projects. 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 construction 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 2012, increases in scope of work accounted for Ps. 13,016 million. Construction 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.

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.

Construction and Mining Services and Other Backlog

Backlog in the engineering and construction industry is a measure of our share of the total dollar value of accumulated signed contracts at a particular moment.

The following table sets forth, at the dates indicated, our backlog of construction and mining services contracts.

 

     As of December 31,  
     2012      2012      2011      2010  
     (Millions of
U.S. dollars)
     (Millions of Mexican pesos)  

Civil Construction

   U.S. $  2,663         Ps. 34,254         Ps. 28,203         Ps. 26,844   

Industrial Construction

     621         7,984         7,115         8,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction Backlog

   U.S. $  3,284         Ps. 42,238         Ps. 35,318         Ps. 35,229   

Mining Services and Other Backlog

   U.S. $  635         Ps. 8,166         —           —     

In our Civil Construction segment we report our new mining services contracts which have a backlog of Ps. 8,166 million, these projects principally reflect the contracts in our San Martin subsidiary in Peru. We group our mining services business with our Civil Construction segment due to the similarity between our mining services and certain services provided by our traditional construction business, which leads us to review and manage our mining activities within the scope of our Civil Construction segment’s performance metrics.

 

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Total contract awards and net additions to existing contracts totaled Ps. 44,180 million (approximately U.S.$ 3,435 million) in 2012. See Note 8 to our consolidated financial statements. Seven projects represented approximately 66% of backlog in the Civil Construction segment, and 54% of total backlog, at December 31, 2012. The following table sets forth certain information relating to these seven projects.

 

      Amount     

Estimated Completion Date

   % of Total
Construction
Backlog
     % of Total Backlog  
   (Millions of Mexican pesos)                     

Civil Construction Backlog

           

Mitla-Tehuantepec
highway

     Ps. 5,547       Fourth quarter of 2015      13%         11%   

Barranca Larga-Ventanilla Highway

     5,182       Third quarter of 2014      12%         10%   

Package Highway Sonora State

     2,801       Second quarter of 2019      7%         6%   

Avenida Domingo Diaz Panama

     2,663       Third quarter of 2014      6%         5%   

Lazaro Cardenas TEC II Container Terminal

     2,262       Third quarter of 2014      5%         4%   

Tepic Bypass

     2,192       Second quarter of 2014      5%         4%   

Eastern Discharge Tunnel

     2,013       Second quarter of 2014      5%         4%   

As of December 31, 2012, approximately 15% of construction backlog was attributable to construction projects outside Mexico. Public sector projects represented approximately 72% of our total construction backlog. At December 31, 2012, construction contracts with a value exceeding U.S.$ 400 million accounted for 25% of our total construction backlog, construction contracts with a value ranging from U.S. $ 200 million to U.S. $ 400 million accounted for 21% and construction contracts with a value of less than U.S.$ 200 million accounted for 54% of our total construction 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, we cannot assure you 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 substantial penalties fixed as a percentage of a contract price. Fixed price, not-to-exceed and mixed price contracts collectively accounted for approximately 53% of our construction backlog as of December 31, 2012. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Construction—Construction Backlog.”

Competition

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, in addition to the Mexican companies, we compete primarily with Spanish and Brazilian companies. Major competitors include Impulsora del Desarrollo y el Empleo en America Latina, S.A.B. de C.V., or IDEAL, and Carso Infraestructura y Construcciones, S.A. de C.V., both related parties of Grupo Carso, Tradeco Infraestructura, S.A. de C.V., La Peninsular Compañia Constructora S.A. de C.V. (a member of Grupo Hermes), Promotora y Desarrolladora Mexicana, S.A. de C.V., Azvi-Cointer de Mexico, S.A. de C.V., Fomento de Construcciones y Contratas, S.A., or FCC, ACS Actividades de Construcciones y Servicios, S.A. and Dragados S.A. (together, ACS), Constructora Norberto Odebrecht S.A. and Andrade Gutierrez S.A. This market is fragmented, with many small local participants in civil construction.

In our Industrial Construction segment, we compete with Mexican, Brazilian, Argentine, Korean, French, Italian and Japanese companies, including Odebrecht, Cobra Gestion de Infraestructuras, S.A. and Dragados Industrial and Dragados Offshore (each part of ACS), Techint S.A. de C.V., Duro Felguera Mexico, S.A. de C.V., Mitsubishi Corporation, Swecomex, S.A. de C.V. (a member of Grupo Carso), Transportacion Maritima Mexicana, S.A. de C.V., Samsung Ingenieria Manzanillo, S.A. de C.V., Grupo R S.A. de C.V., Korea Gas Corporation, Abengoa/Abener Energia, Construcciones y

 

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Equipos Latinoamericanos, S.A. de C.V., Construcciones Mecanicas Monclova S.A. de C.V., Industrial Perforadora de Campeche S.A. de C.V., Inelectra, Samsung Engineering, Senermex, Snam/Saipam, Tecnicas Reunidas S.A. de C.V., Technip, Tradeco Infraestructura S.A. de C.V. and TransCanada.

In our Concessions segment, we compete primarily with Mexican and Spanish companies, including IDEAL, Globalvia Infraestructuras, S.A. de C.V., Compañia Contratistas Nacional, S.A. de C.V., La Peninsular Compañia Constructora, S.A. de C.V., OHL Mexico, S.A.B. de C.V., Promotora y Operadora de Infraestructura, S.A.B. de C.V., Tradeco Infraestructura, S.A. de C.V., Fomento de Construcciones y Contratas, S.A., FCC Aqualia, S.A., Acciona Agua, S.A., Abengoa Mexico, S.A. de C.V. and Impulsa Infraestructura, 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. Our Rodio Kronsa subsidiary faces substantial competition in Spain from large construction companies that operate in that market, as well as from smaller, specialized construction companies that provide the same services offered by Rodio Kronsa.

Raw Materials

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. 7,112 million, or 17%, of our consolidated cost of sales in 2012, Ps. 5,726 million, or 17%, of our consolidated cost of sales in 2011 and Ps. 4,549 million, or 16%, of our consolidated cost of sales in 2010. In our Industrial Construction segment, raw materials accounted for Ps. 2,391 million, or 6% of our consolidated costs of sales in 2012, Ps. 2,056 million, or 6%, of our consolidated cost of sales in 2011 and Ps. 2,000 million, or 7%, of our consolidated cost of sales in 2010.

Civil Construction

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, ports, hydroelectric plants, prisons, tunnels, canals and airports, as well as on the construction, development and remodeling of large multi-storied urban buildings, including office buildings, multiple-dwelling housing developments shopping centers. Our Civil Construction segment has also pursued opportunities in other parts of Latin America, the Caribbean, Asia and the United States, and is currently pursuing select opportunities outside of Mexico and performing three construction projects in Panama, two in Colombia, one in Costa Rica and, through our San Martin subsidiary, certain projects in Peru. Our Civil Construction segment performs activities such as demolition, clearing, excavation, de-watering, drainage, embankment fill, structural concrete construction, concrete and asphalt paving, mining services and tunneling. In 2012, our Civil Construction segment accounted for approximately 68.6% of our total revenues.

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 through 2012:

 

   

the Apulco, Comedero, El Novillo, El Caracol, Cajon de Peña, Tomatlan, Infiernillo, Chicoasen, El Guineo, El Cobano, Jicalan, Falcon, Huites, Aguamilpa, Caruachi and El Cajon dams;

 

   

the Guadalajara-Colima, Mazatlan-Culiacan, Leon-Lagos-Aguascalientes, Guadalajara-Tepic, Mexico City-Morelia-Guadalajara, Cuernavaca-Acapulco, Oaxaca-Sola de Vega and Torreon-Saltillo concessioned highways and the Tehuacan-Oaxaca federal highway;

 

   

17 of the 58 existing airports in Mexico and two airports outside Mexico (the Tocumen Panama international airport in Panama and the Philip S.W. Goldson international airport in Belize) and Terminal 2 of the Mexico City International Airport;

 

   

various hotels and office buildings, including the Maria Isabel Sheraton, Nikko, Paraiso Radisson Mexico City, Westin Regina Los Cabos and the Torre Mayor, among others;

 

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lines one through nine, A and part of B of the Mexico City metro system; and

 

   

the Mexico City sewage system.

The most important projects under construction by the Civil Construction segment during 2012 included:

 

   

the Rio de los Remedios-Ecatepec highway;

 

   

the La Yesca hydroelectric project;

 

   

the Autovia Urbana Sur second level expressway;

 

   

the SPC Sonora and SPC Jalisco projects;

 

   

the Eastern Discharge Tunnel of the Mexico City valley drainage system; and

 

   

Line 12 of the Mexico City metro system.

The Civil Construction segment’s contract awards and additions in 2012 totaled approximately Ps. 36,804 million (approximately U.S.$ 2,862 million), of which Ps. 6,467 million were awarded outside Mexico.

Autovia Urbana Sur. We were awarded a 30-year concession by the Federal District of Mexico, as part of a consortium with IDEAL, and a construction contract for the elevated toll section of the Autovia Urbana Sur expressway in Mexico City. The fixed price contract totaled Ps. 5,366 million and was completed by the end of 2012.

Eastern Discharge Tunnel. In November 2008, the Mexican National Water Commission (Comision Nacional de Aguas), the government of Mexico City and the government of the state of Mexico, acting together as a trust, awarded an ICA-led consortium a Ps. 9,526 million (excluding value-added tax) contract for the construction of the Eastern Discharge Tunnel (Tunel Emisor Oriente) in the Mexico City valley. The tunnel will increase drainage capacity in the Mexico City region and prevent flooding during the rainy season. The ICA-led consortium, Constructora Mexicana de Infraestructura Subterranea, S.A. de C.V., is comprised of Ingenieros Civiles Asociados, S.A. de C.V., Carso Infraestructura y Construccion, S.A. de C.V., Construcciones y Trituraciones, S.A. de C.V., Constructora Estrella, S.A. de C.V. and Lombardo Construcciones, S.A. de C.V. We recognize 50% of the operations from this project, or Ps. 4,727 million of the total construction contract. In 2011, we entered into an agreement increasing our share of the total contract value to Ps. 7,062 million. In 2012, we received an additional contract increase of Ps. 207 million, for a total value of Ps. 7,269. The fixed-term contract has both unit price and fixed price components, and scheduled completion of the project in the third quarter of 2014. The construction contract is under a traditional public works mechanism, in which the counterparty pays us periodically (often monthly) as our work is certified over the term of the contract and we do not finance the project. The project includes the construction of a 62-kilometer tunnel and 24 related access shafts. The tunnel will start at the border of the Federal District and Ecatepec, run along one side of Lake Zumpango, and end in El Salto, Hidalgo.

Line 12 of the Mexico City Metro. In July 2008, the government of Mexico City through its Directorate General of Transportation Works awarded an ICA-led consortium a Ps. 15,290 million (excluding value-added tax) construction contract for Line 12 of the Mexico City metro system. Our civil construction subsidiary Ingenieros Civiles Asociados, S.A. de C.V. holds a 53% interest in the consortium, while Carso Infraestructura y Construccion, S.A. de C.V., the construction partner, holds a 17% interest, and Alstom Mexicana, S.A. de C.V., the integrator for the electro-mechanical systems, holds a 30% interest. The construction contract is under a traditional public works mechanism. After signing a modification agreement with the client, we completed this fixed-price, fixed-term project in the second half of 2012. The project included the construction of a new 24.7-kilometer metro line that linked the eastern and western parts of the city, from Tlahuac to Mixcoac. The Mexico City metro system is the fifth largest urban transport system in the world, today extending more than 200 kilometers on 11 lines. With Line 12 complete, the system now extends more than 225 kilometers.

La Yesca. In September 2007, the Mexican Federal Electricity Commission awarded a U.S.$ 768 million contract for the engineering, procurement and construction of the La Yesca hydroelectric project to our subsidiary Constructora de Proyectos Hidroelectricos S.A. de C.V., or CPH. The La Yesca hydroelectric project is located on the border between the states of Jalisco and Nayarit, and is comprised of civil construction, electromechanical and ancillary work including the procurement, engineering, construction, transportation, start-up, testing and commissioning of two 375-megawatt turbogenerating units. The terms of the La Yesca contract required that we secure financing for the project costs and limit disbursements during the construction phase to 90% of the cash cost of any certified work performed. CPH arranged financing of U.S.$ 910 million for a construction line of credit and U.S.$ 80 million at commencement for a revolving line of credit for the La Yesca hydroelectric project from WestLB AG, which also structured the financing for the El Cajon hydroelectric project. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—La Yesca.” Because the terms of the construction contract provide that the Mexican Federal Electricity Commission will pay for the project upon completion and the financing obtained by CPH covers only the project’s cash

 

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costs, the project did not generate any significant cash flow to us until the fourth quarter of 2012. On November 15, 2012, upon delivery of La Yesca’s first turbine we received the first scheduled payment of U.S.$ 700 million. On December 20, 2012, upon delivery of the second turbine we received the second scheduled payment of U.S.$ 342 million. The aggregate amount received as of December 31, 2012 was US$ 1,042 million and was applied to pay project debt. Through the third quarter of 2012, we recognized revenues from the La Yesca hydroelectric project based on the percentage-of-completion method of accounting. As a result, the project generated a substantial portion of our revenues in 2011 and 2012. The La Yesca hydroelectric project generated Ps. 1,929 million of revenue, or 4% of total revenues, in 2012. At December 31, 2012, we had Ps. 1,453 million in current contract receivables (including receivables recognized using the percentage-of-completion method of accounting) and Ps. 1,004 million of current debt, principally in the revolving line of credit, in our consolidated financial statements relating to the La Yesca hydroelectric project.

Our Civil Construction segment has pursued infrastructure projects in Central and South America and the Caribbean, and we expect to continue to do so on a case-by-case 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. In 2012, 14% of our revenues in the Civil Construction segment were attributable to construction activities outside Mexico. In January 2010, a consortium of ICA with a 43% interest, Fomento de Construcciones y Contratas of Spain with a 43% interest, and Constructora Meco of Costa Rica with a 14% interest, was awarded a contract with an approximate value of U.S.$ 268 million by the Panama Canal Authority for the construction of a 3 kilometer section of the new Pacific Access Channel (PAC-4) for the Panama Canal’s new Pacific locks, running parallel to the existing channel from the Pedro Miguel to the Miraflores locks. The unit price, fixed term public works contract was awarded through an international bidding process. The PAC-4 contract is part of the overall project to widen the Panama Canal. In 2011, we were awarded contracts to (i) build the Northern Interceptor Tunnel in Medellin, Colombia, (ii) extend the Avenida Domingo Diaz and the Corredor Norte highways, both in Panama City, Panama, and (iii) expand the Atlantic petroleum terminal in Limon, Costa Rica. In 2012, we began work on the extension of the Avenida Domingo Diaz and the Corredor Norte highways.

Mining Industry

Additionally, in our Civil Construction segment we report our new mining services contracts which have a backlog of Ps. 8,166 million. These projects principally reflect the contracts held by our San Martin subsidiary in Peru.

Industrial Construction

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. In 2012, our Industrial Construction segment accounted for 13.7% of our total revenues.

Relationship with ICA-Fluor. 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 the ICA-Fluor joint venture. Since 1993, we have owned 51% of the ICA-Fluor joint venture. Partner resolutions require the approval of a simple majority of ICA-Fluor’s partners’ interests, 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 plants within Mexico, and portions of Central America and the Caribbean. This agreement will terminate upon a sale by Fluor or us of any of our partnership interests 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 that give us a competitive advantage in these markets. Beginning in 2013, we no longer proportionately consolidate the revenues of ICA-Fluor. See Note 4 to our consolidated financial statements

During 2012, 74% of the Industrial Construction segment’s revenues were derived from work performed for the public sector, as compared to 79% in 2011, primarily due to the inclusion in that year of a large private sector contract for Braskem Idesa. The segment’s most important clients are Pemex Exploracion y Produccion, Pemex Refinacion and Pemex Gas y Petroquimica Basica. In the private sector, the segment’s most important clients in 2012 were Braskem Idesa Altos Hornos de Mexico, S.A. de C.V., or AHMSA.

 

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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 backlog, as of December 31, 2012, was 19% peso-denominated and 81% dollar-denominated. 17% was unit-price, 51% was fixed price, 29% was mixed price and 3% was cost reimbursements.

Among the principal projects we have completed in the Industrial Construction segment recently are:

 

   

the Pemex Cayo Arcas offshore housing platform; and

 

   

the Pemex Reynosa V plant.

The Industrial Construction segment’s contract awards and additions in 2012 totaled approximately Ps. 7,376 million (approximately U.S.$ 574 million) and included projects such as:

 

   

the Ethylene XXI petrochemical complex;

 

   

the Ayatsil-C Platform;

 

   

the Tula refinery; and

 

   

the Tisimin-D Platform.

The most important projects under construction by the Industrial Construction segment during 2012 included:

 

   

the four Pemex clean fuels low sulfur gasoline projects in Minatitlan, Cadereyta, Madero and Salina Cruz;

 

   

the AHMSA Phase II steel mill and plate line expansion; and

 

   

a cryogenic plant at the Poza Rica gas processing complex.

In 2012, Mexico’s state-owned oil company, Pemex, awarded a contract to ICA-Fluor for the engineering of the first phase of a new refinery in Tula, Hidalgo. In 2012 we proportionally consolidated the revenues from the U.S.$ 135 million contract as with all of ICA-Fluor’s contracts.

In June 2012, ICA-Flour signed a contract with Pemex Exploration and Production for the construction of an offshore production platform for the Ku-Maloob-Zaap field in the Gulf of Mexico. ICA-Flour and its subsidiary, Industrial Del Hierro, will be responsible for the procurement, construction, testing, and load out of the Ayatsil-C platform. The Ayatsil-C platform is 132 meters deep and weighs 11,832 tons. It is the first structure of this size to be installed by Pemex, and the project is expected to be completed by the end of 2013. The contract has a total value of U.S.$ 95 million.

ICA-Flour was also part of a joint venture, with Odebrecht Ingenieria y Construccion de Mexico, S. de R.L. de C.V. and Technip Italy S.p.A., which was awarded a multi-billion dollar engineering, procurement and construction contract by Braskem Idesa on October 4, 2012. The joint venture team will design and build the new petrochemical complex, Ethelyne XXI, in the state of Veracruz, which will include a 1,050 million ton-per-year ethylene cracker and two high density polyethylene plants. The joint venture project team will utilize several operating centers around the world to execute the project.

Concessions

Our Concessions segment focuses on the construction, development, maintenance and operation of long-term concessions of tollroads, tunnels, social infrastructure and water projects and accounted for 9.3% of our total revenues in 2012. The construction work we perform on our concessions is included in our Civil Construction segment. During 2012, we participated in five concessioned highways operating in whole or in part and one operating concessioned tunnel (the Acapulco tunnel) that we consolidate, and in the management and operation of a water treatment plant in Ciudad Acuña and other water supply systems, including the Aqueduct II water supply system as well as the operation of certain non-penitentiary services related to our two SPC projects.

Contracting Practices

Mexican state and municipal governments and the governments of certain foreign countries award concessions for the construction, maintenance and operation of infrastructure facilities. The Mexican government actively pursues a policy of granting concessions to private parties for the design, construction, financing, maintenance and operation of highways, prisons, bridges and tunnels 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. A long-term concession is a license of specified duration (typically between 20 and 40 years), granted by a federal, state or municipal government to finance, build, establish, operate and maintain a public means of communication or transportation.

 

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Our return on any investment in a concession is based on the duration of the concession, in addition to the amount of toll revenues collected or government payments based on operation volume, operation and maintenance costs, debt service costs and other factors. Recovery of our investment in highway concessions is typically accomplished through the collection of toll tariffs or, if under the PPP contract structure, a fixed payment for highway availability (together with a smaller shadow tariff based on traffic volume), or a combination of the two methods. Our return on investment in our water treatment concessions is generally based on the volume of water supplied or treated. Revenues from our SPC projects (the federal detention centers in Sonora and Jalisco) are based on fees paid by the Mexican federal government for their operation and maintenance.

To finance the obligations of our projects, we typically provide a portion of the equity and the rest is arranged through third party financing in the form of loans and debt securities. Recourse on the indebtedness is typically limited to the subsidiary engaged in the project. Our investment of equity 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 or through direct capital contributions. Depending on the requirements of each specific infrastructure concession 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.

Highway and Tunnel Concessions

The following table sets forth certain information as of December 31, 2012, regarding the nine highway and tunnel concessions in which we currently participate, either through subsidiaries or affiliates. As of December 31, 2012, we had five highway and tunnel concessions in operation.

 

Concession (highway and tunnel)

   Kilometers      Date of
Concession
     Concession
Term
(Years)
     % Ownership of
Concessionaire
     % Ownership of
Construction
     Concessionaire’s
Net Investment
in Concession
(Millions of
Mexican pesos)(2)
 

The Kantunil-Cancun Highway(1)(2)

     296         1990         30         100         100         2,572   

Acapulco tunnel(1)(2)

     2.9         1994         40         100         100         825   

Nuevo Necaxa-Tihuatlan Highway(3)

     85         2007         30         50         60         3,497   

Rio Verde-Ciudad Valles Highway(4)

     113.2         2007         20         100         100         4,545   

RCO first package of tollroads(1)(4)

     725         2007         30         18.7         100         4,351   

The La Piedad Bypass(1)(2)

     21         2009         30         100         100         2,439   

Mitla-Tehuantepec highway(2)

     169         2010         20         60         100         205   

Autovia Urbana Sur(1)(4)

     15.9         2010         30         30         100         858   

Barranca Larga-Ventanilla(2)

     104         2012         27         100         100         570   

 

(1) Represents each concessionaire’s investment in the applicable concession, net of depreciation and revaluation of assets for inflation through 2007, except for RCO, in which it represents net investment in equity.
(2) Concession in operation, including the extension, if any, of the tollroad.
(3) Concession fully consolidated in our financial statements.
(4) Concession proportionally consolidated in our financial statements in 2012. Proportionate consolidation for certain of our investments has been eliminated beginning in 2013, based on changes in financial reporting standards that became effective on January 1, 2013. These investments are now accounted for using the equity method. See Note 4 to our consolidated financial statements.
(5) Concession accounted for using the equity method in our financial statements.

Acapulco Tunnel. In 1994, the government of the state of Guerrero granted our subsidiary Tuneles Concesionados de Acapulco, S.A. de C.V., or TUCA, a 25-year concession for the construction, operation and maintenance of a 2.9-kilometer tunnel connecting Acapulco and Las Cruces. The concession term started in June 1994. On November 25, 2002, the Congress of the State Government of Guerrero approved the extension of the concession term by 15 years because the actual volume of

 

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usage was lower than the amount foreseen by the terms of the concession agreement. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—Acapulco Tunnel” and Note 12 to our audited consolidated financial statements.

Nuevo Necaxa-Tihuatlan Highway. In June 2007, the Ministry of Communications and Transportation awarded us a 30-year concession for the construction, operation, maintenance and preservation of the Nuevo Necaxa—Tihuatlan highway. The 85-kilometer highway is located in the states of Puebla and Veracruz. The 30-year concession, with a total investment of approximately U.S.$ 631 million, includes: (i) construction, operation, maintenance, and preservation of the 36.6 kilometer Nuevo Necaxa—Avila Camacho segment; (ii) operation, maintenance, and preservation of the 48.1 kilometer Avila Camacho—Tihuatlan segment; and (iii) a long-term service contract to sustain the capacity of the highway for the Nuevo Necaxa—Avila Camacho segment, in accordance with the exclusive rights provided by the concession. This is the final tranche to complete the highway that will connect Mexico City with the port of Tuxpan in Veracruz. In June 2008, we entered into a financing agreement in the amount of Ps. 6,061 million to finance the construction of this project. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—Nuevo Necaxa—Tihuatlan.”

The Rio Verde-Ciudad Valles Highway. In July 2007, the Ministry of Communications and Transportation awarded the 20-year concession for a 113.2-kilometer highway between Rio Verde and Ciudad Valles in the state of San Luis Potosi to a consortium made up of our subsidiaries. The estimated total investment will be approximately U.S.$ 286 million. The scope of the concession includes: (i) the operation, conservation, maintenance, modernization, and widening of a 36.6 kilometer tranche from Rio Verde—Rayon; (ii) the construction, operation, conservation, and maintenance of an 68.6 kilometer tranche from Rayon—La Pitahaya; and (iii) the operation, conservation, maintenance, modernization, and widening of an 8.0 kilometer tranche from La Pitahaya—Ciudad Valles. This concession includes the exclusive right for the 20-year service contract with the Mexican federal government, acting through the Ministry of Communications and Transportation. On September 19, 2008, we procured the financing for this project in the amount of Ps. 2,550 million. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—Rio Verde-Ciudad Valles Highway.”

The First FARAC Package of Highways (RCO). On October 3, 2007, our affiliate RCO, of which we own 18.7% as of December 31, 2011, paid the Mexican government Ps. 44,051 million for the concession to operate the first package of FARAC tollroads, which was awarded on August 6, 2007. RCO’s payment was financed by long-term bank loans incurred by RCO and capital contributed by RCO’s owners. RCO assumed responsibility for construction, operation, conservation, and maintenance of four tollroads through 2037. The Maravatio—Zapotlanejo, Guadalajara—Zapotlanejo, Zapotlanejo—Lagos de Moreno, and Leon—Lagos—Aguascalientes tollroads have a total length of 558 kilometers in the states of Michoacan, Jalisco, Guanajuato and Aguascalientes. The concession agreement also called for the consortium to make investments of up to Ps. 1.5 billion to expand the toll roads through 2010. In October 2009, RCO placed Ps. 6,550 million in equity-linked structured notes with Mexican institutional investors on the Mexican Stock Exchange. RCO used the net proceeds of the capital increase primarily to pay down debt. After the transaction (including our purchase of additional Series A shares in RCO at the same price per share as the Series B shares underlying the equity-linked structured notes), we owned 13.6% of RCO. On September 23, 2011, we announced that we had sold to RCO 100% of our shares in COVIQSA and CONIPSA (the concessionaires of the Queretaro-Irapuato and Irapuato-La Piedad highways, respectively), in exchange for consideration in cash and, principally, additional shares in RCO, which increased our ownership of RCO to 18.7%. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources — Indebtedness—RCO.” We record our investment in RCO as a long-term investment in unconsolidated affiliates. RCO’s debt is not consolidated and our share in the income of RCO is recorded in the line item “share of income in unconsolidated affiliates.”

We are entitled to appoint two members of RCO’s ten-voting member board. Goldman Sachs Infrastructure Advisors 2006 and Goldman Sachs Global Infrastructure Partners, collectively GSIP, appoint three members, RCO appoints one member, and there are four independent members. Most decisions by RCO’s board are taken by majority vote, although certain decisions, including hiring key management and entering into agreements with the shareholders, may only be taken after approval by the majority plus one of the voting members and certain other decisions, including calls for additional investments and entering into, modifying or terminating any arrangement in excess of U.S.$ 20 million, may only be taken after approval by 90% of the voting members.

In September 2012, RCO placed Ps. 8,215 million in long term notes, Ps. 2,841 million of which matures in 2017 and Ps. 5,374 million (in UDI-denominated notes) of which matures in 2032. The net proceeds were used to refinance RCO indebtedness.

 

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The Kantunil-Cancun Highway (Mayab Consortium). On March 12, 2008, we acquired all the equity of the Mayab Consortium, which holds the concession for the Kantunil-Cancun tollroad. We paid Ps. 912 million to acquire the Mayab Consortium, which holds the concession to construct, operate, and maintain the 241.5-kilometer highway that connects the cities of Kantunil and Cancun in the states of Yucatan and Quintana Roo through December 2020. In August 2011, we signed an amendment to our concession agreement with the Ministry of Communications and Transportation to construct an extension of the tollroad. The amendment includes the construction, operation, conservation and maintenance of a 54-kilometer expansion of the Kantunil-Cancun highway to Playa del Carmen and extends the term of the concession to 2050. The expansion of the highway will require an estimated investment of approximately Ps. 1,900 million. We consolidate the investment in our consolidated financial statements, including long term debt that, as of December 31, 2012, was equivalent to Ps. 4,536 million. This long-term debt matures in 2019 and 2020, and are expected to be repaid from toll revenues generated by the concession. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—The Kantunil-Cancun Highway (Mayab Consortium).”

The La Piedad Bypass. On March 24, 2009, through our wholly-owned subsidiary Libramiento ICA La Piedad, S.A. de C.V., we entered into a thirty-year concession for (i) the construction, operation, conservation and maintenance of the 21.38-kilometer La Piedad Bypass, to alleviate congestion caused by long-haul traffic between the Bajio region and western Mexico, and (ii) the modernization of 38.8 kilometers of the toll-free Federal Highway 110 in the states of Guanajuato and Michoacan and 7.32 kilometers of Highway 90.

The Mitla-Tehuantepec Highway. On June 17, 2010, through our wholly-owned subsidiaries Caminos y Carreteras del Mayab, S.A.P.I. de CV, and Controladora de Operaciones de Infraestructura, S.A. de C.V., or CONOISA, we entered into a twenty-year PPP concession for the construction, operation and maintenance of the 169-kilometer Mitla-Tehuantepec federal highway in Oaxaca. The road includes three segments: Mitla-Entronque Tehuantepec II, Mitla-Santa Maria Albarradas and Lachiguiri-Entronque Tehuantepec II. The construction work is expected to take 40 months. The highway will link the city of Oaxaca with the Isthmus of Tehuantepec, increasing the connectivity of the industrial port of Salina Cruz with central Oaxaca. The modernized highway is expected to promote the economic development of the region and the communities along its route. We began the construction of this project in 2012. In January 2012, we completed the transfer of 40% of this concession to IDEAL and now hold 60%.

Autovia Urbana Sur. We were awarded by Mexico City, as part of a consortium with IDEAL, a 30-year design, construction, maintenance and operating concession for the elevated toll section of the Autovia Urbana Sur expressway in Mexico City. Recovery of our investment is expected through the collection of tolls.

Barranca Larga-Ventanilla Highway. On April 16, 2012, the Ministry of Communications and Transportation awarded us a 30-year concession for the construction, operation and maintenance of the 104-kilometer Barranca Larga-Ventanilla tollroad in the state of Oaxaca. The construction work is expected to take 24 months and was included in our backlog as of the second quarter of 2012. We entered into long term financing for the project on June 15, 2012.

Sonora Highway. On May 15, 2012, we were awarded a seven-year concession from the Ministry of Communications and Transportation to upgrade, maintain and conserve services of 797.4 kilometers of federal highways in the state of Sonora. The package of highways includes the roads that link the state’s main cities: Hermosillo, Nogales and Puerto Peñasco.

Palmillas-Apaseo El Grande Tollroad. We were awarded a 30-year concession for the Palmillas-Apaseo El Grande tollroad by the Ministry of Communications and Transportation in November 2012. The 86-kilometer, 4-lane, high specification tollroad in the states of Queretaro and Guanajuato will create a new link between the Mexico City metropolitan region, the Central Mexican region and the Northern Mexican region. The concession includes nine interchanges, 29 vehicular overpasses and underpasses and calls for the construction of 15 major bridges.

Acapulco Scenic Bypass. In November 2012, the State of Guerrero awarded us with a 30-year concession for a toll tunnel and highway in Acapulco. The project includes a 3.3-kilometer tunnel from the Brisamar interchange to Cayao – Puerto Marques and a 4.7-kilometer highway from the tunnel entrance to the Zona Diamante section of Acapulco.

Other Long-Term Investments

 

Long-term contract

  

Kilometers/
Volume

    

Date of
Concession

    

Concession
Term
(Years)

    

% Ownership of
Concessionaire

    

% Ownership of
Construction

    

Concessionaire’s
Net Investment
in Concession
(Millions of
Mexican pesos)

 

Rio de los Remedios(1)

     25.5 km         2008         5 (Renewable)         100         100           

SPC Projects

     N/A         2010         22         100         100         8,890   

 

(1) Concession fully consolidated in our financial statements. In May 2007, the contract was amended and restated. In the third quarter of 2011, the contract was amended to increase the value of the contract for the construction of the highway.

 

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Rio de los Remedios—Ecatepec. We participate in the Rio de los Remedios—Ecatepec project with a 100% interest in ANESA (formerly known as Viabilis Infraestructura S.A.P.I. de C.V., or Viabilis). In 2008, we began participating in this project with a 50% interest in Viabilis, the contractor for the construction and financing of public works. In June 2009, we obtained a controlling interest in Viabilis by purchase one additional share above our existing 50% interest, allowing us an additional seat on the board of directors of Viabilis. As of such date, we consolidate ANESA. In May 2012, we completed the acquisition of the 50% interest we did not own in Viabilis, and as a result we now wholly own the company and changed its name to ANESA. The Ps. 6,568 million project relates to isolating a drainage canal and building a 25.5-kilometer toll highway in the Mexico City and state of Mexico metropolitan areas. The project calls for construction in three phases, with Phase 1 completed in July 2009, Phase 2 completed in March 2013, and Phase 3 is estimated to be completed in 2014. ANESA was awarded the construction contract for the project on November 15, 2004 by the System of Highways, Airports, Related and Auxiliary Services of the government of the state of Mexico. The contract was amended and restated in May 2007. In June 2008, we obtained bridge loan financing for the project in the amount of U.S.$ 40 million structured by the Ahorro Corporacion of Spain with Caja de Ahorros Municipal de Burgos as agent for various lenders. We have repaid the bridge loan and subsequently became a lender to the project, and in February 2010 we entered into a long term financing agreement in the amount of Ps. 3,000 million with Banobras development bank.

SPC Projects. In 2011, we entered into two agreements to build and operate over a 22-year term two federal penitentiaries for a total investment of Ps. 8,890 million. Construction for the projects was completed in 2012 and the projects are now operational. The infrastructure operations relate to non-penitentiary services.

Port Concessions

Lázaro Cárdenas Port Terminal. In August 2012, our affiliate APM Terminals Lazaro Cardenas, S.A. de C.V., or APMT-Lazaro Cardenas, of which we own 5%, signed a thirty-year agreement to design, finance, construct, operate and maintain the new “TEC II” container terminal in Lazaro Cardenas port, located on Mexico’s Pacific coast. There will be three separate stages of investment and construction. Phase I is expected to be completed in 2015 and is expected to require an investment of approximately U.S.$ 300 million by APMT-Lazaro Cardenas. We estimate that the total investment for all three stages by APMT-Lazaro Cardenas will be U.S.$ 900 million. ICA is expected to perform 100% of the construction of Phase I.

Water Distribution and Water Treatment Concessions

During 2012, we participated in one operating concessioned water treatment plant in Ciudad Acuña as well two additional water treatment plants currently under construction, and in one water supply system in operation and in one additional water supply system currently under construction. The following table sets forth certain information as of December 31, 2012, regarding the water treatment plant and water supply system concessions in which we currently participate, either through subsidiaries or affiliates:

 

Concession

   Capacity
(m3mm)
     Date of
Concession
     Concession
Term
(Years)
     % Ownership of
Concessionaire(1)
     % of
Construction Work
     Concessionaire’s
Net Investment
in Concession
(Millions of
Mexican pesos)
 

Ciudad Acuña Water Treatment Plant(2)(3)

     0.5         1998         22         100         100         239   

Aqueducto II water supply
system(2)(4)

     1.5         2007         20         42         50         980   

El Realito water supply system(4)

     1.0         2009         25         51         51         499   

Agua Prieta water treatment plant(3)

     8.5         2009         20         50         50         1,124   

Atotonilco water treatment plant(5)

     42         2010         25         10         25         —    

 

(1) Does not include the Mexican federal or local governments’ non-recoverable grants.
(2) Concession in operation during 2012.
(3) Concession fully consolidated in our financial statements.
(4) Concession proportionally consolidated in our financial statements in 2012. Proportionate consolidation for certain of our investments have been eliminated beginning in 2013, based on changes in financial reporting standards that became effective on January 1, 2013. These investments are now accounted for using the equity method . See Note 4 to our consolidated financial statements.
(5) Concession accounted for using the equity method in our financial statements.

 

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Ciudad Acuña Water Treatment Plant. 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’s equipment has been upgraded since that time, allowing the plant to operate more efficiently, lowering costs, and increasing its processing capacity to 500 liters per second (lps). During 2012, the concessionaire’s revenues were sufficient to cover its operating expenses. The indebtedness related to this project was repaid in full in September 2008. On August 17, 2009, we entered into an agreement under state law, which has allowed us to simplify the tariff structure.

Aqueduct II Water Supply. In May 2007, a consortium we lead was granted a 20-year concession by the State Water Commission of Queretaro for the construction, operation, and maintenance of the Aqueduct II water supply and purification system in Queretaro state. The Aqueduct II brings water 108 kilometers from the Moctezuma River to the city of Queretaro. The required investment of Ps. 2,854 million was financed by Banco Santander with HSBC and Banorte, among others, on October 5, 2007 in the amount of Ps. 1,700 million for a 17-year period. Additionally, the National Fund for Infrastructure is contributing Ps. 872 million directly to the project. The construction of this project began in 2007. We initiated operations of the project in February 2011. The concessionaire Suministro de Agua de Queretaro, S.A. de C.V., or SAQSA, is made up of the following shareholders: ICA, as consortium leader (primarily through our subsidiary CONOISA) with 37%; Servicios de Agua Trident, S.A. de C.V., a subsidiary of Mitsui Corp with 26%; Fomento de Construcciones y Contratas (including two additional affiliates) with 26%; and PMA Mexico with 11%. Including our interest in PMA Mexico, which is our affiliate, our direct and indirect economic interest in SAQSA is 42.39%. We began proportionally consolidating this project in 2008, and began accounting for this investment using the equity method beginning in 2013. See Note 2 to our consolidated financial statements.

El Realito Aqueduct. In 2009, a consortium we lead signed a 25-year service contract with the State Water Commission of San Luis Potosi to build, operate and maintain the El Realito aqueduct water supply and purification system. In March 2011, our subsidiary Aquos el Realito S.A. de C.V. entered into a 18-year term financing agreement for the construction of the El Realito Aqueduct project, to which it holds a long-term service agreement, in an amount up to Ps. 1,319 million. The consortium is comprised of our subsidiary Controladora de Operaciones de Infraestructura, S.A. de C.V., or CONOISA, as consortium leader, with 51% and Fomento de Construcciones y Contratas, through a subsidiary, with 49%. We proportionally consolidate 51% of the construction performed by this consortium in 2012 and will account for this investment using the equity method in 2013. See Note 4 to our consolidated financial statements.

Agua Prieta Water Treatment Plant. In 2009, a consortium we lead was granted a 20-year contract with the Jalisco State Water Commission for the construction and operation of the Agua Prieta wastewater treatment plant. The Ps. 2,211 million (as of December 31, 2012) contract is a fixed price, fixed term contract with a 33-month term for construction and a subsequent 207-month term for operation. We will earn a portion of the total contract price based on our construction work, which will be set forth in a construction contract at a later date. We expect to finance the project with contributions from the Mexican federal government’s National Fund for Infrastructure, equity contributions from the consortium and commercial bank debt. The consortium is made of the following participants: ICA, as consortium leader, with 50%, ATLATEC, S.A. de C.V. with 34% and Servicios de Agua Trident S.A. de C.V. with 16%.

Atotonilco Water Treatment Plant. A consortium of which our subsidiary CONOISA holds 10.2% was awarded, through an international bidding process, the concession for the construction and operation of the Atotonilco water treatment plant in Tula, Hidalgo by the National Water Commission, or Conagua. On January 7, 2010, the consortium entered into a definitive contract with Conagua. The consortium will be responsible for the design, construction, electromechanical equipment and testing, as well as the operation, conservation and maintenance of the water treatment plant including electricity cogeneration and the removal and final disposition of all waste and biosolids that are produced, over the 25-year term of the agreement. Of the Ps. 9.3 billion total contract value, we expect to record approximately Ps. 1,743 million in construction backlog related to the project. The contract is a fixed price, fixed term agreement. The Atotonilco plant is expected to be the largest of its kind in Mexico and one of the largest in the world, with a treatment capacity of up to 42 cubic meters of wastewater per second. The plant will be located at the outlet of the Eastern Discharge Tunnel, which we are also building. The consortium is comprised of Promotora del Desarrollo de America Latina, S.A. de C.V., a subsidiary of Grupo Carso, as leader with 40.8%, ACCIONA Agua S.A. with 24.26%, Atlatec, S.A. de C.V. (a subsidiary of Mitsui & Co., Ltd.) with 24.26%, our subsidiary CONOISA with 10.2% and other minority investors. The resources for the investment will be provided by the National Fund for Infrastructure for Ps. 4.6 billion, representing 49% of the equity capital of the consortium, and commercial bank debt.

 

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PMA Mexico. We hold 49% of the shares of the environmental services company Proactiva Medio Ambiente Mexico, S.A. de C.V., or PMA Mexico. PMA Mexico operates municipal potable water treatment and supply, sewage, waste water treatment, sanitary landfills, solid waste management and hazardous waste management systems through service contracts and concessions. This company was established as a 50%-50% joint venture with Proactiva Medio Ambiente. In 2006, we sold all but 10% of our interest in the company for Ps. 319 million (U.S.$ 27 million) and subsequently repurchased 39% from our partner in 2007. Proactiva Medio Ambiente holds the other 51% of the company.

Airports

Our Airports segment accounted for 6.5% of our total revenues.

As of December 31, 2012, we controlled an aggregate of 234,502,700 shares of our airport subsidiary GACN, representing 58.63% of GACN’s capital stock. Our investment in GACN was comprised of 167,702,700 series B shares that we owned directly through our wholly-owned subsidiary Aeroinvest, and 66,800,000 series B and BB shares that we controlled through our ownership of 74.5% of the capital stock of SETA, which BB shares in turn control GACN. The remaining 25.5% of SETA was owned by Aeroports de Paris Management, or ADPM. The remaining shareholders in GACN held 41.2% of its outstanding capital stock and 0.2% of the shares are held in GACN’s treasury. GACN is listed on the Mexican Stock Exchange and the Nasdaq.

Aeroinvest and ADPM have agreed that:

 

   

Aeroinvest will select two members of GACN’s audit committee; and

 

   

Aeroinvest and ADPM will jointly select at least one member of GACN’s nominations committee and corporate practices committee.

The consortium agreement also requires the unanimous vote of Aeroinvest and ADPM to approve: (i) the pledging or creation of a security interest in any of GACN’s shares held by SETA or the shares issued by SETA; (ii) any amendments to SETA’s bylaws or the SETA shareholders’ agreement; (iii) a merger, split, dissolution or liquidation; (iv) the amendment or termination of GACN’s bylaws or the participation agreement, technical assistance agreement, and technology transfer agreement entered into at the time of GACN’s privatization; (v) changes in GACN’s capital structure; (vi) the conversion of GACN’s Series BB shares into Series B shares; and (vii) any sale or transfer of shares of SETA.

Under the consortium agreement, transfers by either Aeroinvest or ADPM of its shares in SETA to an unaffiliated third party are subject to limited rights of first refusal in favor of the non-transferring shareholder, and such transfers by Aeroinvest are subject, under certain conditions, to tag-along rights in favor of ADPM. In addition, the consortium agreement includes put and call options in respect of shares of SETA held by Aeroinvest, whereby, from June 14, 2009 through the later of June 14, 2015 and six months following the termination of the technical assistance agreement, under certain conditions,

 

   

ADPM may require Aeroinvest and certain of its affiliates to purchase a portion of shares of SETA held by ADPM, which Aeroinvest has agreed to secure through a pledge (prenda bursatil) approximately 4% of the outstanding capital stock of GACN; and

 

   

in the event of the parties’ inability to resolve definitively a matter to be decided by the board of directors or shareholders of SETA, Aeroinvest may require ADPM to sell to Aeroinvest a portion of shares of SETA held by ADPM.

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 44% of GACN’s revenues in 2012 and 46% in 2011. The airports serve a major metropolitan area (Monterrey), three tourist destinations (Acapulco, Mazatlan and Zihuatanejo), two border cities (Ciudad Juarez and Reynosa) and seven regional centers (Chihuahua, Culiacan, Durango, San Luis Potosi, Tampico, Torreon 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.

In October 2008, GACN acquired 90% of the shares of Consorcio Grupo Hotelero T2, S.A. de C.V., which has the rights to develop and operate a 287-room hotel and approximately 5,000 square meters of commercial space inside the new Terminal 2 of the Mexico City International Airport under a 20-year lease agreement with the Mexico City International Airport. NH Hoteles, S.A. de C.V., a Spanish company, owns the other 10%. As of December 31, 2012, total revenues of the hotel amounted to Ps. 158 million, annual average occupancy decreased to 79.4% from 82.8% in 2011. In 2012, the annual average rate per room was Ps. 1,173.

 

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The substantial majority of the Airports segment’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 67.8% of GACN’s total revenues in 2012 were earned from aeronautical (tariff-regulated) services such as the provision of aircraft parking, passenger walkways and airport security services. Changes in revenues from aeronautical services are principally driven by the passenger and cargo volume at the airports. All of our 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. In December 2010, the Ministry of Communications and Transportation approved the master development programs for each of our subsidiary concession holders for the 2011 to 2015 period. These programs will be in effect from January 1, 2011 until December 31, 2015.

The Airports segment also derives revenues 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.

In August 2010, Grupo Mexicana indefinitely suspended operations of three airlines (Mexicana Airlines, MexicanaClick and MexicanaLink). Grupo Mexicana and its affiliates accounted for 12.2% of GACN’s total revenues during the first six months of 2010 and 16.6% of GACN’s total passenger traffic during the same period.

The following table provides summary data for each of the airports for the year ended December 31, 2012:

 

     Year Ended December 31, 2012  
     Terminal
Passengers
     Revenues(1)      Revenues Per
Terminal
Passenger(2)
 

Airport

   (Number in
millions)
     %      (Millions of
pesos)
     %      (Pesos)  

Metropolitan area:

              

Monterrey International Airport

     6.1         48.5         1,282.1         48.5         210.0   

Tourist destinations:

              

Acapulco International Airport

     0.5         4.3         118.2         4.5         216.1   

Mazatlan International Airport

     0.7         5.3         157.0         5.9         234.5   

Zihuatanejo International Airport

     0.5         3.6         107.0         4.1         233.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total tourist destinations

     1.7         13.3         382.2         14.5         228.3   

Regional cities:

              

Chihuahua International Airport

     0.9         6.8         166.4         6.3         194.6   

Culiacan International Airport

     1.2         9.3         220.9         8.4         189.1   

Durango International Airport

     0.2         1.9         51.8         2.0         214.0   

San Luis Potosi International Airport

     0.3         2.2         77.1         2.9         284.5   

Tampico International Airport

     0.6         4.7         120.2         4.6         202.1   

Torreon International Airport

     0.4         3.3         90.5         3.4         218.1   

Zacatecas International Airport

     0.3         2.1         57.9         2.2         218.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total regional destinations

     3.8         30.3         784.8         29.7         205.9   

Border cities:

              

Ciudad Juarez International Airport

     0.7         5.6         131.0         5.0         187.3   

Reynosa International Airport

     0.3         2.4         61.9         2.3         204.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total border city destinations

     1.0         8.0         192.9         7.3         192.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

     12.6         100         2,642.0         100         209.8   

 

(1) Does not include eliminations of transactions among GACN’s subsidiaries or revenues from construction services.
(2) Revenues per terminal passenger are calculated by dividing the total revenues for each airport by the number of terminal passengers for each airport. The result has been rounded to the decimal.

 

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Competition

The Acapulco, Mazatlan and Zihuatanejo International Airports are substantially dependent on tourists. These airports face competition from competing tourist destinations. We believe that the main competitors to these airports are those airports serving other vacation destinations in Mexico, such as Los Cabos, Cancun and Puerto Vallarta, and abroad, such as Puerto Rico, Florida, Cuba, Jamaica, the Dominican Republic, other Caribbean islands and Central America.

In the future, we may face competition from Aeropuerto del Norte, an airport near Monterrey operated by a third party pursuant to a concession. Historically, Aeropuerto del Norte has been used solely for general aviation operations. The state of Nuevo Leon has requested in the past that the Ministry of Communications and Transportation amend Aeropuerto del Norte’s concession to allow it to serve commercial aviation operations. To date, the Ministry of Communications and Transportation has not amended Aeropuerto del Norte’s concession. However, there can be no assurance that the Ministry of Communications and Transportation will not authorize such amendment and that commercial aviation flights will not operate from Aeropuerto del Norte in the future.

Excluding our airports servicing tourist destinations, our airports currently do not face significant competition.

Housing

In 2012, our Housing segment accounted for 3% of our total revenues. Our Housing segment participated during 2012 in all stages of the housing industry, performing and procuring architectural and engineering design, facilitating buyer financing and constructing and marketing homes. We subcontracted some construction services, such as urbanization.

The principal raw materials we require for our Housing operations are cement, steel, construction aggregates, doors, windows and other housing fixtures.

In 2010, we expanded our operations in the Housing segment by increasing our stake in Los Portales, a real estate development company in Peru, from 18% to 50%, and we participated in several new housing development projects in Mexico, including a joint venture with Prudential Investment Management, Inc. to develop social interest housing with Prudential Real Estate Investors, S. de R.L. de C.V. During 2012, 2011 and 2010 we sold 6,677, 6,797 and 7,116 homes, respectively.

Additionally, we continue to develop our vertical residential property on Reforma Avenue in Mexico City.

New low income housing construction in Mexico had increased steadily after the year 2000 due to several governmental initiatives that improved the conditions for both developers and prospective buyers of housing. In addition, the incorporation of the Mexican Federal Mortgage Corporation (Sociedad Hipotecaria Federal) made it easier for people to finance purchases and construction of homes in Mexico. Nevertheless, the number of mortgage credits granted under these initiatives decreased to approximately 97,298 housing units in 2012 from 105,000 housing units in 2011, as the credit crisis and elevated safety concerns, particularly in Mexico’s northern border cities, have recently had a significant negative impact on development in the low income housing market.

The Housing segment competed primarily with large Mexican public housing developers such as Corporacion GEO, S.A.B. de C.V., Urbi Desarrollos Urbanos, S.A.B. de C.V., Desarroladora Homex, S.A.B. de C.V., Consorcio Ara S.A.B. de C.V., and Sare Holding, S.A.B. de C.V., as well as regional competitors.

On December 3, 2012, we announced that we signed an agreement with Javer for Javer to acquire the assets and operating liabilities related to 20 affordable housing development projects being developed through our ViveICA subsidiary. We expect to receive newly issued shares of stock representing approximately 23% ownership stake in Javer, as well as a Ps. 600 million cash payment to repay bank debt related to the assets and the assumption by Javer of Ps. 400 million in accounts payable. ICA will become Javer’s third largest shareholder, with two board seats. The transaction is expected to close during the second quarter of 2013, subject to customary real property asset closing conditions. As of December 31, 2012, these housing assets were classified as held for sale, valued at their fair value, in our consolidated statement of financial position, and their results of operations were classified as discontinued operations presented retrospectively for 2011 and 2010 in our consolidated statements of comprehensive income.

Effective January 1, 2013, we discontinued the horizontal housing business line, because it no longer represents a significant or strategic business line of ICA. Therefore, as of January 1, 2013, the remaining operations in our Housing segment are grouped together with the Corporate and Other segment, as such operations do not qualify for separate segment reporting.

 

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Corporate and Other

Our Corporate and Other segment includes all of our real estate operations, including, as of 2013, our low-income housing operations, as well as, through our subsidiary Grupo ICA S.A. de C.V., our corporate operations. The results of operations in our Corporate and Other segment in 2012 and 2011 have not changed significantly.

Geographical Distribution of Revenues

Revenues from foreign operations accounted for approximately 12% of our revenues in 2012, 7% of our revenues in 2011 and 6% of our revenues in 2010.

The following table sets forth our revenues by geographic area for each of the years in the three-year period ended December 31, 2012.

 

    Year Ended December 31,  
    2012     2011     2010  
    (Millions of
MexicanPesos)
    (Percent
of Total)
    (Millions of
Mexica Pesos)
    (Percent
of Total)
    (Millions of
MexicaPesos)
    (Percent
of Total)
 

Mexico

    Ps. 41,810        88%        Ps. 37,736        93%        Ps. 29,931        94%   

Spain

    777        2           1,044        3        1,306        4      

Other Latin American countries and the United States

    4,956        10           1,701        4        771        2      

Inter-segment eliminations

    —          —            —          —          —          —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    Ps. 47,543        100%        Ps. 40,481        100%        Ps. 32,008        100%   

Approximately 15% of our construction backlog as of December 31, 2012 is related to projects outside Mexico (as compared to approximately 9% as of December 31, 2011) and approximately 44% of our construction backlog as of December 31, 2012 was denominated in foreign currencies (principally U.S. dollars) (as compared to approximately 21% of our backlog as of December 31, 2011).

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 past experiences with Mexican government officials and private-sector individuals. Although we are active abroad, we have sought to be more selective than in the past when bidding for international projects. See “Item 5. Operating and Financial Review and Prospects — Operating Results.”

Environmental Matters

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. The waste and water treatment plants that are operated by one of our equity investees are subject to certain waste regulations, including for bio-hazardous 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, and changes in the interpretation or enforcement of such 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

 

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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, financing institutions providing credit for projects on a case—by-case basis now and in the future could require us to comply with international environmental regulations that may be more restrictive than Mexican environmental regulations.

In projects outside of Mexico, including within the Panama Canal zone, we are also required to comply with environmental laws by applicable authorities. We believe we are in substantial compliance with environmental laws to which we are subject.

Sustainable Development

In 2011, in an effort to measure and improve our sustainability performance, we began publishing an annual Sustainability Report providing a snapshot of our operations’ economic, environmental and social impacts. Our annual report expands upon and deepens our engagement with a diverse range of stakeholders—including investors, local communities in which we operate, employees and their families, suppliers and other business partners—by explaining how we respond to their expectations and interests.

By creating and maintaining a culture of sustainability, we seek to achieve long-term business success that aligns with the interests and needs of other stakeholders. In the recent years we have sought to redouble our efforts related to our zero-tolerance policy towards corruption. We have developed an anticorruption program that involves training of our employees, testing employees about conflicts of interest, as well as specific training and follow-up in our procurement area. In January 2013, our Board of Directors approved our first Code of Ethics and Conduct for Providers, Contractors and Business Partners, which will be annexed to our Code of Ethics and Business Conduct.

C. ORGANIZATIONAL STRUCTURE

The following table sets forth our significant subsidiaries as of December 31, 2012, including the principal activity, domicile and our ownership interest:

 

Subsidiary

   Principal
Activity
   Domicile      Ownership
Interest
(%)

Constructoras ICA, S.A. de C.V.

   Construction      Mexico          100

Controladora de Empresas de Vivienda, S.A. de C.V.

   Housing      Mexico          100

Controladora de Operaciones de Infraestructura, S.A. de C.V.

   Concessions      Mexico          100

Ingenieros Civiles Asociados, S.A. de C.V.

   Heavy urban and specialized
construction
     Mexico          100

ICA—Fluor Daniel, S. de R.L. de C.V.(1)

   Industrial construction      Mexico            51

Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.

   Airport operations      Mexico       58.63(2)

Constructora de Proyectos Hidroelectricos, S.A. de C.V. /Constructora Hidroelectrica La Yesca, S.A. de C.V.

   Consortia for the construction of the
La Yesca hydroelectric project
     Mexico            99

 

(1) Proportionally consolidated.
(2) Directly and through our interest in SETA.

D. PROPERTY, PLANT AND EQUIPMENT

Approximately 93% of our assets and properties, including concessions, are located in Mexico, with the balance in Europe and other Latin American countries. At December 31, 2012, the net book value of all land (excluding real estate inventories) and buildings, machinery and equipment and concessions was approximately Ps. 44,342 million (approximately U.S.$ 3,448 million). We currently lease machinery from vendors primarily under operating leases. For information regarding property in our Housing segment, see “Item 4. Information on the Company-Business Overview-Description of Business Segments-Housing.”

 

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Our principal executive offices, which we lease, are located at Blvd. Manuel Avila Camacho 36, Col. Lomas de Chapultepec, Del. Miguel Hidalgo, 11000 Mexico City, Mexico. We own the property where our executive offices were formerly located at Mineria No. 145, 11800, Mexico City, Mexico.

We believe that all our facilities are adequate for our present needs and suitable for their intended purposes.

 

Item 4A. Unresolved Staff Comments

None.

 

Item 5. Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. Our consolidated financial statements have been prepared in accordance with IFRS. The consolidated statements of income and other comprehensive income for the years ended December 31, 2011 and 2010 have been retroactively adjusted to reflect the results of a significant portion of our affordable housing business (in our Housing segment), which we agreed to sell in December 2012, as a discontinued operation.

In 2012, we commenced accounting for our San Martin subsidiary on a fully consolidated basis, which may affect the comparability of our consolidated financial statements for the year ended December 31, 2012 to our previously published consolidated financial statements for the year ended December 31, 2011. See Note 3h to our consolidated financial statements.

Overview

We are a Mexican company principally engaged in construction, the operation of infrastructure projects under long-term concession or service agreements and homebuilding. Approximately 88% of our revenue in 2012 was generated in Mexico. 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, the contract terms relating to those projects, the volume of traffic on our highway concessions and in our airports, and conditions in the Mexican housing market, among other factors. In 2012, we had several significant projects in the mature phases of construction; however, due to an increased volume of projects with better margins in the construction phase, we experienced greater revenue and operating income compared to 2011. Nonetheless, due to the dynamic nature of project awards, this is not a predictor of future returns or trends.

The construction, infrastructure operations, and homebuilding industries, and as a result, our results of operations, are substantially influenced by political and economic conditions in Mexico. The National Infrastructure Program in Mexico, which the Mexican government announced was designed to expand Mexico’s infrastructure, accelerate Mexico’s economic growth and make the Mexican economy more internationally competitive, contemplated public and private investments totaling Ps. 951 billion from 2007 to 2012 in highways, railroads, ports, airports, telecommunications, water and sanitation, irrigation, and flood control projects. In addition, the National Infrastructure Program called for an additional Ps. 1,581 billion in energy sector investments. Mexico entered into a recession beginning in the fourth quarter of 2008, and in 2009 GDP fell by approximately 6.5%. Due to the impact of the turmoil in the global financial system and the recession in Mexico, the rate of awards of infrastructure projects in Mexico was slower in 2009 than we anticipated, particularly in the areas of energy, ports and railways. Mexico’s economy has since expanded, with GDP posting positive growth of 5.5% in 2010, 3.9% in 2011 and 3.9% in 2012. The Mexican government has also extended the time period for certain bidding processes for the awards, in part because of the need to reevaluate the corresponding projects’ feasibility in the current economic environment.

Our business strategy is to grow our construction business (composed of our Civil Construction and Industrial Construction segments in 2012) as well as to grow and diversify into construction-related activities, particularly infrastructure, which we believe offer opportunities for potentially higher growth, higher margins, and reduced volatility of operating results. Our goal is also to generate a greater portion of our consolidated revenues from our Concessions and Airports segments over the medium term. These two segments in aggregate represented 15.8% and 14.6% of our consolidated revenues in 2012 and 2011, respectively. Our infrastructure and other investments represent an actively managed portfolio of investments; some may be held to maturity and others may be divested prior to maturity, based on market developments or opportunities to redeploy capital in new projects.

 

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A. OPERATING RESULTS

Certain U.S. dollar amounts have been translated from Mexican pesos for convenience purposes at an exchange rate of Ps. 12.86 per U.S.$ 1.00, the free market exchange rate for Mexican pesos on December 31, 2012, as reported by Banamex.

Our operations are divided into the following six segments: (1) Civil Construction, (2) Industrial Construction, (3) Concessions, (4) Airports, (5) Housing, and (6) Corporate and Other.

Consolidated Results of Operations for the Three Years Ended December 31, 2012

Total Revenues

Total revenues increased 17% in 2012 from 2011. This increase was primarily due to the completion of construction of several major medium term projects, including the SPC projects and the Autovia Urbana Sur expressway. All of the business segments reported growth in total revenues, after eliminations.

Total revenues increased 26% in 2011 from 2010. This increase was primarily attributable to an increase in work volume on projects in our Civil Construction and Industrial Construction segments, which represented 84% of the consolidated revenue growth during the period of 2011, as well as an increase in the volume of projects in our Concessions segment, which represented 8% of the consolidated revenue growth during the period. All of the business segments (other than Corporate and Other) reported growth in total revenues, after eliminations.

The following table sets forth the revenues of each of our segments and divisions for each of the years in the three-year period ended December 31, 2012. See Note 37 to our consolidated financial statements.

 

     Year Ended December 31,  
     2012      2011     2010  
     (Millions of
Mexican
pesos)
    (Percentage
of Total)
     (Millions of
Mexican
pesos)
    (Percentage
of Total)
    (Millions of
Mexican
pesos)
    (Percentage
of Total)
 

Revenues:

             

Construction:

             

Civil

     Ps. 32,597        69%         Ps. 28,710        71%        Ps. 23,448        73%   

Industrial

     6,507        14%         5,210        13%        4,401        14%   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     39,104        83%         33,920        84%        27,849        87%   

Concessions

     4,408        9%         3,130        8%        2,102        6%   

Airports

     3,098        6%         2,776        7%        2,505        8%   

Housing

     1,492        3%         1,219        3%        185        1%   

Corporate and Other

                    7               33          

Eliminations

     (559     (1)%         (571     (1%     (666     (2%
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     Ps. 47,543        100%         Ps. 40,481        100%        Ps. 32,008        100%   

Gross Profit

Gross profit increased 12% to Ps. 6,823 million in 2012 compared to Ps. 6,078 million in 2011. Gross profit as a percentage of total revenue decreased to 14% compared to 15% in 2011, primarily due to the increase in cost of sales outpacing the increase in total revenues over the same period, which in turn was due principally to increased financing costs related to our financed projects in the Civil Construction, Concessions and Housing segments in the construction stage. Our greatest gross profit increases were in our Concessions and Civil Construction segments.

Gross profit increased 37% to Ps. 6,078 million in 2011 compared to Ps. 4,424 million in 2010. Gross profit as a percentage of total revenue increased to 15% in 2011 compared to 14% in 2010, primarily due to consolidated revenue growth outpacing the increase in consolidated cost of sales over the same period, representing slightly greater economies of scale. Our greatest gross profit increases were in our Concessions segment and, to a lesser extent, in our Civil Construction and Industrial Construction segments, which increases were primarily a result of higher margins on the mix of projects. In 2010, the Airports segment recorded an allowance for doubtful accounts in cost of sales of Ps. 143 million, related to the bankruptcy filing by the airlines of Grupo Mexicana.

 

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General Expenses

Selling, general and administrative expenses increased 16% to Ps. 3,602 million in 2012 compared to Ps. 3,099 million in 2011. The increase in 2012 was primarily due to a comparable growth in our total revenues at 17%. The primary factors underlying this growth in expenses are several fold, and include our recent acquisition of San Martin, a mining services construction company in Peru, which made up 16% of the overall increase in general expenses, an increase in expenses related to a ramp-up in our Panamanian operations (that is, the Corredor Norte Highway, the Avenida Domingo Diaz extension and the PAC-4 project), which made up 13% of the overall increase in general expenses, an increase in expenses related to promotion and bidding processes, which made up 11% of the overall increase in general expenses, and an increase in employee salaries and benefits, which made up 11% of the overall increase in general expenses. Such increases in expenses amounted to Ps. 257 million, representing 51% of the overall increase in general expenses. Selling, general and administrative expenses as a percentage of total revenue generally remained flat at 7.6% in 2012 compared to 7.7% in 2011.

Selling, general and administrative expenses increased 27% to Ps. 3,099 million in 2011 from Ps. 2,439 million in 2010. The increase in 2011 was primarily due to the growth in operations of the business segments, as well as from higher administration expenses, which increased in part due to our new voluntary retirement savings plan and increased participation in bidding processes in Mexico and abroad. Selling, general and administrative expenses as a percentage of total revenue remained flat at 7.7% in 2011 compared to 7.6% in 2010.

Other Income and Expenses, Net

In 2012, our net other income was Ps. 460 million, compared to Ps. 495 million in 2011, and included principally Ps. 435 million related to the revaluation of our investment property, and a Ps. 25 million gain in sales of property, plant and equipment.

In 2011, our net other income was Ps. 495 million, compared to a loss of Ps. 30 million in 2010. This increase of Ps. 525 million was principally a result of the sale of the Queretaro-Irapuato and Irapuato-La Piedad highway concessions to RCO during the third quarter of 2011.

Operating Income

The following table sets forth operating income or loss of each of our segments and divisions for each of the years in the three-year period ended December 31, 2012.

 

     Year Ended December 31  
     2012     2011     2010  
     (Millions of Mexican pesos)  

Operating Income:

      

Construction:

      

Civil

     Ps. 1,191        Ps. 1,116        Ps. 767   

Industrial

     253        356        156   
  

 

 

   

 

 

   

 

 

 

Subtotal

     1,444        1,472        923   

Airports

     1,148        917        747   

Concessions

     796        917        241   

Housing

     74        8        (8

Corporate and Other

     (9     194        (1

Eliminations

     229        (34     53   
  

 

 

   

 

 

   

 

 

 

Total

     Ps. 3,681        Ps. 3,474        Ps. 1,955   

Operating margin

     8%        9%        6%   

Operating income increased 6% in 2012 from 2011. This increase was driven primarily by Airports segment which had a 25% increase in operating income due to increased passenger traffic, which was partially offset by the lesser impact of lower operating income in Industrial Construction, which decreased by 29% compared to 2011 due to the mix of projects in execution. In 2012, the Civil Construction and Industrial Construction segments contributed 32% and 7%, respectively, of total operating income and the Concessions and Airports segments contributed 22% and 31% of operating income, respectively. The balance, after eliminations, came from the Housing and Corporate and Other segments.

Operating income increased 78% in 2011 from 2010. This increase was driven primarily by the Concessions segment’s revenue growth, the other income representing the gain on sales of the Queretaro-Irapuato and Irapuato-La Piedad PPP highways to our affiliate RCO, and the increase in operating income in Civil and Industrial Construction principally due to better margins in certain new construction projects awarded in 2011, which offset decreased operating income in our Housing segment. In 2011, the Civil Construction and Industrial Construction segments contributed 32% and 10%, respectively, of total operating income and the Concessions and Airports segments each contributed 26% of operating income. The balance, after eliminations, came from the Housing and Corporate and Other segments.

 

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Construction

Civil Construction

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, 2012.

 

     Year Ended December 31,  
     2012      2011      2010  
     (Millions of Mexican pesos)  

Revenues

     Ps. 32,597         Ps. 28,710         Ps. 23,448   

Operating income

     1,191         1,116         767   

Operating margin

     4%         4%         3%   

Revenues. The 14% increase in the Civil Construction segment’s revenues in 2012 from 2011 was principally due to the high volume and pace of work on the SPC projects, which increased by 248% for the Sonora SPC project and by 344% for the Jalisco SPC project, as well as the consolidation of San Martin (Ps. 2,024 million), our recently acquired mining sector construction company in Peru. These projects together contributed 47% to revenues in 2012.

The 22% increase in the Civil Construction segment’s revenues in 2011 from 2010 was principally due to the work performed on the Autovia Urbana Sur highway and the two SPC projects, which started construction during the year and which generated an additional Ps. 4,544 million of revenue in 2012, as well as the continued level of construction in other projects such as the Line 12 of the Mexico City Metro, the Rio de los Remedios-Ecatepec highway and La Yesca hydroelectric project. The projects that contributed the most to revenues in 2011 were Line 12 of the Mexico City metro system with Ps. 4,075 million, the Rio de los Remedios-Ecatepec highway with Ps. 3,755 million, the La Yesca hydroelectric project with Ps. 3,273 million, the Autovia Urbana Sur highway with Ps. 2,218 million, the two SPC projects jointly with Ps. 2,326 million and the Eastern Discharge Tunnel with Ps. 1,474 million.

Operating Income. Operating income for the Civil Construction segment increased by 7% in 2012 from 2011, primarily due to the increase in revenues in the segment due to the mix of projects under construction. The two SPC projects, both of which were completed in December 2012, represented 54% of this increase.

Operating income for the Civil Construction segment increased by 45% in 2011 from 2010 due to a greater increase in revenues than in operating expenses, a result of higher margins in the mix of projects under construction, and a decrease in financing costs related to the La Yesca hydroelectric project from Ps. 227 million in 2010 to Ps. 70 million in 2011 due to the prepayment of certain derivative liabilities in 2010.

Industrial Construction

The following table sets forth the revenues and operating income of our Industrial Construction segment for each of the years in the three-year period ended December 31, 2012.

 

     Year Ended December 31,  
     2012      2011      2010  
     (Millions of Mexican pesos)  

Revenues

     Ps. 6,507         Ps. 5,210         Ps. 4,401   

Operating income

     253         356         156   

Operating margin

     4%         7%         4%   

Revenues. The Industrial Construction segment’s revenues increased by 25% in 2012 from 2011. This increase primarily reflected an increase in revenues from our Salina Cruz and Minatitlan clean fuels project and from our AHMSA steel mill and plate line expansion, which together represented 63% of the increase. The projects that contributed the most to revenues in 2012 were Salina Cruz (Ps. 929 million, or 14%), Madero (Ps. 751 million, or 12%), Cadereyta (Ps. 498 million, or 8%) and Minatitlan (Ps. 611 million, or 9%) clean fuels projects for Pemex, the Poza Rica Cryogenic I project (Ps. 435 million, or 7%), and the Fenix project for AHMSA (Ps. 834 million, or 13%).

The Industrial Construction segment’s revenues increased by 18% in 2011 from 2010. This increase primarily reflected an increase in work on projects already under construction, including the Cadereyta and Madero clean fuels projects. The projects that contributed the most to revenues in 2011 were the Madero clean fuels plant for Ps. 783 million, which was an increase of Ps. 225 million from 2010, and the Cadereyta clean fuels project for Ps. 786 million, which was an increase of Ps. 342 million from 2010. The AHMSA steel mill and plate line expansion and the Poza Rica Cryogenic plant project also contributed to revenues with Ps. 664 million and Ps. 535 million, respectively.

 

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Operating Income. The Industrial Construction segment had a 29% decrease in operating income in 2012 from 2011, primarily due to a decrease of mining activity related to the El Boleo mine for Minera y Metalurgica del Boleo, S.A. de C.V., in 2012 and the completion of Package II of the Minatitlan refinery project.

The Industrial Construction segment had a 129% increase in operating income in 2011 from 2010 primarily due to an increased volume of work, higher margins in the mix of projects, including in certain contracts with private sector clients, recognition of price increases and operating efficiencies.

Construction and Mining Services and Other Backlog

The following table sets forth, at the dates indicated, our backlog of construction and mining services contracts.

 

     As of December 31,  
     2012      2012      2011      2010  
     (Millions of
U.S. dollars)
     (Millions of Mexican pesos)  

Civil Construction

   U.S. $  2,663         Ps. 34,254         Ps. 28,203         Ps. 26,844   

Industrial Construction

     621         7,984         7,115         8,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction Backlog

   U.S. $  3,284         Ps. 42,238         Ps. 35,318         Ps. 35,229   

Mining Services and Other Backlog

   U.S. $  635         Ps. 8,166         —           —     

Total construction backlog at December 31, 2012 increased compared to December 31, 2011, reaching Ps. 42,238 million primarily due to the addition of new project awards replacing other executed projects, primarily the Barranca Larga – Ventanilla project in the Civil Construction segment for Ps. 5,182 and the Ethelyne XXI project in the Industrial Construction segment for Ps. 3,493.

Total construction backlog at December 31, 2011 remained steady compared to December 31, 2010, reaching Ps. 35,318 million primarily due to additions to existing contracts and new project awards replacing other projects as they are executed.

The table below sets forth the seven projects that represented approximately 66% of backlog in the Civil Construction segment, and 54% of total construction backlog, at December 31, 2012.

 

     Amount     

Estimated Completion Date

   % of Civil and Industrial
Construction Backlog
 
   (Millions of
Mexican pesos)
             

Civil Construction Backlog

        

Mitla-Tehuantepec highway

     Ps. 5,547       Fourth quarter of 2015      13   

Barranca Larga Ventanilla highway

     5,182       Third quarter of 2014      12   

Sonora Highway

     2,801       Second quarter of 2019      7   

Avenida Domingo Diaz

     2,663       Third quarter of 2014      6   

Lazaro Cardenas TEC II Container Terminal

     2,262       Third quarter of 2014      5   

Tepic Bypass

     2,192       Second quarter of 2014      5   

Eastern Discharge Tunnel

     2,013       Second quarter of 2014      5   

In the Industrial Construction segment, backlog was Ps. 7,984 million as of December 31, 2012. The Ethelyne XXI plant accounted for Ps. 3,493 million, or 44% of industrial construction backlog and 8% of our total construction backlog, as of December 31, 2012. We expect to complete this project in the fourth quarter of 2014.

As of December 31, 2012, approximately 15% of construction backlog was attributable to construction projects outside Mexico, and public sector projects represented approximately 72% of our total backlog.

Our book and burn index (defined as the ratio of new construction contracts, plus net contract additions, to executed construction works) was 1.2 in 2012 compared to 1.0 in 2011. New contract awards and net increases to existing contracts during 2012 offset the execution of projects during the year.

Mining and Other Services Backlog

As of December 31, 2012, our backlog of long-term mining and other services contracts, which relate primarily to San Martin, our recently acquired mining construction company in Peru, totaled Ps. 8,166 million.

 

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Concessions

The following table sets forth the revenues and operating results of our Concessions segment for each year in the three-year period ended December 31, 2012.

 

     Year Ended December 31,  
     2012      2011      2010  
     (Millions of Mexican pesos)  

Revenues

     Ps. 4,408         Ps. 3,130         Ps. 2,102   

Operating Income

     796         917         241   

Operating Margin

     18%         29%         11%   

Revenues. The Concessions segment’s revenue was Ps. 4,408 million in 2012. The 41% increase in revenue over 2011 was due primarily to financing income and construction revenues, although traditionally the segment’s revenues are principally derived from the collection of tolls on toll roads, fees for the availability and use of toll-free roads, fees by volume of treated water delivered to the municipalities and the financial and construction revenues during the construction phase. In 2012 we experienced this effect due to the SPC projects and Rio de los Remedios – Ecatepec, but as the other concessions come into operation, we do not expect this effect to continue. The segment had 10 highways, five concessioned water projects, two SPC projects and one port as of December 31, 2012. Of these 18 concessions, 11 were operational at year-end, and two (the Rio de los Remedios – Ecatepec highway and the Rio Verde – Ciudad Valle) were in partial operation.

The Concessions segment’s revenue was Ps. 3,130 million in 2011. The 49% increase in revenue over 2010 was due primarily to an increase in the segment’s construction revenues for those concession projects that were in the construction phase as well as financial income, which contributed to 71% of the increase.

Operating Income. The Concessions segment reported a 13% decrease in operating income for 2012 compared to 2011, principally due to the gain on sale of the Queretaro-Irapuato and Irapuato-La Piedad PPP highways in the third quarter of 2011 for approximately Ps. 441 million, which did not recur in 2012.

The Concessions segment reported a 280% increase in operating income for 2011 compared to 2010, principally due to an increase in other income, which was the result of our sale of the Queretaro-Irapuato and Irapuato-La Piedad highway concessions to our affiliate RCO for approximately Ps. 441 million, the commencement of construction of the SPC projects and the continued operation of concessions.

Airports

The following table sets forth the revenues and operating results of our Airports segment for each year in the three-year period ended December 31, 2012.

 

     Year Ended December 31,  
     2012      2011      2010  
     (Millions of Mexican pesos)  

Revenues

     Ps. 3,098         Ps. 2,776         Ps. 2,505   

Operating Income

     1,148         917         747   

Operating Margin

     37%         33%         30%   

Revenues. The Airports segment’s revenues increased by 12% in 2012 from 2011, primarily as a result of an increase in both aeronautical and non-aeronautical revenues. The sum of aeronautical and non-aeronautical revenues in 2012 increased by 15% as compared to 2011.

Aeronautical revenues, principally from passenger charges, increased 14%. The increase in passenger charges was attributable to an increase in passenger traffic during the year.This increase in passenger charges was attributable to a 7% increase in passenger traffic from 12.0 million in 2011 to 12.8 million in 2012.

Non-aeronautical revenues increased 17%, primarily due to revenues from our checked baggage-screening service, which has been operating since March 1, 2012 and amounted to approximately Ps. 26 million in 2012, as well as revenues from hotel services, which increased by 12% to Ps. 158 million in 2012 from Ps. 142 million in 2011, car parking services, which increased by 10% to Ps. 124 million in 2012 from Ps. 113 million in 2011, the leasing of space, which increased by 15% to Ps. 59 million in 2012 from Ps. 51 million in 2011, and advertising, which increased by 9% to Ps. 82 million in 2012 from Ps. 75 million in 2011. Total terminal passenger traffic volume increased 7% in 2012 compared to 2011. Domestic terminal passenger traffic volume increased 8%, while international terminal passenger traffic volume increased 2%. The main percentage increases in total terminal passenger traffic volume (excluding transit passengers) in 2012 as compared to 2011 were at the Reynosa (with a 39.9% increase), Torreon (with a 10.0% increase), Monterrey (with a 9.0% increase) and

 

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Chihuahua (with a 9.0% increase) airports, while the Monterrey airport had the greatest absolute increase in total terminal passenger traffic volume. The main percentage decreases in total terminal passenger traffic (excluding transit passengers) in 2012 as compared to 2011 were at the Acapulco (with a 8.5% decrease) and Mazatlan (with a 7.7% decrease) airports.

The Airports segment’s revenues increased by 11% in 2011 from 2010. Aeronautical revenues, principally passenger charges, increased 13%, and non-aeronautical revenues increased 20%, with the largest increases generated by the NH Terminal 2 Hotel at the Mexico City International Airport, advertising, commercial leases (retailers, duty free and other leases) and GACN cargo fees. Total terminal passenger traffic volume increased 1.6% in 2011 compared to 2010. Domestic terminal passenger traffic volume increased 3.4%, while international terminal passenger traffic volume decreased 7.4%. The main percentage increases in total terminal passenger traffic volume (excluding transit passengers) in 2011 as compared to 2010 were at the Tampico (21.5%), San Luis Potosi (11.6%), Reynosa (9.3%) and Torreon (11.1%) airports, while the Monterrey airport had the greatest absolute increase in total terminal passenger traffic volume. The main percentage decreases in total terminal passenger traffic (excluding transit passengers) in 2011 as compared to 2010 were at the Acapulco (19.1%) and Zacatecas (7.7%) airports.

Operating Income. The Airports segment reported a 25% increase in operating income for 2012 compared to 2011, mainly as a result of the growth in revenues and heightened control of costs and expenses.

The Airports segment reported a 23% increase in operating income for 2011 compared to 2010, mainly as a result of Ps. 314 million of additional aeronautical and non-aeronautical revenues. Additionally, in 2010, we recognized an allowance for doubtful accounts for Ps. 143 million in 2010 as a result of the bankruptcy filings by the companies of Grupo Mexicana, equivalent to 100% of Grupo Mexicana accounts receivable. This provision was recorded under cost of services.

Housing

On December 3, 2012, we announced that we had entered into an agreement to sell the assets and operating liabilities related to 20 affordable housing development projects being developed by us through our ViveICA subsidiary in exchange for newly issued shares of stock representing an approximately 23% ownership interest in Javer and refinancing of Ps. 600 million of related project debt. As a result, previously reported financial data (including revenues, costs, expenses and operating income) for years prior to 2012 have been adjusted to reflect only the activity from continuing operations, which include our Los Portales real estate business in Peru and assets not included in the transaction with Javer.

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, 2012.

 

     Year Ended December 31,  
     2012      2011      2010  
            (Millions of Mexican pesos)         

Revenues

     Ps. 1,492         Ps. 1,219         Ps. 185   

Operating income

     74         8         (8

Operating margin

     5%         1%         (4%

Revenues. The Housing segment’s total revenues increased by 22% in 2012 from 2011, principally due to a 77% increase in residential unit sales by ViveICA, which represented 66% of the Housing segment’s total revenue increase.

The Housing segment’s total revenues increased by Ps. 273 million in 2011 from 2010, principally due to increased sales in our Los Portales business in Peru consisting principally of real estate and the sale of a parcel of land during the fourth quarter of 2011.

Operating Income. The Housing segment’s operating income increased by Ps. 16 million in 2012 from 2011. The increase was primarily attributable to the revaluation of investment property based on independent appraisals. See Note 14 to our consolidated financial statements.

The Housing segment’s operating income increased to Ps. 8 million in 2011 from a loss of Ps. 8 million in 2010, primarily due to the gain on sale of our housing subsidiary Geoicasa, S.A. de C.V. in 2011 in the amount of Ps. 25 million.

 

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Corporate and Other

After substantial completion of our non-core asset divestiture program, we sold substantially all of the operating assets in our Corporate and Other segment, which now encompasses the administrative operations of our holding and subholding companies, including functions that are not directly managed by our other five business segments. As a result, the Corporate and Other segment generated de minimis revenue for each year in the three-year period ended December 31, 2012.

The following table sets forth the revenues and operating income of the Corporate and Other segment for each year in the three-year period ended December 31, 2012.

 

     Year Ended December 31,  
     2012     2011      2010  
           (Millions of Mexican pesos)         

Revenues

     Ps. —        Ps. 7         Ps. 33   

Operating income

     (9     194         (1

Revenues. The Corporate and Other segment’s revenues remained flat on a year-over-year basis for the three-year period ended December 31, 2012.

Operating Income. The Corporate and Other segment’s operating income decreased to a loss of Ps. 9 million in 2012 from a gain of Ps. 194 million in 2011, which is due to intercompany transactions subsequently eliminated upon consolidation in 2011. The Corporate and Other segment’s operating income increased to Ps. 194 million in 2011 from a loss of Ps. 1 million in 2010, primarily due to an increase in non-recurring other income paid from other subsidiaries.

Financing Cost, Net

The following table sets forth the components of our net comprehensive financing costs for each year in the three-year period ended December 31, 2012.

 

     Year Ended December 31,  
     2012     2011     2010  
           (Millions of Mexican pesos)        

Interest expense

     Ps. 2,659        Ps. 1,798        Ps. 1,348   

Interest income

     (534     (286     (350

Exchange (gain) loss, net

     (1,243     1,567        (5

Loss on financial instruments

     166        381        316   
  

 

 

   

 

 

   

 

 

 

Financing cost, net(1)

     Ps. 1,048        Ps. 3,460        Ps. 1,309   

 

  (1) Does not include net financing costs of Ps. 2,239 million, Ps. 1,330 million and Ps. 997 million in 2012, 2011 and 2010, respectively, that are included in cost of sales. See Note 33 to our consolidated financial statements.

Net comprehensive financing costs in 2012 reached Ps. 1,048 million. The 70% decrease in net comprehensive financing costs in 2012 from 2011 was mainly due to exchange gains (related to the appreciation of the Mexican peso relative to the U.S. dollar) offsetting increased interest expenses, which in turn increased 48% primarily due to higher average debt levels.

Net comprehensive financing costs in 2011 reached Ps. 3,460 million. The 164% increase in net comprehensive financing costs in 2011 from 2010 was mainly due to exchange losses of Ps. 1.57 billion recorded during the second half of 2011, mainly as a result of depreciation of the Mexican peso with regard to the U.S. dollar and its effect on the valuation of our U.S.$ 500 million of our 8.9% senior notes due 2021 and to higher interest expenses.

Interest expense increased 33% in 2011 compared to 2010, primarily due to increased debt levels as a result of incurring new indebtedness and additional drawings on existing credit facilities.

Interest income increased 87% in 2012 due to an increase in average invested cash balances.

Interest income decreased 18% in 2011 due to a decrease in average invested cash balances, which in turn was caused by our increased reliance on cash to fund working capital needs.

Our total debt as of December 31, 2012 increased 3% compared to December 31, 2011, representing the net effect of contracting new indebtedness primarily for concessioned projects even as we repaid most of the indebtedness associated with the La Yesca hydroelectric project.

 

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Our total debt as of December 31, 2011 increased 56% compared to December 31, 2010, primarily as a result of an increase in the debt drawings for the construction of concession infrastructure projects, the issuance of U.S.$ 500 million of our 8.9% senior notes due 2021, and drawings on existing credit facilities for construction of the La Yesca hydroelectric project, which were permitted as a result of approved certifications for completed work on the project.

At December 31, 2012 and March 31, 2013, we had U.S.$ 1,043 million and U.S.$ 1,058 million, respectively, of debt issued or guaranteed as joint obligor or guarantor by our parent company.

At December 31, 2011 and March 31, 2012, we had U.S.$ 1,711.7 million and U.S.$ 1,738.3 million, respectively, of debt issued or guaranteed as joint obligor or guarantor by our parent company.

At December 31, 2012, 2011 and 2010, 33% and 47% and 39%, respectively, of our total debt was denominated in currencies other than Mexican pesos, principally U.S. dollars or, in the case of some debt related to projects of Rodio Kronsa, euros, and in the case of San Martin, soles. We may in the future incur additional non-peso denominated indebtedness. Declines in the value of the Mexican peso relative to such other currencies could both increase our interest costs and result in foreign exchange losses. Conversely, an increase in the value of the Mexican peso relative to such other currencies could have the opposite effect.

Share in Income and Loss of Unconsolidated Affiliated Companies

Our unconsolidated affiliates include, among others, RCO, our joint venture affiliate with GS Global Infrastructure Partners I, L.P., and PMA Mexico.

Our share of income of unconsolidated affiliated companies represented a loss of Ps. 76 million in 2012 as compared to a gain of Ps. 30 million in 2011, which primarily reflected a loss related to our RCO affiliate, which in turn was principally due to RCO’s higher financing costs in 2012 than in the prior year.

Our share of income of unconsolidated affiliated companies was a gain of Ps. 30 million in 2011 as compared to a gain of Ps. 80 million in 2010, which reflected the sale in November 2010 of our interest in Autopistas Concesionadas del Altiplano, which operated the concession of San Martin-Tlaxcala-El Molinito highway.

Tax

In December 2009, modifications were published to the Mexican Income Tax Law, or Tax Reform, and became effective on January 1, 2010. The Tax Reform requires companies to estimate an income tax, or ISR, liability on benefits received in prior years from tax consolidation of subsidiaries. Our estimated tax payable as a result of the Tax Reform is Ps. 4,901 million as of December 31, 2012.

In 2012, we recorded a consolidated net tax expense of Ps. 694 million, which included an ISR expense of Ps. 599 million and an IETU expense of Ps. 95 million. As of December 31, 2012, we had a deferred ISR asset of Ps. 7,233 million related to tax losses generated by our subsidiaries, as well as a deferred IETU asset of Ps. 200 million related to other net taxable temporary differences and Ps. 380 million related to tax credits for foreign taxes paid. Additionally, we had a deferred IETU liability of Ps. 832 million and a deferred ISR liability of Ps. 4,032. See Note 23 to our consolidated financial statements.

In 2011, we recorded a consolidated net tax benefit of Ps. 57 million, which included an ISR expense of Ps. 77 million and a IETU benefit of Ps. 134 million. As of December 31, 2011, we had a deferred ISR asset of Ps. 3,371 million related to tax losses generated by our subsidiaries, as well as a net deferred ISR liability of Ps. 1,398 million related to other net taxable temporary differences and a net IETU liability of Ps. 382 million. See Note 23 to our consolidated financial statements.

In 2010, we recorded a net tax provision of Ps. 151 million, reflecting the current and deferred income tax and the business flat tax.

The 17.5% flat rate business tax applies to the sale of goods, the provision of independent services and the granting of use or enjoyment of goods, according to the terms of the law, less certain authorized deductions. The flat rate business tax payable is calculated by subtracting certain tax credits from the tax determined. Revenues, and deductions as well as certain tax credits, are determined based on cash flows generated in each fiscal year. Unlike income tax, a parent and its subsidiaries incur flat rate business tax on an individual basis. Upon enactment of the flat rate business tax law, the asset tax was eliminated; additionally, under certain circumstances, asset tax paid in the ten years prior to a year in which income tax is paid may be refunded. The flat rate business tax is assessed in addition to income tax.

The statutory tax rate in Mexico was 30% for 2012 and 2011, and will be 30% for 2013, 29% for 2014 and 28% for 2015 and thereafter. Generally, the differences between effective tax rates and statutory tax rates are due to different rates for foreign subsidiaries, the effects of inflation and exchange rate fluctuations.

 

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Income from continuing operations

We reported consolidated income from continuing operations of Ps. 1,863 million in 2012, compared to Ps. 101 million in 2011. The increase was primarily due to exchange gains related to the appreciation of the Mexican peso relative to the U.S. dollar, which added to the slight increase in our total operating income as described above.

We reported consolidated income from continuing operations of Ps. 101 million 2011, compared to Ps. 575 million in 2010. The decrease was primarily the result of higher financing costs offsetting the increase in operating income.

Discontinued operations

We reported a loss from discontinued operations of Ps. 155 million in 2012, which reflected the operations of a significant portion of our vertical housing operations that are scheduled to be sold to Javer. The sale of these assets is expected to close during the second quarter of 2013.

We reported income from discontinued operations of Ps. 1,689 million in 2011, which reflected the proceeds of the sale of the Corredor Sur concession in Panama, after taxes and transaction expenses, including make-whole premiums under the original bond indenture governing the project’s debt.

Net Income

We reported consolidated net income of Ps. 1,708.million in 2012, compared to consolidated net income of Ps. 1,790 million in 2011, representing a decrease of 5%.

We reported consolidated net income of Ps. 1,790 million in 2011, compared to consolidated net income of Ps. 971 million in 2010, representing an increase of 84%. Despite the decrease in income before discontinued operations, principally as a result of higher financing cost, consolidated net income increased due to the gain on discontinued operations.

Net income of non-controlling interest was Ps. 578 million in 2012 and Ps. 310 million in 2011. Net income of controlling interest was Ps. 1,130 million in 2012 and Ps. 1,480 million in 2011.

Net income of non-controlling interest was Ps. 310 million in 2011 and Ps. 341 million in 2010. Net income of controlling interest was Ps. 1,480 million in 2011 and Ps. 629 million in 2010.

Critical Accounting Policies and Estimates

Below is a description of the principal critical accounting policies which require the significant use of estimates and the judgment of management based on their experience and current events, as well as a description of the respective accounting internal control.

Accounting for Construction Contracts

Accounting Policy:

Revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the company. Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for goods and services provided in the normal course of activities.

For accounting purposes, we recognize revenue from construction contracts using the percentage of completion method established in International Accounting Standard 11 “Construction Contracts” (IAS 11). The percentage of completion method requires us to timely ascertain the performance of the project and appropriately present the legal and economic substance of the contract. Under this method, the revenues from the contract are matched with the costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed.

The base revenue utilized to calculate percentage of profit includes the following: (i) the initial amount established in the contract, (ii) additional work orders requested by the customer, (iii) changes in the considered yields, (iv) the value of any adjustments (for inflation, exchange rates or changes in prices, for example) agreed to in the contract, (v) the decrease in the original contract value and agreements in contracts (vi) claims and conventional penalties, and (vii) completion or performance bonuses, as of the date on which any revision takes place and is effectively approved by the customers.

In order to determine the basis for costs used to calculate the percentage of completion in accordance with the costs incurred method, we consider the following: (i) the costs directly related to the specific contract, (ii) indirect costs related to the general contract activity that can be matched to a specific contract; and (iii) any other costs that may be transferred to the

 

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customer under the contract terms. The costs directly related to the specific contract include all direct costs such as materials, labor, subcontracting costs, manufacturing and supply costs of equipment, start-up costs and depreciation. Indirect costs identified that are assignable to the contract include indirect labor, payroll of technical and administrative personnel, construction site camps and related expenses, quality control and inspection, internal and external contract supervision, insurance costs, bonds, depreciation, amortization, repairs and maintenance.

Costs which are not included within contract costs are: (i) any general administrative expenses not included under any form of reimbursement in the contract; (ii) selling expenses; (iii) any research and development costs and expenses not considered reimbursable under the contract; and (iv) 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 revenue for such item. In addition, work performed in independent workshops and construction in-process are also excluded costs and are recorded as assets when they are received or used under a specific project.

Variations in the scope of construction works may arise due to several factors, including: improvements in the construction process due to reduced supplies or runtime, local regulatory changes and changes in the conditions for the execution of the project or its implementation, design changes requested by the customer and the geological conditions not included in the original plan. Additionally, and in order to identify possible changes in contracts, we have implemented a method whereby these changes can be identified and reported, and whereby the amounts can be quantified and approved and the changes implemented efficiently on projects. A variation in contract revenue is recognized when (a) it is probable that the customer will approve the changes and the amount of revenue resulting from the change, and (b) the amount of revenue can be reliably measured. Claims or incentives for early completion are recognized as part of the revenue of a contract, provided that there is sufficient evidence that the customer will authorize payment for these items. Consequently, claims and incentives are included in contract revenue only when (a) negotiations have reached an advanced stage such that it is probable that the customer will accept the claim, and (b) the probable amount to be accepted by the customer can be reliably determined. With respect to incentive payments, revenues are recognized only when the execution of the contract is significantly advanced to conclude that the specified standards of performance will be achieved or exceeded and the amount of the incentive payment can be reliably measured.

Costs incurred for change orders based on customers’ instructions which are still awaiting definition and price authorization are recognized as assets within the caption “cost and estimated earnings in excess of billings on uncompleted contracts.”

For those funded projects in which financing revenue are included as part of the selling price, only borrowing costs directly related to the acquisition or construction of the asset, less the realized yields by the temporary investment of such funds and the exchange loss, to the extent it is an adjustment to interest costs, are attributed to the contract costs. The borrowing costs that exceed the estimates and cannot be passed on to the customers are not part of contract costs. In these types of contracts, the collection of the contract amount from the client may take place at the completion of the project. However, periodic reports of the advance of the project to date are provided to and approved by the client, which serve as the basis so that we can continue to obtain financing for the project.

When a contract includes construction of various facilities, construction of each facility is treated as a separate profit center when: (i) separate proposals have been submitted for each facility; (ii) each facility has been subject to separate negotiation and we and the customer have been able to accept or reject that part of the contract relating to each asset; (iii) the costs and revenues of each asset can be identified.

A group of contracts, whether with one or several clients, are treated together as one unique center of profit when: i) the group of contracts have been negotiated together as a unique package; ii) the contracts are so closely interrelated that they are effectively part of a single project with an overall profit margin; and iii) the contracts are executed simultaneously or in a continuous sequence.

The estimated profit of various profit centers cannot offset one another. We ensure that when several contracts integrate a profit center, its results are properly combined.

Internal Control:

As part of the planning process of a construction contract before commencing any project, we review the principal obligations and conditions of the specific contract for the purpose of reasonably estimating (i) the projected revenue, (ii) the costs to be incurred in the project and (iii) the gross profit of the project, and identify the rights and obligations of the parties.

 

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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 considers an analysis of the customer’s economic solvency and reputational standing, the legal framework, the availability of resources, the technological complexity of the project, the obligations and rights assumed, the economic, financial and geological risks, and the possibility of mitigation of risks, as well as the 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.

In contracts involving performance guarantees related to the equipment on which the performance of the project depends, the decision to participate will depend on, among other factors, our ability to transfer the risks and penalties related to these guarantees to the suppliers and/or subcontractors.

In contracts involving guarantees related to timely delivery, we generally plan the project to take into consideration the risk of delay and allow sufficient time for the timely completion of the project in spite of unavoidable delays.

Projects are executed in accordance with a work program determined prior to commencement of the project, which is periodically updated. The work plan includes the description of the construction to be performed, the critical execution route, the allocation and timeliness of the resources required and the project’s cash flow forecast.

The construction contracts in which we participate are typically governed by civil law of various jurisdictions which recognizes a contractor’s right to receive payment for work performed. Under this body of law, the buyer is the legal owner of the works in execution while they are in-process, and the contractor is entitled to payment for work performed, even though payment may not occur until the completion of the contract. The typical terms of our contracts also provide for our right to receive payment for work performed.

The construction contracts into which we enter are generally either (i) unit price or (ii) fixed price (either lump sum or not-to exceed). The evaluation of the risks related to inflation, exchange rates and price increases for each type of contract depends on if the contract is a public works contract or is with the private sector.

In unit price contracts in the private sector, 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 we retain 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.

For unit price contracts related to public works, in addition to escalation clauses, in Mexico the “Public Works and Services Law” establishes mechanisms to adjust the value of such public unit-price contracts for cost increases. The Public Works and Services Law provides the following mechanisms for the adjustment of unit prices in unit-price contracts: (i) a review of individual unit prices for which adjustment may be possible; (ii) review of unit prices by group where the estimated amount of work remaining to be performed represents at least 80% of the total amount of remaining work under the contract; and (iii) for those projects in which the relationship between the input and the total contract cost is established, an adjustment to reflect the increased cost may be made based on such proportion. The application of these mechanisms is required to be specified in the relevant contract.

In lump sum contracts, not-to-exceed contracts or contracts where there are no escalation clauses in which we undertake to provide materials or services at fixed unit prices required for a project in the private sector, we generally absorb the risk related to inflation, exchange-rate fluctuations or price increases for materials. However, we seek to mitigate these risks 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 economic analysis firms; (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 contract is executed with the customer.

For those risks that cannot be mitigated or which surpass acceptable levels, we carry out a quantitative analysis in which we determine the probability of occurrence of the risk, measure the potential financial impact, and adjust the fixed price of the contract to an appropriate level.

For fixed price contracts in the public sector, the Public Works and Services Law protects the contractors when adverse economic conditions arise that could not have been anticipated at the time of awarding the contract and thus were not considered in the initial contract bid. The Public Works and Services Law allows the Controller’s Office (Secretaria de la Funcion Publica) to issue guidelines through which public works contractors may recognize increases in their initial contract prices as a result of adverse economic changes.

 

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In recent years, our construction contracts have been increasingly of the fixed price type or mixed price contracts in which a portion of the contract is at fixed price and the rest at unit prices. While we have entered into contracts with unit pricing in the last three years, we believe that fixed price 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.

Furthermore, we expect that due to the financing trends, future contracts related to concessions, infrastructure construction and industrial construction will restrict adjustments to the contract price for additional work performed as a result of incorrect contract specifications.

In order to be able to apply percentage-of-completion method, the following requirements must be met: (i) the contract must clearly specify the legal rights related to the goods or services to be provided and to be received by the parties, the consideration to be exchanged and the terms of the agreement; (ii) our legal and economic right to receive the payment for the work performed as the contract is executed must be specified; (iii) the expectation must be that both the contractor and the customer will fulfill their respective contractual obligations; and (iv) based on the construction budget and contract, the total amount of revenue, the total cost to be incurred and the estimated profit can be determined.

The estimations are based on the terms, conditions and specifications of each specific contract, including assumptions made by management of the project in order to ensure that all costs attributable to the project were included.

Periodically, we evaluate the reasonableness of the estimates used in the determination of the percentage of completion. Cost estimates are based on assumptions, which can differ from the actual cost over the life of the project. Accordingly, estimates are reviewed periodically, taking into account factors such as price increases for materials, the amount of work to be done, inflation, exchange-rate fluctuations, changes in contract specifications due to adverse conditions and provisions created based on the construction contracts over the project duration, including those related to penalties, termination and startup clauses of the project and the rejection of costs by customers, among others. If, as a result of this evaluation, there are modifications to the revenue or cost previously estimated, or if the total estimated cost of the project exceeds expected revenues, an adjustment is made in order to reflect the effect in results of the period in which the adjustment or loss is incurred. The estimated revenues and costs may be affected by future events. Any change in these estimates may affect our results.

We consider that the potential credit risk related to construction contracts is adequately covered because the construction projects in which we participate generally involve customers of recognized solvency. Billings received in advance of execution or certification of work are recognized as advances from customers. In addition, we periodically evaluate the reasonableness of our accounts receivable. In cases when an indication of collection difficulty exists, allowances for bad debts are created and charged to results in the same period. The allowance is determined based on management’s best judgment in accordance with prevailing circumstances at that time, modified by changes in circumstances. Usually, we show a period between 30 and 60 days of “cost and estimated earnings in excess of billings on uncompleted contracts.” Our policy is not to recognize an allowance for doubtful accounts on contracts that require the customer to pay for the work not as it is performed, but only when the project is completed unless there are sufficient indicators that such receivable will not be collectible.

Construction backlog takes into account only those projects over which we have control. We consider ourselves to have control when we have a majority participation in the project and when we are assigned leadership of the project. In a case in which there is contractual joint control, the percentage of the contract is incorporated in the backlog according to our participation as provided in the contract.

Long-Lived Assets

The long-lived assets that we have refer to property, plant and equipment and concessions granted by the Mexican government and foreign governments for the construction, operation and maintenance of highways, bridges and tunnels, airport administration and municipal services.

The investment in concessions is classified either as an intangible asset, a financial asset (account receivable) or a combination of both based on the terms of service concession agreements.

A financial asset is originated when an operator constructs or makes improvements to the infrastructure and the operator has an unconditional right to receive a specific amount of cash or other financial asset during the contract term. An intangible asset is originated when the operator constructs or makes improvements and is allowed to operate the infrastructure for a fixed period after the construction ends. In this case the operator’s future cash flows have not been specified, because they may vary depending on the use of the asset.

 

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A combination of both – a financial asset and an intangible asset – is originated when the return/profit for the operator is partially provided by a financial asset and partially by an intangible asset.

Accounting Policy:

Upon transition to IFRS, we utilized the deemed cost exception in IFRS with respect to certain of our long-lived assets. We elected to value certain land, buildings and major machinery and equipment at their fair value, using values calculated by appraisers duly recognized by the Mexican National Banking and Securities Commission, representing deemed cost for those assets. Additionally, for the remaining items of property, plant and equipment, we decided to utilize the indexed cost balance existing under Mexican Financial Reporting Standards, thereby maintaining inflation adjustments through 2007, such amounts also representing the deemed cost of those assets. Inflation was removed from our intangible assets under concession, such that their recognition was based on their historical cost. Subsequent to initial adoption of IFRS, we apply a historical cost model, which consists of recording acquisitions at their acquisition or construction cost, or at fair value in the case of goods acquired through contributions, donations or in payment of debt. The expenses incurred for improvements which increase the value of the asset are capitalized and are valued at their acquisition cost.

For certain investments in concessions, a financial asset is recorded at fair value and is subsequently valued at amortized cost by calculating interest through the effective interest method at the date of the financial statements, based on the yields determined for each of the concession contracts. For other concessions, an intangible asset are recorded at their acquisition or construction cost. The comprehensive cost of financing accrued during the construction period is capitalized.

We calculate depreciation on our fixed assets, such as buildings, furniture, office equipment and vehicles, over the useful life of the asset. The depreciation of machinery and equipment is calculated according to the units of production method (machine hours used in regard to total estimated usage hours of the assets during their useful lives, which range from 4 to 10 years). In investment in concessions, amortization as in the case of our investment in highways and tunnel concessions involving the use of facilities over the period of the concession is calculated by the units of production method. In the case of water treatment plants we consider treated water volumes. At the airport concessions, amortization is determined by considering the term of the concession, which is 50 years.

We periodically evaluate the impairment of long-lived assets, considering the cash-generating unit to which the asset belongs. If the carrying amounts of cash-generating units exceed their recoverable value, we write-down the cash-generating units to their recoverable value. The recoverable value is the greater of the net selling price of the cash-generating unit and its value in use, which is the present value of discounted future net cash flows.

When the recoverable value improves, and such improvement is greater than the carrying value of the asset and appears to be permanent, the loss from impairment recorded previously is reversed only up to the amount of the previously recognized impairment loss.

The maintenance costs of airports, which are approved in the master development plan, are provisioned with a charge to results of the year; in the other concessions, the provision is created with a charge to results of the year for the amount which is expected to be disbursed.

Internal Control:

Discount rates used to determine the value in use, which is the present value of discounted future net cash flows, are determined in real terms by calculating the weighted average cost of capital for each cash-generating unit, which in turn is calculated by estimating the cost of equity and the cost of debt incurred for each cash-generating unit. The cost of equity is calculated using the capital asset pricing model, which uses the beta coefficients of comparable public companies in local and international markets. The cost of incurred debt is calculated based on the terms of debt currently outstanding for projects in-process as well as existing financial market conditions. The method we use to calculate the recoverable value of our cash-generating units takes into account the particular circumstances of the assets, including the terms and conditions of each concession, machinery and equipment involved, and intangible assets.

We evaluate indicators of impairment as part of the process to determine the recoverable values of cash-generating units. The indicators of impairment considered for these purposes include, among others, 1) the operating losses or negative cash flows in the period if they are combined with a history or projection of losses, 2) depreciation and amortization charged to results which, in percentage terms, in relation to revenues, are substantially higher than those of previous years, 3) the effects of obsolescence, 4) reduced demand for the services rendered, 5) competition and other economic and legal factors. The mechanism to calculate the recovery value is based on the specific circumstances of the concessions, plant and machinery and intangibles. In the case of the concessioned routes, the projected revenues consider the projected vehicle flows, and assumptions and estimates are used relative to population growth and the peripheral economy of the concessioned route, temporary reductions in vehicle flows due to rate increases, commercial strategies to boost their use, among others, which may be determined and adjusted depending on the actual results obtained.

 

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In addition, as part of the process to determine the recoverable values of our cash-generating units, we perform sensitivity analyses that measure the effect of key performance variables on projected net cash flows, considering the most probable outcomes of those variables. The critical variables used in our sensitivity analyses for the determination of recoverable value consider those variables that create value in each of our projects. These include (i) operating revenues, (ii) costs of operation and (iii) macroeconomic conditions, including foreseeable changes in interest rates. Our analyses also include contractually agreed-upon values related to maintenance and other investments when we are contractually bound to incur such investments in certain projects. Variations in discount rates are taken into account considering general changes in market interest rates and are applied to three possible scenarios with respect to projections of revenues: an optimistic case, a probable case (base case) and a pessimistic case. We consider that this range of outcomes is sufficiently broad to help us analyze the limits of the value of each critical variable and can also be broad enough for us to effectively consider projects that are in their mature phase. Variations are considered with respect to individual variables as well as with respect to “cross variations” where we apply simultaneous changes to combined variables.

Types of Long-Lived Assets

Depending upon their operating status, projects related to long-lived assets or cash-generating units can either be in the construction phase or operating phase. Projects in the construction phase are composed of investments in the process of being executed (constructed), whereas projects in the operating phase involve operating risks.

In the case of highways, we participate in two main project types: concessions and public-private partnerships (PPPs). The main difference between these categories is that revenues for PPP projects are paid directly by the government (not users) and include fixed revenues in addition to variable revenues, which we believe improves our revenue profile and risk exposure arising from our highways portfolio. Projected variable revenue scenarios are taken from studies that forecast traffic volume. These forecasts also take into account anticipated changes in toll levels and are prepared using statistical models based on historic behavior for each project. Operating expense projections are developed by the individuals in charge of the project operation. Projections for investment commitments are considered when such commitments are contractually required under the concession agreement. Projections are reviewed by operating committees and by the trusts in which both the governmental authorities and the project’s lenders participate. Our analyses as of December 31, 2012, using base case scenarios, indicate that a 52.2% decrease in variable revenues or 382.9% increase in operating costs would not result in impairment of our contractual obligations related to maintenance for these projects in the operating phase.

In water treatment and transportation projects, the structure of the project differs only in that the service is not provided directly to the public at large, but instead to governmental entities for water and drainage systems. In these types of projects, revenues and expenses are related both to the demand for the services by the population as a whole and the operating capacity of the project. Typically revenues include a fixed component to recover investment and fixed operating and maintenance costs, as well as a variable component that depends on the volume of water processed. The sensitivity analyses in these cases are based principally on population increase, which is the main factor determining future demand for the service. Our analyses as of December 31, 2012, using base case scenarios, indicate that a 3.4% decrease in variable revenues or a 2.0% increase in operating costs, would not result in impairment of finished projects in the operating phase.

Our airport projects are regulated by five-year master plans negotiated with the Mexican government, in which our future investment commitments are established and in which the maximum tariff we can charge per passenger is set. These are high-volume projects in which the variable that most affects the value in use is revenue. The sensitivity analyses for these projects are based on different scenarios of passenger traffic and ability to recover the maximum tariff. Our analyses as of December 31, 2012, using base case scenarios, indicate that an 41.1% decrease in revenues or a 110.1% increase in operating costs would not result in impairment of our contractual obligations related to investments at our airports.

As of December 31, 2012, our pre-tax discount rates for highway projects averaged approximately 8.37% in real terms (excluding inflation), and for water projects averaged approximately 7.41% in real terms. For our airports, our pre-tax discount rate averaged 11.79% as of December 31, 2012.

Our estimates for all projects may be based on assumptions that differ from, and may be adjusted according to, actual use.

 

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Income Tax

Accounting Policy:

We determine and recognize current and deferred taxes on income. In the case of income tax (ISR) we are subject to the tax consolidation regime.

The provision or benefit for current ISR and Business Flat Tax (IETU) is recorded in results of the year in which they are incurred. Deferred ISR and IETU are both recognized based on the assets and liabilities method, which considers the temporary differences derived from comparing assets and liabilities in the statements of financial position and their tax bases, plus any future benefit from the tax losses obtained in previous years which have not yet been deducted, and the offsetting of tax credits not used from previous periods. Temporary differences are recognized at the income tax rates which have been approved, or which are substantially enacted, at the date of the statement of financial position. Consequently, the effect on deferred assets and liabilities derived from a change in tax laws and rates is recognized in the statement of comprehensive income of the year in which they go into effect. The resulting deferred tax provision or benefit is reflected in our consolidated statement of comprehensive income.

The calculation and recognition of deferred taxes 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. In determining if deferred tax assets or tax loss carryforwards should be recognized, we consider the facts and circumstances that may have an impact in subsequent years on financial projections of taxable income, together with our estimates of recovery of tax losses for concession projects during the concession term. Our concession terms range from 20 to 50 years.

Deferred tax assets are not recognized if they are not probable of being realized. Any change in our estimates may have an effect on our financial condition and results of operations.

In connection with IETU, we also perform projections of future taxable income over the period during which our existing deferred taxes will reverse in order to determine whether during those years, we expect to pay IETU or ISR. We record deferred taxes based on the tax we expect to pay. Such projections are based on our estimates of the taxable revenues that we expect to recognize in the future in the ordinary course of business, less tax deductions permitted by applicable law.

Derivative Financial Instruments

We enter into derivative financial instruments to hedge our exposure to interest rate and foreign currency exchange risk related to the financing for our construction and concessions projects.

Accounting Policy:

When the related transaction complies with all hedge accounting requirements, we designate the derivative as a hedging financial instrument (either as a cash flow hedge, a foreign currency hedge or a fair value hedge) at the time we enter into the contract. When we enter into a derivative for hedging purposes from an economic perspective, but such derivative does not comply with all the requirements established by IFRS to be considered as hedging instruments, the gains or losses from the derivative financial instrument are recorded in the results of the period. Our policy is not to enter into derivative instruments for purposes of speculation

Per IAS 39, “Financial Instruments: Recognition and Measurement,” we value and recognize all derivatives at fair value, regardless of the purpose for holding them. We base fair value on market prices for derivatives traded in recognized markets. If no active market exists, we value the derivative instrument using the valuation techniques carried out by a price provider authorized by the National Registry of Securities (Registro Nacional de Valores) and the valuations provided by valuation agents (counterparties). These valuations are based on methodologies recognized in the financial sector and are supported by sufficient and reliable information. Valuations are carried out monthly in order to review changes and impact on business units and consolidated results. Fair value is recognized in the consolidated statement of financial position as a derivative asset or derivative liability, in accordance with the rights and obligations of the derivative contract and in accordance with IFRS.

For cash flow hedges (including interest rate swaps and interest rate options) and foreign currency hedges designated as foreign currency cash flow hedges and including exchange rate instruments, foreign currency swaps and foreign currency options, the effective portion is recognized within statement of comprehensive income as a component of other comprehensive income. We subsequently reclassify the amounts in other comprehensive income to the interest income or expense within the statement of comprehensive income, affecting net income, when profit or loss is affected by the hedged item. The ineffective portion is recognized immediately in the interest income or expense of the period. For fair value hedges, the fluctuation in the fair value of both the derivative and the open risk position is recognized in interest income or expense of the period in which it takes place. We carry out tests of effectiveness for derivatives that qualify as hedging instruments from an accounting perspective at least every quarter and every month if material changes occur.

 

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For those derivatives that do not comply with hedge accounting requirements, the fluctuation in their fair value is recognized in profit or loss of the period when valued.

Internal Control:

Our activities are exposed to different economic risks which include (i) market financial risks (interest rate, foreign currency and pricing), (ii) credit risk, and (iii) liquidity risk.

We try to minimize the potential negative effects of the aforementioned risks in financial performance through different strategies. We use financial derivatives to hedge those exposures to the financial risks of operations recognized in the statement of financial position (recognized assets and liabilities), as well as firm commitments and forecast transactions which are probable to occur.

We only contract hedge financial derivatives to reduce uncertainty in the returns on projects. The financial derivatives which we enter into may be designated for accounting purposes as hedging instruments or as trading instruments, without affecting our objective of mitigating the risks to which we are exposed in the projects.

In interest rate hedges we enter into the instruments in order to fix interest rates and thus make the projects more feasible. We enter into exchange rate hedge instruments to reduce the exchange rate risk in projects whose labor costs and inputs are incurred in a currency different from that of their financing source. We enter into the financing in the same currency as that of the payment source.

The contracting of financial derivatives is in most cases related to project financing, for which reason it is quite common that the same institution (or its affiliates) which provided the financing also acts as the counterparty. This includes instruments which cover fluctuations in the interest rate and the exchange rate. In both cases, the derivatives are contracted directly with the counterparties.

Our internal control policy establishes that the contracting of credit and of the risks involved in the projects requires a collective analysis by representatives from the finance, legal, administration and operations departments, before they can be authorized. As part of such analysis we also evaluate the use of derivatives to hedge financing risks. Based on internal control policy, the contracting of derivatives is the responsibility of the finance and administration departments once the aforementioned analysis is concluded.

When evaluating the use of derivatives to hedge financing risks, we conduct sensitivity analyses of the different possible levels of the relevant variables, in order to define the economic efficiency of each of the different alternatives available to hedge the risk measured. We compare each alternative in order to define the best one. Furthermore, we conduct effectiveness tests with the support of an appraisal expert to determine the treatment applicable to the financial instrument once it is entered into.

We maintain a policy of entering into financial instruments at the project level, and we do not enter into instruments involving margin calls or additional credit contracts to those authorized by our committees responsible for their performance, as no additional sources of liquidity are designated for those types of instruments. In those projects requiring collateral, the policy is that the necessary deposits are made initially or letters of credit are established at the time they are entered into, in order to limit project exposure.

See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Derivative Financial Instruments.”

Other Policies

Accounting for Real Estate Sales

Accounting Policy:

We recognize revenues derived from sales of low income housing, residential environment, and real estate in accordance with International Financial Reporting Interpretations Committee “Agreements for the Construction of Real Estate” (or IFRIC 15) and IAS 18, when the risks and benefits of the housing have been transferred to the buyer, which occurs upon passage of title to the buyer.

 

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Our real estate inventories are divided into two large segments: land held for development and inventories in-process (which include both houses under construction and unsold finished houses).

The valuation of inventory, the control of the cost of sales and the related profit are recognized through a cost budgeting system. The cost budgeting system is reviewed quarterly and updated periodically when modifications are made to sales price or cost estimates of construction and development of the home. Variations in the original cost budget that require a change in value of inventory are applied to results in the period in which they are determined. Inventory costs include (i) the cost of land, (ii) rights, licenses, permits and other project costs, (iii) housing development costs, construction and infrastructure costs, (iv) financial cost incurred during the construction period and (v) administration and supervision of real estate. The costs related to real estate projects that are capitalized during development of the project and are applied to cost of sales in the proportion in which revenues are recognized.

Internal Control:

To determine any possible impairment of our land held for development, we carry out appraisals every two to three years or more frequently when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

With respect to inventory in-process, approximately 82% of homes under construction and unsold finished homes are within the low-income sector, while the remainder is within the moderate-income sector. With respect to homes in the low income sector, sales of such homes are generally financed by government-sponsored housing fund programs, which provide financial aid to customers to stimulate home purchases in this sector. Prices of homes in this sector are generally regulated by such government programs, thereby limiting our flexibility to establish sale prices. Sale prices in this sector are therefore sensitive to the availability of funding offered by the government under such programs as well as conditions prevailing in the Mexican economy, which in turn can be affected by global economic conditions. However, through 2012, we have not historically experienced significant fluctuations in sales in this sector and have been able to maintain a stable gross margin of between 16% and 26%. Despite the global financial crisis, Mexican governmental policies supporting housing development have continued, albeit at a slower pace. Although we expect that trend to continue, any strict price controls put in place by the Mexican federal government or inherent from adverse economic conditions in Mexico that exceed our current operating margin could cause an impairment with respect to housing in this sector.

With respect to homes in the moderate-income sector, on a quarterly basis, we perform a review of estimated revenues and costs for the projects in-process to evaluate the sector’s operating margin. Additionally, on an annual basis, we perform formal impairment tests based on discounted cash flow projections and to determine the expected rates of returns of the project. Such cash flow projections incorporate actual revenues and costs through the date of the evaluation as well as estimated future investments we expect to incur to complete and sell the project. Revenues are projected based on the current selling price of the home, considering any discounts that we may offer. Selling prices for the moderate-income sector are based on market studies of what a willing buyer would pay, comparable prices for similar projects in the areas in which we develop and the general economic conditions in Mexico. We only offer discounts on sale prices of homes when sales prices have increased over time and the discount would not exceed the original sale price of the home. Our policy is not to grant discounts when the discounted sales price would result in a value lower than the carrying value of the inventory. Our management determines discounts on a home-by-home basis. Cost estimates are based on our cost budgeting system as discussed above. Impairment is recognized when the fair value less costs to sell is less than the carrying amount of the inventory. As in the low-income sector, we generally earn a gross margin of approximately 17% to 22% in this sector. Accordingly, we are only recognize impairment on inventories in the moderate-income sector if we offer discounts greater than our operating margin or otherwise significantly reduce our prices below our operating margin because of, for example, market forces or deteriorating economic factors. We have not historically recognized impairment on inventory in this sector, nor have our cash flow projections through 2012 indicated any impairment loss for the inventory of homes in this sector.

In both the low- and moderate-income sectors, we have seen a 3% decrease in the last quarter of 2012 compared to the last quarter of 2011 and a 73% decrease in the first quarter of 2013 in home sales, when compared to the same period in the prior year.

See Note 5 to our consolidated financial statements for further information regarding additional critical accounting policies.

Effect of Application of the Critical Accounting Policies and Estimates on Results and Financial Position

Set forth below are the results derived from the application of the aforementioned policies and their effects on our consolidated financial statements as of and for the years ended December 31, 2012, 2011 and 2010.

 

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Construction Contracts

Our consolidated financial statements as of December 31, 2012 included a provision for costs relating to project terminations amounting to Ps. 760 million and a machinery lease provision of Ps. 590 million. Our consolidated financial statements as of December 31, 2011 included a provision for costs relating to project terminations amounting to Ps. 559 million and the repair and maintenance of machinery under lease agreements amounting to Ps. 611 million. Our consolidated financial statements as of December 31, 2010 included a provision for costs relating to project terminations amounting to Ps. 539 million and a machinery lease provision of Ps. 476 million related to rental payments due and payable, as well as a short-term provision of Ps. 3 million for estimated losses upon project termination related to projects that we expected to be substantially completed during 2011. As of December 31, 2012, 2011 and 2010, our consolidated financial statements include an allowance for doubtful accounts related to construction contracts of Ps. 1,483 million, Ps. 1,413 million and Ps. 654 million, respectively. Allowances and provisions were recorded based on our best estimates and current circumstances. If these circumstances change, we may need to modify the amount of allowances and provisions we have recorded.

Below is a table of relevant projects with either upward and downward changes in gross profit and their corresponding accounting effect due to favorable or unfavorable adjustments to contracts based on the percentage-of-completion method. The net changes in project profitability from revisions in estimates, both increases and decreases, were a net decrease of Ps. 1,286,145 thousand, Ps. 704,364 thousand and Ps. 271,664 thousand for the years ended December 31, 2012, 2011 and 2010, respectively. The projects are summarized as follows:

 

     Number of Projects      Ranges of changes in gross profit (1)     Adjustments to contracts  
          (In thousands of Ps.)     (In thousands of Ps.)  
                  

Range of increase in
projects with
upward changes

    

Range of decrease in
projects with downward
changes

       
     Upward
changes
     Downward
changes
     From          To          From     To     Favorable      Unfavorable  

Year ended December 31, 2012

     1         4         Ps. 117,648         NA         Ps. (207,269     Ps. (686,141     Ps. 117,648         Ps. (1,403,793

Year ended December 31, 2011

     1         3         98,241         NA         (96,230     (517,063     98,241         (802,605

Year ended December 31, 2010

     1         4         227,758         NA         (95,820     (174,603     227,758         (499,422

 

(1) Contract amounts were selected whose variation in gross margin was higher than Ps. 113,321 thousand, Ps. 95,362 thousand and Ps. 87,284 thousand for the years ended December 31, 2012, 2011 and 2010, respectively.

Income Tax

In 2012, we recorded a net tax of Ps. 694 million, which reflected the following components:

 

   

a current ISR expense of Ps. 1,876 million,

 

   

a deferred ISR benefit of Ps. 1,277 million,

 

   

a current IETU expense of Ps. 47 million, and

 

   

a deferred IETU expense of Ps. 48 million.

As of December 31, 2012, we had a net ISR liability of Ps. 4,032 million (net of deferred income tax related to items in other comprehensive income) and a net deferred IETU liability of Ps. 832 million.

In 2011, we recorded a net tax benefit of Ps. 57 million, which reflected the following components:

 

   

a current ISR expense of Ps. 914 million,

 

   

a deferred ISR benefit of Ps. 837 million,

 

   

a current IETU expense of Ps. 194 million, and

 

   

a deferred IETU benefit of Ps. 327 million.

 

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As of December 31, 2011, we had a net deferred ISR liability of Ps. 1,398 million and a net deferred IETU liability of Ps. 382 million.

The tax payable of Ps. 4,901 million for the deconsolidation tax, is payable as follows: Ps. 274 million in 2013 (reflected in current liabilities as of December 31, 2011), Ps. 1,871 million from 2014 to 2017 and the remainder payable from 2018 and through 2022. The estimate reflected in the financial statements is calculated under the terms of the law.

Tax losses as of December 31, 2012 have been recognized, as we believe we will be able to recover such losses based on projections of future taxable income and various operating strategies with favorable tax effects, rather than through our deferred tax liabilities. Our existing level of backlog is expected to generate a greater volume of business in the future, resulting in increased taxable income that will compensate deferred tax assets recognized as of December 31, 2012.

Tax losses as of December 31, 2011 have been recognized, as we believe we will be able to recover such losses either by offset of deferred tax liabilities that will reverse in subsequent periods or projections of future taxable income. Our existing level of backlog is expected to generate a greater volume of business in the future, resulting in increased taxable income that will compensate deferred tax assets recognized as of December 31, 2011.

In 2010, we recorded a net tax provision of Ps. 151 million, which reflected the following components:

 

   

a current ISR expense of Ps. 221 million,

 

   

a deferred ISR benefit of Ps. 15 million,

 

   

a current IETU expense of Ps. 295 million, and

 

   

a deferred IETU benefit of Ps. 350 million.

As of December 31, 2010, we had a net deferred tax liability of Ps. 574 million and a net deferred IETU liability of Ps. 834 million.

At December 31, 2012, 2011 and 2010, we also had an asset tax credit carryforwards of Ps. 690 million, Ps. 1,115 million and Ps. 1,468 million, respectively.

Derivative Financial Instruments

We have entered into interest rate swaps and options (designated as cash flow hedges), foreign currency swaps and options (designated as foreign currency cash flow hedges) and other derivative instruments (designated as trading derivatives as they do not meet hedge accounting requirements) for the terms of some of our credit facilities with the objective of reducing the uncertainties resulting from interest rate and exchange rate fluctuations. To date, the results of our derivative financial instruments have been mixed. Their mark-to-market valuation as of December 31, 2012, increased our derivative liabilities by Ps. 700 million and increased our derivative assets by Ps. 175 million. Those effects are reflected in our consolidated equity by Ps. 922 million and Ps. 166 million in our consolidated statement of comprehensive income for 2012. Their mark-to-market valuation as of December 31, 2011, decreased our derivative liabilities by Ps. 219 million and increased our derivative assets by Ps. 311 million. Those effects are reflected in our consolidated equity by Ps. 483 million and Ps. 381 million in our consolidated statement of comprehensive income for 2011. Their mark-to-market valuation as of December 31, 2010, decreased our derivative liabilities by Ps. 36 million and decreased our derivative assets by Ps. 57 million. Those effects were reflected in our consolidated equity by Ps. 655 million and Ps. 316 million in our consolidated statement of comprehensive income for 2010.

Long-Lived Assets

As of December 31, 2012, we did not recognize any impairment of long-lived assets.

Accounting for Low Income Housing Sales and Costs

As of December 31, 2012, we recognized an impairment in our real estate inventories or low income housing inventories in the amount of Ps. 476 million net of taxes as a result of valuing them at their fair value, given that they are held for sale to Javer. See Note 2 to our consolidated financial statements.

Recently Issued Accounting Standards

New International Financial Reporting Standards

We have not applied the following newly issued IFRS standards, as their effective dates are subsequent to December 31, 2012, although their early adoption is allowed:

 

   

IFRS 9, Financial Instruments (or IFRS 9), effective for annual periods beginning on or after January 1, 2015.

 

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IFRS 10, Consolidated Financial Statements (IFRS 10), effective for annual periods beginning on or after January 1, 2013.

 

   

IFRS 11, Joint Arrangements (or IFRS 11), effective for annual periods beginning on or after January 1, 2013.

 

   

IFRS 12, Disclosure of Interests in Other Entities (or IFRS 12), effective for annual periods beginning on or after January 1, 2013.

 

   

IFRS 13, Fair Value Measurement (or IFRS 13), effective for annual periods beginning on or after January 1, 2013.

 

   

Amendments to IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities (or IFRS 7), effective for annual periods beginning on or after January 1, 2013.

 

   

Amendments to IFRS 9 and IFRS 7, Mandatory Effective Date of IFRS 9 and Transition Disclosures, effective for annual periods beginning on or after January 1, 2015.

 

   

Amendments to IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements and IFRS 12, Disclosure of Interests in Other Entities: Transition Guidance, effective for annual periods beginning on or after January 1, 2013.

 

   

IAS 19, (as revised in 2011) Employee Benefits (or IAS 19), effective for annual periods beginning on or after January 1, 2013.

 

   

IAS 27, (as revised in 2011) Separate Financial Statements (or IAS 27), effective for annual periods beginning on or after January 1, 2013.

 

   

IAS 28, (as revised in 2011) Investments in Associates and Joint Ventures, effective for annual periods beginning on or after January 1, 2013.

 

   

Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities and Related disclosures (or IAS 32), effective for annual periods beginning on or after January 1, 2014.

 

   

Amendments to IFRS, Annual Improvements to IFRS’s 2009-2011 cycle (except for the amendment to IAS 1), effective for annual periods beginning on or after January 1, 2013.

IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9 was amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. The main requirements of IFRS 9 are described below:

IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods.

In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss.

With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability, that is attributable to changes in the credit risk of that liability, is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss was presented in profit or loss.

Previously, under IAS 39, the total amount of change in fair value of financial liabilities designated at fair value through profit or loss had been recognized in profit or loss for the year.

We have not early applied IFRS 9. We anticipate our adoption of IFRS 9 for the annual period beginning on January 1, 2015. Therefore, we have not deemed it possible to reasonably estimate the effects of adoption as of the date of issuance of the accompanying consolidated financial statements.

In May 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued, including IFRS 10, IFRS 11, IFRS 12, IAS 27 (as revised in 2011) and IAS 28 (as revised in 2011). Also, in June 2012, the following Improvements to IFRS 10, 11 and 12 were published:

IFRS 10 replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements. SIC-12 Consolidation – Special Purpose Entities, will be withdrawn upon the effective date of IFRS 10. Under IFRS 10, there is only one basis for consolidation, that is, control. In addition, IFRS 10 includes a new definition of

 

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control that contains three elements: (a) power over an investee, (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor’s return.

IFRS 11 introduces new accounting requirements for joint arrangements, replacing IAS 31. The option to apply the proportional consolidation method on jointly controlled entities is eliminated. In addition, IFRS 11 eliminates the concept concerning jointly controlled assets, and establishes only two types of joint arrangements, joint operations and joint ventures, depending on the rights and obligations of the parties. A joint operation is a joint arrangement whereby the parties that have joint control have rights to assets and obligations on liabilities. In this type of arrangement, each party recognizes the assets to which they have rights and liabilities which bear obligations as part of its other assets and liabilities. Joint ventures are joint arrangements whereby the parties that have joint control have rights to the net assets.

In addition, joint ventures under IFRS 11 should be accounted using the equity method, whereas jointly controlled entities under IAS 31 can be accounted using the equity method or proportionate accounting.

IFRS 12 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the disclosure requirements in IFRS 12 are more extensive than those in the current standards.

IAS 27, Separate Financial Statements, includes the requirements for separate financial statements of controlling entities, which have not changed, including amendments in IAS 27; part of this IAS is replaced with IFRS 10.

IAS 28 is amended to conform to changes based on the issuance of IFRS 10, 11 and 12.

Amendments to IFRS 10, 11 and 12. The amendments explain that the “date of initial application” of IFRS 10 is the beginning of the reporting period in which IFRS 10 is applied for the first time. The amendments clarify how a reporting entity should adjust comparative periods retrospectively determining whether consolidation from the date of initial adoption under IFRS 10 is different from that under IAS 27 and SIC 12. When a reporting entity concludes, on the basis of the requirements of IFRS 10, it should consolidate an investee that was not previously consolidated, IFRS 10 requires an entity to apply purchase accounting in accordance with IFRS 3, Business Combinations, to measure the assets, liabilities and non-controlling interest in the investee at the date the entity obtains control (based on the requirements of IFRS 10). The entity should adjust retrospectively the comparative period. The amendments clarify which version of IFRS 3 should be used in different scenarios. When a reporting entity concludes, on the basis of the requirements of IFRS 10, that it should not consolidate an investee that was previously consolidated, IFRS 10 requires that interest on investment is measured at the amount that would have been measured if the requirements IFRS 10 had been in effect when the investor was involved in the investment. The entity should adjust retrospectively the comparative period. When control over the investee is lost during the comparative period (i.e., results in a sale), the amendments confirm that there is no need to adjust the comparative figures retrospectively (even though consolidation may have been different under IAS 27 and SIC 12). The amendments limit the requirement to present comparative information adjusted for the period immediately preceding the date of initial application.

It also eliminates the requirement to present comparative information for the disclosures relating to unconsolidated structured entities for any period prior to the first annual period in which IFRS 12 applies.

Our management anticipates that the application of these five standards only will have an impact on disclosures in the consolidated financial statements, except with respect to the application of IFRS 11. The adoption of IFRS 11 is expected to change the classification and subsequent accounting of our investment in Autovía Necaxa Tihuatlan, S.A. de C.V., ICA Fluor, S. de R.L. de C.V. and subsidiaries, Rodio Kronsa, S.A., Los Portales, S.A., Suministro de Agua de Queretaro, S.A. de C.V., Aquos El Realito, S.A. de C.V., Constructora de Infraestructura de Aguas Potosí, S.A. de C.V., Constructora MT de Oaxaca, S. A. de C.V., Actica Sistemas, S. de R.L. de C.V., C7AI Servicios Industriales Especializados, S.A. de C.V., Infraestructura y Saneamiento de Atotonilco, S.A. de C.V. y Administracion y Servicios Atotonilco, S.A. de C.V., which are entities classified as jointly controlled under IAS 31 and have been accounted for using the proportionate consolidation method. Under IFRS 11, these entities will be classified as joint ventures and will be accounted for using the equity method, which will have an impact on the amounts reported in the consolidated financial statements as of December 31, 2012 and 2011, when presented for comparison purposes in the consolidated financial statements for 2013, in which the standard will be initially adopted.

 

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The estimated effects of adoption of IFRS 11 on our consolidated financial statements for the years ended December 31, 2012 and 2011, considering the elimination of proportionate consolidation and presenting such investments under the equity method, are as follows:

 

     Year ended December 31,  
     2012      2011  
     (Millions of Mexican pesos)  

Statement of income and other comprehensive income

     

Revenues

     Ps. 37,406         Ps. 32,436   

Operating income

     3,047         2,874   

Net income

     1,707         1,790   

Statement of financial position

     

Current assets

     35,839         43,027   

Non-current assets

     63,362         47,333   

Current liabilities

     28,898         35,388   

Non-current liabilities

     49,641         34,147   

Statement of cash flows

     

Cash and cash equivalents at the beginning of the year

     8,858         2,923   

Cash and cash equivalents at the end of the year

     6,088         8,858   

Other

     

Backlog

     35,353         19,815   

The business segment data is also expected to change upon adoption of IFRS 11.

IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of IFRS 13 is broad; it applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only under IFRS 7, Financial Instruments: Disclosures will be extended by IFRS 13 to cover all assets and liabilities within its scope. The application of the new standard may affect certain amounts reported in the financial statements and result in more extensive disclosures in the consolidated financial statements.

The amendments to IAS 32 clarify existing application issues relating to the offset of financial assets and financial liabilities requirements. Specifically, the amendments clarify the meaning of “currently has a legally enforceable right of set-off” and “simultaneous realization and settlement.”

The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement. The disclosures should be provided retrospectively for all comparative periods.

Our management anticipates that the application of these amendments to IAS 32 and IFRS 7 may result in more disclosures being made with regard to offsetting financial assets and financial liabilities in the future.

The amendments to IAS 19 change the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in fair value of plan assets when they occur, and hence eliminate the ‘corridor approach’ permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. The amendments require all actuarial gains and losses to be recognized immediately through other comprehensive income in order for the net pension asset or liability recognized in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previous version of IAS 19 are replaced with a ‘net-interest’ amount, which is calculated by applying the discount rate to the net defined benefit liability or asset.

 

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Based on management’s preliminary assessment, when we apply the amendments to IAS 19 for the first time on January 1, 2013, retained earnings would be reduced by Ps. 218 million, net of taxes, with the corresponding adjustments being recognized in the retirement benefit obligation and income tax liability. This net effect reflects a number of adjustments, including their income tax effects: a) full recognition of actuarial gains through other comprehensive income and decrease in the net pension deficit; b) immediate recognition of past service costs in profit or loss and an increase in the net pension obligation and c) reversal of the difference between the gain arising from the expected rate of return on pension plan assets and the discount rate through other comprehensive income.

B. LIQUIDITY AND CAPITAL RESOURCES

General

Our principal uses of funds in 2012 were:

 

   

Ps. 1,001 million for the Rio de los Remedios–Ecatepec highway;

 

   

Ps. 981 million for the Barranca Larga–Ventanilla highway;

 

   

Ps. 543 million for the Autovia Urbana Sur expressway; and

 

   

Ps. 370 million for the Rio Verde–Ciudad Valles highway.

Our principal sources of funds in 2012 were third party financing for our construction, concessions and housing development projects, proceeds from project execution, a bond offering in the international capital markets, operating cash flow and asset sales. In July 2012, we raised U.S.$ 350 million from an offering of 8.375% senior notes due 2017.

Our expected future sources of liquidity include cash flow from our Civil Construction, Industrial Construction, Concessions and Airport segments as well as from third party debt and equity for our construction and housing projects. We cannot assure you that we will be able to continue to generate liquidity from these sources. We expect our principal future commitments for capital expenditures to include capital requirements related to new and existing concessions. Each of the concessions we currently have under contract has long-term third party financing. Our policy and practice is to have indicative arrangements in place for third party financing at the time we participate in a bid for a concession. It is also our policy and practice to have arrangements in place for third party financing at the time we participate in a bid for a construction project, if the construction project requires financing. Construction projects that require third party financing include those without traditional public works payment procedures, where we receive an initial payment in advance and we invoice the client periodically after making expenditures for the project. Our traditional public works contracts, on the other hand, require spending simultaneously with or after payment of invoices by the public project owner, thereby typically not requiring capital expenditures in excess of available funding. Because of our third-party financing policies and the procedures of our public works contracts, we expect our capital requirements related to concessions to vary less than our discretionary capital spending in other areas such as in non-public works construction, which are more often sensitive to market conditions, although there can be no assurance that our capital requirements related to concessions will not vary.

As of December 31, 2012 we had net working capital (current assets less current liabilities) of Ps. 5,655 compared to Ps. 8,201 as of December 31, 2011 and Ps. 2,001 million as of December 31, 2010. The decrease in our total net working capital at December 31, 2012 from December 31, 2011 was primarily attributable to the use of cash for the construction of the SPC projects. The increase in our total net working capital at December 31, 2011 from December 31, 2010 was primarily attributable to the unused proceeds received from the financings related to the SPC projects.

Although from 2008 through 2010 we saw a trend toward lower net working capital balances in our Company, that trend was due in part to large payments made on a smaller volume of projects towards the end of 2007 than we currently have. From 2010 to 2012, we continued to experience the trend towards lower net working capital due in part to a larger portion of our concessions entering into their operating stage. During the construction phase of concession projects, we tend to experience higher working capital balances as a result of higher cash balances from the financing obtained for the concession project. During the operational phase of a concession, our cash balances may not be as high, as cash was utilized in the construction phase of the concession, and what remains is cash generated from the operation of the concession, as well as current payables related to the operations of concessions. We expect this trend to continue as more of our concessions move from the construction phase to the operational phase.

There can be no assurance, however, that the trend toward lower net working capital balances will not recur due to changes in the mix of projects under execution at any given time and their completion dates. Another trend toward our greater working capital needs is the growth of our Concessions segment, in which we have seen a trend toward greater investment requirements in infrastructure projects. When we perform construction under concessions, we generally must wait for an extended period—until after the concession has completed construction and begun operating—to recover the costs of construction. Additionally, our accounts receivables reflect a particular contracting scheme used in our Chicontepec II oil field and Package II of the Minatitlan refinery projects for Pemex where the contractor was paid only on major milestones, adding Ps. 927 million, Ps. 1,241 million and Ps. 1,672 million to our accounts receivable as of December 31, 2012, 2011 and

 

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2010, respectively, and requiring us to provide significant advance funding. Finally, when constructing public works, we often experience a delay in payment of our invoices, particularly in the initial phases of a project. The impact of the turmoil in the global financial system, the recession in Mexico and the change in presidential administration in Mexico may result in delayed payment of monthly invoices for construction compared to what is historically typical. We believe that our working capital is sufficient to meet our requirements in connection with work we currently intend to carry out over both the short and long-term.

The decrease in 2012 in current liabilities was primarily due to the payment of bank debt related to the La Yesca project. The increase in 2011 in current liabilities was primarily due to the reclassification of the debt related to the La Yesca hydroelectric project to current liabilities and, to a lesser extent, the incurrence of bridge loan financing while we finalize long-term financing arrangements. Our liabilities have increased in line with increases in our volume of work and number of projects, which typically result in current liabilities to subcontractors and suppliers.

Our cash and cash equivalents (including restricted cash) were Ps. 8,413 million as of December 31, 2012, as compared to Ps. 10,900 million as of December 31, 2011 and Ps. 4,519 million as of December 31, 2010. At December 31, 2012, we had a current ratio (current assets over current liabilities) of 1.17, as compared to a current ratio of 1.21 at December 31, 2011. At December 31, 2011, we had a current ratio (current assets over current liabilities) of 1.21, as compared to a current ratio of 1.10 at December 31, 2010.

Cash and cash equivalents (including restricted cash) at year-end 2012 included:

 

   

Ps. 1,259 million, or 15% of our cash and cash equivalents, held by ICA-Fluor, which are unrestricted;

 

   

Ps. 2,617 million, or 31% of our cash and cash equivalents, held in reserves established to secure financings, including any related expenses, in connection with the Acapulco Tunnel, the Kantunil-Cancun toll road, the Rio Verde-Ciudad Valles, Nuevo Necaxa-Tihuatlan, the Mitla-Tehuantepec highway, the two SPC projects, the La Piedad bypass project and the Agua Prieta water treatment plant, all of which are restricted;

 

   

Ps. 1,248 million, or 15% of our cash and cash equivalents, held in our Airports segment, which is unrestricted;

 

   

Ps. 572 million, or 7% of our cash and cash equivalents, held by our Ingenieros Civiles Asociados subsidiary;

 

   

Ps. 843 million, or 10% of our cash and cash equivalents, held by the La Yesca hydroelectric project; and

 

   

Ps. 122 million, or 1% of our cash and cash equivalents, held by San Martin.

Certain uses of cash and cash equivalents by certain of our less than wholly-owned subsidiaries require the consent of the other shareholders or partners, as applicable, of such subsidiary or joint venture, which are the Fluor Corporation, in the case of ICA-Fluor; Soletanche Bachy France S.A.S., in the case of Rodio Kronsa; FCC Construccion, S.A., in the case of the Nuevo Necaxa-Tihuatlan highway and the Aqueduct II water supply project; LP Holding, S.A., in the case of Los Portales; Fomento de Construcciones y Contratas S.A. and Constructora Meco S.A. in the case of the Panama Canal (PAC-4) expansion project; and Aqualia Gestion Integral del Agua, S.A., Aqualia Infraestructuras, S.A. and Servicios de Agua Trident, S.A. de C.V., in the case of our concessionaire for the El Reality water supply system. Also, certain projects under construction in 2012 are managed jointly with Promotora del Desarrollo de America Latina, S.A. de C.V., such as the construction of the second level of Periferico Sur in Mexico City, or Autovia Urbana Sur, and the Mitla-Tehuantepec highway. In the case of these entities, the consent of our partners or other shareholders is only required with respect to the use of cash and cash equivalents outside of normal budgeted operations. The budget for normal operations is set by the board of directors of the relevant subsidiary, which are comprised of members appointed by both us and the other partners or shareholders, depending on the terms of the bylaws of the entity. While the cash held in these entities is not destined for a specific use or set aside as a compensating balance, the requirements for its use could limit our access to liquid resources or limit us from freely deciding when to use cash and cash equivalents outside of normal operations. Additionally, a portion of our cash and cash equivalents are held in reserves established to secure financings and thus form part of our restricted cash balances. The reserve requirements of such financings could also limit our access to liquid resources and limit our ability to decide when to use our cash and cash equivalents. See “Item 3. Key Information—Risk Factors—A substantial percentage of our cash and cash equivalents are held through less-than-wholly owned subsidiaries or joint ventures, or in reserves, that restrict our access to them.”

We generated a net Ps. 5,487 million in operating activities during 2012, as compared to using a net Ps. 10,155 million in operating activities during 2011. This increase can be attributed to the collection on the accounts receivables related to the La Yesca hydroelectric project. We used a net Ps. 10,155 million in operating activities during 2011, as compared to using a net Ps. 4,531 million in operating activities during 2010. The underlying drivers that led to changes in our operating cash flows in 2011 were (i) an increase in the number and volume of projects under execution, (ii) increased use of our cash reserves because of an increase in long-term accounts receivable owed by our clients (due to the payment structures of certain significant projects) and (iii) advance payments to suppliers.

 

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Portions of our assets are pledged to a number of banks under credit arrangements, including: WestLB AG, Banco Santander (Mexico), S.A., Banco Inbursa, S.A. Institucion de Banca Multiple, Grupo Financiero Inbursa, BBVA Bancomer, BG Trust Inc., Bank of America Merrill Lynch, Value Casa de Bolsa, S.A. de C.V., Banco Mercantil del Norte, S.A., Grupo Financiero Banorte, Banco Nacional de Mexico, S.A., Integrante del Grupo Financiero Banamex, Banco Espiritu Santo de Investimento, Banco del Bajio, S.A., Banco Nacional de Obras y Servicios Publicos, S.N.C., Institucion de Banca de Desarrollo, Bancolombia, S.A., Morgan Stanley Bank, N.A., and Interamerican Credit Corporation. The assets we have pledged include collection rights under construction contracts, concessions, construction machinery and equipment, real property, dividend rights and shares of each of our financed concession projects. Notably among these, we have pledged our shares in the Autovia Urbana Sur highway concession, Autovia Necaxa-Tihuatlan, S.A. de C.V., or Auneti, our subsidiary that operates the Nuevo Necaxa-Tihuatlan highway, our 50% interest in Los Portales, S.A., a real estate subsidiary located in Peru, RCO, our Atotonilco water treatment project, our interest in the El Realito project, our interest in the Agua Prieta project, our shares of Viabilis Infraestructura S.A.P.I. de C.V., or Viabilis, the contractor for the Rio de los Remedios-Ecatepec toll highway project, as well as the collection rights of the Rio de Los Remedios project. In general, assets securing credit arrangements will remain pledged until the arrangement 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. At December 31, 2012, we had unrestricted access to Ps. 5,654 million of our cash and cash equivalents, as compared to Ps. 4,845 million as of December 31, 2011 and Ps. 2,975 million at December 31, 2010. See Note 6 to our consolidated financial statements.

Our debt agreements contain standard covenants and events of default applicable to us, including cross-defaults that permit our lenders to accelerate debt. In addition, the indenture under which we issued U.S.$ 500 million and U.S. $ 350 million of notes at the holding company level in February 2011 and July 2012, respectively, contain various covenants and conditions that limit our ability to, among other things: incur or guarantee additional debts; create liens; enter into transactions with affiliates; and merge or consolidate with other companies. As a result of these covenants, we are limited in the manner in which we conduct our business and may be unable to engage in certain business activities. We believe we are currently in compliance with all our restrictive covenants. Additionally, we have increasingly been required to accept clauses which, if invoked, typically require a borrower to pay additional amounts under a loan agreement as may be necessary to compensate a lender for any increase in costs to such lender as a result of a change in law, regulation or directive. Certain of our subsidiaries, such as the Constructora de Proyectos Hidroelectricos, S.A. de C.V. consortium, or CPH, 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. CPH’s financing for the La Yesca hydroelectric project contains various restrictive covenants typical in a project financing including, significantly, covenants limiting CPH’s access to additional cash other than what the project specifically requires until project completion and after final payment from the Mexican Federal Electricity Commission (Comision Federal de Electricidad) is received, as well as covenants limiting CPH’s ability to contract additional debt or guarantees. Our subsidiary Viabilis has contracted financing for the Rio de los Remedios-Ecatepec highway project that contains standard covenants and events of default applicable to Viabilis, significantly, reporting obligations, conduct of business, compliance with laws, limitations on merger and acquisition transactions, limits on contracting additional debt or guarantees, limits on modification of construction contracts without the consent of the lenders and a prohibition on derivative transactions. The Viabilis financing agreement does not include covenants or events of default related to financial ratios. Our unconsolidated affiliate RCO has financing with terms requiring a waterfall of payments that may restrict the cash available for distributions to shareholders until 2014. Restrictive covenants in our debt agreements restrict only the project contracting the financing agreement in which they are contained, and generally do not restrict our operating subsidiaries. See Note 22 to our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” We are not currently, and are not reasonably likely to be, in breach of any of our material debt covenants, and we do not have any stated events of default or cross-defaults in our debt agreements that would allow our lenders to accelerate our debt if not cured within applicable grace periods.

In certain bidding processes we have also been required to prove, typically at the bidding level, our debt ratios (total debt divided by total assets) and liquidity ratios (short-term assets divided by short-term debt). The requirements related to these ratios vary. In certain projects, we were required only to disclose the existing ratios to the potential client, without a minimum requirement, such as in the Atotonilco and El Realito water treatment projects and the PAC-4 project in Panama. In other bidding guidelines we have seen debt ratios required to be less than 0.7 or 0.8, and liquidity ratios required to be greater than 1.0 or 1.2. Our experience shows that these requirements can vary greatly from client to client and country to country. We have historically met or exceeded the debt and liquidity ratio requirements for the projects on which we have bid.

 

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We have also been required to demonstrate minimum capital in order to participate in bids for construction contracts and concessions. The minimum capital requirements are not uniform across clients, and can also vary for the same client depending on a project’s type and magnitude. For example, in two bids with the Ministry of Communications and Transportation, we were required to have minimum capital of Ps. 280 million and Ps. 900 million, respectively. The state government of Jalisco, Mexico required minimum capital of Ps. 386 million for the Agua Prieta project, while the Atotonilco project’s client, the National Water Commission, required Ps. 1,000 million. We believe we will continue to be required to demonstrate minimum capital in order to participate in certain bids for construction contracts and concessions.

Project Financing

We use a number of project financing structures to raise the capital necessary for our 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 under limited—or non-recourse structures. 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.

In our Concessions segment, we typically provide a portion of the equity itself and our investment is returned over time once the project is completed. Concessions are an approach to financing public-sector projects through the private sector. In certain non-concession projects that are financed as part of Mexico’s public works financing program, payment of the contract price is deferred until the project is operational. Due to the nature of most infrastructure projects, which typically involve long-term operations, we do not recover our equity or debt contribution or receive payment under the contract until the construction phase is completed. Depending on the requirements of each specific infrastructure project, whether such project is a concession or not, 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 security holders 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 our 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 selective in choosing projects where we expect to recover our investment and earn a reasonable rate of return. However, we cannot assure you that we will be able to realize these objectives or continue financing construction projects as we have in the past.

Indebtedness

Our total debt to equity ratio was 2.5 to 1 at December 31, 2012 and 2.4 to 1.0 at December 31, 2011. The deterioration in the debt to equity ratio at December 31, 2012 from December 31, 2011 mainly reflected the incurrence of debt to finance the execution of projects including concessions under construction as well as our issuance of the 2017 Senior Notes. Our total debt to equity ratio was 2.4 to 1.0 at December 31, 2011 and 1.7 to 1.0 at December 31, 2010. The deterioration in the debt to equity ratio at December 31, 2011 from December 31, 2010 mainly reflected the incurrence of debt to finance the execution of projects, including concessions under construction and the La Yesca hydroelectric project, as well as our issuance of U.S.$ 500 million of 8.9% senior notes due 2021.

As of December 31, 2012, approximately 24% of our consolidated revenues and 33% of our indebtedness were denominated in foreign currencies, mainly U.S. dollars. Unless, as is our policy, we contract debt financing in the same currency as the source of its repayment, decreases in the value of the Mexican peso relative to the U.S. dollar may increase the cost in Mexican pesos of our debt service obligations with respect to our U.S. dollar denominated indebtedness and may also result in foreign exchange losses as the Mexican peso value of our foreign currency denominated indebtedness is increased. We have entered into cash flow hedges, including with respect to foreign currency cash flow, and other trading derivative instruments for the terms of some of our credit facilities with the objective of reducing the uncertainties resulting from interest rate and exchange rate fluctuations. To date, the results of our derivative financial instruments have been mixed and have not substantially affected our cash flows. See “Item 3. Risk Factors—Risks Related to Mexico and Other Markets in Which We Operate—Appreciation or depreciation of the Mexican peso relative to the U.S. dollar, other currency fluctuations

 

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and foreign exchange controls could adversely affect our financial condition and results of operations” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Derivative Financial Instruments.” Several of our subsidiaries have lesser exposure to foreign currency risk because a higher percentage of their revenues are denominated in U.S. dollars.

Certain of our subsidiaries, such as CPH, 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. See Note 22 to our consolidated financial statements.

In 2012, our debt service obligations (principal and interest before commissions expenses) totaled Ps. 53,273 million for debt denominated in pesos and U.S. dollars, as compared to Ps. 50,622 million in 2011. As of December 31, 2012, our net debt (interest paying debt less cash and cash equivalents) was Ps. 44,861 million, as compared to Ps. 39,722 million as of December 31, 2011. Our net debt increased in 2012 due to an increase in our debt, particularly in our Concessions segment and Corporate and Other segment.

In 2011, our debt service obligations (which includes principal and interest before commissions and expenses) totaled Ps. 50,622 million for debt denominated in pesos and U.S. dollars, as compared to Ps. 32,345 million in 2010. As of December 31, 2011, our net debt (interest paying debt less cash and cash equivalents) was Ps. 39,722 million, as compared to Ps. 27,826 million as of December 31, 2010. Our net debt increased in 2011 due to an increase in our debt, particularly in our Concessions segment and Corporate and Other segment.

Empresas ICA

In February 2011, we issued U.S.$ 500 million of 8.9% senior unsecured notes due 2021, or the 2021 Notes. The notes are guaranteed on a senior unsecured basis by our subsidiaries Constructoras ICA, S.A. de C.V., or CICASA, Controladora de Empresas de Vivienda, or CONEVISA, and CONOISA. Approximately half of the net proceeds from the sale of the notes was used to repay a bridge loan among our subsidiary Aeroinvest, as borrower, us, as guarantor, and Bank of America, N.A., acting through its Cayman Branch, as lender. The balance of the proceeds from the notes was used for general corporate purposes, including equity contributions for new and existing projects. In July 2012, we issued U.S.$ 350 million of 8.375% senior unsecured notes due 2017, or the 2017 Notes. The new issuance was also guaranteed on a senior unsecured basis by our subsidiaries CICASA, CONOISA and CONEVISA. The net proceeds from the sale of the notes were used to prepay short—and long-term debt.

We have entered into cross currency swaps for interest payments on the 2021 Notes and 2017 Notes through 2017 and the first half of 2015, respectively.

La Yesca

CPH is a special purpose subsidiary created to construct the La Yesca hydroelectric project. The terms of the La Yesca contract require that we secure financing for the project costs and limit disbursements during the construction phase to 90% of the cash cost of any certified work performed. We and the other shareholder of CPH have agreed to guarantee certain obligations of CPH 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. CPH obtained financing for the construction phase of the La Yesca hydroelectric project in the first quarter of 2008 from WestLB AG, which also structured the financing for the El Cajon hydroelectric project. The financing consisted of a U.S.$ 910 million line of credit to be used to cover construction costs and a U.S.$ 140 million revolving line of credit to be used to finance monthly working capital requirements and to be repaid from the construction line of credit, both of which contain various restrictive covenants typical in a project financing including, significantly, covenants limiting CPH’s access to additional cash other than what the project specifically requires until project completion and after final payment from the Mexican Federal Electricity Commission (Comision Federal de Electricidad) is received, as well as covenants limiting CPH’s ability to contract additional debt or guarantees. The $ 910 million construction line of credit was syndicated and has a term that lasts the duration of the construction period, subject to certain permissible extensions if the La Yesca project completion date is delayed. The repayment of the construction line of credit occurred in two installments: (i) the first payment of U.S.$ 700 million was made on the date of provisional acceptance of the first turbine unit, and (ii) the second payment of U.S.$ 342 million was paid on December 20, 2012 upon delivery of the second turbine unit in 2012. The current project debt is a U.S.$ 140 million working capital line of credit, which has the same term as the construction line of credit. The working capital line of credit is expected to be repaid from the construction line of credit.

 

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RCO

On August 6, 2007, the Ministry of Communications and Transportation awarded the first FARAC concession package to RCO, a consortium formed by two of our subsidiaries and GSIP in which we originally participated with 20% of the equity and GSIP originally held the remaining 80% of the equity. The FARAC concession consists of a 30-year concession to construct, operate, exploit, conserve, and maintain the 558-kilometer Maravatio—Zapotlanejo, Guadalajara—Zapotlanejo, Zapotlanejo—Lagos de Moreno, and Leon—Lagos—Aguascalientes toll roads in the states of Michoacan, Jalisco, Guanajuato and Aguascalientes, as well as extension or enlargement works as the Ministry of Communications and Transportation determines. RCO paid Ps. 44,051 million for the assets. The concessionaire obtained a Ps. 31,000 million long-term financing with Banco Santander Central Hispano, S.A. We have a minority interest in the concessionaire, accounting for it as a non-consolidated affiliate, and were required to contribute Ps. 3,118 million as equity capital. Our consortium partner GSIP and the long-term financing described above contributed the remaining investment amount paid to the Mexican federal government under the concession. The terms of the financing required, among other conditions: (i) the pledge of our and GSIP’s shares of the consortium in favor of the creditors and (ii) a waterfall of payments that may restrict the cash available for distributions to shareholders until 2014. Because the investment is accounted for under the equity method, the debt is not consolidated on our balance sheet.

In October 2009, RCO placed Ps. 6,550 million in equity-linked structured notes with Mexican institutional investors on the Mexican Stock Exchange. After the transaction (including our purchase of additional Series A shares in RCO at the same price per share as the Series B shares underlying the equity-linked structured notes), we owned 13.6% of RCO and GSIP owned 54.5%. The trust holding the Series B shares underlying the equity-linked structured notes owned the remaining 31.9% of RCO. RCO used the net proceeds of the capital increase together with the equity provided by the original shareholders primarily to pay down debt totaling Ps. 5,666 million of the long-term financing with Banco Santander. After paying this debt reduction, the outstanding balance on the long-term financing with Banco Santander was Ps. 27,291 million.

There are no parent company guarantees of these RCO financing arrangements.

In September 2011, we completed the sale of our Queretaro-Irapuato and Irapuato-La Piedad highway concessions to RCO in exchange for cash and an increased shareholding in RCO from 13.6% to 18.7%.

In September 2012, RCO placed Ps. 8,215 million in long term notes, Ps. 2,841 million of which matures in 2017 and Ps. 5,374 million (in UDI-denominated notes) of which matures in 2032. The net proceeds were used to refinance RCO indebtedness.

Aeroinvest

On December 22, 2010, our subsidiary Aeroinvest entered into a Ps. 2,275 million bridge loan with Bank of America, N.A. Cayman Branch, or Bank of America, to prepay Aeroinvest’s series 2007-1 Class A, Class B and Class C notes issued in 2007. In February 2011, we repaid this loan in its entirety with the funds obtained from our issuance of U.S.$ 500 million of 8.9% senior notes that month.

On November 30, 2012, Aeroinvest prepaid its U.S.$ 45 million credit with Bank of America, which was backed by a pledge of shares. On that same day, Aeroinvest entered into a credit agreement with Inbursa in the amount of Ps. 750 million, which was subsequently increased by Ps. 350 million for a total of Ps. 1,100 million, which matures November 2015. A total of 53,473,020 Series B shares of GACN held by Aeroinvest were pledged to the bank through a trust agreement. There are no additional guarantees or collateral. This loan also requires compliance with a leverage ratio of less than 3 and a GACN earnings before depreciation and amortization, or EBDA, to debt service ratio of no less than 3.0. As of December 31, 2012, we were in compliance with these requirements, with a leverage ratio of 2.18 and an EBDA to debt service ratio of 10.90. We have entered into an interest rate swap for the original Ps. 750 million under this loan for the term of the loan.

In 2012, Aeroinvest entered into a credit agreement with Banamex in the amount of Ps. 385 million due to mature in December 2014. Aeroinvest pledged 22,168,028 of its Series B shares in the GACN to the lender. There are no additional guarantees or collateral.

Grupo Aeroportuario del Centro Norte

On July 14, 2011, our indirect subsidiary GACN placed Ps. 1,300 million in 5-year peso-denominated notes (certificados bursatiles) with local investors in the Mexican market. The interest rate on the notes is the 28-day Mexican Interbank Equilibrium Rate, or TIIE, plus 70 basis points. GACN used the net proceeds of the offering to prepay Ps. 1,011.3 million in existing debt and commissions, with the balance of the net proceeds used to fund committed investments under GACN’s Master Development Program for its 13 airports, as well as to make strategic investments.

 

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On March 26, 2013, GACN placed an aggregate principal amount of Ps. 1,500 million of its 6.47% 10-year peso-denominated notes (certificados bursátiles) in the Mexican market. On March 22, 2013, GACN issued 28-day commercial paper in the amount of Ps. 100 million. The net proceeds from the issuance of the commercial paper will be used for working capital and general corporate purposes. GACN expects to renew the commercial paper at each maturity.

SPC Projects

In September 2011, two of our special purpose subsidiaries placed Ps. 7,100 million in bonds in two tranches—one Mexican peso tranche in the amount of Ps. 5,323 million at a fixed annual rate of 10.1% and one UDI tranche in the amount of Ps. 1,777 million with a real annual rate of 5.65%—in the Mexican market with a term of 20.8 years to finance two social infrastructure projects consisting of the construction of, and provision of non-penitentiary services to, two federal penitentiaries. Our obligations under these debt securities are secured by a pledge of the collection rights under the SPC contracts. We expect to begin making quarterly principal and interest payments on the bonds in 2013 according to their amortization schedule. In 2012, we reopened the bonds and issued Ps. 160 million in the Mexican market under substantially similar terms as the Mexican peso tranche. In the same year we also issued a series of subordinated notes for Ps. 1,699 million (in UDI-denominated notes) in the Mexican market at a real annual rate of 8%. As of December 31, 2012, the outstanding balance of these 2012 issuances was Ps. 1,887 million.

ViveICA Credit Lines

On September 4, 2007, our housing subsidiary ViveICA entered into an uncommitted revolving debt facility funded by Deutsche Bank for the peso equivalent of U.S.$ 50 million to finance projects in several cities. The facility was denominated in pesos and had a maturity of six years, with a four-year revolving period during which ViveICA was permitted to draw on the funds. Because the facility was uncommitted, we did not pay a commitment fee to Deutsche Bank and Deutsche Bank had discretion to cease advancing funds under the agreement.

We used this facility to finance projects before project authorization documents were obtained and to recover the appraised value of the project land upon delivery of definitive project authorization, thus increasing the turnover and liquidity of projects. This facility was paid in full during the first quarter of 2012.

On August 20, 2009, ViveICA entered into facility funded by IXE Banco for Ps. 350 million. The facility is denominated in pesos and had a maturity of 2 years with interest at the 28-day TIIE plus 3.5%. ViveICA has received funds from the facility of Ps. 350 million, which it used to repay short-term commercial paper. We make monthly payments on the loan, which was expected to be fully paid upon expiration of its term on August 16, 2011. However, we executed an agreement to reschedule the payments under this facility beginning in June 2010 to extend the repayment term for 36 months thereafter. We extended the repayment term in order to provide increased working capital for ViveICA. Under this agreement, ViveICA and Ingenieros Civiles Asociados, S.A. de C.V. have agreed not reduce our equity in ViveICA by more than 10% for the term of the loan. Ingenieros Civiles Asociados has provided a guarantee under the terms of this facility. As of December 31, 2012, we had approximately Ps. 33 million outstanding under this facility.

On March 22, 2011, ViveICA entered into a Ps. 500 million 3-year term facility with Banorte, with an interest at the 28-day TIIE, plus a 4% spread. This facility has a parent company guarantee from EMICA. As of December 31, 2012, we had Ps. 244,392 million outstanding under this facility.

Nuevo Necaxa–Tihuatlan

On June 2, 2008, our subsidiary Auneti, which operates the Nuevo Necaxa—Tihuatlan toll highway concession, entered into a guaranteed multi-tranche loan for the long-term financing of the construction of the Nuevo Necaxa—Avila Camacho segment of the Nuevo Necaxa—Tihuatlan highway in the amount of Ps. 6,061 million. The loan agreement consists of two tranches: (1) Tranche A provides a Ps. 5,510 million loan for a nine-year term to be used for the acquisition of the concession and its construction, and (2) Tranche B provides a Ps. 551 million support facility at the completion of construction, for a nine-year term, to be used for the payment of interest on Tranche A. Both tranches of the loan are without recourse to Auneti’s shareholders and were provided by Banco Santander, HSBC Securities (USA) Inc. and Dexia S.A. There is no parent company guarantee under this loan. We have entered into an interest rate swap in connection with this facility.

Atotonilco

On August 16, 2010, we entered into an 18-year term loan agreement with Banobras development bank for Ps. 4,790 million. This facility has an interest rate at the 28-day TIIE plus 2.75% to 3.5%, depending on the year in which the funds are effectively disbursed. The collateral for this loan includes a pledge on our shares of the project concessionaire. We have an interest rate swap in connection with this facility.

 

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Acapulco Tunnel (TUCA)

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 (nominal value) in notes (certificados bursatiles) due 2022, which were listed on the Mexican Stock Exchange. These 2005 notes accrued interest at TIIE plus 2.95%. The 2005 notes were 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 (nominal value) to Banco Nacional de Obras y Servicios Publicos, S.N.C. and Ps. 206 million (nominal value) of TUCA’s ordinary participation certificates, we received approximately Ps. 460 million (nominal value) from the sale of these notes, which was used for general corporate purposes.

In 2008, TUCA used the proceeds of its new notes offering to repay the 2005 notes. TUCA issued the new notes in the amount of Ps. 1,250 million, with a term of up to 26 years. The new notes accrue interest at the rate of TIIE plus up to 2.95% and are non-recourse.

There are no parent company guarantees of these Acapulco Tunnel financing arrangements. We have entered into interest rate option in connection with this project.

Rio Verde–Ciudad Valles Highway

On September 19, 2008, our subsidiary ICA San Luis, S.A. de C.V., which operates the Rio Verde–Ciudad Valles highway concession entered into a long-term financing for the construction of a 113.2-kilometer highway in the state of San Luis Potosi, in the amount of Ps. 2,550 million. The loan was structured by Banco Santander and has a term of 17 years. There is no parent company guarantee of this Rio Verde–Ciudad Valles highway financing arrangement. We have entered into an interest rate swap in connection with this facility.

The Kantunil-Cancun Highway (Mayab Consortium)

In 2008, as a consequence of our acquisition of the Mayab Consortium, which holds the concession for the Kantunil-Cancun highway, we assumed the Mayab Consortium’s long-term debt securities, which as of December 31, 2011 were equivalent to Ps. 2,446 million. The debt is denominated in Unidades de Inversion, or UDIs, which are Mexican peso currency equivalent units of account that are indexed to Mexican inflation on a daily basis (as measured by the change in the Mexican National Consumer Price Index). As of December 31, 2012, one UDI was equal to approximately Ps. 4.8746. The long-term debt matures in 2019 and 2020, and is expected to be repaid from toll revenues generated by the concession. We consolidate the investment in our consolidated financial statements. There is no parent company guarantee of this Kantunil-Cancun highway financing arrangement. In August 2011, we signed an amendment to our concession agreement with the Ministry of Communications and Transportation to construct an extension of the tollroad. The amendment includes the construction, operation, conservation and maintenance of a 54-kilometer expansion of the Kantunil-Cancun highway to Playa del Carmen and extends the term of the concession to 2050. The expansion of the highway will require an estimated investment of approximately Ps. 1,900 million.

In 2012, the Mayab Consortium placed Ps. 4,500 million in notes (certificados bursátiles) with a maturity of 22 years in the Mexican market in two trenches. The first tranche was in the amount of Ps. 1,195 million with a fixed interest rate of 9.67%, and the second tranche was denominated in UDIs in an amount equivalent to Ps. 3,305 million at a fixed interest rate of 5.80%. At December 31, 2012, the UDI-denominated notes were equivalent to Ps. 3,342 million. Interest on these notes is paid semi-annually. We used approximately Ps. 2,339 million of the net proceeds from the issuance of these notes to prepay the earlier notes assumed in 2008. We expect to apply Ps. 1,909 million to the construction of the 54-kilometer expansion of the Kantunil-Cancun highway. The notes are to be repaid with the proceeds from the operation of the project.

In October 2012, with the proceeds from the offering of the new notes we prepaid the entirety of the Mayab Consortium’s long-term debt securities at a premium of Ps. 161 million. See Note 33 to our financial statements.

Rio de los Remedios-Ecatepec

In February 2010, our subsidiary ANESA (then known as Viabilis) entered into a long-term financing agreement for the Rio de los Remedios-Ecatepec highway project with Banobras development bank. The Ps. 3,000 million line of credit was applied to Phase 1 of the highway project. On April 15, 2010, ANESA made its first draw under this line of credit in the amount of Ps. 1,136 million. As of December 31, 2012, we have Ps. 3,000 million outstanding under this line of credit. This credit facility matures in 2037 and has a fixed interest rate of 7.8% plus applicable margin, which varies between 295 and 370 basis points over the term of the loan. Repayment of the loan is expected to occur over the final 14 years of its term; 70% of the loan will be subject to a fixed payment calendar while 30% is payable only to the extent cash is available from the highway project after the fixed-calendar payments are made. The financing agreement includes standard covenants and events of default applicable to ANESA, significantly, reporting obligations, conduct of business, compliance with laws, limitations on merger and

 

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acquisition transactions, limits on contracting additional debt or guarantees, limits on modification of construction contracts without the consent of the lenders and a prohibition on derivative transactions. The financing agreement does not include covenants or events of default related to financial ratios. We are in compliance with the terms of this contract.

The financing package with Banobras for the ANESA credit facility includes a joint and several guarantee of ANESA’s performance by Ingenieros Civiles Asociados, S.A. de C.V., our construction subsidiary, as well as a payment guarantee by our subsidiary CICASA, until operations of various phases of the highway begin. Additionally, our shares of ANESA are pledged to Banobras as collateral.

El Realito

In March 2011, our subsidiary Aquos el Realito S.A. de C.V. entered into a 18-year term financing agreement for the construction of the El Realito Aqueduct project, to which it holds a long-term service agreement, in an amount up to Ps. 1,319 million. As of December 31, 2012, our portion of the outstanding debt for the project was Ps. 399 million. This credit arrangement also contains certain financial ratios which will be required to be met beginning upon operation of the project. The debt service coverage ratio less than 1.2 but greater than 1.18 will require us to increase our debt service reserve account. As of December 31, 2012, we have not yet measured our compliance, given that the project is still under construction. We have entered into an interest rate swap in connection with this agreement and our effective rate is 7.81%.

Agua Prieta

In March 2011, our subsidiary Renova Atlatec S.A. de C.V., or Renova Atlatec, the holder of the long-term service agreement with the Jalisco State Water Comission (CEA) for the construction and operation of the Agua Prieta Waste Water Treatment Plant, entered into a 16-year term financing agreement for the construction of this project in the amount of Ps. 1,175 million. As of December 31, 2012, our portion of the outstanding debt for this project was Ps. 788 million. This loan is guaranteed by the shares of CONOISA in Renova Atlatec. The agreement also provides that the debtor must maintain a debt service coverage ratio of at least 1.02 to 1 during the operation phase. As of December 31, 2012, we have not yet measured our compliance, given that the project is still under construction. We have entered into an interest rate swap in connection with this agreement with our effective rate being 8.17%.

Autovia Urbana Sur

In May 2011, our affiliate Concesionaria Vial San Jeronimo-Muyuguarda, S.A., which holds the concession for the second level of a section of the Periferico Sur expressway in Mexico City, entered into a long term financing agreement for the project’s construction in the amount of Ps. 2,957 million. The loan has a term of 10 years and is secured by a pledge over our shares in the concessionaire. We have also entered into an interest rate swap in connection with this agreement.

Mitla-Tehuantepec

In September 2012, Autovía Mitla Tehuantepec entered into a Ps. 6,320 million facility for the expansion and modernization of the Mitla-Tehuantepec highway. This facility has an interest rate at the 91-day TIIE plus 2.95%. The source of repayment for this facility is the revenue generated from the toll fees paid by users of the highway. The facility also includes a debt service coverage ratio requirement of not less than 1.2 which will be required to be met beginning upon operation of the project. As of December 31, 2012, we have not yet measured our compliance, given that the project is still under construction.

Barranca Larga—Ventanilla

During 2012, our newly acquired subsidiary Desarolladora de Infraestructura Puerto Escondido, S.A. de C.V., or DIPESA, entered into a facility in the amount of Ps. 1,368 million, which matures in November 2032. This facility bears interest at the 28-day TIIE plus 3%. All of our shares in DIPESA are pledged under this facility.

Other Debt

As of December 31, 2012 we had no other material outstanding long-term debt.

    Derivative Financial Instruments

We enter into derivative financial instruments to reduce uncertainty on the return of our projects. From an accounting perspective our derivative financial instruments can be classified as for hedging or for trading purposes. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Policies and Estimates—Derivative Financial Instruments.” The decision to enter into a derivative financial instrument is linked, in most cases, to the financing for a project, because the uncertainties we seek to reduce result from fluctuations in interest rates and exchange rates relevant to the project’s financing. Our derivative financial instruments as of December 31, 2012 and 2011 are composed of instruments that hedge interest rate and exchange rate fluctuations.

 

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When financing for our projects is at a variable interest rate, we may enter into interest rate hedges. Our interest rate hedges can include swaps to reduce our exposure to volatility risks; these swaps convert the interest rate from variable to fixed. We may also enter into interest rate options that establish a maximum limit to the variable rate to cap financial costs. In 2010, we entered into interest rate swaps in connection with an Aeroinvest loan, the La Piedad bypass and the Atotonilco project.

We may enter into exchange rate hedges to reduce the foreign currency exchange rate risk where the currency used in the financing (and corresponding repayment) of the project is different from the currency in which we expect the project to incur labor, supply or other costs. In 2012, 2011 and 2010, we entered into foreign exchanges hedges in connection with AHMSA Phase II steel mill and plate line expansion in our Industrial Construction segment.

It is our policy to enter into financial instruments at the level of each project, by the subsidiaries carrying out such project. Accordingly, the counterparty for a derivative financial instrument is often the same institution (or an affiliate) that provides the financing for the project to which that instrument is linked. We generally execute our derivatives directly with the hedge provider. We believe we have diversified the credit risk of our derivative financial instruments by contracting them with different financial institutions.

It is our policy not to enter into, and we have not entered into, derivative instruments that have margin calls or similar mechanisms that might impose additional obligations on parent companies of our subsidiaries. Since we enter into all our derivative instruments at the level of each project, hedge providers on occasion require additional financial support for the project subsidiary’s obligations. In those cases, our policy is to limit such support to cash collateral or a standby letter of credit provided at the time we enter into the derivative, so that the amount of such collateral or letter of credit is defined without any provision that would permit increase thereof or margin calls. It is also our policy that such collateral or letter of credit only be payable to the hedge provider upon an event of default under the hedge agreement.

Our internal control policies state that entering into derivative financial instruments requires collaborative analysis by representatives from our Finance, Legal, Administration and Operations areas, prior to approval. Once this analysis has been concluded and documented, the responsibility for entering into derivatives belongs to the Finance and Administration areas, in accordance with our internal control policy. Our policies do not expressly require authorization by the Corporate Practices, Finance, Planning and Sustainability Committee or the Audit Committee for entry into derivative financial instruments. Our policies limit the authority of those who can execute derivative financial instruments in certain ways, the most important of which are the following:

 

   

Our Board of Directors establishes limitations on the amounts and types of derivative transactions that our officers may enter into on our behalf.

 

   

The Board has vested our Chief Executive Officer with the power to enter into derivative financial instruments subject to certain limits on amount and complexity. The CEO has delegated this power using powers of attorney, also subject to caps on amount and complexity, to our Vice President for Finance and Administration and appropriate Finance officers.

 

   

In the event that the CEO, the Vice President for Finance and Administration or an appropriate Finance officer wishes to enter into a derivative financial instrument that exceeds or goes beyond the limitations set by the board, the board’s specific authorization is required.

When assessing the potential use of derivatives to hedge financial market risks, we perform sensitivity analyses of possible outcomes of alternative derivative instruments to help us evaluate the economic efficiency of each alternative available to us to hedge the risk. We compare the terms, obligations and conditions to choose which alternative best suits our strategy. Once we enter into a derivative, we conduct effectiveness tests with the help of expert appraisers to determine its accounting treatment. See “Item 5. Operating and Financial Review and Prospects – Operating Results – Critical Accounting Policies and Estimates – Derivative Financial Instruments.”

La Yesca Derivatives

During 2008, we entered into foreign currency exchange options related to the La Yesca hydroelectric project to hedge our foreign exchange risk, because the financing and sources of payment (revenues) related to this project are in U.S. dollars while the majority of its project costs are in Mexican pesos. These options establish exchange rate levels that we expect will permit the U.S. dollars obtained from the La Yesca financing to cover the project’s costs and expenses in Mexican pesos. The four options we entered into established together an average exchange rate of Ps. 11.33 per U.S. dollar, for the period from July 2008 to July 2010 for three of the options and to April 2011 for the fourth option. The notional amount fluctuated from U.S.$ 194.5 million to U.S.$ 499.3 million, based on the spot exchange rate compared to the exchange rate set forth in the derivative contract. We analyzed the effectiveness of these instruments with the assistance of external evaluators. The analysis concluded that the amount of the derivative covered the peso-denominated costs of the project, and any reduction in the market value of the instrument was expected to be offset by exchange gains on the value of the construction contract.

 

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Nonetheless, due to changes in the La Yesca construction schedule and the increasing volatility of Mexican peso-U.S. dollar exchange rate fluctuations, on April 20, 2009, we and the provider of the La Yesca foreign currency exchange options restructured the options to (i) stabilize the notional amount so that it remains unchanged regardless of the difference between the spot exchange rate and the exchange rate set forth in the derivative contract, (ii) reduce the notional amount to Ps. 2,083 million (approximately U.S.$ 183.5 million), corresponding to weekly transactions averaging Ps. 16 million (approximately U.S.$ 1.4 million), to better fit the La Yesca hydroelectric project’s peso obligations, and (iii) reschedule the weekly settling of notional amounts to match the revised construction schedule and disbursement program. The options as restructured were effective for the period from April 24, 2009 through March 2, 2012. This option was again restructured in August 2011 to better reflect the conditions of the project, including reducing the notional amount.

The cost of the 2009 renegotiation of the La Yesca options was U.S.$ 33 million, for which the provider required a letter of credit from Compañia Hidroelectrica La Yesca, or COHYSA, as a credit support document. The letter of credit accrued interest at the London Interbank Offered Rate, or LIBOR, plus 450 basis points. The cost of renegotiation, including interest, becomes due upon completion of the La Yesca hydroelectric project. On September 15, 2010, we entered into a U.S.$ 16 million credit agreement to replace the expiring letter of credit. The cost of the 2011 restructuring was U.S.$ 2.9 million.

During 2007, we entered into two derivative contracts that established a maximum interest rate of 5.5% (an interest rate cap). During 2008, we entered into a combination of a purchase of a cap option and a sale of a floor option (which established a minimum interest rate on the financing) on certain of our credit agreements related to the La Yesca project; this transaction was designated as a cash flow hedge. At December 31, 2012, these contracts expired.

In September 2012, we entered into a derivative contract that establishes a maximum interest rate of 1.0% to reflect the low risk profile of the project.

RCO Derivative

RCO’s long-term financing has a floating interest rate. In order to hedge for fluctuations of the floating rate, RCO entered into six interest rate swaps; four that swapped the floating rate for a fixed interest rate and two that swapped the floating rate to a “real” (inflation-adjusted) interest rate. The real interest rate swaps are designed to hedge increases in the costs of RCO’s operating and capital expenditures because of inflation. Given that we recognize RCO as an equity method investment, the aggregate fair value to us of the six derivatives on December 31, 2012 was a loss of Ps. 55 million, as compared to a loss of Ps. 357 million on December 31, 2011, representing our share of the total value of the derivative. The cash flows derived from the four fixed interest rate swaps are paid or received on a monthly basis, while the cash flows derived from the two real rate swaps are paid on an annual basis. This derivative is classified as a hedging instrument.

In September 2012, RCO issued Ps. 8.215 billion in aggregate principal amount of long-term bonds, Ps. 2.841 billion in aggregate principal amount of bonds with a 15-year maturity and Ps. 5.394 billion in aggregate principal amount (denominated in UDIs) of bonds with a 20-year maturity. These bonds refinanced a portion of RCO’s long-term financing and reduced the notional amount of the two real interest rate swaps from Ps. 11,365 million to Ps. 8,400 million and the notional amount of the four fixed interest rate swaps from Ps. 15,070 million to Ps. 14,279 million.

Other Derivatives

In August 2006, we entered into a derivative financial instrument known as a “European style option,” which limited the interest rate on a notional amount of Ps. 580 million of our debt securities. In August 2010, we renewed this financial instrument and changed the notional amount to Ps. 490 million. After the sale of our CONIPSA subsidiary to our affiliate RCO in the third quarter of 2011, we no longer consolidate the entity that holds this derivative. Until the time of the sale, this option was classified as a hedge for accounting purposes.

Between November and December 2011, we entered into a series of foreign exchange forwards with varying maturities in order to mitigate foreign exchange exposure on the AHMSA Phase II steel mill and plate line expansion. These instruments have a fair value as of December 2012 of Ps. 22 million. These instruments are classified as hedging contracts for accounting purposes.

 

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In the second half of 2010, we entered into cross-currency swap transactions in order to mitigate our interest and exchange rate exposure in the Eastern Discharge Tunnel project to hedge prices of the tunnel boring machines used in this project. As of December 31, 2012, the fair value of these instruments is Ps. 19 million. These instruments are classified as hedging contracts for accounting purposes.

In February 2011, we entered into four coupon-only swaps to hedge our foreign currency interest payment exposure related to our U.S.$ 500 million senior unsecured notes. For more information on our senior unsecured notes, see “Item 5. Liquidity and Capital Resources—Indebtedness—Empresas ICA.” The fair value as of December 31, 2012 of these swaps is Ps. 89 million. These instruments are classified as hedging contracts for accounting purposes.

During 2011 we entered into a series of interest rate swaps (exchanging variable or floating rates for fixed rates) in our Concessions segment in connection with the following projects: the Atotonilco water treatment plant with a notional amount of Ps. 4,310 million; the Autovia Urbana Sur project with a Ps. 2,957 million notional amount; the Agua Prieta water treatment plant with a notional amount of Ps. 940 million; and the El Realito water treatment plant with a notional amount of Ps. 989 million.

In August 2012, we entered into three coupon-only swaps to hedge our foreign currency interest payment exposure related to our U.S.$ 350 million senior unsecured notes. The fair value as of December 31, 2012 of these swaps is Ps. 22 million. These instruments are classified as hedging contracts for accounting purposes.

During 2012 we entered into a series of cross currency swaps in connection with certain indebtedness incurred by CICASA, our Civil and Industrial Construction subholding company, Aeroinvest, our GACN subholding company, and EMICA, our parent holding company, with combined notional amounts of U.S.$ 139 million and Ps. 712 million. Our project company Autovia Mitla-Tehuantepec, S.A. de C.V., the concessionaire for the Mitla-Tehuantepec highway project, also entered into an interest rate swap in the notional amount of Ps. 7,900 million. See Note 21c to our consolidated financial statements.

For our Mayab Consortium bridge loan related to the acquisition of the land for the expansion of the concession, we entered into a foreign exchange forward with a strike price of U.S.$ 14.25 per Mexican peso, which as of December 31, 2012 had a notional amount of U.S.$ 45 million.

In 2012, EMICA also entered into a forward contract settled in cash on 22,280,100 of its shares, from May 22 to August 21, 2013 in non-consecutive periods, for a weighted average strike price of Ps.24.99 per share and equivalent to an amount of Ps.556.8 million, with maturity in one year. If the instrument is exercised, the effect will be accounted for in the reserve for the acquisition of shares. If the instrument is not exercised, the fair value of the forward will be recognized in valuation of financial instruments in interest expense in the consolidated statement of income and other comprehensive income.

Also, in December 2012, CICASA entered into a cross currency swap in order to mitigate the fluctuations in exchange rates and interest rates related to a dollar-denominated, variable rate bridge loan. The fixed exchange rate is Ps.12.87 per U.S. dollar with a fixed rate of 7.99%. The primary position related to this instrument is dollar-denominated debt bearing interest at LIBOR. As a part of the same transaction, EMICA entered into a derivative financial instrument, which gives an affiliate of the lender the right to purchase 11.9 million shares of EMICA at a fixed price. This instrument was classified as a trading instrument.

Additional Sources and Uses of Funds

We may from time to time repurchase or sell our outstanding equity securities if market conditions and other relevant considerations make such repurchases or sales appropriate. The amount that we may use to repurchase our securities is authorized annually by our shareholders at our ordinary general meeting. See “Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchaser.”

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.

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 considered net of value-added tax was 212 days as of December 31, 2012, which is a 5% decrease from 223 days as of December 31, 2011, primarily as a result of the La Yesca hydroelectric project, for which we have already begun to collect payments.

 

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C. TREND INFORMATION

Please see “Item 5. Operating and Financial Review and Prospects,” “Item 3. Key Information—Risk Factors” and “Item 4. Information on the Company” for trend information.

  D. OFF-BALANCE SHEET ARRANGEMENTS

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 material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

        E. 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, 2012, the scheduled maturities of our contractual obligations were as follows:

 

     Payments Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (Millions of Mexican pesos)  

Long-term debt obligations

     Ps. 42,024         Ps. 1,183         Ps. 3,236         Ps. 7,510         Ps. 30,090   

Notes payable

     9,742         —           —           —           —     

Fixed interest(1)

     26,374         2,467         4,892         4,557         14,458   

Variable interest(2)

     7,423         865         1,712         1,435         3,411   

Operating and financial leases obligations

     2,484         1,189         140         1,449         96   

Master development programs(3)

     2,152         992         1,160         —           —     

Purchase obligations

     135         44         91         —           —     

Seniority premiums

     670,880         —           80,900         53,933         536,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     Ps. 761,214         Ps. 6,740         Ps. 92,131         Ps. 68,884         Ps. 584,103   

 

(1) Fixed interest rates range from 3.78% to 10.10%.
(2) Variable interest rate was estimated using the following ranges: 0.96% (LIBOR plus spread) to 7.31% (LIBOR plus spread); and 4.84% (TIIE plus spread) to 11.30% (TIIE plus spread). When calculating variable interest rates, we used LIBOR and TIIE as of December 31, 2012.
(3) In 2015, the fifth year of our current master development program, we expect to conduct a negotiation with the Ministry of Communications and Transportation to determine the new master development program’s commitments for the subsequent five years.

As of December 31, 2012, the scheduled maturities of other commercial commitments were as follows:

 

     Amount of Commitment Expiration per Period  

Contractual Obligations

   Total Amounts
Committed
     Less Than
1 Year
     1-3 Years      4-5 Years      Over
5 Years
 
     (Millions of Mexican pesos)  

Standby letters of credit

     Ps. 7,844         Ps. 6,111         Ps. 1,733         Ps. 0         Ps. 0   

Guarantees(1)

     23,019         5,584         17,549         42         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial commitments

     Ps. 31,019         Ps. 11,695         Ps. 19,282         Ps. 42         Ps. 0   

 

(1) Consist principally of bonds delivered to guarantee bids, advance payments and performance.

 

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Item 6. Directors, Senior Management and Employees

A. 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 elected by our shareholders at the annual ordinary general meeting. In September 2006, our bylaws were amended to comply with the Mexican Securities Market Law in effect since June 2006. See “Item 6. Directors Senior Management and Employees—Board Practices.” Our current Board of Directors was elected on April 16, 2013 in three classes, with terms designed to provide a transition to the staggered term arrangement provided by the bylaws. The President of the Board of Directors must be a Mexican national. The Board of Directors currently consists of 12 members. As of April 18, 2012, seven of our directors are independent directors within the meaning of the Mexican Securities Market Law. The directors are as follows:

 

Name

   Position    Years as Director      Age  

Bernardo Quintana I.(2)

   Chairman      35         71   

Jose Luis Guerrero Alvarez(3)

   Director      23         69   

Diego Quintana Kawage(1)

   Director      6         42   

Alonso Quintana Kawage(2)

   Director      5         39   

Fernando Flores y Perez(1)(4)(5)

   Director      5         67   

Elsa Beatriz Garcia Bojorges(2)(4)(5)(6)

   Director      4         47   

Salvador Alva Gomez(3)(4)(5)

   Director      3         62   

Margarita Hugues Velez(2)(4)(5)

   Director      3         47   

Carlos Fernandez Gonzalez(3)(4)(5)

   Director      0         47   

Ricardo Gutierrez Munoz(1)(4)(5)

   Director      0         70   

Carlos Guzman Bofill(1)(4)(5)

   Director      0         63   

Eduardo Revilla Martinez(3)

   Director      0         51   

 

  (1) Director whose term expires on April 30, 2014.
  (2) Director whose term expires on April 30, 2015.
  (3) Director whose term expires on April 30, 2016.
  (4) Independent directors within the meaning of the Mexican Securities Market Law.
  (5) Independent directors within the meaning of Rule 10A-3 under the Securities Exchange Act of 1934, as amended.
  (6) Audit committee financial expert, within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002.

Listed below are the names, responsibilities and prior business of our directors and senior management:

Bernardo Quintana Isaac has been a member of our Board of Directors since 1978. Mr. Quintana was appointed Chairman of our Board of Directors in 1994. He also acted as our CEO from December 1994 through 2006. Mr. Quintana currently sits on the board of directors of Cementos Mexicanos and of Banamex. He is a member of the Mexican Council of Businessmen and is active in various philanthropic organizations in the Mexican community including the ICA Foundation and the Letras Mexicanas Foundation. He was previously Chairman for the Mexican Energy Conservation Trust, or FIDE, until 2012 and also was the Chairman of the Board of Trustees of the National University of Mexico, or UNAM, until 2009. He also sits on the Board of the National College for Professional Technical Education, or CONALEP. In the United States, he is a member of the Board of Trustees of the Culver Educational Foundation in Indiana and the Board of Visitors of the Anderson School of Management at the University of California at Los Angeles, or UCLA. Mr. Quintana holds a degree in civil engineering from the UNAM and an MBA from UCLA. He has been distinguished by France’s National Order of the Legion of Honor (Legion d’honneur), the highest decoration from the Republic of France. Likewise, in 2007, in recognition of his career in business, the Mexico-U.S. Chamber of Commerce in Washington, D.C. awarded Mr. Quintana the “Good Neighbor Award,” a recognition given to both public and private sector leaders. In 2009, he was honored as a Commander in the Order of Leopold II from the Government of Belgium. In 2011, Mr. Quintana awarded the National Engineering Price from the Mexican Association of Engineers and Architects. In 2012, he received the degree of Doctor Honoris Causa in Civil Engineering from Indiana Institute of Technology. He is the father of Mr. Alonso Quintana, Mr. Diego Quintana and Mr. Rodrigo Quintana.

Dr. Jose Luis Guerrero Alvarez has been a member of our Board of Directors since 1990, and was our Chief Executive Officer and Executive Vice President from January 2007 to June 2012. Dr. Guerrero was previously our Chief Financial Officer and Executive Vice President. Between 1972 and 1979, he held positions as Planning Director of Combinado Industrial Sahagun, Technical Director at Roca Fosforica Mexicana, and Technical Planning and Development Submanager

 

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at the Lazaro Cardenas Las Truchas steel plant. He also worked at Wichman Wimet, Conventry (United Kingdom), Fabricas Automex and Industria del Hierro. Dr. Guerrero holds an degree in mechanical and electrical engineering from the Universidad Nacional Autonoma de Mexico, or UNAM, a diploma D’Ingenieur from the Institut Superieur des Materiaux et de la Construction Mechanique of Paris, France, an M.S. and a Ph.D. in Engineering from the University of Illinois at Urbana-Champaign, and has attended various executive courses at Harvard University, Stanford University, the University of Pennsylvania, the Instituto Tecnologico Autonomo de Mexico, or ITAM, and the Instituto Panamericano de Alta Direccion de Empresa, or IPADE. Dr. Guerrero has been a professor in Materials Science in the Engineering School of UNAM and a professor of Finance at IPADE. In addition to being a member of our Board of Directors, Dr. Guerrero is also the Chairman of the Board of GACN, an independent member of the Board of Directors of the Mexican Stock Exchange, as well as the Chairman of its Supervisory Committee, and a member of the board of directors of Enova Endevour. He is also a former member of the board of directors of Banco Nacional de Mexico.

Alonso Quintana Kawage is Chief Executive Officer, head of the Executive Committee and a member of our Board of Directors. On March 26, 2012, our Board of Directors appointed Mr. Quintana as our new Chief Executive Officer, effective July 1, 2012. From January 2007 through June 2011, he was ICA’s Chief Financial Officer, where he led the efforts to secure the financing for the most rapid growth in ICA’s history, including landmark projects such as the La Yesca hydroelectric project, the FARAC I tollroads, and the Nuevo Necaxa – Tihuatlan highway. In addition, he led two international equity offerings in 2007 and 2009 that raised over U.S.$ 750 million in the international and domestic markets, and an international bond offering that raised U.S.$ 500 million in 2011. Mr. Quintana originally joined ICA in 1994, and has also served in ICA’s Industrial Construction and Civil Construction segments, as well as our infrastructure (Airports and Concessions) segments. He is also a director of GACN, our publicly-listed airport subsidiary. Mr. Quintana is a civil engineering graduate of the Universidad Iberoamericana, and has an M.B.A from the Kellogg School of Management of Northwestern University.

Diego Quintana Kawage has been a member of our Board of Directors since 2008, and is our representative for the Industrial Construction segment, as well as responsible for our Airports and Housing segments, strategic alliances and real estate development. He joined ICA in 1995, and served as the Director General of ViveICA, ICA’s homebuilding company, from 2004 to 2009 and as Finance Director of ViveICA from 2000 to 2003. He is an economics graduate of the Universidad Anahuac and has a Master’s of Science in Management from Stanford University.

Fernando Flores y Perez has been a member of our Board of Directors since 2008. Mr. Flores is presently founding partner of EFE Consultores, S.C. Mr. Flores also worked for the administration of President Vicente Fox until December 2006 as General Director and Chairman of the board of the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social). He also was Undersecretary of the Ministry of Labor, Safety and Preventative Social Planning. He was CEO for Aerovias de Mexico and CEO and Chairman of Compañia Mexicana de Aviacion (MEXICANA). He was President of the National Chamber of Air Transportation (Camara Nacional del Aerotransporte). Previously he held executive positions in MEXICANA, the Mexican Institute of Social Security, Grupo Industrial DINA, and Combinado Industrial Sahagun. Mr. Flores holds a law degree from the Universidad Iberoamericana and studied business administration at the same university.

Elsa Beatriz Garcia Bojorges has been a member of our Board of Directors since 2009. She is a Researcher and Board Member of the Mexican Financial Reporting Standards Board (Consejo Mexicano de Normas de Informacion Financiera, A.C.), or CINIF, which is the accounting standard setting body in Mexico. She is the president of our Audit Committee, as well as the president of the audit committee, and a member of the corporate governance practices committee, of RCO. In 2010, 2011 and 2012, she participated on behalf of Mexico in the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting hosted by the United Nations Conference on Trade and Development. Previously, she worked as an independent financial consultant. Previously, she was a partner in the accounting firm Bouzas, Reguera, Gonzalez y Asociados, S.C. She is a lecturer at several universities, accounting associations and companies in Mexico and is a columnist for the Public Accountancy Journal. She holds an accounting degree with honors from UNAM, as well a diploma in financial engineering. She has been certified by the Mexican Institute of Public Accountants, or IMCP, since 1999. In 2012, she received from the IMCP her certification as an accounting specialist.

Salvador Alva Gomez has been a member of our Board of Directors since April 2010. Mr. Alva holds a chemical engineering degree from UNAM and an MBA. from the Universidad de las Americas, or UDLA, in Puebla, Mexico. Over his 24 years at PepsiCo, he was a member of its Executive Committee and was its President for Latin America. Currently he is President of Tecnologico de Monterrey System. He currently sits on the boards of Endeavor and Tecnologico de Monterrey.

Margarita Hugues Velez has been a member of our Board of Directors since April 2010. Ms. Velez holds a law degree from the Universidad Panamericana in Mexico City. She is the Vice President of Legal and Corporate Affairs and Secretary to the board of directors of Grupo Modelo, S.A.B. de C.V., or Grupo Modelo, the leading beer manufacturer in Mexico and the seventh largest in the world. Prior to joining Grupo Modelo, Ms. Hugues was a project finance and corporate attorney at Galicia y Robles, S.C. in Mexico City and at Hunton & Williams in Washington D.C.

 

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Carlos Fernandez Gonzalez joined our Board of Directors in April 2013. Mr. Fernandez holds a degree in industrial engineering from the Anahuac University and has studied at the postgraduate level at IPADE. Currently he holds the position of CEO and chairman of the board of directors of Grupo Modelo. Under his leadership, Grupo Modelo transformed from a family company to a global leader in corporate governance and policies.

Ricardo Gutierrez Munoz joined our Board of Directors in April 2013. Mr. Gutierrez holds an accounting degree from the Instituto Politecnico Nacional as well as a master’s degree in finance from the Universidad LaSalle, both in Mexico. Since 2011 he has held the position of chairman of the executive committee of Mexichem, S.A.B. de C.V., or Mexichem. He previously served as Mexichem’s CEO, overseeing 75 different companies in the chemical and petrochemical industry in Mexico, the Americas, the U.K., Japan and Taiwan. Mr. Gutierrez has also been the CEO and member of the board of directors for Grupo Industrial Camesa, Vice President of Corporate Development for Empresas Lazagorta, CEO and member of the board of directors of Industrias Synkro and Finance Director for Indetel/Alcatel.

Carlos Guzman Bofill joined our Board of Directors in April 2013. Mr. Guzman holds a degree in chemical engineering from the Universidad Iberoamericana in Mexico. Additionally, he has a M.SC. in chemical engineering from Massachusetts Institute of Technology as well as an MBA from Stanford University. From 2010 to 2012 he was the CEO of Pro-Mexico. From 2000 to 2010 Mr. Guzman was the CEO of HP Mexico. He has been the National President for the Mexican Association for the Information Technology Industry, Director of Market Development for HP Mexico and the Director of Strategic Planning for Alfa Division Acero.

Eduardo Revilla Martinez joined our Board of Directors in April 2013. Mr. Revilla holds a law degree from the Escuela Libre de Derecho. He is a partner in the law firm Revilla y Alvarez Alcala S.C. He previously served in various legal capacities at Mexico’s Ministry of Finance and Public Credit, including legal director, liaison representative to Washington, D.C., tax prosecutor for constitutional claims and director of international tax affairs. He is a professor of tax law at ITAM, in the Escuela Libre de Derecho, the Universidad Iberoamericana and the Centro de Investigacion y Docencia Economica. He is a member of the International Fiscal Association and beginning in 2012 has been an independent member of the governing board of the Taxpayers Public Defender (Procuraduría de la Defensa del Contribuyente). Mr. Revilla was also a member of the Committee on Tax Affairs of the Organisation for Economic Co-operation and Development, or OECD.

Our executive officers currently are as follows:

 

Name

  

Current Position

   Years as
Executive
Officer

Alonso Quintana Kawage

   Chief Executive Officer    6

Diego Quintana Kawage

   Executive Vice President, Industrial Construction, Airports, Homebuilding, Real Estate and Strategic Alliances    6

Juan Carlos Santos

   Divisional Director, Industrial Construction    6

Victor Bravo Martin

   Chief Financial Officer    4

Rodrigo Quintana Kawage

   General Counsel    4

Porfirio Gonzalez

   Divisional Director, Airports; Chief Executive Officer of GACN    2

Ricardo Ibarra Garcia Parra

   Divisional Director, Housing    0

Carlos Benjamin Mendez Bueno

   Vice President, Concessions    6

Ruben Lopez Barrera

   Vice President, Strategic Planning, Business Development and International    3

Luis Horcasitas Manjarrez

   Vice President, Civil Construction    3

Ruben Lopez Barrera is Vice President and our Director of Strategic Planning, Business Development and International for ICA and a member of ICA’s Executive Committee. He previously served as GACN’s Chief Executive Officer and Director for Human Resources, Legal, and Communication, and as ICA’s Business Development Director and Project Finance Director. He has more than 18 years working at ICA. Mr. Lopez received a degree in civil engineering from the Universidad Iberoamericana, a Master of Science in management from the Sloan Master’s Program at the Stanford Graduate School of Business, and a master’s degree in business administration from the joint program of the Pontificia Universidad Catolica de Chile and the University of Washington in Seattle, WA.

Luis Horcasitas Manjarrez is the Vice President overseeing Civil Construction for ICA and a member of ICA’s Executive Committee. In his 34 years of experience at ICA, he has held a variety of positions, including as divisional director of heavy construction, director of infrastructure operations and director of international concessions, among others. Mr. Horcasitas was also the director of our El Cajon hydroelectric project. He studied engineering at the Escuela de Ingenieria Municipal and has taken specialized courses in road building. He previously served as the Vice President of Construction for the Mexican Association of Roadways, A.C., or AMIVT, and as alternate representative of the Communications and Transportation sector of the Mexican Construction Industry Chamber of Commerce. He is an active participant in several engineering related associations in Mexico.

Carlos Benjamin Mendez Bueno has been the Divisional Director of our Concessions segment since January 2007. Mr. Mendez is a civil engineer with a bachelor’s degree from UNAM. He has participated in various post-graduate studies such as “Strategic Planning” at the University of Pennsylvania’s Wharton School, “Certification in Project Administration” from the International Institute of Learning and “Advanced Management Program (AD2)” from IPADE. He has been with us since 1975 and has held various management and senior management positions within civil construction, international projects and infrastructure. Mr. Mendez is a member of the alumni association of the Engineering School at UNAM, and was the Vice President for Industrial Relations, Representation, and Management of the Mexico City delegation to the Mexican Construction Industry Chamber until 2008. He was also a board member of the Mexican Road Association, or AMC, and represented ICA before the International Road Federation’s Executive Officers. He now represents Mexico before the World Road Association, or PIARC, in the field of Road Tunnels Operation.

Juan Carlos Santos is our Divisional Director of Industrial Construction. He first joined ICA in 1992, and has served as an alternate member of our Board of Directors, the Director of Projects for ICA-Fluor, and the Project Manager for several plants including the first liquefied natural gas terminal in Mexico in Altamira, Tamaulipas. Previously, he was the contracts and project control manager for the Cantarell project, the largest nitrogen injection plant in the world. He is a civil engineering graduate of UNAM and has been certified as a Project Manager Professional by the Project Management Institute. He also holds a master’s degree in business administration from Georgetown University in Washington, D.C.

Victor Bravo Martin has been our Chief Financial Officer since July 1, 2011. He previously served as Divisional Director of our Airports segment and Chief Executive Officer of GACN. Mr. Bravo has more than 26 years of professional experience at ICA. Additionally, he served as GACN’s Chief Financial Officer from March 2006 to July 2009. Prior to joining GACN, he served in various capacities with us from 1987 to 2006, including Corporate Finance Director, Project

 

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Finance Director, Corporate Finance Analysis Manager and Corporate Economic Analysis Manager. Mr. Bravo holds a B.S. in economics from the Instituto Tecnologico y de Estudios Superiores de Monterrey, a diploma in finance from the Instituto Tecnologico Autonomo de Mexico, and an M.B.A. from the Leonard N. Stern School of Business at New York University and the Manchester University School of Business. Mr. Bravo also has a diploma from the Advance Direction of Companies program at the IPADE Business School.

Rodrigo Quintana Kawage has been our General Counsel since June 2010. Previously, Mr. Quintana worked as in-house counsel at Banco de Mexico, Mexico’s central bank, and as an associate in the finance practice of Mayer Brown LLP, a global law firm, in its Chicago and New York offices. Mr. Quintana joined our legal department in 2001, and then rejoined after leaving Mayer Brown LLP in January 2009. Mr. Quintana holds law degrees from the Instituto Tecnologico Autonomo de Mexico in Mexico City and from the University of Chicago Law School. He is the son of Mr. Bernardo Quintana and the brother of Mr. Alonso Quintana and Mr. Diego Quintana.

Porfirio Gonzalez has more than 15 years professional experience in the airport industry. He has been GACN’s Chief Executive Officer since July 2011. From 2006 through June 2011, he was GACN’s director of airports. In that position, he was responsible for the relationships of GACN and the airports with federal, state and local authorities. He also oversaw and coordinated the airport consultative councils of all 13 airports. These councils bring together airport managers, airlines, other airport service providers and governmental authorities to ensure effective airport operation. From 1998 to 2006, Mr. Gonzalez served as the director of the business division, subdirector of operations and development, and manager of the Monterrey International Airport. Prior to joining us he served in various capacities in the Mexican federal government and the state government of Nuevo Leon, including as General Director of Tourism. Mr. Gonzalez holds a B.S. in civil engineering from the Universidad Autonoma de Nuevo Leon. He has also completed various specialization courses in the areas of airports, safety and security, finance, management and human resources.

Ricardo Ibarra Garcia Parra has been our Divisional Director of our Housing segment since March 2012. Mr. Ibarra joined our company in 1997, and has worked in our Housing segment for the last eight years. Mr. Ibarra holds an undergraduate degree in civil engineering from the Instituto Tecnologico y de Estudios Superiores de Monterrey and a master’s degree from the University of Southern California

Since July 1, 2011, an Executive Committee headed by Mr. Alonso Quintana Kawage has coordinated our operations across our various business divisions. The members appointed to our Executive Committee are as follows:

 

Name

  

Current Position

Alonso Quintana Kawage

   President

Diego Quintana Kawage

   Executive Vice President, Industrial Construction division, Airports, Housing and Strategic Alliances

Carlos Benjamin Mendez Bueno

   Vice President, Concessions

Luis Horcasitas Manjarrez

   Vice President, Civil Construction

Ruben Lopez Barrera

   Vice President, Strategic Planning, Business Development and International

B. COMPENSATION

For the year ended December 31, 2012, the aggregate compensation of our directors and executive officers paid or accrued in that year for services in all capacities was approximately Ps. 263 million. In 2012, we paid management and non-management directors Ps. 44 thousand net of taxes for each board meeting, Corporate Practices, Finance, Planning and Sustainability Committee meeting or Audit Committee meeting they attend. As of April 16, 2013, our shareholders approved the payment of Ps. 50 thousand net of taxes to management and non-management directors for each board meeting. Additionally, we pay non-management directors Ps. 5,000 per hour for work related to their duties on our board or on either committee. We also paid the Chairman of our Board of Directors approximately Ps. 10 million net of taxes in 2012.

Management Bonuses

Performance bonuses are paid to eligible members of management by the subsidiaries that employ them.

 

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Our Corporate Practices Committee determines the bonuses for senior and middle management. Through April 16, 2013 the Corporate Practices, Finance, Planning and Sustainability Committee determined compensation for executive officers and the Chief Executive Officer. As of April 16, 2013, our shareholders approved the restructuring of the Corporate Practices, Finance, Planning and Sustainability Committee, dividing its responsibilities into two committees, the Corporate Practices Committee and the Finance, Planning and Sustainability Committee. The Corporate Practices Committee will determine the compensation of executive officers and the Chief Executive Officer. We have adopted the following policies regarding the calculation of the performance bonus:

 

   

in years in which our income (calculated as described below) is 4% or less of our net worth, no bonuses will be paid,

 

   

in years in which our income (calculated as described below) is greater than 4% of our net worth, up to 20% of the amount by which income exceeds 4% of net worth may be paid as bonuses.

Income for these purposes means income from all sources (including extraordinary items) before income taxes, employees’ statutory profit sharing and the bonus itself. Net worth for these purposes is our net worth as at the end of the year for which the bonus is being calculated, without giving effect to that bonus. This formula is subject to change by the Board of Directors, provided that all outside directors approve any such change.

A substantial portion of the shares beneficially owned by our directors and executive officers, along with other shares owned by our management, are owned through a trust, which we refer to as the management trust. The management trust is supervised by a technical committee consisting of members of our Board of Directors, and the Quintana family controls the vote of the management trust. This technical committee has broad discretionary authority over the corpus of 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.

Additionally, and only for our executive management, we have a performance bonus plan, directly linked to the overall performance of the company and on a secondary basis to the performance of certain business units and the satisfaction of personal objectives. This bonus is payable in cash.

Options to Purchase Securities from Registrant or Subsidiaries

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 on April 29, 2003.

The stock option plan was terminated on April 16, 2004 and all options granted under the plan expired on April 29, 2010. We do not expect to grant stock options going forward.

Prior to their expiration on April 29, 2010, 113,485 options (on a post-reverse split basis) were exercised at a weighted average exercise price of Ps. 22.50. As of December 31, 2012, we had no stock options outstanding.

Pension Plan

In 2006, we created a defined benefit pension plan covering all active employees aged more than 65 who are part of our Board of Directors and have a minimum of 10 years of service as members of the board prior to their retirement. Until 2008, these employees were entitled to benefits beginning at the age of 55, with gradual reductions of their salary taken into account for pension purposes. Beginning January 1, 2008, the plan was revised to defer the early retirement age an additional two years, which such deferral ended in 2010. In 2012, the pension plan was further modified to provide lifelong benefits for executives as well as to establish an early retirement age of 60 for all employees, provided that they have 10 years of service with our Company. See Note 35 to our consolidated financial statements.

 

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For the year ended December 31, 2012, the aggregate amount that we have accrued to provide pension and retirement benefits is Ps. 105 million.

In 2011, the existing defined benefit pension plan was replaced as the vehicle for new enrollees with a new voluntary retirement savings plan offered to senior and executive management employees. This plan offers a pretax savings component of up to 10% of the employee’s taxable income, and corporate matching of up to 2.5%.

C. BOARD PRACTICES

For a table setting forth our current directors and management, the expiration of their current terms of office and the period of time during which each has served in that office, see “Item 6. Directors, Senior Management and Employees—Directors and Senior Management.” We have no service contracts for our directors providing benefits upon termination of employment.

The Mexican Securities Market Law enacted by Mexico’s Federal Congress on December 30, 2005 (in effect since June 2006) altered the legal regime applicable to public companies in Mexico. In order to comply with the new law, our shareholders approved the amendment of our by-laws at an extraordinary general shareholders’ meeting on September 12, 2006.

Management Structure

Our management is vested in a Board of Directors and a chief executive officer. The duties of the Board of Directors are, among others, to set general strategy for the company, and for the legal entities controlled by it, and to appoint, supervise and, if and as necessary, remove the chief executive officer. In fulfillment of its duties and responsibilities, our bylaws, in accordance with the Mexican Securities Market Law, provide for our Board of Directors to be aided by one or more committees made up of independent directors.

Our bylaws provide for our Board of Directors to be comprised of no fewer than 5 and no more than 21 directors, of which at least 25% must be independent directors. Members of the Board of Directors are elected on a staggered basis. Each year, one-third of the members of the board are elected by our shareholders and, once elected, board members occupy their positions for the following three years without the need for shareholder ratification in the interim. Notwithstanding the foregoing, at any ordinary general shareholders’ meeting, any director can be removed by a 51% vote of our shareholders.

Any holder or group of holders of 10% of the voting capital stock of ICA may appoint a director. Shareholders that exercise such right may not participate in the appointment of remaining directors.

Our Board of Directors meets at least on a quarterly basis and has the duties and authority set forth in the company’s bylaws and in the Mexican Securities Market Law. The chairman of the Board of Directors is appointed by the shareholders at each annual ordinary general shareholders’ meeting, or by the Board of Directors itself, and has the authority to propose to the board the discussion and resolution of various matters, including proposals as to the independent directors that are to comprise the committee or committees that perform auditing and corporate practices duties, as well as the appointment and removal of the chief executive officer. The independent members of our board meet once per year with the chairman of our board. Under Mexican law, the chairman of our board may not be president of any of the Audit Committee, the Corporate Practices Committee or the Finance, Planning and Sustainability Committee.

Our Board of Directors has the authority to establish special committees to assist the board in the performance of its duties. Our bylaws provide that audit and corporate practices duties may be delegated to one committee or to two separate committees at the discretion of the board.

Our chief executive officer is the main executive of the company, responsible for the management, direction and execution of our business, subject to the strategies set forth by the Board of Directors. The chief executive officer is also responsible for the fulfillment of resolutions approved by shareholders or the board. The chief executive officer is vested with broad agency authority. However, this authority is limited when it comes to exercising voting rights attached to the company’s shares in its subsidiaries. In regards thereto, the chief executive officer must act in accordance with instructions or policies provided by the board. Such authority is also limited in respect of sales of our real estate and equity holdings and in respect of transactions referred to in paragraph c), Section III of Article 28 of the Mexican Securities Market Law. In either such case, the chief executive officer may only act with the Board of Directors’ prior authorization. Furthermore, if the relevant transaction involves an amount equal to or exceeding 20% of the company’s net worth, the chief executive officer may only act with the prior authorization of our shareholders.

 

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Board Practices

In response to the enactment of the Mexican Securities Market Law, our Board of Directors established a Corporate Practices Committee, which was replaced by the Corporate Practices, Finance, Planning and Sustainability Committee on April 24, 2009. On April 16, 2013, the annual shareholders meeting approved the division of the Corporate Practices, Finance, Planning and Sustainability Committee into two Board committees: the Corporate Practices Committee, with its duties set forth in Section I of Article 42 and other applicable provisions of the Mexican Securities Market Law, and the Finance, Planning and Sustainability Committee. The duties of the Corporate Practices Committee include providing an opinion on the nomination of the chief executive officer, assessing the performance of our senior management, providing an opinion on related-party transactions and compensation proposals for senior management and reviewing certain exempted actions of the Board of Directors. The duties of the Finance, Planning and Sustainability Committee include proposing general guidelines for creating and monitoring compliance with our strategic plan, providing an opinion on investment and financing policies proposed by our chief executive officer, providing an opinion on the assumptions in the annual budget and monitoring application of the budget and our control system, and evaluating risk factors that affect us and our mechanisms for controlling risk. As of April 16, 2013, Fernando Flores y Perez is chairman of both the Corporate Practices Committee and the Finance, Planning and Sustainability Committee. Each member’s term on either committee runs concurrently with such member’s term on our Board of Directors. All members of either committee are independent directors as such term is defined in the Mexican Securities Market Law, and Mr. Mulas and Mr. Dychter are independent directors as such term is defined in Rule 10A-3 under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act.

The Mexican Securities Market Law requires that the Audit Committee be responsible for the duties set forth in Section II of Article 42 and other applicable provisions of the Mexican Securities Market Law. Such duties include evaluating our independent auditor, reviewing the audit report, opinion, and other documents prepared annually by the independent auditor, informing the Board of Directors of the quality of and any deficiencies in the company’s internal control mechanisms and regarding internal audits of the company or entities controlled by the company. As of April 16, 2013, the members of the Audit Committee were Elsa Beatriz Garcia Bojorges, as chairman, and Margarita Hugues Velez and Fernando Flores Perez, each of whom were independent as such term is defined in the Mexican Securities Market Law and in Rule 10A-3 under the Exchange Act. Each member’s term on the Audit Committee runs concurrently with such member’s term on our Board of Directors.

Both of the above committees are empowered to call shareholders’ meetings and hire independent counsel and other advisors, as they deem necessary to carry out their duties, including, in the case of the Corporate Practices Committee, the review of related-party transactions.

D. EMPLOYEES

As of each of the three years ended December 31, 2012, 2011 and 2010, we had approximately 34,363, 40,003 and 29,647 employees, respectively, approximately 33%, 30% and 26% of whom were permanent employees, respectively. The number of temporary employees employed by us varies significantly and is largely dependent on the level of our construction activities.

In Mexico, all of our employees, other than managerial and certain administrative employees, are currently affiliated with labor unions. Labor relations in each facility in Mexico are governed by a separate collective bargaining agreement, executed between the relevant subsidiary and a union selected by the employees of the relevant facility. Wages are renegotiated every year while other terms are renegotiated every two years. Labor relations for each construction project are governed by a separate collective bargaining agreement, which is coterminous with the project. Such agreements are reviewed once per year if the duration of the project so permits. Although, from time to time we have faced strikes at particular facilities or construction sites, we have never had a strike that materially affected our overall operations in Mexico. We believe that we have good relations with our employees.

E. SHARE OWNERSHIP

As of December 31, 2012, Mr. Bernardo Quintana and members of his immediate family, including our directors Alonso Quintana Kawage and Diego Quintana Kawage and our general counsel Rodrigo Antonio Quintana Kawage, may be deemed to have had beneficial ownership of 38,952,496, or 6.4%, of our outstanding shares (excluding shares owned through the management trust). Through the management trust they hold 5,527,475 shares, or 0.9%, for a total of 44,479,971, or 7.3%, of our outstanding shares. Additionally, as of December 31, 2012, the following of our directors or officers each beneficially owned shares (other than shares owned through the management trust) totaling no more than 1% of any class of our capital stock: Jose Luis Guerrero Alvarez, Carlos Benjamin Mendez Bueno, Ricardo Ibarra Garcia Parra, Victor Bravo Martin, and Salvador Alva Gomez. None of our directors or officers has voting rights different from other shareholders, other than, as applicable, rights as a participant in the management trust or fundacion trust described below and rights of the position of director and/or officer.

 

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Item 7. Major Shareholders and Related Party Transactions

A. MAJOR SHAREHOLDERS

The following table sets forth certain information regarding the ownership of outstanding shares as of December 31, 2012.

 

Identity of Person or Group

   Amount Owned      Percentage(1)  

Bernardo Quintana I(2)

     38,952,496         6.4%   

Management Trust

     24,600,669         4.1%   

Foundation Trust

     8,318,499         1.4%   

 

  (1) For all percentages, based upon 607,357,582 shares outstanding as of December 31, 2012.
  (2) Reflects shares owned directly by Mr. Quintana and his family, including Alonso Quintana Kawage, Diego Quintana Kawage and Rodrigo Antonio Quintana Kawage, and not through the management trust.

The major shareholders, as set forth in the table above, do not have voting rights different from other shareholders, other than Mr. Quintana’s rights as a participant in the management trust and foundation trust described below and as a member of our Board of Directors.

Our shares are the only class of security we offer in Mexico. We have no information as to the number of record holders in Mexico. At December 31, 2012, 283,694,454 shares, or 46.7% of shares outstanding, were held in the form of CPOs, which have limited voting rights. See “Item 9. The Offer and Listing – Trading – Limitations affecting ADS Holders and CPO Holders.” As of December 31, 2012, 8.9% of our outstanding shares were represented by 54,078,748 ADSs representing four of our shares each, and such ADSs were held by 60 recordholders with registered addresses in the United States. Because certain of the ADSs are held by nominees, the number of recordholders may not be representative of the number of beneficial holders. See “Item 9. The Offer and Listing – Trading.”

Our directors and executive officers, as a group, beneficially own approximately 63,841,165 shares (10.5% of the shares outstanding). A portion of the shares beneficially owned by our directors and executive officers (collectively, approximately 4.1% of the shares outstanding), are owned through a trust, referred to as the management trust. The technical committee of the management trust, which consists of members of our Board of Directors, has broad discretionary authority over the corpus of this trust, including voting power over the shares contained therein and the conditions governing withdrawal of such shares.

In April 2011, pursuant to the Mexican Securities Market Law, we announced that we had acquired 7,545,300 of our shares outstanding using the reserve for share purchases, at an average price of Ps. 26.47 per share, for an amount of Ps. 199,705,967.01. As part of our employee stock plan, 3,781,275 of these shares were transferred to the management trust at an average price of Ps. 28.05 per share.

In May 2012, pursuant to the Mexican Securities Market Law, we announced that we had acquired 4,207,000 of our outstanding shares using the reserve for share repurchases at an average price of Ps. 23.93 per share and at a total purchase price of Ps. 100,694,464. As part of our employee stock plan, 6,885,385 of these shares were transferred to the management trust at an average price of Ps. 20.65 per share.

In May 2012, we entered into one-year forward contracts to acquire 22,280,100 shares of EMICA in a series of nonconsecutive transactions between May 22, 2012 and August 21, 2012 at a weighted average strike price of Ps. 24.99 per share, equivalent to Ps. 556.8 million. The total amount of shares represented 3.67% of EMICA’s shares outstanding.

If market conditions are favorable the forward contracts will be exercised with a charge to the share repurchase reserve approved by the shareholders in accordance with the Policy for the Acquisition and Disposition of Own Shares approved by the Board of Directors. The value of the exercise will be calculated by multiplying at maturity the numbers of shares in each contract by the strike price.

 

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In the event of not exercising the instruments, the price for setting the contracts will be the difference between the strike price and EMICA’s shares in the market. At