EX-1 2 d307187dex1.htm CERTAIN INFORMATION WITH RESPECT TO CEMEX Certain information with respect to CEMEX

Exhibit 1

SUMMARY

Unless the context otherwise requires, references herein to our sales and assets, including percentages, for a country or region are calculated before eliminations resulting from consolidation, and thus include intercompany balances between countries and regions. These intercompany balances are eliminated when calculated on a consolidated basis. References herein to “U.S.$” and “Dollars” are to U.S. Dollars, references to “€” are to Euros, references to “£” and “Pounds” are to British Pounds, and, unless otherwise indicated, references to “Ps,” “Mexican Pesos” and “Pesos” are to Mexican Pesos.

References herein to “Total Financial Obligations” refer to: (i) total debt plus (ii) total other financial obligations, less (iii) the liability component of the 10% mandatory convertible notes (the “Mandatory Convertible Notes”) issued by CEMEX, S.A.B. de C.V. (the “Company”). Other financial obligations does not include (a) our securitization programs and (b) the equity component of (x) the Mandatory Convertible Notes, (y) the 4.875% Convertible Subordinated Notes due 2015 issued by the Company (the “2010 Optional Convertible Subordinated Notes”) and (z) the 3.25% Convertible Subordinated Notes due 2016 and the 3.75% Convertible Subordinated Notes due 2018, each issued by the Company (together, the “2011 Optional Convertible Subordinated Notes”).

CEMEX

Founded in 1906, CEMEX is one of the largest cement companies in the world, based on annual installed cement production capacity as of December 31, 2011 of approximately 95.6 million tons. We are the largest ready-mix concrete company in the world with annual sales volumes of approximately 55 million cubic meters and one of the largest aggregates companies in the world with annual sales volumes of approximately 160 million tons, in each case based on our annual sales volumes in 2011. We are also one of the world’s largest traders of cement and clinker, having traded approximately 8.4 million tons of cement and clinker in 2011. CEMEX, S.A.B. de C.V. is a holding company primarily engaged, through our operating subsidiaries, in the production, distribution, marketing and sale of cement, ready-mix concrete, aggregates and clinker throughout the world.

We operate globally with operations in Mexico, the United States, Northern Europe, the Mediterranean, South America and the Caribbean and Asia. We had total assets of approximately Ps548 billion (U.S.$39 billion) as of December 31, 2011, and an equity market capitalization of approximately Ps98.8 billion (U.S.$7.7 billion) as of February 24, 2012.

As of December 31, 2011, our main cement production facilities were located in Mexico, the United States, Spain, Egypt, Germany, Colombia, the Philippines, Poland, the Dominican Republic, the United Kingdom, Croatia, Panama, Latvia, Puerto Rico, Thailand, Costa Rica and Nicaragua. As of December 31, 2011, our assets (after eliminations), cement plants and installed capacity, on an unconsolidated basis by region, were as set forth below. Installed capacity, which refers to theoretical annual production capacity, represents gray cement equivalent capacity, which counts each ton of white cement capacity as approximately two tons of gray cement capacity, and includes installed capacity of cement plants that have been temporarily closed.

 

     As of December 31, 2011  
     Assets After
Eliminations
(in Billions
of Pesos)
     Number of
Cement Plants
     Installed Cement
Production
Capacity
(Millions of Tons
Per Annum)
 

Mexico(1)

     64         15         29.3   

United States

     246         13         17.1   

Northern Europe

        

United Kingdom(2)

     33         3         2.4   

Germany

     12         2         4.9   

France

     16         —           —     

Rest of Northern Europe(3)

     19         3         4.6   

Mediterranean

        

Spain

     58         8         11   

Egypt

     8         1         5.4   

Rest of Mediterranean(4)

     11         3         2.4   

South America and the Caribbean

        

Colombia

     12         6         4.8   

Rest of South America and the Caribbean(5)

     22         5         8.0   

Asia

        

Philippines

     9         2         4.5   

Rest of Asia(6)

     2         1         1.2   

Corporate and Other Operations

     36         —           —     

 

 

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The above table includes our proportional interest in the installed capacity of companies in which we hold a non-controlling interest.

 

(1) “Number of cement plants” and “Installed cement production capacity” includes two cement plants that have been temporarily closed with an aggregate annual installed capacity of 2.6 million tons of cement.
(2) “Number of cement plants” and “Installed cement production capacity” includes a cement plant which has been mothballed since November 2008, with an annual installed capacity of 0.3 million tons of cement.
(3) Refers primarily to our operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland. For purposes of the columns labeled “Assets after eliminations” and “Installed cement production capacity,” includes our approximate 33% interest, as of December 31, 2011, in a Lithuanian cement producer that operated one cement plant with annual installed capacity of 1.3 million tons of cement as of December 31, 2011.
(4) Refers primarily to our operations in Croatia, the United Arab Emirates (“UAE”) and Israel.
(5) Includes our operations in Costa Rica, Panama, Puerto Rico, the Dominican Republic, Nicaragua, Jamaica and other countries in the Caribbean, Guatemala and small ready-mix concrete operations in Argentina.
(6) Includes our operations in Thailand, Bangladesh, China and Malaysia.

Geographic Breakdown of Net Sales for the Year Ended December 31, 2011

The following chart indicates the geographic breakdown of our net sales, before eliminations resulting from consolidation, for the year ended December 31, 2011:

 

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Breakdown of Net Sales by Product for the Year Ended December 31, 2011

The following chart indicates the breakdown of our net sales by product, after eliminations resulting from consolidation, for the year ended December 31, 2011:

 

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Financial Ratios

 

     As of and for the
Year Ended December 31,
 
     2007      2008     2009      2010      2011  

Ratio of Operating EBITDA to interest expense(1)

     5.53         4.49        2.68         1.80         1.62   

Ratio of earnings to combined fixed charges under MFRS(2)

     4.37         (1.40     0.65         0.30         0.14   

 

N/A Not Applicable.

(1)

We have included these financial ratios because they are a convenient means by which investors measure a company’s ability to service debt. Operating EBITDA equals operating income before amortization expense and depreciation. Operating EBITDA differs from Consolidated EBITDA, as such term is defined in each of the indentures governing the (i) 9.50% Senior Secured Notes due 2016 and 9.625% Senior Secured Notes due 2017 issued by CEMEX Finance LLC, or together, the December 2009 Notes, (ii) 9.25% Senior Secured Notes due 2020 and 8.875% Senior Secured Notes due 2017 issued by CEMEX España, acting through its Luxembourg branch, or together, the May 2010 Notes, (iii) 9.000% Senior Secured Notes due 2018 issued by CEMEX, S.A.B. de C.V., or the January 2011 Notes, (iv) additional 9.25% Senior Secured Notes due 2020 issued by CEMEX España, acting through its Luxembourg branch, or the Additional May 2010 Notes, (v) Floating Rate Senior Secured Notes due 2015 issued by CEMEX, S.A.B. de C.V., or the April 2011 Notes, and (vi) additional 9.000% Senior Secured Notes due 2018 issued by CEMEX, S.A.B. de C.V., or the Additional January 2011 Notes. We refer to the December 2009 Notes, May 2010 Notes, January 2011 Notes, Additional May 2010 Notes, April 2011 Notes and Additional January 2011 Notes, collectively, as the Existing Senior Secured Notes. Under Mexican Financial Reporting Standards, or MFRS, CEMEX assesses goodwill for impairment annually unless events occur that require more frequent reviews. Discounted cash flow analyses are used to assess goodwill impairment, as described in note 11B to our consolidated financial statements included in our Form 6-K filed with the Securities and Exchange Commission on February 24, 2012 (containing consolidated audited financial statements of CEMEX, S.A.B. de C.V. and its subsidiaries as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009) (the “6-K”). Operating EBITDA and the ratio of Operating EBITDA to interest expense are presented herein because we believe that they are widely accepted as financial indicators of our ability to internally fund capital expenditures and service or incur debt. Operating EBITDA and such ratios should not be considered as indicators of our financial performance, as alternatives to cash flow, as measures of liquidity or as being comparable to other similarly titled measures of other companies. Operating EBITDA is reconciled below to operating income under MFRS as reported in the statements of operations, before giving

 

 

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  effect to any non-controlling interest, and to net cash flows provided by continuing operations as reported in the statements of cash flows, which we consider to be the most comparable measure as determined under MFRS. Interest expense presented in this chart differs from the definition of Consolidated Interest Expense as such term is defined in the indentures governing the Existing Senior Secured Notes. Interest expense under MFRS does not include coupon payments and issuance costs of the 6.196% Fixed-to-Floating Rate Callable Perpetual Debentures, 6.640% Fixed-to-Floating Rate Callable Perpetual Debentures, 6.722% Fixed-to-Floating Rate Callable Perpetual Debentures and 6.277% Fixed-to-Floating Rate Callable Perpetual Debentures (collectively, the “Debentures”), issued by consolidated entities of approximately Ps1,847 million for 2007, approximately Ps2,596 million for 2008, approximately Ps2,704 million for 2009, approximately Ps1,624 million for 2010 and approximately Ps1,010 million for 2011, as described in note 16D to our consolidated financial statements included in the 6-K.

 

     For the Year Ended December 31,  
     2007     2008     2009     2010     2011  
     (in millions of Pesos)  

Reconciliation of operating EBITDA to net cash flows provided by continued operations

          

Operating EBITDA

     Ps48,752        Ps45,787        Ps36,153        Ps29,317        Ps29,102   

Less:

          

Operating depreciation and amortization expense

     17,142        19,699        20,313        18,474        17,119   

Operating income

     Ps31,610        Ps26,088        Ps15,840        Ps10,843        Ps11,983   

Plus/minus:

          

Changes in working capital excluding income taxes

     (877     1,299        (2,599     100        2,327   

Operating depreciation and amortization expense

     17,142        19,699        20,313        18,474        17,119   

Other items, net

     (3,484     (8,631     174        (7,579     (8,818

Net cash flows provided by continued operations after income tax

     Ps44,391        Ps38,455        Ps33,728        Ps21,838        Ps22,611   

 

(2) For purposes of determining the ratio of earnings to combined fixed charges, (a) earnings consist of pre-tax income from continuing operations before adjustment for non-controlling interests in consolidated subsidiaries or income or loss from equity investees, fixed charges, amortization of capitalized interest, distributed income of equity investees, and our share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges, less interest capitalized and the non-controlling interest in pre-tax income of subsidiaries that have not incurred fixed charges and (b) fixed charges consist of interest expensed and capitalized, amortized premiums, discounts and capitalized expenses related to indebtedness and our estimate of the interest within rental expense. The denominator of this ratio under MFRS does not include coupon payments and issuance costs of the Debentures issued by consolidated entities, which were approximately Ps1,847 million for 2007, approximately Ps2,596 million for 2008, approximately Ps2,704 million for 2009, approximately Ps1,624 million for 2010 and approximately Ps1,010 million for 2011, as described in note 16D to our consolidated financial statements included in the 6-K.

Business Strategy

We seek to continue to strengthen our global leadership by growing profitably through our integrated positions along the cement value chain and maximizing our overall performance by employing the following strategies:

Focus on our core business of cement, ready-mix concrete and aggregates

We plan to continue focusing on our core businesses, the production and sale of cement, ready-mix concrete and aggregates, and the vertical integration of these businesses, leveraging our global presence and extensive operations worldwide. We believe that managing our cement, ready-mix concrete and aggregates operations as an integrated business allows us to capture a greater portion of the cement value chain, as our established presence in ready-mix concrete secures a distribution channel for our cement products. Moreover, we believe that, in most cases, vertical integration brings us closer to the end consumer. We believe that this strategic focus has historically enabled us to grow our existing businesses and expand our operations internationally, particularly in high-growth markets and higher-margin products. In less than 20 years, we have evolved from primarily a Mexican cement producer to a global building materials company with a diversified product portfolio across a balanced mix of developed and emerging economies.

We intend to continue focusing on our most promising, structurally attractive markets with considerable infrastructure needs and housing requirements, where we have substantial market share and benefit from competitive advantages. Despite the current economic and political turmoil, we believe that some of the countries in which we operate (particularly Mexico, the United States, Colombia, Poland and the Philippines) are poised for economic growth, as significant investments are made in infrastructure, notably by the economic stimulus programs that have been announced by governments in some of these markets.

 

 

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We are focused on managing costs and maintaining profitability in the current economic environment, and we believe that we are well-positioned to benefit when the construction cycle recovers. A combination of continued government stimulus spending and renewed focus on infrastructure investment in many of our markets, along with some recovery for housing and for non-residential construction sectors, could translate into substantial growth in demand for our products.

We will continue to analyze our current portfolio and monitor opportunities for asset divestitures, as evidenced by the disposals we have made in the last few years in the United States, Spain, Italy, Australia and elsewhere.

Provide our customers with the best value proposition

We want CEMEX to be the supplier of choice for our customers, whether global construction firms or individuals building their family’s first home. We want to provide them with the most efficient and effective building solutions for their construction project, large or small. We seek a clear understanding of what they require to meet their needs.

We believe that by pursuing our objective of integrating our business along the cement value chain, we can improve and broaden the value proposition that we provide to our customers. We believe that by offering integrated solutions, we can provide our customers more reliable sourcing as well as higher quality services and products.

We continue to focus on developing new competitive advantages that will differentiate us from our competitors. We are evolving from a traditional supplier of building materials into a fully integrated turnkey solutions provider, mostly in infrastructure projects which make extensive use of our cement and concrete products. For example, in Mexico alone, we have paved more than 10,000 kilometers of concrete highways and roads. We have also recently provided tailor-made solutions for important infrastructure projects in the country, including the Baluarte Bicentennial Bridge and La Yesca Dam in Jalisco and Nayarit. We also continue innovating with new products, and recently launched two new global ready-mix brands designed using proprietary admixtures developed by our researchers.

We strive to provide superior building solutions in the markets we serve. To this end, we tailor our products and services to suit customers’ specific needs, from home construction, improvement and renovation to agricultural, industrial and marine/hydraulic applications. Our porous paving concrete, for example, is best suited for sidewalks and roadways because it allows rainwater to filter into the ground, reducing flooding and helping to maintain groundwater levels. In contrast, our significantly less permeable and highly resistant concrete products are well-suited for applications in coastal, marine and other harsh environments.

Our global building materials trading network, which is one of the largest in the world, plays a fundamental and evolving role in fulfilling our objectives. Our network of strategically located terminals allows us to build strong relationships with reliable suppliers and shippers around the world, which we believe translates into a superior value proposition for our customers. We can direct building materials (primarily cement, clinker and slag) from markets with excess capacity to markets where they are needed most and, in the process, optimize the allocation of our worldwide production capacity.

Maximize our operating efficiency

We have a long history of successfully operating world-class cement production facilities in developed and emerging markets and have demonstrated our ability to produce cement at a lower cost compared to industry standards in most of these markets. We continue to strive to reduce our overall cement production related costs and corporate overhead through disciplined cost management policies and through improving efficiencies by removing redundancies. We also implemented several worldwide standard platforms as part of this process. In addition, we implemented centralized management information systems throughout our operations, including administrative, accounting, purchasing, customer management, budget preparation and control systems, which have helped us to achieve cost efficiencies. In a number of our core markets, such as Mexico, we launched aggressive initiatives aimed at reducing the use of fossil fuels, consequently reducing our overall energy costs.

Furthermore, significant economies of scale in key markets often allow us to obtain competitive freight contracts for key components of our cost structure, such as fuel and coal, among others.

Through a worldwide import and export strategy, we will continue to seek to optimize capacity utilization and maximize profitability by redirecting our products from countries experiencing economic downturns to target

 

 

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export markets where demand may be greater. Our global trading system enables us to coordinate our export activities globally and take advantage of demand opportunities and price movements worldwide. Should demand for our products in the United States improve, we believe we are well-positioned to service this market through our established presence in the southern and southwestern regions of the country and our ability to import to the United States.

Our industry relies heavily on natural resources and energy, and we use cutting-edge technology to increase energy efficiency, reduce carbon dioxide emissions and optimize our use of raw materials and water. We are committed to measuring, monitoring and improving our environmental performance. In the last few years, we have implemented various procedures to improve the environmental impact of our activities as well as our overall product quality, such as a reduction of carbon dioxide emissions, an increased use of alternative fuels to reduce our reliance on primary fuels, an increased number of sites with local environmental impact plans in place and the use of alternative raw materials in our cement.

Strengthen our capital structure and regain our financial flexibility

In light of the current global economic environment and our substantial amount of indebtedness, we have been focusing, and expect to continue to focus, on strengthening our capital structure and regaining financial flexibility through reducing our debt, improving cash flow generation and extending maturities. This ongoing effort has included the following key strategic initiatives:

Global Refinancing. On August 14, 2009, we entered into the Financing Agreement (including with lenders who are affiliates of J.P. Morgan and BofA Merrill Lynch), which extended the maturities of approximately U.S.$15.0 billion in syndicated and bilateral bank facilities and private placement obligations, of which U.S.$7,195 million remained outstanding as of December 31, 2011. Since entering into the Financing Agreement, we have successfully completed several capital markets transactions, the proceeds of which were substantially applied to reduce our debt thereunder and to address other debt maturities. As of December 31, 2011, we had principal payments due under the Financing Agreement of U.S.$488 million on December 15, 2013 and U.S.$6,707 million on February 14, 2014. We currently have funds available to address all of our significant scheduled maturities until the December 15, 2013 maturity under the Financing Agreement. Maintaining market terms and achieving an appropriate size, tenor and pricing for our overall corporate financing facilities is an ongoing objective of ours. Consistent with this objective, the Company maintains an ongoing dialogue with its creditors regarding refinancing alternatives for its upcoming maturities.

Asset Divestitures. We have continued a process to divest assets in order to reduce our debt and streamline operations, taking into account our cash liquidity needs and prevailing economic conditions and their impact on the value of the asset or business unit being divested. In 2012, our objective is to raise in excess of U.S.$500 million from asset sales.

Global Cost-Reduction Initiatives. In response to decreased demand in most of our markets as a result of the global economic recession, in 2008 we identified and began implementing global cost-reduction initiatives intended to reduce our annual cost structure to a level consistent with the decline in demand for our products. Such global cost-reduction initiatives encompass different undertakings, including headcount reductions, capacity closures across the cement value chain and a general reduction in global operating expenses. During the first half of 2011, CEMEX launched a company-wide program aimed at enhancing competitiveness, providing a more agile and flexible organizational structure and supporting an increased focus on the company’s markets and customers. CEMEX is targeting to generate approximately U.S.$400 million in annualized cost savings intended to improve our operating results by the end of 2012 through the implementation of this program, which contemplates an improvement in underperforming operations, a reduction in selling, general and administrative costs and the optimization of the company’s organizational structure.

In connection with the implementation of our cost-reduction initiatives, and as part of our ongoing efforts to eliminate redundancies at all levels and streamline corporate structures to increase our efficiency and reduce operating expenses, we have reduced our global headcount by approximately 28%, from 61,545 employees as of December 31, 2007 to 44,104 employees as of December 31, 2011. Both figures exclude personnel from our operations in Australia sold in October 2009 and our operations in Venezuela, which were expropriated in 2008, but do not give effect to any other divestitures.

Also as part of these initiatives, during 2009, we temporarily shut down (for a period of at least two months) several cement production lines in order to rationalize the use of our assets and reduce the accumulation of our

 

 

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inventories. On January 22, 2010, we announced the permanent closure of our Davenport cement plant located in northern California, which had an installed cement production capacity of approximately 0.9 million tons per annum. The plant had been closed on a temporary basis since March 2009 due to economic conditions. We have been serving our customers in the region through our extensive network of terminals in northern California, which are located in Redwood City, Richmond, West Sacramento and Sacramento. Since March 2009, our state-of-the-art cement facility in Victorville, California has provided and will continue to provide cement to this market more efficiently than the Davenport plant. Opened in 1906, Davenport was the least efficient of our 14 plants in the United States. We have no other set plans for the Davenport facility at this time. Similar actions were taken in our ready-mix concrete and aggregates businesses. Such rationalizations included, among others, our operations in Mexico, the United States, Spain and the United Kingdom. During 2011, due to the low levels of construction activity and increased costs, we implemented a minimum margin strategy in our Arizona operations through the closure of under-utilized facilities and the reduction of headcount, among other actions designed to improve the profitability of our operations in the region.

Furthermore, during 2011, we achieved energy cost-savings by actively managing our energy contracting and sourcing, and by increasing our use of alternative fuels. We believe that these cost-saving measures better position us to quickly adapt to potential increases in demand and thereby benefit from the operating leverage we have built into our cost structure.

Lower Capital Expenditures. In light of the continued weak demand for our products throughout most of our markets, we reduced capital expenditures related to maintenance and expansion of our operations to approximately U.S.$459 million during 2011, from approximately U.S.$555 million during 2010 and approximately U.S.$636 million during 2009 (in each case excluding acquisitions and capital leases). This reduction in capital expenditures has been implemented to maximize our free cash flow generation available for debt service and debt reduction, consistent with our ongoing efforts to strengthen our capital structure, improve our conversion of operating EBITDA to free cash flow and regain our financial flexibility. Pursuant to the Financing Agreement, we are prohibited from making aggregate annual capital expenditures in excess of U.S.$800 million until the debt under the Financing Agreement has been repaid in full. We believe that these restrictions on capital expenditures do not diminish our world-class operating and quality standards.

Recruit, retain and cultivate world-class managers

Our senior management team has a strong track record operating diverse businesses throughout the cement value chain in emerging and developed economies globally.

We will continue to focus on recruiting and retaining motivated and knowledgeable professional managers. We encourage managers to regularly review our processes and practices, and to identify innovative management and business approaches to improve our operations. By rotating our managers from one country to another and from one area of our operations to another, we can increase their diversity of experience and knowledge of our business.

 

 

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RISK FACTORS

Risks Relating to Our Business

Economic conditions in some of the countries where we operate may adversely affect our business, financial condition and results of operations.

The economic conditions in some of the countries where we operate have had and may continue to have a material adverse impact on our business, financial condition and results of operations throughout our operations worldwide. Our results of operations are highly dependent on the results of our operating subsidiaries in the United States, Mexico and Western Europe. Despite some aggressive measures taken by governments and central banks thus far, there is still a significant risk that these measures may not prevent several of the countries where we operate from experiencing further economic declines. The construction downturn has been more severe in countries that experienced the largest housing market expansion during the years of high credit availability (such as the United States, Spain, Ireland and the United Kingdom). Most government sponsored recovery efforts focus on fostering growth in demand from infrastructure projects. The infrastructure plans announced to date by many countries, including the United States and Mexico, may not stimulate economic growth or yield the expected results because of delays in implementation and/or bureaucratic issues, among other obstacles. A worsening of the economic crisis or delays in implementing any such plans could adversely affect demand for our products.

In the United States, the recession was longer and deeper than the previous two recessions during the 1990s and in early 2000, and the economic uncertainty continues despite some recent positive signals. In 2011, housing starts, the primary driver of cement demand in the residential sector, reached a total of 606,900, according to the U.S. Census Bureau, which was 3.4% higher than the 2010 total of 586,900. The timing of a housing recovery remains uncertain given the current market environment, tight credit conditions and housing oversupply. As part of the announced government fiscal stimulus package, the U.S. Congress passed the American Recovery and Reinvestment Act of 2009, which provided for approximately U.S.$85 billion for infrastructure spending. To date, however, spending under this program has not been effective to offset the decline in cement and ready-mix concrete demand as a result of current economic conditions. The uncertain economic environment and tight credit conditions also adversely affected the U.S. industrial and commercial sectors during 2010, with contract awards—a leading indicator of construction activity—declining 17% in 2010 compared to 2009, according to FW Dodge. This combination of factors resulted in the worst decline in sales volumes that we have experienced in the United States in recent history. In 2011, contract awards increased 6% compared to 2010, according to FW Dodge; our U.S. operations’ domestic cement sales volumes, however, decreased 2% in 2011 compared to 2010.

The Mexican economy was also significantly and adversely affected by the financial crisis. Mexican dependence on the U.S. economy remains very important, and therefore, any downside to the economic outlook in the United States may hinder economic growth in Mexico. The crisis also adversely affected local credit markets resulting in an increased cost of capital that had a negative impact on companies’ ability to meet their financial needs. During 2008, the Mexican Peso depreciated by 20.5% against the Dollar. During 2009 and 2010, the Mexican Peso had a mild recovery, appreciating by approximately 5% and 6%, respectively, against the Dollar. During 2011, the Mexican Peso depreciated by approximately 11.5% against the Dollar. Exchange rate depreciation and/or volatility in the markets would adversely affect our operational and financial results. We cannot be certain that a contraction of Mexican economic output will not take place, which would negatively affect the construction sector and demand for our products.

Many Western European countries, including the United Kingdom, France, Spain, Germany and Ireland, have faced difficult economic environments due to the financial crisis and its impact on their economies, including the construction sectors. If this situation were to deteriorate further, our financial condition and results of operations could be further affected. The situation has been more pronounced in those countries with a higher degree of previous market distortions (especially those experiencing real estate bubbles and durable goods overhangs prior to the crisis), such as Spain, or those more exposed to financial turmoil, such as the United Kingdom. According to OFICEMEN, the Spanish cement trade organization, domestic cement demand in Spain declined 17% in 2011 compared to 2010. Our domestic cement and ready-mix concrete sales volumes in Spain decreased approximately 19% and 21%, respectively, in 2011 compared to 2010. In the construction sector, the residential adjustment could last longer than anticipated, while non-residential construction could experience a sharper decline than expected. Furthermore, the austerity measures being implemented by some European countries could result in further declines in construction activity and demand for our products. In addition, a default by Greece on its debt or its exit from the

 

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Euro could have a negative impact on other countries in Europe in which we operate, which could adversely affect demand for our products and, as a consequence, adversely affect our business and results of operations. If these risks materialize, our business, financial condition and results of operations may be adversely affected. The important trade links with Western Europe make some of the Eastern European countries susceptible to the Western European recession. Large financing needs in these countries pose a significant vulnerability. Central European economies could face delays in implementation of European Union Structural Funds (funds provided by the European Union to member states with lowest national incomes per capita) related projects due to logistical and funding problems, which could have a material adverse effect on cement and/or ready-mix concrete demand. In addition, the current concerns about sovereign debt and the budget deficit levels of Greece, Ireland, Portugal, Spain, Italy and several other European countries have resulted in increased volatility and risk perception in the financial markets.

The Central and South American economies also pose a downside risk in terms of overall activity. A new financial downturn, lower exports to the United States and Europe, lower remittances and lower commodity prices could represent an important risk for the region in the short term. This may translate into greater economic and financial volatility and lower growth rates, which could have a material adverse effect on cement and ready-mix concrete consumption and/or prices. Political or economic volatility in the South American, Central American or the Caribbean countries in which we have operations may also have an impact on cement prices and demand for cement and ready-mix concrete, which could adversely affect our business and results of operations.

The Asia-Pacific region will likely be affected if the economic landscape further deteriorates. An additional increase in country risk and/or decreased confidence among global investors would also limit capital flows and investments in the Asian region. In the Middle East region, lower oil revenues and tighter credit conditions could moderate economic growth and adversely affect construction investments. Our operations in the UAE have been adversely affected by credit concerns and the end of the construction boom. In addition, the accumulated housing overhang, the rapid decline in property values and the radical change in the international financial situation could prompt a sudden adjustment of the residential markets in some of the countries in the region. The political instability in Egypt in 2010 and 2011, which resulted in former President Hosni Mubarak resigning from his post on February 11, 2011, is continuing and has caused a reduction in overall economic activity in Egypt, which is negatively affecting demand for building materials, and interruptions in services, such as banking, which is also having a material adverse effect on our operations in Egypt.

If the economies of the major countries where we operate were to continue to deteriorate and fall into an even deeper and longer lasting recession, or even a depression, our business, financial condition and results of operations would be adversely affected.

Concerns regarding the European debt crisis and market perception concerning the instability of the Euro could affect our operating profits.

We conduct business in many countries that use the Euro as their currency (the “Eurozone”). Concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the Euro, and the suitability of the Euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries.

These concerns could lead to the reintroduction of individual currencies in one or more Eurozone countries, or in more extreme circumstances, the possible dissolution of the Euro currency entirely. Should the Euro dissolve entirely, the legal and contractual consequences for holders of Euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of our Euro-denominated assets and obligations. In addition, concerns over the effect of this financial crisis on financial institutions in Europe and globally could have an adverse affect on the global capital markets, and more specifically on our ability, and the ability of our customers, suppliers and lenders to finance their respective businesses, to access liquidity at acceptable financing costs, if at all, and on the demand for our products.

The Financing Agreement contains several restrictions and covenants. Our failure to comply with such restrictions and covenants could have a material adverse effect on us.

The Financing Agreement requires us to comply with several financial ratios and tests, including a consolidated coverage ratio of EBITDA to consolidated interest expense of not less than (i) 1.75:1 for each period of four consecutive fiscal quarters (measured semi-annually) up to and including the period ending December 31, 2012 and (ii) 2.00:1 for the remaining periods of four consecutive fiscal quarters (measured semi-annually) to

 

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December 31, 2013. In addition, the Financing Agreement allows us a maximum consolidated leverage ratio of total debt (including the Debentures) to EBITDA for each period of four consecutive fiscal quarters (measured semi-annually) not to exceed 7.00:1 for the period that ended December 31, 2011, 6.5:1 for the period ending June 30, 2012, 5.75:1 for the period ending December 31, 2012, 5.00:1 for the period ending June 30, 2013 and 4.25:1 for the period ending December 31, 2013. Our ability to comply with these ratios may be affected by current economic conditions and high volatility in foreign exchange rates and the financial and capital markets. For the period ended December 31, 2011, we expect to report to the lenders under the Financing Agreement a consolidated coverage ratio of approximately 1.88:1 and a consolidated leverage ratio of approximately 6.64:1, each as calculated pursuant to the Financing Agreement. Pursuant to the Financing Agreement, we are prohibited from making aggregate annual capital expenditures in excess of U.S.$800 million.

We are also subject to a number of negative covenants that, among other things, restrict or limit our ability to: (i) create liens; (ii) incur additional debt; (iii) change our business or the business of any obligor or material subsidiary (as defined in the Financing Agreement); (iv) enter into mergers; (v) enter into agreements that restrict our subsidiaries’ ability to pay dividends or repay intercompany debt; (vi) acquire assets; (vii) enter into or invest in joint venture agreements; (viii) dispose of certain assets; (ix) grant additional guarantees or indemnities; (x) declare or pay cash dividends or make share redemptions; (xi) issue shares; (xii) enter into certain derivatives transactions; (xiii) exercise any call option in relation to any perpetual bonds we issue unless the exercise of the call options does not have a materially negative impact on our cash flow; and (xiv) transfer assets from subsidiaries or more than 10% of shares in subsidiaries into or out of CEMEX España or its subsidiaries if those assets or subsidiaries are not controlled by CEMEX España or any of its subsidiaries.

The Financing Agreement also contains a number of affirmative covenants that, among other things, require us to provide periodic financial information to our lenders. Pursuant to the Financing Agreement, however, a number of those covenants and restrictions will automatically cease to apply or become less restrictive if (i) we receive an investment-grade rating from two of Standard & Poor’s Rating Services, Moody’s Investors Service, Inc. and Fitch Ratings; (ii) our consolidated leverage ratio for the two most recently completed semi-annual testing periods is less than or equal to 3.5:1; and (iii) no default under the Financing Agreement is continuing. Restrictions that will cease to apply when we satisfy such conditions include the capital expenditure limitations mentioned above and several negative covenants, including limitations on our ability to declare or pay cash dividends and distributions to shareholders, limitations on our ability to repay existing financial indebtedness, certain asset sale restrictions, the quarterly cash balance sweep, certain mandatory prepayment provisions, and restrictions on exercising call options in relation to any perpetual bonds we issue (provided that participating creditors will continue to receive the benefit of any restrictive covenants that other creditors receive relating to other financial indebtedness of ours in excess of U.S.$75 million). At such time, several baskets and caps relating to negative covenants will also increase, including permitted financial indebtedness, permitted guarantees and limitations on liens. However, there can be no assurance that we will be able to meet the conditions for these restrictions to cease to apply prior to the final maturity date under the Financing Agreement.

The Financing Agreement contains events of default, some of which may be outside our control. Such events of default include defaults based on (i) non-payment of principal, interest, or fees when due; (ii) material inaccuracy of representations and warranties; (iii) breach of covenants; (iv) bankruptcy or insolvency of CEMEX, S.A.B. de C.V., any borrower under an existing facility agreement (as defined in the Financing Agreement) or any other of our material subsidiaries (as defined in the Financing Agreement); (v) inability to pay debts as they fall due or by reason of actual financial difficulties, suspension or threatened suspension of payments on debts exceeding U.S.$50 million or commencement of negotiations to reschedule debt exceeding U.S.$50 million; (vi) a cross-default in relation to financial indebtedness in excess of U.S.$50 million; (vii) a change of control with respect to CEMEX, S.A.B. de C.V.; (viii) a change to the ownership of any of our subsidiary obligors under the Financing Agreement, unless the proceeds of such disposal are used to prepay Financing Agreement debt; (ix) enforcement of the share security; (x) final judgments or orders in excess of U.S.$50 million that are neither discharged nor bonded in full within 60 days thereafter; (xi) any restrictions not already in effect as of August 14, 2009 limiting transfers of foreign exchange by any obligor for purposes of performing material obligations under the Financing Agreement; (xii) any material adverse change arising in the financial condition of CEMEX, S.A.B. de C.V. and each of its subsidiaries, taken as a whole, which more than 66.67% of the participating creditors determine would result in our failure, taken as a whole, to perform payment obligations under the existing facilities or the Financing Agreement; and (xiii) failure to comply with laws or our obligations under the Financing Agreement cease to be legal. If an event of default occurs and is continuing, upon the authorization of 66.67% of the participating creditors, the creditors have the ability to accelerate all outstanding amounts due under the existing facilities. Acceleration is automatic in the case of insolvency.

 

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There can be no assurance that we will be able to comply with the restrictive covenants and limitations contained in the Financing Agreement. Our failure to comply with such covenants and limitations could result in an event of default, which could materially and adversely affect our business and financial condition.

We have a substantial amount of debt maturing in the next several years, including a significant portion of debt not subject to the Financing Agreement. If we are unable to secure refinancing on favorable terms or at all, we may not be able to comply with our upcoming payment obligations. Our ability to comply with our debt maturities and financial covenants may depend on us making asset sales, and there is no assurance that we will be able to execute such sales on terms favorable to us or at all.

As of December 31, 2011, our Total Financial Obligations were Ps239,118 million (U.S.$17,129 million), not including approximately Ps13,089 million (U.S.$938 million) of notes issued in connection with the Debentures, but including our debt subject to the Financing Agreement, which was approximately Ps100,442 million (U.S.$7,195 million). Of such Total Financial Obligations amount, approximately Ps5,202 million (U.S.$373 million) is maturing during 2012; Ps7,987 million (U.S.$572 million) is maturing during 2013; Ps111,869 million (U.S.$8,013 million) is maturing during 2014 (including the last principal payment under the Financing Agreement of U.S.$6,707 million due on February 14, 2014); Ps19,656 million (U.S.$1,408 million) is maturing during 2015; Ps35,950 million (U.S.$2,575 million) is maturing during 2016; and Ps58,454 million (U.S.$4,186 million) is maturing after 2016.

If we are unable to comply with our upcoming principal maturities under our indebtedness (including the Financing Agreement), or refinance or extend maturities of our indebtedness, our debt could be accelerated. Acceleration of our debt would have a material adverse effect on our business and financial condition. The failure to achieve a refinancing or extension of maturity of the Financing Agreement prior to its maturity in February 2014 would have a material adverse effect on our liquidity and on our ability to meet our other obligations, including our other indebtedness.

Our ability to comply with our financial covenants and payment obligations under the Financing Agreement and other indebtedness may depend in large part on asset sales, and there is no assurance that we will be able to execute such sales on terms favorable to us or at all.

As a result of the restrictions under the Financing Agreement and other debt instruments, the current global economic environment and uncertain market conditions, we may not be able to complete asset divestitures on terms that we find economically attractive or at all. The current volatility of the credit and capital markets can significantly affect us due to the limited availability of funds to potential acquiring parties, including industry peers. In addition, high levels of consolidation in our industry in some jurisdictions may further limit potential assets sales to interested parties due to antitrust considerations. If we are unable to complete asset divestitures and our cash flow or capital resources prove inadequate, we could face liquidity problems and may not be able to comply with financial covenants and payment obligations under our indebtedness.

In addition, our levels of debt, contractual restrictions, and our need to deleverage may limit our planning flexibility and our ability to react to changes in our business and the industry, and may place us at a competitive disadvantage compared to competitors who may have lower leverage ratios and fewer contractual restrictions. There can also be no assurance that, because of our high leverage ratio and contractual restrictions, we will be able to maintain our operating margins and deliver financial results comparable to the results obtained in the past under similar economic conditions.

We may not be able to generate sufficient cash to service all of our indebtedness or satisfy our short-term liquidity needs, and we may be forced to take other actions to satisfy our obligations under our indebtedness and our short-term liquidity needs, which may not be successful.

Historically, we have addressed our liquidity needs (including funds required to make scheduled principal and interest payments, refinance debt, and fund working capital and planned capital expenditures) with operating cash flow, borrowings under credit facilities, receivables and inventory financing facilities, proceeds of debt and equity offerings and proceeds from asset sales.

As of December 31, 2011, we had U.S.$616 million in receivables financing facilities, which consisted of securitization programs in Spain, the United States, France (which incorporated the sale of trade receivables in the United Kingdom) and Mexico. We cannot ensure that, going forward, we will be able to roll over or renew these programs, which could adversely affect our liquidity.

 

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The global equity and credit markets in the last few years have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective and outstanding debt financings to widen considerably. This volatility and illiquidity has materially and adversely affected a broad range of fixed income securities. As a result, the market for fixed income securities has experienced decreased liquidity, increased price volatility, credit downgrade events and increased defaults. Global equity markets have also been experiencing heightened volatility and turmoil, with issuers exposed to the credit markets being most seriously affected. The disruptions in the financial and credit markets may continue to adversely affect our credit rating, our common stock, our CPOs and our ADSs. If the current pressures on credit continue or worsen, and alternative sources of financing continue to be limited, we may be dependent on the issuance of equity as a source to repay our existing indebtedness, including meeting amortization requirements under the Financing Agreement. Although we have been able to raise debt, equity and equity-linked capital following our entry into the Financing Agreement in August 2009, as capital markets recovered, previous conditions in the capital markets in 2008 and 2009 were such that traditional sources of capital were not available to us on reasonable terms or at all. As a result, there is no guarantee that we will be able to successfully raise additional debt or equity capital at all or on terms that are favorable.

The Financing Agreement restricts us from incurring additional debt, subject to a number of exceptions. The debt covenant under the Financing Agreement permits us to incur a liquidity facility or facilities entered into with a participating creditor under the Financing Agreement in an amount not to exceed U.S.$1.0 billion (of which up to U.S.$500 million may be secured). In addition, the Financing Agreement requires proceeds from asset disposals, incurrence of debt and issuance of equity, and cash flow to be applied to the prepayments of the exposures of participating creditors subject to our right to retain cash on hand up to U.S.$650 million, including the amount of undrawn commitments of a permitted liquidity facility or facilities (unless the proceeds are used to refinance existing indebtedness on the terms set forth in the Financing Agreement), and to temporarily reserve proceeds from asset disposals, permitted refinancings and cash on hand, to be applied to the repayment of CBs that are scheduled to mature during 2012.

We and our subsidiaries have sought and obtained waivers and amendments to several of our debt instruments relating to a number of financial ratios in the past. Our ability to comply with these ratios may be affected by current global economic conditions and high volatility in foreign exchange rates and the financial and capital markets. We may need to seek waivers or amendments in the future. However, we cannot assure you that any future waivers, if requested, will be obtained. If we or our subsidiaries are unable to comply with the provisions of our debt instruments, and are unable to obtain a waiver or amendment, the indebtedness outstanding under such debt instruments could be accelerated. Acceleration of these debt instruments would have a material adverse effect on our financial condition.

If the global economic environment deteriorates further and our operating results worsen significantly, if we were unable to complete debt or equity offerings or if our planned divestitures and/or our cash flow or capital resources prove inadequate, we could face liquidity problems and may not be able to comply with our upcoming principal payment maturities under our indebtedness or refinance our indebtedness.

The terms of our indebtedness impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and may impede our ability to refinance our debt and the debt of our subsidiaries.

We have issued a total of U.S.$5,392 million and €465 million aggregate principal amount of senior secured notes under the indentures governing such notes. The instruments governing our consolidated indebtedness impose significant operating and financial restrictions on us. These restrictions will limit our ability, among other things, to: (i) incur debt; (ii) pay dividends on stock; (iii) redeem stock or redeem subordinated debt; (iv) make investments; (v) sell assets, including capital stock of subsidiaries; (vi) guarantee indebtedness; (vii) enter into agreements that restrict dividends or other distributions from restricted subsidiaries; (viii) enter into transactions with affiliates; (ix) create or assume liens; (x) engage in mergers or consolidations; and (xi) enter into a sale of all or substantially all of our assets.

 

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These restrictions could limit our ability to seize attractive growth opportunities for our businesses that are currently unforeseeable, particularly if we are unable to incur financing or make investments to take advantage of these opportunities.

These restrictions may significantly impede our ability, and the ability of our subsidiaries, to develop and implement refinancing plans in respect of our debt or the debt of our subsidiaries.

Each of the covenants is subject to a number of important exceptions and qualifications.

Furthermore, upon the occurrence of any event of default under the Financing Agreement, or other credit facilities or any of our other debt, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If the lenders accelerate payment of those amounts, we can offer no assurance that our assets will be sufficient to repay in full those amounts, to satisfy all of our other liabilities.

In addition, in connection with the entry into new financings or amendments to existing financing arrangements, our and our subsidiaries’ financial and operational flexibility may be further reduced as a result of more restrictive covenants, requirements for security and other terms that are often imposed on sub-investment grade entities.

We may not be able to realize the expected benefits from acquisitions, some of which may have a material impact on our business, financial condition and results of operations.

Our ability to realize the expected benefits from acquisitions depends, in large part, on our ability to integrate acquired operations with our existing operations in a timely and effective manner. These efforts may not be successful. Although we currently are seeking to dispose of assets to reduce our overall leverage and the Financing Agreement and other debt instruments restrict our ability to acquire assets, we may in the future acquire new operations and integrate such operations into our existing operations, and some of such acquisitions may have a material impact on our business, financial condition and results of operations. We cannot assure you that we will be successful in identifying or acquiring suitable assets in the future. If we fail to achieve the anticipated cost savings from any acquisitions, our business, financial condition and results of operations would be materially and adversely affected.

Our use of derivative financial instruments has negatively affected our operations especially in volatile and uncertain markets.

We have used, and may continue to use, derivative financial instruments to manage the risk profile associated with interest rates and currency exposure of our debt, to reduce our financing costs, to access alternative sources of financing and to hedge some of our financial risks. However, there is no assurance that our use of such instruments will allow us to achieve these objectives due to the inherent risks in any derivatives transaction.

During 2009, we reduced the aggregate notional amount of our derivatives, thereby reducing the risk of cash margin calls. This initiative included closing substantially all notional amounts of derivative instruments related to our debt (currency and interest rate derivatives) and the settlement of our inactive derivative financial instruments, which we finalized during April 2009. The Financing Agreement and other debt instruments significantly restrict our ability to enter into derivative transactions.

As of December 31, 2011, our derivative financial instruments that had a potential impact on our comprehensive financing result consisted of equity forward contracts on third party shares and equity derivatives on our own shares (including our capped call transactions in connection with (i) the 4.875% Convertible Subordinated Notes due 2015, or the 2010 Optional Convertible Subordinated Notes, which we closed in March 2010, and (ii) the 3.25% Convertible Subordinated Notes due 2016 and 3.75% Convertible Subordinated Notes due 2018, or together, the 2011 Optional Convertible Subordinated Notes, which we closed in March 2011), a forward instrument over the Total Return Index of the Mexican Stock Exchange and interest rate derivatives related to energy projects. See note 12D to our consolidated financial statements included in the 6-K.

Most derivative financial instruments are subject to margin calls in case the threshold set by the counterparties is exceeded. If we resume using derivative financing instruments in the future, the cash required to cover margin calls in several scenarios may be substantial and may reduce the funds available to us for our operations or other capital needs. The mark-to-market changes in some of our derivative financial instruments are reflected in our statement of operations, which could introduce volatility in our controlling interest net income and

 

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our related ratios. For the years ended December 31, 2009, 2010 and 2011, we had net losses related to the recognition of changes in the fair value of derivative financial instruments during the applicable period for approximately Ps2,160 million (U.S.$141 million), Ps849 million (U.S.$67 million) and Ps3,994 million (U.S.$320 million), respectively. In the current environment, the creditworthiness of our counterparties may deteriorate substantially, preventing them from honoring their obligations to us. We maintain equity derivatives that in a number of scenarios may require us to cover margin calls that could reduce our cash availability. If we resume using derivative financing instruments, or with respect to our outstanding or new equity derivative positions, we may incur net losses from our derivative financial instruments. See note 2K to our consolidated financial statements included in the 6-K.

Higher energy and fuel costs may have a material adverse effect on our operating results.

Our operations consume significant amounts of energy and fuel, the cost of which has significantly increased worldwide in 2011 and in recent years. Energy and fuel prices have recently increased and may continue to increase as a result of the political turbulence in Iran, Iraq and other countries in Africa and the Middle East. In an attempt to mitigate high energy and fuel costs and volatility, we have implemented the use of alternative fuels such as tires, biomass and household waste, which will make us less vulnerable to price spikes. We have also implemented technical improvements in several facilities and entered into long-term supply contracts of petcoke and electricity to mitigate price volatility. Despite these measures, we cannot assure you that our operations would not be materially adversely affected in the future if energy and fuel costs increase.

A substantial amount of our total assets consists of intangible assets, including goodwill. We have recognized charges for goodwill impairment in the past, and if market and industry conditions continue to deteriorate further, impairment charges may be recognized. Our charges for impairment may be materially greater under U.S. GAAP than under MFRS.

As of December 31, 2011, approximately 41% of our total assets were intangible assets, of which approximately 71% (Ps158,951 million) corresponded to goodwill related primarily to our acquisitions of RMC Group, p.l.c., or RMC, and Rinker. Goodwill is recognized at the acquisition date based on the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed. If applicable, goodwill is subsequently adjusted for any correction to the preliminary assessment given to the assets acquired and/or liabilities assumed within the twelve-month period following the purchase date.

Our consolidated financial statements have been prepared in accordance with MFRS, which differ significantly from U.S. GAAP with respect to the methodology used to determine the final impairment loss, when applicable, including the selection of key economic assumptions related to the determination of the discount rates used to assess our assets’ fair value. Pursuant to our policy under MFRS, goodwill and other intangible assets of indefinite life are not amortized and are tested for impairment when impairment indicators exist or in the fourth quarter of each year, by determining the value in use of the reporting units to which those intangible assets relate (a reporting unit comprises multiple cash generating units), which is the result of the discounted amount of estimated future cash flows expected to be generated by the reporting units. An impairment loss is recognized under MFRS if the value in use is lower than the net book value of the reporting unit. We determine the discounted amount of estimated future cash flows over a period of five years, unless a longer period is justified in a specific country, considering the economic cycle of the reporting units and prevailing industry conditions. Impairment tests are sensitive to the projected future prices of our products, trends in operating expenses, local and international economic trends in the construction industry, as well as the long-term growth expectations in the different markets, among other factors. We use after-tax discount rates, which are applied to after-tax cash flows for each reporting unit. Undiscounted cash flows are significantly sensitive to the growth rates in perpetuity used. Likewise, discounted cash flows are significantly sensitive to the discount rate used. The higher the growth rate in perpetuity applied, the higher the amount obtained of undiscounted future cash flows by reporting unit. Conversely, the higher the discount rate applied, the lower the amount obtained of discounted estimated future cash flows by reporting unit. See note 11B to our consolidated financial statements included in the 6-K.

For the year ended December 31, 2010, we recognized a goodwill impairment loss under MFRS of approximately Ps189 million (U.S.$15 million) associated with our reporting unit in Puerto Rico, which we acquired in July 2002. For the year ended December 31, 2011, we recognized a goodwill impairment loss under MFRS of approximately Ps145 million (U.S.$12 million) associated with our reporting unit in Latvia, which we acquired in March 2005. See notes 11 and 11B to our consolidated financial statements included in the 6-K.

 

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As mentioned above, differences between MFRS and U.S. GAAP with respect to the methodology used to determine the final impairment loss, when applicable, including the selection of key economic assumptions related to the determination of the discount rates used to assess our assets’ fair value, led to a materially greater impairment loss under U.S. GAAP, as compared to that recognized in our 2008 consolidated financial statements under MFRS. For the year ended December 31, 2008, we recognized goodwill impairment losses under U.S. GAAP of approximately U.S.$4.7 billion (compared to U.S.$1.3 billion under MFRS), of which an estimated impairment loss corresponding to the United States reporting unit was recognized for approximately U.S.$4.5 billion (compared to U.S.$1.2 billion of goodwill impairment losses recognized under MFRS) related to the completion of the second step required to allocate the fair value of the U.S. reporting unit’s net assets. During 2009, we completed our U.S. GAAP analysis in connection with the year 2008 impairment exercise and reduced final impairment losses under U.S. GAAP by approximately U.S.$71 million. We did not recognize any additional goodwill impairment losses under U.S. GAAP for the year ended December 31, 2010.

Due to the important role that economic factors play in testing goodwill for impairment, a further downturn in the economies where we operate could necessitate new impairment tests and a possible downward readjustment of our goodwill for impairment under both MFRS and U.S. GAAP. Such an impairment test could result in additional impairment charges which could be material to our financial statements.

CEMEX, S.A.B. de C.V.’s ability to repay debt and pay dividends depends on our subsidiaries’ ability to transfer income and dividends to us.

CEMEX, S.A.B. de C.V. is a holding company with no significant assets other than the stock of its direct and indirect subsidiaries and its holdings of cash and marketable securities. In general, CEMEX, S.A.B. de C.V.’s ability to repay debt and pay dividends depends on the continued transfer to it of dividends and other income from its wholly-owned and non-wholly-owned subsidiaries. The ability of CEMEX, S.A.B. de C.V.’s subsidiaries to pay dividends and make other transfers to it is limited by various regulatory, contractual and legal constraints. The Financing Agreement restricts CEMEX, S.A.B de C.V.’s ability to declare or pay cash dividends.

The ability of CEMEX, S.A.B. de C.V.’s subsidiaries to pay dividends, and make loans and other transfers to it is generally subject to various regulatory, legal and economic limitations. Depending on the jurisdiction of organization of the relevant subsidiary, such limitations may include solvency and legal reserve requirements, dividend payment restrictions based on interim financial results or minimum net worth and withholding taxes on loan interest payments. For example, our subsidiaries in Mexico are subject to Mexican legal requirements, which provide that a corporation may declare and pay dividends only out of the profits reflected in the year-end financial statements that are approved by its stockholders. In addition, such payment can be approved by a subsidiary’s stockholders only after the creation of a required legal reserve (equal to one fifth of the relevant company’s capital) and satisfaction of losses, if any, incurred by such subsidiary in previous fiscal years.

CEMEX, S.A.B. de C.V. may also be subject to exchange controls on remittances by its subsidiaries from time to time in a number of jurisdictions. In addition, CEMEX, S.A.B. de C.V.’s ability to receive funds from these subsidiaries may be restricted by covenants in the debt instruments and other contractual obligations of those entities.

CEMEX, S.A.B. de C.V. currently does not expect that existing regulatory, legal and economic restrictions on its subsidiaries’ ability to pay dividends and make loans and other transfers to us will negatively affect its ability to meet its cash obligations. However, the jurisdictions of organization of CEMEX, S.A.B. de C.V.’s subsidiaries may impose additional and more restrictive regulatory, legal and/or economic limitations. In addition, CEMEX, S.A.B. de C.V.’s subsidiaries may not be able to generate sufficient income to pay dividends or make loans or other transfers to it in the future. Any material additional future limitations on our subsidiaries could adversely affect CEMEX, S.A.B. de C.V.’s ability to service our debt and meet its other cash obligations.

We are subject to restrictions due to non-controlling interests in our consolidated subsidiaries.

We conduct our business through subsidiaries. In some cases, third-party shareholders hold non-controlling interests in these subsidiaries. Various disadvantages may result from the participation of non-controlling shareholders whose interests may not always coincide with ours. Some of these disadvantages may, among other things, result in our inability to implement organizational efficiencies and transfer cash and assets from one subsidiary to another in order to allocate assets most effectively.

 

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We have to service our U.S. Dollar-denominated obligations with revenues generated in Pesos or other currencies, as we do not generate sufficient revenue in Dollars from our operations to service all our U.S. Dollar-denominated obligations. This could adversely affect our ability to service our obligations in the event of a devaluation or depreciation in the value of the Peso, or any of the other currencies of the countries in which we operate, compared to the Dollar. In addition, our consolidated reported results and outstanding indebtedness are significantly affected by fluctuations in exchange rates between the Peso and other currencies.

A substantial portion of our Total Financial Obligations is denominated in Dollars. As of December 31, 2011, our U.S. Dollar-denominated Total Financial Obligations represented approximately 77% of our Total Financial Obligations, not including approximately U.S.$748 million of U.S. Dollar-denominated Debentures. Our U.S. Dollar-denominated debt must be serviced with funds generated by our subsidiaries. Although the acquisition of Rinker increased our U.S. assets substantially, we nonetheless continue to rely on our non-U.S. assets to generate revenues to service our U.S. Dollar-denominated debt. Consequently, we have to use revenues generated in Pesos, Euros or other currencies to service our U.S. Dollar-denominated debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Market Disclosure—Interest Rate Risk, Foreign Currency Risk and Equity Risk—Foreign Currency Risk.” A devaluation or depreciation in the value of the Peso, Euro, Pound or any of the other currencies of the countries in which we operate, compared to the Dollar, could adversely affect our ability to service our debt. In 2011, Mexico, the United Kingdom, Germany, France, the Rest of Northern Europe region (which includes our subsidiaries in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia), Spain, Egypt, the Rest of the Mediterranean region (which includes our subsidiaries in Croatia, UAE and Israel) and Colombia, our main non-U.S. Dollar-denominated operations, together generated approximately 67% of our total net sales in Peso terms (approximately 22%, 8%, 8%, 7%, 7%, 4%, 3%, 4% and 4%, respectively) before eliminations resulting from consolidation. In 2011, approximately 16% of our net sales in Peso terms were generated in the United States. During 2011, the Peso depreciated approximately 11.5% against the Dollar, the Euro depreciated approximately 2.8% against the Dollar and the Pound remained almost flat against the Dollar. If we enter into currency hedges in the future, these may not be effective in covering all our currency-related risks. Our consolidated reported results for any period and our outstanding indebtedness as of any date are significantly affected by fluctuations in exchange rates between the Peso and other currencies, as those fluctuations influence the amount of our indebtedness when translated into Pesos and also result in foreign exchange gains and losses as well as gains and losses on derivative contracts we may have entered into to hedge our exchange rate exposure.

In addition, as of December 31, 2011, our Euro denominated Total Financial Obligations represented approximately 20% of our Total Financial Obligations, not including the €147 million aggregate principal amount of Euro-denominated Debentures.

We are subject to litigation proceedings, including antitrust proceedings, that could harm our business if an unfavorable ruling were to occur.

From time to time, we may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. As described in, but not limited to, the “Regulatory Matters and Legal Proceedings” section, we are currently subject to a number of significant legal proceedings, including, but not limited to, tax matters in Mexico, as well as antitrust investigations in Europe and antitrust actions by private parties in Florida. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. We cannot assure you that these or other legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise adversely affect us should an unfavorable ruling occur. See “Regulatory Matters and Legal Proceedings.”

Our operations are subject to environmental laws and regulations.

Our operations are subject to a broad range of environmental laws and regulations in each of the jurisdictions in which we operate. The enactment of stricter laws and regulations, or stricter interpretation of existing laws or regulations, may impose new risks or costs on us or result in the need for additional investments in pollution control equipment, which could result in a material decline in our profitability.

In late 2010, the U.S. Environmental Protection Agency (the “EPA”) issued the final portland cement national emission standard for hazardous air pollutants under the federal Clean Air Act (“Portland Cement NESHAP”). This rule requires portland cement facilities to limit emissions of mercury, total hydrocarbons,

 

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hydrochloric acid and particulate matter, and is scheduled to take effect in 2013. The EPA also promulgated New Source Performance Standards (the “NSPS”) for cement plants at the same time. The Company, along with others in its industry, has challenged these rules in administrative and judicial proceedings. In the administrative proceeding, the EPA agreed to reconsider certain aspects of both the Portland Cement NESHAP and NSPS rules. It did not, however, delay implementation of the rules, and it refused to reconsider certain aspects of the rules considered important to us. In the judicial proceeding, a December 2011 decision of the D.C. Circuit Court of Appeals remanded the Portland Cement NESHAP and asked the EPA to recompute the standards; however, the court declined to stay the rule pending reconsideration and therefore the compliance date remains September 2013. The court also rejected all challenges to the NSPS rule. If the rules take effect as currently constituted, or if the remand results in the EPA issuing a stricter Portland Cement NESHAP rule, such developments could have a material impact on our business or results of operations.

In addition, the Company and others in its industry have challenged the EPA’s final emissions standards for commercial and industrial solid waste incinerators (“CISWI”), which were published in March 2011. The challenges assert, among other things, that the rules impermissibly overlap with the Portland Cement NESHAP and create ambiguity with respect to how portland cement kilns will be regulated in the future. In May 2011, the EPA announced that it will postpone implementation of the standards while it reconsiders portions of the rules and addresses related legal challenges. EPA re-proposed the CISWI rule in December of 2011. The re-proposed rule is less stringent in some respects than the previous final rule of March 2011; however, the proposed standards remain challenging. The EPA sought comments on the re-proposed rule, which were due February 21, 2012. The Portland Cement Association provided industry comments to the CISWI proposal. The pending administrative and judicial proceedings will be held in abeyance while EPA is re-considering the rule. If the rules take effect as proposed, they could have a material impact on our business or results of operations.

The EPA also has proposed regulating Coal Combustion Products (“CCPs”) generated by electric utilities and independent power producers as a hazardous or special waste under the Resource Conservation and Recovery Act (“RCRA”). We use CCPs as a raw material in the cement manufacturing process, as well as a supplemental cementitious material, in some of our ready-mix concrete products. It is too early to predict how the EPA will ultimately regulate CCPs, but if CCPs are regulated as a hazardous or special waste in the future, it may result in changes to the mix of our products away from ones that use CCPs as a raw material. Based on current information, we believe, although there can be no assurance, that such matters will not have a material impact on us. The EPA has announced that it plans to finalize the rule by late 2012.

Efforts to address climate change through domestic federal, state and regional laws and regulations, as well as through international agreements and the laws and regulations of other countries, to reduce the emissions of greenhouse gases (“GHGs”) can create risks and uncertainties for our business. This is because the cement manufacturing process requires the combustion of large amounts of fuel and creates carbon dioxide (“CO2”) as a by-product of the calcination process. Such risks could include costs to purchase allowances or credits to meet GHG emission caps, costs required to provide equipment to reduce emissions to comply with GHG limits or required technological standards, or decreased profits or losses arising from decreased demand for our goods or higher production costs resulting directly or indirectly from the imposition of legislative or regulatory controls.

The EPA has promulgated a series of regulations pertaining to emissions of GHGs from industrial sources. The EPA issued a Mandatory Reporting of GHG Rule, effective December 29, 2009, which requires certain covered sectors, including cement manufacturing, with GHG emissions above an established threshold to inventory and report their GHG emissions annually on a facility-by-facility basis. We are in the process of complying with this regulation, and do not expect this rule to have a material economic impact on us.

In 2010, the EPA issued a final rule that establishes GHG thresholds for the New Source Review Prevention of Significant Deterioration (“PSD”) and Title V Operating Permit programs. The rule “tailors” the requirements of these CAA permitting programs to limit which facilities will be required to obtain PSD and Title V permits for GHG. Cement production facilities are included within the categories of facilities required to obtain permits, provided that their GHG emissions exceed the thresholds in the tailoring rule. The PSD program requires new major sources of regulated pollutants and major modifications at existing major sources to secure pre-construction permits, which establish, among other things, limits on pollutants based on Best Available Control Technology (“BACT”). According to the EPA’s rules, stationary sources, such as cement manufacturing, which are already regulated under the PSD program for non-GHG pollutants, would need to apply for a PSD permit as of January 2, 2011, for any GHG emissions increases above 75,000 tons/year of carbon dioxide equivalent (“CO2e”).

 

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Therefore, new cement plants and existing plants undergoing modification which are major sources for non-GHG pollutants regulated under the Clean Air Act would need to acquire a PSD permit for construction or modification activities that increase CO2e by 75,000 or more tons/year, and would have to determine and install BACT controls for those emissions. Beginning in July 2011, any new source that emits 100,000 tons/year of CO2e or any existing source that emits 100,000 tons/year of CO2e and undergoes modifications that would emit 75,000 tons/year of CO2e, must comply with PSD obligations. This rule is now in effect and CEMEX USA facilities are complying with these requirements. Complying with these PSD permitting requirements can involve significant costs and delay. The costs of future GHG-related regulation of our facilities through these efforts or others could have had a material economic impact on our U.S. operations and the U.S. cement manufacturing industry.

On the legislative front, during the past few years, various bills have been introduced in the U.S. Congress seeking to establish caps or other limits on GHG emissions. However, Republicans took control of the House of Representatives in the November 2010 elections, and it is highly unlikely that legislation addressing GHG emissions will be passed by Congress as long as Republicans remain in control of the House. On the contrary, the House has passed a numbers of measures that would invalidate EPA’s authority to establish GHG emissions for stationary sources. Nonetheless, any legislation imposing significant costs or limitations on raw materials, fuel or production, or requirements for reductions of GHG emissions, could have a significant impact on the cement manufacturing industry and a material economic impact on our U.S. operations, including competition from imports in countries where such costs are not imposed on manufacturing.

In addition to pending U.S. federal regulation and legislation, states and regions are establishing or seeking to establish their own programs to reduce GHG emissions, including from manufacturing sectors. For example, California passed AB 32 into law in 2006, which, among other things, seeks a statewide reduction of GHG emissions to 1990 levels by 2020 and places responsibility with the California air Resources Board (“CARB”) to develop the implementing regulations which, among other things, requires the minimization of leakage to the extent feasible. In October 2011, CARB approved a cap-and-trade program that will go into effect in January 2013 for the utility and industrial sectors, which includes the cement sector. Based on the current regulatory framework, we expect that CARB will distribute free emission allowances to industrial facilities under an output based benchmark system based on each industrial sector’s leakage risk. Emission allowances may be used to satisfy a covered entity’s compliance obligation under the cap. The cement sector was classified in the high leakage risk category which uses a 100% leakage assistance factor over the 2013 through 2020 period. Thus, based on the current regulatory framework, we expect to be able to satisfy a substantial portion of our compliance obligation under the cap using free allowances over the years 2013 through 2020, which could reduce the cost of complying with the cap. The program is designed to incentivize industrial facilities to improve energy efficiency and substitute lower carbon fuels for fossil fuels and the company is actively pursuing these opportunities as part of its alternative fuels program. However, even with the expected distribution of free allowances to the cement industry and advancements in energy efficiency and fuel substitution, we cannot provide assurance that the overall costs of complying with a cap-and-trade program will not have a material impact on our operations in California.

Also, in 2007, CARB approved a regulation that will require California equipment owners/operators to reduce diesel particulate and nitrogen oxide emissions from in-use off-road diesel equipment and to meet progressively more restrictive emission targets. In 2008, CARB approved a similar regulation for in-use on-road diesel equipment. The emission targets will require us to retrofit our California-based equipment with diesel emission control devices or replace equipment with new engine technology in accordance with certain deadlines, which will result in higher equipment related expenses or capital investments. The company may incur substantial expenditures to comply with these requirements. In December 2010, CARB amended both regulations to grant economic relief to affected fleets by extending certain compliance dates and modifying compliance requirements.

Finally, there are ongoing efforts on the international front to address GHG emissions. We are actively monitoring negotiations of the United Nations Framework Convention on Climate Change (“UNFCCC”), and we operate in countries that are signatories to the Kyoto Protocol, which establishes GHG emission reduction targets for developed country parties to the protocol, such as the countries of the European Union. Hence, our operations in the United Kingdom, Spain, Germany, Latvia and Poland are subject to binding caps on CO2 emissions imposed by member states of the European Union as a result of the European Commission’s directive establishing the European Emissions Trading System (“ETS”) to implement the Kyoto Protocol. Under this directive, companies receive from the relevant member states set limitations on the levels of CO2 emissions from their industrial facilities. These allowances are tradable so as to enable companies that manage to reduce their emissions to sell their excess allowances to companies that are not reaching their emissions objectives. Failure to meet the emissions caps is

 

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subject to significant monetary penalties. For the years 2008 through 2012, the European Commission significantly reduced the overall availability of allowances. In December 2008, the European Commission, Council, and Parliament reached an agreement on a new Directive that will govern emissions trading after 2012. One of the main features of the Directive is that a European-wide benchmark will be used to allocate free allowances among installations in the cement sector according to their historical clinker production. On April 27, 2011, the European Commission adopted a Decision setting out the rules, including benchmarks of GHG emissions performance, to be used by the Member States in calculating the number of allowances to be allocated free annually to industrial sectors, including the cement sector, that are deemed to be exposed to the risk of carbon leakage. Based on the criteria in the Decision, we expect that the aggregate amount of allowances that will be annually allocated for free to CEMEX in Phase III of the ETS (2013-2020) will exceed our emissions, assuming that the cement industry continues to be considered a trade exposed industry. However, a review of the qualifying criteria for being considered as a trade exposed industry is to take place in 2014 and it is possible that the cement industry could lose that status. As a result of continuing uncertainty regarding final allowances, it is premature to draw conclusions regarding the overall position of all of our European cement plants. Also, separate cap-and-trade schemes may be adopted in individual countries outside the EU. For example, there is now a trading scheme in place in Croatia, who are due to become members of the European Union on July 1, 2013 after which their scheme will in due course be incorporated into that of the EU ETS.

Under the ETS, we seek to reduce the impact of any excess emissions by either reducing the level of CO2 released in our facilities or by implementing clean development mechanism (“CDM”) projects under the Kyoto Protocol in emerging markets. We have registered 5 CDM projects. If we are not successful in implementing emission reductions in our facilities or obtaining credits from CDM projects, we may have to purchase a significant amount of allowances in the market, the cost of which may have an impact on our operating results.

Although we monitor other international efforts to regulate GHG emissions carefully, it is more difficult to estimate the potential impact of any international agreements under the UNFCCC or through other international or multilateral instruments. A Conference of Parties was held in November-December 2011 in Durban, South Africa, extending the Kyoto Protocol for five more years (until 2017). The Durban package states that a new international agreement with legal force, that would include emission reduction targets for developing countries, must be agreed by 2015 and implemented by 2020.

Given the uncertain nature of the actual or potential statutory and regulatory requirements for GHG emissions at the federal, state, regional and international levels, we cannot predict the impact on our operations or financial condition or make a reasonable estimate of the potential costs to us that may result from such requirements. However, the impact of any such requirements, whether individually or cumulatively, could have a material economic impact on our operations in the United States and in other countries.

As is the case with other companies in our industry, some of our aggregate products contain varying amounts of crystalline silica, a common mineral. Also, some of our construction and material processing operations release, as dust, crystalline silica that is in the materials being handled. Excessive, prolonged inhalation of very small-sized particles of crystalline silica has allegedly been associated with respiratory disease (including silicosis). Under various laws, we may be subject to claims related to exposure to these or other substances.

Environmental laws and regulations also impose liability and responsibility on present and former owners, operators or users of facilities and sites for hazardous substance contamination at such facilities and third-party disposal sites without regard to causation or knowledge of contamination. We occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities (or ongoing operational or construction activities) may lead to hazardous substance releases or discoveries of historical contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. While compliance with these laws and regulations has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. Furthermore, we cannot provide assurance that existing or future circumstances or developments with respect to contamination will not require us to make significant remediation or restoration expenditures. See “Regulatory Matters and Legal Proceedings—Environmental Matters.”

 

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We are an international company and are exposed to risks in the countries in which we have significant operations or interests.

We are dependent, in large part, on the economies of the countries in which we market our products. The economies of these countries are in different stages of socioeconomic development. Consequently, like many other companies with significant international operations, we are exposed to risks from changes in foreign currency exchange rates, interest rates, inflation, governmental spending, social instability and other political, economic or social developments that may materially affect our results.

With the acquisitions of RMC in 2005 and Rinker in 2007, our geographic diversity significantly increased. As of December 31, 2011, we had operations in Mexico, the United States, the United Kingdom, Germany, France, Rest of Northern Europe (which includes our subsidiaries in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland), Egypt, Spain, Rest of Mediterranean (which includes our subsidiaries in Croatia, the UAE and Israel), Colombia and Rest of South America and the Caribbean (which includes our subsidiaries in Costa Rica, the Dominican Republic, Panama, Nicaragua, Puerto Rico, Guatemala, Argentina and other assets in the Caribbean region), the Philippines and Rest of Asia (which includes our subsidiaries in Thailand, Bangladesh, China and Malaysia).

For a geographic breakdown of our net sales for the year ended December 31, 2011, see “Summary—Geographic Breakdown of Net Sales for the Year Ended December 31, 2011.”

Our operations in the South America and the Caribbean region are faced with several risks that are more significant than in other countries. These risks include political instability and economic volatility. For example, on August 18, 2008, Venezuelan officials took physical control of the facilities of CEMEX Venezuela, S.A.C.A., or CEMEX Venezuela, following the issuance on May 27, 2008 of governmental decrees confirming the expropriation of all of CEMEX Venezuela’s assets, shares and business. See “Regulatory Matters and Legal Proceedings—Other Legal Proceedings—Expropriation of CEMEX Venezuela and ICSID Arbitration.”

Our operations in Egypt, the UAE and Israel have experienced instability as a result of, among other things, civil unrest, extremism and the deterioration of general diplomatic relations in the region. There can be no assurance that political turbulence in Egypt, Libya and other countries in Africa and the Middle East will abate in the near future or that neighboring countries will not be drawn into conflicts or experience instability.

In January 2011, protests and demonstrations demanding a regime change began taking place across Egypt, which resulted in former President Hosni Mubarak resigning from his post on February 11, 2011. Subsequently, Mr. Mubarak transferred government powers to the Egyptian Army. The Supreme Council of the Armed Forces of Egypt then issued a statement expressing a commitment to oversee an orderly transition of power by holding elections under a stable environment. Since then, demonstrations and protests have continued to take place across Egypt. Although CEMEX’s operations in Egypt have not been immune from disruptions resulting from the turbulence in Egypt, CEMEX continues with its cement production, dispatch and sales activities as of the date hereof. Risks to CEMEX’s operations in Egypt include a potential reduction in overall economic activity in Egypt, which could affect demand for building materials, and interruptions in services, such as banking, which could have a material adverse effect on our operations in Egypt.

There have been terrorist attacks and ongoing threats of future terrorist attacks in countries in which we maintain operations. There can be no assurance that there will not be other attacks or threats that will lead to an economic contraction or erection of material barriers to trade in any of our markets. An economic contraction in any of our major markets could affect domestic demand for cement and could have a material adverse effect on our operations.

Our operations can be affected by adverse weather conditions.

Construction activity, and thus demand for our products, decreases substantially during periods of cold weather, when it snows or when heavy or sustained rainfalls occur. Consequently, demand for our products is significantly lower during the winter in temperate countries and during the rainy season in tropical countries. Winter weather in our European and North American operations significantly reduces our first quarter sales volumes, and to a lesser extent our fourth quarter sales volumes. Sales volumes in these and similar markets generally increase during the second and third quarters because of normally better weather conditions. However, high levels of rainfall can adversely affect our operations during these periods as well. Such adverse weather conditions can adversely affect our results of operations and profitability if they occur with unusual intensity, during abnormal periods, or last longer than usual in our major markets, especially during peak construction periods.

 

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The Mexican tax consolidation regime may have an adverse effect on our cash flow, financial condition and net income.

During November 2009, the Mexican Congress approved a general tax reform, effective as of January 1, 2010. Specifically, the tax reform requires CEMEX, S.A.B. de C.V. to retroactively pay taxes (at current rates) on items in past years that were eliminated in consolidation or that reduced consolidated taxable income (“Additional Consolidation Taxes”). This tax reform will require CEMEX, S.A.B. de C.V. to pay taxes on certain previously exempt intercompany dividends, certain other special tax items, and operating losses generated by members of the consolidated tax group not recovered by the individual company generating such losses within the succeeding 10-year period, which may have an adverse effect on our cash flow, financial condition and net income. This tax reform also increases the statutory income tax rate from 28% to 30% for the years 2010 to 2012, 29% for 2013, and 28% for 2014 and future years.

For the 2010 fiscal year, CEMEX was required to pay (at the new, 30% tax rate) 25% of the Additional Consolidation Taxes for the period between 1999 and 2004, with the remaining 75% payable as follows: 25% for 2011, 20% for 2012, 15% for 2013 and 15% for 2014. Additional Consolidation Taxes arising after 2004 is taken into account in the sixth fiscal year after their occurrence and will be payable over the succeeding five years in the same proportions (25%, 25%, 20%, 15% and 15%).

On June 30, 2010, CEMEX paid approximately Ps325 million (approximately U.S.$23 million as of December 31, 2011, based on an exchange rate of Ps13.96 to U.S.$1.00) of Additional Consolidation Taxes. This first payment represented 25% of the Additional Consolidation Taxes for the “1999 to 2004” period. On March 31, 2011, CEMEX paid approximately Ps506 million (approximately U.S.$36 million as of December 31, 2011, based on an exchange rate of Ps13.96 to U.S.$1.00). This amount covered the second payment, which together with the first payment represented 50% of the Additional Consolidation Taxes for the “1999-2004” period, and also included the first payment of 25% of the Additional Consolidation Taxes for the “2005” period. As of December 31, 2011, our estimated payment schedule of remaining taxes payable resulting from changes in the tax consolidation regime was as follows: approximately Ps693 million in 2012, approximately Ps693 million in 2013, approximately Ps1.9 billion in 2014 and approximately Ps8.9 billion in 2015 and thereafter. For the year ended December 31, 2011, we paid approximately Ps831 million (U.S.$59.5 million) of Additional Consolidation Taxes. See “Regulatory Matters and Legal Proceedings—Tax Matters” and notes J and 15D to our consolidated financial statements included in the 6-K.

On February 15, 2010, we filed a constitutional challenge (juicio de amparo) against the January 1, 2010 tax reform described above. However, we cannot assure you that we will prevail in this constitutional challenge. As of June 3, 2011 we were notified of a favorable verdict at the first stage of the trial; the Mexican tax authorities filed an appeal (recurso de revisión) before the Mexican Supreme Court, which is pending.

It may be difficult to enforce civil liabilities against us, the Issuer or our respective directors, executive officers and controlling persons.

We are a publicly traded stock corporation with variable capital (sociedad anónima bursátil de capital variable) organized under the laws of Mexico, CEMEX España is a corporation (sociedad anónima) organized under the laws of Spain and CEMEX España, S.A., Luxembourg Branch is a branch of CEMEX España established under the laws of Luxembourg. Substantially all of CEMEX, S.A.B. de C.V.’s directors and officers reside in Mexico, substantially all the officers and directors of CEMEX España reside in Spain and Mexico, and those of CEMEX España, S.A. Luxembourg Branch reside in Europe, and all or a significant portion of the assets of those persons may be, and the majority of our assets are, located outside the territory of the United States. As a result, it may not be possible for you to effect service of process within the United States upon such persons or to enforce against them or against us, CEMEX España or the Issuer in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the United States. We have been advised by our General Counsel, Lic. Ramiro G. Villarreal, that there is doubt as to the enforceability in Mexico, either in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated on the U.S. federal securities laws.

 

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MEXICAN PESO EXCHANGE RATES

Mexico has had no exchange control system in place since the dual exchange control system was abolished in November 1991. The Mexican Peso has floated freely in foreign exchange markets since December 1994, when the Mexican Central Bank (Banco de México) abandoned its prior policy of having an official devaluation band. Since then, the Peso has been subject to substantial fluctuations in value. The Peso depreciated against the Dollar by approximately 1% and 20.5% in 2007 and 2008, respectively, appreciated against the Dollar by approximately 5% and 6% in 2009 and 2010, respectively, and depreciated against the Dollar by approximately 11.5% in 2011. These percentages are based on the exchange rate that we use for accounting purposes, or the CEMEX accounting rate. CEMEX accounting rates represent the average of three different exchange rates that are provided to us by Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex, or Banamex. For any given date, the CEMEX accounting rate may differ from the noon buying rate for Pesos in New York City published by the U.S. Federal Reserve Bank of New York.

The following table sets forth, for the periods and dates indicated, the end-of-period, average and high and low points of the CEMEX accounting rate as well as the noon buying rate for Pesos, expressed in Pesos per U.S.$1.00.

 

      CEMEX Accounting Rate      Noon Buying Rate  

Year Ended December 31,

   End of
Period
     Average(1)      High      Low      End of
Period
     Average (1)      High      Low  

2007

     10.92         10.93         11.07         10.66         10.92         10.93         11.27         10.67   

2008

     13.74         11.21         13.96         9.87         13.83         11.15         13.92         9.92   

2009

     13.09         13.51         15.57         12.62         13.06         13.50         15.41         12.63   

2010

     12.36         12.67         13.21         12.15         12.38         12.64         13.19         12.16   

2011

     13.96         12.45         14.21         11.50         13.95         12.43         14.25         11.51   

Monthly (2011)

                       

September

     13.87            14.08         12.31         13.77            13.87         12.26   

October

     13.33            14.05         13         13.17            13.93         13.1   

November

     13.64            14.21         13.34         13.62            14.25         13.38   

December

     13.96            14.02         13.48         13.95            13.99         13.49   

Monthly (2012)

                       

January

     13.05            13.91         12.93         13.04            13.75         12.93   

February(2)

     12.90            12.90         12.66         12.81            12.95         12.63   

 

(1) The average of the CEMEX accounting rate or the noon buying rate for Pesos, as applicable, on the last day of each full month during the relevant period.
(2) February noon buying rates are through February 17, 2012. CEMEX accounting rates are through February 24, 2012.

On February 24, 2012, the CEMEX accounting rate was Ps12.90 to U.S.$1.00. Between January 1, 2012 and February 17, 2012, the Peso appreciated by 8.9% against the Dollar, based on the noon buying rate for Pesos.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The financial data set forth below as of and for each of the five years ended December 31, 2011 have been derived from our audited consolidated financial statements. The financial data set forth below as of December 31, 2011 and 2010 and for each of the three years ended December 31, 2011, 2010 and 2009 have been derived from, and should be read in conjunction with, and are qualified in their entirety by reference to, the consolidated financial statements and the notes thereto included in the 6-K. Our audited consolidated financial statements for the year ended December 31, 2011 were approved by our shareholders at our 2011 annual shareholders’ meeting held on February 23, 2012.

The operating results of newly acquired businesses are consolidated in our financial statements beginning on the acquisition date. Therefore, all periods presented do not include operating results corresponding to newly acquired businesses before we assumed operating control. As a result, the financial data for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 may not be comparable to that of prior periods.

Our consolidated financial statements included in the 6-K have been prepared in accordance with MFRS, which differ in significant respects from U.S. GAAP.

In November 2008, the Mexican National Banking and Securities Commission (“CNBV”) published regulations requiring registrants whose shares are listed on the Mexican Stock Exchange to stop preparing their financial statements using MFRS and to begin preparing their consolidated financial statements using IFRS as issued by the International Accounting Standards Board (“IASB”) no later than January 1, 2012. Earlier adoption was allowed following certain requirements published by the CNBV.

On August 31, 2010, the Mexican Board of Financial Reporting Standards (CINIF) issued MFRS Interpretation 19 (“Interpretation 19”) requiring companies in the process of adopting IFRS to disclose any obligation and/or decision to adopt IFRS, the expected date of adoption of IFRS and the estimated impact of the adoption on the financial statements. The interpretation is effective for all financial statements issued on or after September 30, 2010.

In order to be in a position to adopt IFRS, as issued and interpreted by the IASB, we gathered the necessary material and human resources required for the identification and quantification of the differences between MFRS and IFRS for purposes of the initial balance sheet as of January 1, 2010, as well as for the conversion to IFRS of its financial information systems. As of December 31, 2011, the migration process to IFRS had been substantially completed. We are in the process of finalizing our financial statements under IFRS for the years ended December 31, 2011 and 2010, using for these purposes, the IFRS effective as of December 31, 2011, and expect to issue our financial statements under IFRS during the first quarter of 2012. See note 24 to our consolidated financial statements included in the 6-K for a description of our migration to IFRS and details of the main effects in our consolidated financial statements following disclosure requirements of Interpretation 19.

As a result of the adoption of IFRS by CEMEX, the 2011 consolidated financial statements of CEMEX included in the 6-K are the last MFRS financial statements to be published by CEMEX, and all future consolidated financial information will be prepared on the basis of IFRS. In addition, the regulations of the SEC do not require foreign private issuers that prepare their financial statements on the basis of IFRS (as published by the IASB) to reconcile such financial statements to U.S. GAAP. As such, while CEMEX has in the past reconciled its consolidated financial statements to U.S. GAAP, those reconciliations will no longer be presented in our filings with the SEC. Therefore, any references to accounting treatments under MFRS or U.S. GAAP relate solely to the application of MFRS or U.S. GAAP to our historical consolidated financial statements, but do not relate to the accounting treatments we will follow in the future, which will be on the basis of IFRS.

Beginning on January 1, 2008, according to MFRS B-10, “Inflation effects,” inflationary accounting will only be applied in a high-inflation environment, defined by MFRS B-10 as existing when the cumulative inflation for the preceding three years equals or exceeds 26%. Until December 31, 2007, inflationary accounting was applied to all CEMEX subsidiaries regardless of the inflation level of their respective country. Beginning in 2008, only the financial statements of those subsidiaries whose functional currency corresponds to a country under high inflation will be restated to take account of inflation. Designation of a country as a high or low inflation environment takes place at the end of each year and inflation is applied prospectively. During 2008, the financial statements of subsidiaries in Costa Rica and Venezuela were restated, during 2009, the financial statements of subsidiaries in Egypt, Nicaragua, Latvia and Costa Rica were restated, during 2010 and 2011, the financial statements of subsidiaries in Egypt, Nicaragua and Costa Rica were restated.

 

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Beginning in 2008, MFRS B-10 has eliminated the restatement of financial statements for the period as well as the comparative financial statements for prior periods into constant values as of the date of the most recent balance sheet. Beginning in 2008, the amounts of the income statement, statement of cash flow and statement of changes in stockholders’ equity are presented in nominal values; meanwhile, amounts of financial statements for prior years are presented in constant Pesos as of December 31, 2007, the last date in which inflationary accounting was applied. Until such date, the restatement factors for current and prior periods were calculated considering the weighted average inflation of the countries in which we operate and the changes in the exchange rates of each of these countries relative to the Mexican Peso, weighted according to the proportion that our assets in each country represent of our total assets.

Non-Peso amounts included in the financial statements are first translated into Dollar amounts, in each case at a commercially available or an official government exchange rate for the relevant period or date, as applicable, and those Dollar amounts are then translated into Peso amounts at the CEMEX accounting rate, described under “Mexican Peso Exchange Rates,” as of the relevant period or date, as applicable.

The Dollar amounts provided below and, unless otherwise indicated herein, are translations of Peso amounts at an exchange rate of Ps13.96 to U.S.$1.00, the CEMEX accounting rate as of December 31, 2011. However, in the case of transactions conducted in Dollars, we have presented the Dollar amount of the transaction and the corresponding Peso amount that is presented in our consolidated financial statements. These translations have been prepared solely for the convenience of the reader and should not be construed as representations that the Peso amounts actually represent those Dollar amounts or could be converted into Dollars at the rate indicated. The noon buying rate for Pesos on December 31, 2011 was Ps13.95 to U.S.$1.00. Between January 1, 2012 and February 17, 2012, the Peso appreciated by 8.9% against the Dollar, based on the noon buying rate for Pesos.

 

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CEMEX, S.A.B. DE C.V. and Subsidiaries Selected Consolidated Financial Information

 

     As of and for the year ended December 31,  
     2007     2008     2009     2010     2011  
     (in millions of Pesos, except ratios and share and per share amounts)  

Income Statement Information:

          

Net sales

     Ps 228,152        Ps 225,665        Ps 197,801        Ps 178,260        Ps 188,938   

Cost of sales(1)

     (151,439     (153,965     (139,672     (128,307     (135,068

Gross profit

     76,713        71,700        58,129        49,953        53,870   

Operating expenses

     (45,103     (45,612     (42,289     (39,110     (41,887

Operating income

     31,610        26,088        15,840        10,843        11,983   

Other expense, net

     (2,984     (21,403     (5,529     (6,672     (4,241

Comprehensive financing result(2)

     1,018        (28,326     (15,106     (15,627     (23,200

Equity in income of associates

     1,487        869        154        (524     (409

Income (loss) before income tax

     31,131        (22,772     (4,641     (11,980     (15,867

Discontinued operations(3)

     288        2,097        (4,276     —          —     

Non-controlling interest net income (loss)

     837        45        240        27        (37

Controlling interest net income (loss)

     26,108        2,278        1,409        (16,516     (19,127

Basic earnings (loss) per share(4)(5)(6)(7)

     1.17        0.09        0.05        (0.53     (0.61

Diluted earnings per share(4)(5)(6)(7)

     1.17        0.09        0.05        —          —     

Dividends per share(4)(8)(9)

     0.29        —          —          —          —     

Number of shares outstanding(4)(10)

     22,297        22,985        25,643        29,975        31,267   

Balance Sheet Information:

          

Cash and temporary investments

     8,108        12,900        14,104        8,354        16,128   

Property, machinery and equipment, net

     250,015        270,281        258,863        231,254        245,763   

Total assets

     542,314        623,622        582,286        515,097        548,299   

Short-term debt

     36,160        95,269        7,393        5,618        4,674   

Long-term debt

     180,636        162,805        203,751        189,439        204,603   

Non-controlling interest and perpetual debentures(11)

     40,985        46,575        43,697        19,524        16,720   

Total controlling stockholders’ equity

     163,168        190,692        213,873        194,176        191,017   

Other Financial Information:

          

Net working capital(12)

     15,108        16,358        12,380        8,605        10,843   

Book value per share(4)(10)(13)

     7.32        8.30        8.34        6.48        6.11   

Operating margin

     13.9     11.6     8.0     6.1     6.3

Operating EBITDA(14)

     48,752        45,787        36,153        29,317        29,102   

Ratio of Operating EBITDA to interest expense(14)

     5.53        4.49        2.68        1.80        1.62   

Investment in property, machinery and equipment, net

     21,779        20,511        6,655        4,726        3,198   

Depreciation and amortization

     17,666        19,699        20,313        18,474        17,119   

Net cash flow provided by continuing operations(15)

     45,625        38,455        33,728        21,838        22,611   

Basic earnings (loss) per CPO(4)(5)(6)(7)

     3.51        0.30        0.15        (1.59     (1.83

U.S. GAAP(16) :

          

Income Statement Information:

          

Net sales

     Ps 226,742        Ps 224,804        Ps 197,801        Ps 178,260        N/A   

Operating income (loss)(16)

     28,623        (42,233     10,396        5,487        N/A   

Controlling interest net income (loss)

     21,367        (61,886     (5,904     (7,170     N/A   

Basic earnings (loss) per share

     0.96        (2.31     (0.21     (0.23     N/A   

Diluted earnings (loss) per share

     0.96        (2.31     (0.21     (0.23     N/A   

Balance Sheet Information:

          

Total assets

     563,565        605,072        558,541        504,065        N/A   

Perpetual debentures(12)

     33,470        41,495        39,859        16,310        N/A   

Long-term debt(12)

     164,497        162,810        203,602        197,068        N/A   

Non-controlling interest

     8,010        5,105        3,865        3,334        N/A   

Total controlling stockholders’ equity

     172,217        151,294        165,539        151,537        N/A   

 

(1) Cost of sales includes depreciation and freight expenses of raw materials used in our producing plants. Our cost of sales excludes (i) expenses related to personnel and equipment comprising our selling network and those expenses related to warehousing at the points of sale, which are included as part of our administrative and selling expenses line item, and (ii) freight expenses of finished products from our producing plants to our points of sale and from our points of sale to our customers’ locations, which are all included as part of our distribution expenses line item.

 

A-25


(2) Comprehensive financing result includes financial expenses, financial income, results from financial instruments, including derivatives and marketable securities, foreign exchange result and monetary position result.
(3) On October 1, 2009, we completed the sale of our Australian operations to a subsidiary of Holcim Ltd. for approximately $2.02 billion Australian Dollars (approximately U.S.$1.7 billion). “Discontinued operations” includes the results of our Australian operations, net of income tax, for the nine-month period ended September 30, 2009, the twelve-month period ended December 31, 2008 and the six-month period ended December 31, 2007. Accordingly, our financial information under MFRS and under U.S. GAAP presented above for the years ended December 31, 2007, 2008 and 2009 was restated to present our Australian operations as “Discontinued operations.” See note 3B to our consolidated financial statements included in the 6-K.
(4) Our capital stock consists of Series A shares and Series B shares. Each of our CPOs represents two Series A shares and one Series B share. As of December 31, 2011, approximately 91.2% of our outstanding share capital was represented by CPOs. Each of our ADSs represents ten CPOs.
(5) Earnings (loss) per share are calculated based upon the weighted average number of shares outstanding during the year, as described in note 18 to our consolidated financial statements included in the 6-K. Basic earnings (loss) per CPO is determined by multiplying the basic earnings (loss) per share for each period by three (the number of shares underlying each CPO). Basic earnings (loss) per CPO is presented solely for the convenience of the reader and does not represent a measure under MFRS.
(6) Basic earnings per share in the table above for the years ended December 31, 2007, 2008 and 2009 are comprised of basic earnings per share of continuing operations of Ps1.16, Ps0.01 and Ps0.20, respectively, and by basic earnings per share of discontinued operations of Ps0.01 in 2007, Ps0.08 in 2008 and a loss per share of Ps0.15 in 2009. Likewise, diluted earnings per share for the years ended December 31, 2007, 2008 and 2009 are comprised of diluted earnings per share of continuing operations of Ps1.16, Ps0.01 and Ps0.20, respectively, and by diluted basic earnings per share of discontinued operations of Ps0.01 in 2007, Ps0.08 in 2008 and a loss per share of Ps0.15 in 2009. Pursuant to MFRS, diluted earnings per share shall not be disclosed when the result from continuing operations is a loss.
(7) For the years ended December 31, 2007 and 2008, the number of shares outstanding was not restated retroactively to give effect to the capitalization of retained earnings declared in February 2011 and April 2010, respectively, as is required under MFRS for their disclosure in our consolidated financial statements.
(8) Dividends declared at each year’s annual shareholders’ meeting are reflected as dividends of the preceding year.
(9) In years prior to the 2008 fiscal year, our board of directors proposed, and our shareholders approved, dividend proposals, whereby our shareholders had a choice between stock dividends or cash dividends declared in respect of the prior year’s results, with the stock issuable to shareholders who receive the stock dividend being issued at a 20% discount from then current market prices. The dividends declared per share or per CPO in these years, expressed in Pesos, were as follows: 2007, Ps0.84 per CPO (or Ps0.28 per share) and 2008, Ps0.87 per CPO (or Ps0.29 per share). As a result of dividend elections made by shareholders, in 2007, Ps147 million in cash was paid and approximately 189 million additional CPOs were issued in respect of dividends declared for the 2006 fiscal year and in 2008, Ps214 million in cash was paid and approximately 284 million additional CPOs were issued in respect of dividends declared for the 2007 fiscal year. For purposes of the table, dividends declared at each year’s annual shareholders’ meeting for each period are reflected as dividends for the preceding year. We did not declare a dividend for fiscal year 2008, 2009 and 2010. At our 2008 annual shareholders’ meeting, held on April 23, 2009, our shareholders approved a recapitalization of retained earnings. New CPOs issued pursuant to the recapitalization were allocated to shareholders on a pro-rata basis. As a result, shares equivalent to approximately 334 million CPOs were issued and paid. CPO holders received one new CPO for each 25 CPOs held and ADS holders received one new ADS for each 25 ADSs held. There was no cash distribution and no entitlement to fractional shares. At our 2009 annual shareholders’ meeting, held on April 29, 2010, our shareholders approved a recapitalization of retained earnings. New CPOs issued pursuant to the recapitalization were allocated to shareholders on a pro-rata basis. As a result, shares equivalent to approximately 384 million CPOs were issued and paid. CPO holders received one new CPO for each 25 CPOs held and ADS holders received one new ADS for each 25 ADSs held. There was no cash distribution and no entitlement to fractional shares. At our 2010 annual shareholders’ meeting, held on February 24, 2011, our shareholders approved a recapitalization of retained earnings. New CPOs issued pursuant to the recapitalization were allocated to shareholders on a pro-rata basis. As a result, shares equivalent to approximately 401 million CPOs were issued and paid. CPO holders received one new CPO for each 25 CPOs held and ADS holders received one new ADS for each 25 ADSs held. There was no cash distribution and no entitlement to fractional shares. In connection with our 2011 annual shareholders’ meeting held on February 23, 2012, our shareholders approved a recapitalization of retained earnings. CPO holders will receive one new CPO for each 25 CPOs held and ADS holders will receive one new ADS for each 25 ADSs held. There will be no cash distribution and no entitlement to fractional shares. It is expected that shares equivalent to approximately 419 million CPOs will be allocated to shareholders on a pro-rata basis.

 

A-26


(10) Based upon the total number of shares outstanding at the end of each period, expressed in millions of shares, and includes shares subject to financial derivative transactions, but does not include shares held by our subsidiaries.
(11) Non-controlling interest, as of December 31, 2007, 2008, 2009, 2010 and 2011, includes U.S.$3,065 million (Ps33,470 million), U.S.$3,020 million (Ps41,495 million), U.S.$3,045 million (Ps39,859 million), U.S.$1,320 million (Ps16,310 million) and U.S.$938 million (Ps13,089 million), respectively, that represents the nominal amount of the fixed-to-floating rate callable perpetual debentures, denominated in Dollars and Euros, issued by consolidated entities. In accordance with MFRS, these securities qualify as equity due to their perpetual nature and the option to defer the coupons. However, for purposes of our U.S. GAAP reconciliation, we recorded these debentures as debt and coupon payments thereon as part of financial expenses in our income statement.
(12) Net working capital equals trade receivables, less allowance for doubtful accounts plus inventories, net, less trade payables.
(13) Book value per share is calculated by dividing the total controlling stockholders’ equity by the number of shares outstanding.
(14) Operating EBITDA equals operating income before amortization expense and depreciation. Under MFRS, until December 31, 2004, amortization of goodwill was recognized as part of other expenses, net. Commencing January 1, 2005, MFRS ceased amortization of goodwill and we assess goodwill for impairment annually unless events occur that require more frequent reviews. Discounted cash flow analyses are used to assess goodwill impairment, as described in note 11B to our consolidated financial statements included in the 6-K. Operating EBITDA and the ratio of Operating EBITDA to interest expense are presented because we believe that they are widely accepted as financial indicators of our ability to internally fund capital expenditures and service or incur debt. Operating EBITDA and such ratios should not be considered as indicators of our financial performance, as alternatives to cash flow, as measures of liquidity or as being comparable to other similarly titled measures of other companies. Operating EBITDA is reconciled below to operating income under MFRS before giving effect to any non-controlling interest, which we consider to be the most comparable measure as determined under MFRS. Interest expense presented in this chart differs from the definition of Consolidated Interest Expense as such term is defined in the indentures governing the Existing Senior Secured Notes. Interest expense under MFRS does not include coupon payments and issuance costs of the Debentures issued by consolidated entities of approximately Ps1,847 million for 2007, approximately Ps2,596 million for 2008, approximately Ps2,704 million for 2009, approximately Ps1,624 million for 2010 and approximately Ps1,010 million for 2011, as described in note 16D to our consolidated financial statements included in the 6-K.
(15) For the year ended December 31, 2007, a statement of cash flow was not required under MFRS; therefore, net cash flows provided by operating activities included in this item for such year refer to net cash flows provided by operating activities as determined for the Statements of Changes in Financial Position and represent controlling interest net income plus items not affecting cash flows plus changes in working capital, excluding effects from acquisitions, and including inflation effects and unrealized foreign exchange effects.
(16) Operating loss under U.S. GAAP for the year ended December 31, 2008 includes impairment losses of approximately Ps67,202 million (U.S.$4,891 million).

 

A-27


MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our consolidated financial statements, included in the 6-K, include those subsidiaries in which we hold a controlling interest or which we otherwise control. Control exists when we have the power, directly or indirectly, to govern the administrative, financial and operating policies of an entity in order to obtain benefits from its activities.

Until December 31, 2008, financial statements of joint ventures, which are those entities in which we and other third-party investors have agreed to exercise joint control of such entity’s administrative, financial and operating policies, were consolidated through the proportional integration method, considering our interest in the results of operations, assets and liabilities of such entities, based on International Accounting Standard No. 31, “Interest in Joint Ventures.” Beginning in 2009, based on MFRS B-8 “Consolidated or Combined Financial Statements,” the financial statements of joint ventures are recognized by the equity method. No significant effects resulted from the adoption of MFRS B-8 in 2009, considering that CEMEX sold its joint venture investments in Spain during 2008.

Investments in associates are accounted for by the equity method, when we have significant influence, which is presumed with an equity interest between 10% and 50% in public companies and between 20% and 50% in non-public companies unless it is proven that we have significant influence with a lower percentage. Under the equity method, after acquisition, the investment’s original cost is adjusted for the proportional interest of the holding company in the associate’s equity and earnings, considering the effects of inflation.

All significant balances and transactions between related parties have been eliminated in consolidation.

For the periods ended December 31, 2010 and 2011, our consolidated results reflect the following transactions:

 

   

As a result of Ready Mix USA’s exercise of its put option (see note 9A to our consolidated financial statements included in the 6-K) and after performance of the obligations by both parties under the put option agreement, effective August 1, 2011, CEMEX acquired its former joint venture partner’s interests in CEMEX Southeast, LLC and Ready Mix USA, LLC, including a non-compete and a transition services agreement, for approximately U.S.$352 million (Ps4,914 million). In accordance with the joint venture agreements, from the date on which Ready Mix USA exercised its put option until the date CEMEX acquired Ready Mix USA’s interest, Ready Mix USA continued to control and manage Ready Mix USA, LLC. Upon CEMEX’s acquisition, the purchase price was assigned to each joint venture in proportion to CEMEX’s relative contribution interest in CEMEX Southeast, LLC and Ready Mix USA, LLC, considering the original fair values as of the dates of the agreements in 2005. As of December 31, 2011, we were in the process of completing the allocation of the purchase price of Ready Mix USA, LLC to the fair values of the assets acquired and liabilities assumed. The consolidated financial statements of CEMEX include the balance sheet of Ready Mix USA, LLC as of December 31, 2011, based on the best estimate of its net asset’s fair value as of the acquisition date, and its results of operations for the five-month period ended December 31, 2011.

 

   

On August 27, 2010, we completed the sale of seven aggregates quarries, three resale aggregate distribution centers and one concrete block manufacturing facility in Kentucky to Bluegrass Materials Company, LLC for U.S.$88 million in proceeds.

 

A-28


Selected Consolidated Statement of Operations Data

The following table sets forth our selected consolidated statement of operations data for each of the three years ended December 31, 2009, 2010 and 2011 expressed as a percentage of net sales.

 

     Year Ended December 31,  
     2009     2010     2011  

Net sales

     100.0     100.0     100.0

Cost of sales

     (70.6     (72.0     (71.5
  

 

 

   

 

 

   

 

 

 

Gross profit

     29.4        28.0        28.5   
  

 

 

   

 

 

   

 

 

 

Administrative and selling expenses

     (14.5     (14.5     (13.6

Distribution expenses

     (6.9     (7.4     (8.6
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     (21.4     (21.9     (22.2
  

 

 

   

 

 

   

 

 

 

Operating income

     8.0        6.1        6.3   
  

 

 

   

 

 

   

 

 

 

Other expenses, net

     (2.8     (3.8     (2.2

Operating income after other expenses, net

     5.2        2.3        4.1   
  

 

 

   

 

 

   

 

 

 

Comprehensive financing result:

      

Financial expense

     (6.8     (9.1     (9.5

Financial income

     0.2        0.2        0.3   

Results from financial instruments

     (1.1     (0.5     (2.2

Foreign exchange result

     (0.1     0.5        (1.0

Monetary position result

     0.2        0.1        0.1   
  

 

 

   

 

 

   

 

 

 

Net comprehensive financing result

     (7.6     (8.8     (12.3
  

 

 

   

 

 

   

 

 

 

Equity in income of associates

     0.1        (0.3     (0.2
  

 

 

   

 

 

   

 

 

 

Loss before income tax

     (2.3     (6.8     (8.4
  

 

 

   

 

 

   

 

 

 

Income taxes

     5.3        (2.5     (1.7
  

 

 

   

 

 

   

 

 

 

Income (loss) before discontinued operations

     3.0        (9.3     (10.1
  

 

 

   

 

 

   

 

 

 

Discontinued operations

     (2.2     —          —     
  

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     0.8        (9.3     (10.1

Non-controlling interest net income loss

     (0.1     0.0        0.0   
  

 

 

   

 

 

   

 

 

 

Controlling interest net income (loss)

     0.7        (9.3     (10.1
  

 

 

   

 

 

   

 

 

 

 

A-29


Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Summarized in the table below are the percentage (%) increases (+) and decreases (-) for the year ended December 31, 2011 compared to the year ended December 31, 2010 in our domestic cement and ready-mix concrete sales volumes, as well as export sales volumes of cement and domestic cement and ready-mix concrete average prices for each of our geographic segments. The table below and the other volume data presented by geographic segment in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section are presented before eliminations resulting from consolidation (including those shown on page F-24 of our consolidated financial statements included in the 6-K).

 

      Domestic Sales
Volumes
    Export Sales
Volumes
    Average Domestic Prices in
Local Currency(1)
 

Geographic Segment

   Cement     Ready-Mix
Concrete
    Cement     Cement     Ready-Mix
Concrete
 

Mexico

     +1     +6     +19     +3     +6

United States(2)

     -2     +7     —          Flat        +3

Northern Europe

          

United Kingdom

     +6     +11     —          +2     +2

Germany

     +14     +13     —          -1     Flat   

France

     N/A        +12     —          N/A        +1

Rest of Northern Europe(3)

     +16     +15     —          +2     +4

Mediterranean

          

Spain

     -19     -21     +6     Flat        -1

Egypt

     -3     -17     —          -7     -9

Rest of Mediterranean(4)

     -6     +13     —          +2     +5

South America and the Caribbean

          

Colombia

     +5     +29     —          +10     +6

Rest of South America and the Caribbean(5)

     +4     +5     —          +5     +7

Asia

          

Philippines

     -5     —          +19     -8     —     

Rest of Asia(6)

     +8     -8     —          +2     +12

 

N/A = Not Applicable

(1) Represents the average change in domestic cement and ready-mix concrete prices in local currency terms. For purposes of a geographic segment consisting of a region, the average prices in local currency terms for each individual country within the region are first translated into Dollar terms (except for the Rest of Northern Europe and the Rest of Mediterranean regions, which is translated first into Euros) at the exchange rates in effect as of the end of the reporting period. Variations for a region represent the weighted average change of prices in Dollar terms (except for the Rest of Europe region, which represent the weighted average change of prices in Euros) based on total sales volumes in the region.
(2) On August 27, 2010, we sold seven aggregates quarries, three resale aggregate distribution centers and one concrete block manufacturing facility all located in Kentucky.
(3) Refers primarily to operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland.
(4) Includes mainly the operations in Croatia, the UAE and Israel.
(5) Includes the operations in Costa Rica, Guatemala, Panama, Nicaragua, Puerto Rico, the Dominican Republic, Jamaica and other countries in the Caribbean, and small ready-mix concrete operations Argentina.
(6) Includes primarily our operations in Malaysia, Thailand, Bangladesh and China.

On a consolidated basis, our cement sales volumes increased approximately 2%, from 65.6 million tons in 2010 to 66.8 million tons in 2011, and our ready-mix concrete sales volumes increased approximately 8%, from 51.0 million cubic meters in 2010 to 54.9 million cubic meters in 2011. Our net sales increased approximately 6%, from Ps178.2 billion in 2010 to Ps188.9 billion in 2011, and our operating income increased approximately 11%, from Ps10.8 billion in 2010 to Ps11.9 billion in 2011.

 

A-30


The following tables present selected condensed financial information of net sales and operating income for each of our geographic segments for the years ended December 31, 2011 and 2010. The net sales information in the table below is presented before the eliminations resulting from consolidation shown on page F-21 of our consolidated financial statements included in the 6-K. Variations in net sales determined on the basis of Mexican Pesos include the appreciation or depreciation which occurred during the period between the local currencies of the countries in the regions vis-à-vis the Mexican Peso; therefore, such variations differ substantially from those based solely on the countries’ local currencies:

 

Geographic Segment

   Variation 
in Local
Currency(1)
    Approximate
Currency
Fluctuations,
Net of  Inflation
Effects
    Variations
in Mexican
Pesos
    Net Sales For the Year
Ended December 31,
 
         2010     2011  
                       (in millions of Pesos)  

Mexico

     +1     —          +1     Ps 42,907        Ps 43,361   

United States(2)

     +1     -1     Flat        31,575        31,643   

Northern Europe

          

United Kingdom

     +7     +3     +10     14,320        15,753   

Germany

     +12     +6     +18     13,524        15,975   

France

     +12     +4     +16     12,179        14,170   

Rest of Northern Europe(3)

     +7        +15     +22     11,677        14,278   

Mediterranean

          

Spain

     -14     +3     -11     8,013        7,142   

Egypt

     -11     -11     -22     8,608        6,686   

Rest of Mediterranean(4)

     +8     -1     +7     7,253        7,762   

South America and the Caribbean

          

Colombia

     +21     +2     +23     6,964        8,533   

Rest of South America and the Caribbean(5)

     +8     +12     +20     12,380        14,852   

Asia

          

Philippines

     -10     +2     -8     4,014        3,701   

Rest of Asia(6)

     +5     -2     +3     2,512        2,597   

Others(7)

     +26     +55     +81     8,215        14,858   
        

 

 

   

 

 

 

Net sales before eliminations

         +9     Ps 184,141        Ps 201,311   

Eliminations from consolidation

           (5,881     (12,373
        

 

 

   

 

 

 

Consolidated net sales

         +6     Ps 178,260        Ps 188,938   
        

 

 

   

 

 

 

 

Geographic Segment

   Variations
in Local
Currency(1)
    Approximate
Currency
Fluctuations,
Net of  Inflation
Effects
    Variations
in Mexican
Pesos
    Operating Income (Loss) For
the Year Ended
December 31,
 
         2010     2011  
                       (in millions of Pesos)  

Mexico

     +8     —          +8     Ps 12,380        Ps 13,341   

United States(2)

     Flat        +6     +6     (8,990     (8,440

Northern Europe

          

United Kingdom

     +86     N/A        >100     (780     672   

Germany

     >100     N/A        >100     26        481   

France

     >100     N/A        >100     221        731   

Rest of Northern Europe(3)

     >100     N/A        >100     208        823   

Mediterranean

          

Spain

     -17     -1     -18     984        806   

Egypt

     -30     -6     -36     4,146        2,658   

Rest of Mediterranean(4)

     +51     -4     +47     448        660   

South America and the Caribbean

          

Colombia

     +17     +4     +21     2,226        2,696   

Rest of South America and the Caribbean(5)

     +8     +9     +17     2,222        2,597   

Asia

          

Philippines

     -41     -29     -70     909        273   

Rest of Asia(6)

     -4     +4     Flat        73        73   

Others(7)

     +2     -69     -67     (3,230     (5,388
      

 

 

   

 

 

   

 

 

 

Operating income

         +11     Ps 10,843        Ps 11,983   
      

 

 

   

 

 

   

 

 

 

 

N/A = Not Applicable

(1) For purposes of a geographic segment consisting of a region, the net sales and operating income data in local currency terms for each individual country within the region are first translated into Dollar terms at the exchange rates in effect as of the end of the reporting period (except for the Rest of Northern Europe and the Rest of Mediterranean regions, which represents the weighted average change in prices in Euros). Variations for a region represent the weighted average change in Dollar terms based on net sales and operating income for the region.

 

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(2) On August 27, 2010, we sold seven aggregates quarries, three resale aggregate distribution centers and one concrete block manufacturing facility all located in Kentucky.
(3) Refers primarily to operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland.
(4) Includes mainly the operations in Croatia, the United Arab Emirates and Israel.
(5) Includes primarily the operations in Costa Rica, Panama, Puerto Rico, the Dominican Republic, Nicaragua, Jamaica and other countries in the Caribbean, Guatemala, and small ready-mix concrete operations in Argentina.
(6) Includes primarily our operations in Malaysia, Thailand, Bangladesh and China.
(7) Our Others segment refers to: (i) cement trade maritime operations, (ii) our information technology solutions business (Neoris), (iii) CEMEX, S.A.B. de C.V. and other corporate entities and (iv) other minor subsidiaries with different lines of business.

Net Sales

Our consolidated net sales increased approximately 6%, from approximately Ps178 billion in 2010 to Ps189 billion in 2011. The increase in net sales was primarily attributable to higher volumes and prices in our main markets. The infrastructure and residential sectors continue to be the main drivers of demand in most of our markets. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our net sales on a geographic segment basis. The discussion of volume data below is presented before eliminations resulting from consolidation (including those shown on page F-24 of our consolidated financial statements included in the 6-K). The discussion of net sales information below is presented before the eliminations resulting from consolidation shown on page F-21 of our consolidated financial statements included in the 6-K.

Mexico

Our domestic cement sales volumes from our operations in Mexico increased approximately 1% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 6% during the same period. Our net sales from our operations in Mexico represented approximately 22% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. The increases in domestic cement and ready-mix concrete sales volumes were primarily attributable to a modest growth in the self-construction sector. Our cement export volumes of our operations in Mexico, which represented approximately 3% of our Mexican cement sales volumes in 2011, increased approximately 19% in 2011 compared to 2010, primarily as a result of higher export volumes to the South America region. Of our total cement export volumes during 2011 from operations in Mexico, 22% was shipped to the United States, 36% to Central America and the Caribbean and 42% to South America. Our average domestic sales price of cement for our operations in Mexico increased approximately 3%, in Peso terms, in 2011 compared to 2010, and the average sales price of ready-mix concrete increased approximately 6%, in Peso terms, over the same period. For the year ended December 31, 2011, cement represented approximately 53%, ready-mix concrete approximately 23% and our aggregates and other businesses approximately 24% of our net sales for our operations in Mexico before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in domestic cement and ready-mix concrete sales volumes and average sales prices, our net sales in Mexico, in Peso terms, increased approximately 1% in 2011 compared to 2010.

United States

Our domestic cement sales volumes from our operations in the United States, which include cement purchased from our other operations, decreased approximately 2% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 7% during the same period. The increases in our ready-mix concrete sales volumes of our operations in the United States resulted primarily from the consolidation of the Ready Mix USA joint venture in August 2011. During the year, construction activity in the residential sector remained relatively stagnant due to excess inventory, tight credit conditions, weak job market and lack of confidence in the economy. In addition, continued weakness in state fiscal conditions and uncertainty over federal funding negatively affected the infrastructure sector. The industrial and commercial sector continued to show improvement. Our net sales from our operations in the United States represented approximately 16% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average sales price of domestic cement of our operations in the United States remained flat, in Dollar terms, in 2011 compared to 2010, and the average sales price of ready-mix concrete increased approximately 3%, in Dollar terms, over the same

 

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period. For the year ended December 31, 2011, cement represented approximately 30%, ready-mix concrete approximately 30% and our aggregates and other businesses approximately 40% of our net sales for our operations in the United States before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in ready-mix concrete sales volumes and average sales prices, partially offset by the decrease in domestic cement sales volumes, our net sales in the United States, in Dollar terms, increased approximately 1% in 2011 compared to 2010.

Northern Europe

In 2011, our operations in the Northern Europe region consisted of our operations in the United Kingdom, Germany and France, which represent the most significant operations in this region, in addition to our Rest of Northern Europe segment, which refers primarily to our operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland. Our net sales from our operations in the Northern Europe region represented approximately 30% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. As of December 31, 2011, our operations in the Northern Europe region represented approximately 14% of our total assets. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our net sales for our main operations in the Northern Europe region.

United Kingdom

Our domestic cement sales volumes from our operations in the United Kingdom increased approximately 6% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 11% during the same period. The main driver of construction activity during the year was the infrastructure sector, although a slowdown was apparent during the second half of the year. Similarly, after a positive first half of the year, the residential sector was constrained by weak market fundamentals during the second half of the year, which made it difficult for buyers to obtain mortgages. The industrial and commercial sector was negatively affected by economic instability that accelerated during the second half of 2011. Our net sales from our operations in the United Kingdom represented approximately 8% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement from our operations in the United Kingdom increased approximately 2%, in Pound terms, in 2011 compared to 2010, and the average price of ready-mix concrete increased approximately 2%, in Pound terms, over the same period. For the year ended December 31, 2011, cement represented approximately 15%, ready-mix concrete approximately 25% and our aggregates and other businesses approximately 60% of net sales of our operations in the United Kingdom before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in domestic cement and ready-mix concrete sales volumes and average sales prices, net sales from our operations in the United Kingdom, in Pound terms, increased approximately 7% in 2011 compared to 2010.

Germany

Our domestic cement sales volumes from our operations in Germany increased approximately 14% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 13% during the same period. The increases in domestic cement and ready-mix concrete sales volumes resulted primarily from the positive momentum of the residential sector, resulting from historically low mortgage rates, stable construction prices, shrinking unemployment and higher wages. Performance from the industrial and commercial sector benefited from the strength in the manufacturing sector, as well as high capacity utilization. Construction activity from the infrastructure sector decreased slightly due to cuts in the national budget. Our net sales from our operations in Germany represented approximately 8% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement from our operations in Germany decreased approximately 1%, in Euro terms, in 2011 compared to 2010, and the average price of ready-mix concrete remained flat, in Euro terms, over the same period. For the year ended December 31, 2011, cement represented approximately 26%, ready-mix concrete approximately 35% and our aggregates and other businesses represented approximately 39% of net sales of our operations in Germany before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

 

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As a result of the increases in domestic cement and ready-mix concrete sales volumes, partially offset by the decrease in domestic cement average sales prices, net sales in Germany, in Euro terms, increased approximately 12% in 2011 compared to 2010.

France

Our ready-mix concrete sales volumes from our operations in France increased approximately 12% in 2011 compared to 2010. The increase in ready-mix concrete volumes resulted primarily from the residential sector, which benefited from economic stimulus plan measures, such as social housing, tax incentives and zero rate loans, as well as favorable credit conditions. The increase in the number of new project starts and permits, especially from offices and warehouses, positively affected the performance of the industrial and commercial sector. Construction activity from the infrastructure sector remained stable, driven mainly by private investments, which offset the drop in public investments. Our net sales from our operations in France represented approximately 7% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average sales price of ready-mix concrete from our operations in France increased approximately 1%, in Euro terms, in 2011 compared to 2010. For the year ended December 31, 2011, ready-mix concrete represented approximately 73% and our aggregates and other businesses represented approximately 27% of our net sales for our operations in France before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in ready-mix concrete sales volumes and average sales prices, net sales in France, in Euro terms, increased approximately 12% in 2011 compared to 2010.

Rest of Northern Europe

In 2011, our operations in our Rest of Northern Europe segment consisted primarily of our operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland. Our domestic cement sales volumes of our operations in our Rest of Northern Europe segment increased approximately 16% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 15% during the same period. The increases in domestic cement and ready-mix concrete sales volumes resulted primarily from better weather conditions compared to last year and increased demand from infrastructure projects. Our net sales from our operations in our Rest of Northern Europe segment represented approximately 7% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement from our operations in our Rest of Northern Europe segment increased approximately 2%, in Euro, terms in 2011 compared to 2010, and the average price of ready-mix concrete increased approximately 4%, in Euro terms, over the same period. For the year ended December 31, 2011, cement represented approximately 37%, ready-mix concrete approximately 42% and our aggregates and other businesses approximately 21% of net sales from our operations in our Rest of Northern Europe segment before intra-sector eliminations within the segment and before eliminations resulting from consolidation, as applicable.

As a result of the increases in domestic cement and ready-mix concrete sales volumes and average sales prices, net sales in our Rest of Northern Europe segment, in Euro terms, increased approximately 7% in 2011 compared to 2010.

Mediterranean

In 2011, our operations in the Mediterranean region consisted of our operations in Spain and Egypt, which represent the most significant operations in this region, in addition to our Rest of Mediterranean segment, which includes mainly our operations in Croatia, the UAE and Israel. Our net sales from our operations in the Mediterranean region represented approximately 11% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. As of December 31, 2011, our operations in the Mediterranean region represented approximately 14% of our total assets. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our net sales for our main operations in the Mediterranean region.

Spain

Our domestic cement sales volumes from our operations in Spain decreased approximately 19% in 2011 compared to 2010, while ready-mix concrete sales volumes decreased approximately 21% during the same period. The decreases in domestic cement and ready-mix concrete sales volumes were the result of lower construction activity across all regions and demand sectors. The residential sector was negatively affected by high inventory levels and lack of financing, with housing permits at all time lows. Large budget cuts and lack of economic

 

A-34


resources negatively affected the infrastructure sector activity. Furthermore, activity from the industrial and commercial sector declined, given the lack of visibility, high risk premium, unfavorable macroeconomic conditions and tighter credit. Our net sales from our operations in Spain represented approximately 4% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our cement export volumes of our operations in Spain, which represented approximately 29% of our cement sales volumes in Spain for the year ended December 31, 2011, increased by approximately 6% in 2011 compared to 2010, primarily as a result of higher export volumes to Europe, partially offset by lower export volumes to Africa. Of such total cement export volumes, 31% was shipped to Europe and the Middle East, and 69% to Africa. Our average domestic sales price of cement of our operations in Spain remained flat, in Euro terms, in 2011 compared to 2010, and the average price of ready-mix concrete decreased approximately 1%, in Euro terms, over the same period. For the year ended December 31, 2011, cement represented approximately 67%, ready-mix concrete approximately 20% and our aggregates and other businesses approximately 13% of net sales for our operations in Spain before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the decreases in domestic cement and ready-mix concrete sales volumes, partially offset by the increase in the cement export volumes, our net sales in Spain, in Euro terms, decreased approximately 14% in 2011 compared to 2010.

Egypt

Our domestic cement sales volumes from our operations in Egypt decreased approximately 3% in 2011 compared to 2010, while ready-mix concrete sales volumes decreased approximately 17% during the same period. The domestic cement and ready-mix concrete sales volumes were negatively affected by the country’s political and social unrest, which slowed Egypt’s economy and affected the overall business environment. In the infrastructure sector, most projects were on hold due to a reduction in government expenditures. In addition, spending on other demand segments was stagnant, as a result of heightened uncertainty given the difficult political situation. Our net sales from our operations in Egypt represented approximately 3% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement of our operations in Egypt decreased by approximately 7%, in Egyptian pound terms, in 2011 compared to 2010, and the average price of ready-mix concrete decreased approximately 9%, in Egyptian pound terms, over the same period. For the year ended December 31, 2011, cement represented approximately 87%, ready-mix concrete approximately 7% and our aggregates and other businesses approximately 6% of net sales for our operations in Egypt before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the decreases in domestic cement and ready-mix concrete sales volumes and average domestic sales prices, our net sales in Egypt, in Egyptian pound terms, decreased approximately 11% in 2011 compared to 2010.

Rest of Mediterranean

In 2011, our operations in our Rest of Mediterranean segment consisted mainly of our operations in Croatia, the UAE and Israel. Our domestic cement sales volumes of our operations in our Rest of Mediterranean segment decreased approximately 6% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 13% during the same period. The decrease in domestic cement sales volumes resulted primarily from a slowdown in construction activity in our operations in Croatia and the UAE, and the increase in ready-mix concrete sales volumes resulted primarily from an upturn in the housing sector and more infrastructure projects in our operations in Israel. Our net sales from our operations in our Rest of Mediterranean segment represented approximately 4% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement from our operations in our Rest of Mediterranean increased approximately 2%, in Dollar terms, in 2011 compared to 2010, and the average price of ready-mix concrete increased approximately 5%, in Dollar terms, over the same period. For the year ended December 31, 2011, cement represented approximately 25%, ready-mix concrete approximately 58% and our aggregates and other businesses approximately 17% of our net sales from our operations in our Rest of Mediterranean segment before intra-sector eliminations within the segment and before eliminations resulting from consolidation, as applicable.

 

A-35


As a result of the increases in ready-mix concrete sales volumes and domestic cement and ready-mix concrete average sales prices, partially offset by the decrease in domestic cement sales volumes, net sales in our Rest of Mediterranean segment, in Dollar terms, increased approximately 8% in 2011 compared to 2010.

South America and the Caribbean

In 2011, our operations in the South America and the Caribbean region consisted of our operations in Colombia, which represents the most significant operation in this region, in addition to our Rest of South America and the Caribbean segment, which includes our operations in Costa Rica, Guatemala, Panama, Nicaragua, Puerto Rico, the Dominican Republic, Jamaica and other countries in the Caribbean, and small ready-mix concrete operations in Argentina. Most of these trading operations consist of the resale in the Caribbean region of cement produced by our operations in Mexico. Our net sales from our operations in the South America and the Caribbean region represented approximately 11% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. As of December 31, 2011, our operations in the South America and the Caribbean region represented approximately 6% of our total assets. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our net sales for our main operations in the South America and the Caribbean region.

Colombia

Our domestic cement volumes from our operations in Colombia increased approximately 5% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 29% during the same period. Construction activity for the year was driven by the residential sector, particularly middle and high income housing development, which benefited from stable interest rates, controlled inflation, low unemployment and favorable macroeconomic conditions. Construction spending in the industrial and commercial sector, primarily on warehouses and commercial buildings, had a positive effect on volumes for the year. In addition, construction spending on infrastructure projects, primarily on road construction and maintenance, contributed to the performance of the sector. Our net sales from our operations in Colombia represented approximately 4% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement from our operations in Colombia increased approximately 10%, in Colombian Peso terms, in 2011 compared to 2010, while the average price of ready-mix concrete increased approximately 6%, in Colombian Peso terms, over the same period. For the year ended December 31, 2011, cement represented approximately 62%, ready-mix concrete approximately 26% and our aggregates and other businesses approximately 12% of our net sales for our operations in Colombia before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in domestic cement and ready-mix concrete sales volumes and average sales prices, net sales of our operations in Colombia, in Colombian Peso terms, increased approximately 21% in 2011 compared to 2010.

Rest of South America and the Caribbean

In 2011, our operations in our Rest of South America and the Caribbean segment included our operations in Costa Rica, Guatemala, Panama, Nicaragua, Puerto Rico, the Dominican Republic, Jamaica and other countries in the Caribbean, and small ready-mix concrete operations in Argentina. Our domestic cement volumes from our operations in our Rest of South America and the Caribbean segment increased approximately 4% in 2011 compared to 2010, and ready-mix concrete sales volumes increased approximately 5% during the same period. Our net sales from our operations in our Rest of South America and the Caribbean segment represented approximately 7% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement for our operations in our Rest of South America and the Caribbean segment increased approximately 5%, in Dollar terms, in 2011 compared to 2010, and the average sales price of ready-mix concrete increased approximately 7%, in Dollar terms, over the same period. For the year ended December 31, 2011, cement represented approximately 72%, ready-mix concrete approximately 20% and our other businesses approximately 8% of net for our operations in our Rest of South America and the Caribbean segment before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in domestic cement and ready-mix concrete sales volumes and average sales prices, net sales of our operations in our Rest of South America and the Caribbean segment, in Dollar terms, increased approximately 21% in 2011 compared to 2010.

 

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Asia

In 2011, our operations in the Asia region consisted of our operations in the Philippines, which represents the most significant operation in this region, in addition to our Rest of Asia segment, which includes our operations in Thailand, Bangladesh, China and Malaysia. Our net sales from our operations in the Asia region represented approximately 3% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. As of December 31, 2011, our operations in the Asia region represented approximately 2% of our total assets. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our net sales for our main operations in the Asia region.

The Philippines

Our domestic cement volumes from our operations in the Philippines decreased approximately 5% in 2011 compared to 2010 primarily as a result of the lower demand for building materials due to the government’s suspension of key infrastructure projects in its effort to implement a more rigorous process relating to the bidding and disbursement of funds, as well as by the delay in the implementation of public-private partnership projects. In addition, unfavorable weather conditions in many regions of the country hampered construction activity during the year. Our net sales from our operations in the Philippines represented approximately 2% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement from our operations in the Philippines decreased approximately 8%, in Philippine Peso terms, in 2011 compared to 2010. For the year ended December 31, 2011, cement represented approximately 100% of our net sales for our operations in the Philippines before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the decreases in domestic cement sales volumes and average sales prices, net sales of our operations in the Philippines, in Philippine Peso terms, decreased approximately 10% in 2011 compared to 2010.

Rest of Asia

In 2011, our operations in our Rest of Asia segment included our operations in Thailand, Bangladesh, China and Malaysia. Our domestic cement volumes from our operations in our Rest of Asia segment increased approximately 8% in 2011 compared to 2010, and ready-mix concrete sales volumes decreased approximately 8% during the same period. Our net sales from our operations in our Rest of Asia segment represented approximately 1% of our total net sales for the year ended December 31, 2011, in Peso terms, before eliminations resulting from consolidation. Our average domestic sales price of cement for our operations in our Rest of Asia segment increased approximately 2%, in Dollar terms, in 2011 compared to 2010, and the average sales price of ready-mix concrete increased approximately 12%, in Dollar terms, over the same period. For the year ended December 31, 2011, cement represented approximately 31%, ready-mix concrete approximately 57% and our other businesses approximately 12% of net sales for our operations in our Rest of Asia segment before intra-sector eliminations within the segment and before eliminations from consolidation, as applicable.

As a result of the increases in domestic cement sales volumes and domestic cement and ready-mix concrete average sales prices, partially offset by the decrease in ready-mix concrete sales volumes, net sales of our operations in our Rest of Asia segment, in Dollar terms, decreased approximately 2% in 2011 compared to 2010.

Others

Our Others segment includes our cement, trade maritime operations, our information technology solutions business and other minor subsidiaries with different lines of business. Net sales of our Others segment increased approximately 26% before eliminations resulting from consolidation in 2011 compared to 2010, in Dollar terms, primarily as a result of an increase of approximately 48% in our worldwide cement, clinker and slag trading operations. For the year ended December 31, 2011, our trading operations’ net sales represented approximately 62%, and our information technology solutions company 21%, of our Others segment’s net sales.

Cost of Sales

Our cost of sales, including depreciation, increased approximately 5%, from Ps128 billion in 2010 to Ps135 billion in 2011, primarily due to higher sales volumes. As a percentage of net sales, cost of sales decreased from 72% in 2010 to 71% in 2011, mainly as a result of higher prices in our most important markets, as well as the results of our cost reduction initiatives, which more than offset the increase in fuel and raw materials costs. Our cost of sales includes freight expenses of raw materials used in our producing plants. However, our costs of sales excludes

 

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(i) expenses related to personnel and equipment comprising our selling network and those expenses related to warehousing at the points of sale, which were included as part of our administrative and selling expenses line item in the amount of approximately Ps7.9 billion in 2010 and Ps8.1 billion in 2011; and (ii) freight expenses of finished products from our producing plants to our points of sale and from our points of sale to our customers’ locations, which were included as part of our distribution expenses line item (except for distribution or delivery expenses related to our ready-mix concrete business, which are included in our cost of sales), and which, for the years ended December 31, 2010 and 2011, represented Ps13.2 billion and Ps16.2 billion, respectively.

Gross Profit

For the reasons explained above, our gross profit increased approximately 8%, from approximately Ps50.0 billion in 2010 to approximately Ps53.9 billion in 2011. As a percentage of net sales, gross profit increased from approximately 28% in 2010 to 29% in 2011. In addition, our gross profit may not be directly comparable to those of other entities that include all their freight expenses in cost of sales. As described above, we include freight expenses of finished products from our producing plants to our points of sale and from our points of sale to our customers’ locations within distribution expenses, which in aggregate represented costs of approximately Ps13.2 billion in 2010 and approximately Ps16.2 billion in 2011.

Operating Expenses

Our operating expenses increased approximately 7%, from approximately Ps39.1 billion in 2010 to approximately Ps41.9 billion in 2011, primarily as a result of higher distribution expenses, which were partially offset by savings from our cost-reduction initiatives. As a percentage of net sales, our operating expenses represented approximately 22% in 2010 and 2011. Operating expenses include administrative, selling and distribution expenses. See note 2Q to our consolidated financial statements included in the 6-K.

Operating Income

For the reasons mentioned above, our operating income increased approximately 11%, from approximately Ps10.8 billion in 2010 to approximately Ps12.0 billion in 2011. As a percentage of net sales, operating income represented approximately 6% in each of 2010 and 2011. Additionally, set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our operating income on a geographic segment basis.

Mexico

Our operating income from our operations in Mexico increased approximately 8%, from approximately Ps12.4 billion in 2010 to approximately Ps13.3 billion in 2011, in Peso terms. The increase in operating income was primarily attributable to the increases in domestic cement and ready-mix concrete sales volumes and average sales prices.

United States

Our operating loss from our operations in the U.S. improved approximately 6%, from an operating loss of approximately Ps9.0 billion in 2010 to an operating loss of approximately Ps8.4 billion in 2011, in Peso terms. As mentioned above, the improvement in operating loss resulted primarily from the consolidation of the Ready Mix USA joint venture and increases in ready-mix concrete sales volumes and average sales prices.

Northern Europe

United Kingdom

Our operating income from our operations in the United Kingdom increased significantly, from an operating loss of approximately Ps780 million in 2010 to an operating income of approximately Ps672 million in 2011, in Peso terms. The increase in the operating income of our operations in the United Kingdom during 2011 compared to 2010 resulted primarily from higher domestic cement and ready-mix concrete sales volumes and average sales prices.

Germany

Our operating income from our operations in Germany increased significantly, from Ps26 million in 2010 to Ps481 million in 2011, in Peso terms. The increase resulted primarily from higher domestic cement and ready-mix concrete sales volumes as a result of the positive momentum of the residential sector.

 

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France

Our operating income from our operations in France improved significantly, from approximately Ps221 million in 2010 to approximately Ps731 million in 2011, in Peso terms. The increase resulted primarily from higher ready-mix concrete and aggregates sales volumes and average sales prices driven by the residential sector.

Rest of Northern Europe

Our operating income from our operations in our Rest of Northern Europe segment increased significantly, from approximately Ps208 million in 2010 to approximately Ps823 million in 2011, in Peso terms. The increase in our operating income from our operations in our Rest of Northern Europe segment resulted from higher domestic cement and ready-mix concrete sales volumes and average sales prices.

Mediterranean

Spain

Our operating income from our operations in Spain decreased approximately 18%, from approximately Ps984 million in 2010 to Ps806 million in 2011, in Peso terms. The decrease in operating income resulted primarily from decreases in domestic cement and ready-mix concrete sales volumes and ready-mix concrete average sales prices as the result of lower construction activity across all regions and demand sectors.

Egypt

Our operating income from our operations in Egypt decreased approximately 36%, from approximately Ps4.1 billion in 2010 to Ps2.7 billion in 2011, in Peso terms. The decrease in operating income resulted primarily from decreases in domestic cement and ready-mix concrete sales volumes and average sales prices given the country’s political and social unrest, which slowed Egypt’s economy and affected the overall business environment.

Rest of Mediterranean

Our operating income from our operations in our Rest of Mediterranean segment increased approximately 47%, from approximately Ps448 million in 2010 to Ps660 million in 2011, in Peso terms. The increase in operating income resulted primarily from increases in ready-mix concrete sales volumes and average sales prices.

South America and the Caribbean

Colombia

Our operating income from our operations in Colombia increased approximately 21%, from approximately Ps2.2 billion in 2010 to approximately Ps2.6 billion in 2011, in Peso terms. The increase resulted primarily from higher domestic cement and ready-mix concrete sales volumes, which benefited from higher construction spending in the industrial and commercial sector, primarily on warehouses and commercial buildings.

Rest of South America and the Caribbean

Our operating income from our operations in our Rest of South America and the Caribbean segment increased approximately 17%, from approximately Ps2.2 billion in 2010 to Ps2.6 billion in 2011, in Peso terms. The increase in operating income resulted primarily from increases in domestic cement and ready-mix concrete sales volumes and average sales prices in our markets.

Asia

The Philippines

Our operating income from our operations in the Philippines decreased approximately 70%, from approximately Ps909 million in 2010 to approximately Ps273 million in 2011, in Peso terms. The decrease in operating income resulted primarily from a decrease in domestic cement sales volumes and average sales prices.

Rest of Asia

Our operating income from our operations in our Rest of Asia segment remained flat in 2011 when compared with 2010 at approximately Ps73 million, in Peso terms.

 

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Others

Our operating loss from our Others segment increased approximately 67%, from an operating loss of approximately Ps3.2 billion in 2010 to an operating loss of approximately Ps5.4 billion, in 2011 in Peso terms. The increase in operating loss resulted primarily from a substantial increase in our worldwide cement, clinker and slag trading operations.

Other Expenses, Net

Our other expenses, net, decreased approximately 36%, from approximately Ps6.7 billion in 2010 to approximately Ps4.2 billion in 2011, primarily due to results from sales of assets and the net effect of the compensation for the nationalization of our operations in Venezuela, partially offset by the increase in our restructuring cost due to our transformation process.

The most significant items included under this caption in 2010 and 2011 are as follows:

 

     2010     2011  
     (in millions of Pesos)  

Restructuring costs

     Ps (897     Ps (1,975

Impairment losses

     (1,904     (1,751

Charitable contributions

     (385     (140

Results from sales of assets and others, net

     (3,486     (375
  

 

 

   

 

 

 
     Ps (6,672     Ps (4,241
  

 

 

   

 

 

 

Comprehensive Financing Result

Pursuant to MFRS, the comprehensive financing result should measure the real cost (gain) of an entity’s financing, net of the foreign currency fluctuations and the inflationary effects on monetary assets and liabilities. In periods of high inflation or currency depreciation, significant volatility may arise and is reflected under this caption. Comprehensive financing result includes:

 

   

financial or interest expense on borrowed funds;

 

   

financial income on cash and temporary investments;

 

   

changes in the fair value resulting from the valuation of financial instruments, including derivative instruments and marketable securities;

 

   

foreign exchange gains or losses associated with monetary assets and liabilities denominated in foreign currencies; and

 

   

gains and losses resulting from having monetary liabilities or assets exposed to inflation (monetary position result) in countries under high inflation environments.

 

     Year Ended December 31,  
     2010     2011  
     (in millions of Pesos)  

Comprehensive financing result:

    

Financial expense

     Ps (16,302     Ps (17,927

Financial income

     439        484   

Results from financial instruments

     (956     (4,112

Foreign exchange result

     926        (1,804

Monetary position result

     266        159   
  

 

 

   

 

 

 

Comprehensive financing result

     Ps (15,627     Ps (23,200
  

 

 

   

 

 

 

Our comprehensive financing result in 2011 was a loss of approximately Ps23.2 billion, an increase from the loss of approximately Ps15.6 billion in 2010. The components of the change are shown above. Our financial expense increased approximately 10%, from approximately Ps16.3 billion in 2010 to approximately Ps17.9 billion in 2011. The increase was primarily attributable to emission of fixed rate instruments to prepay debt under the Financing Agreement. Our financial income increased 10%, from Ps439 million in 2010 to Ps484 million in 2011. Our loss from our financial instruments increased substantially, from a loss of approximately Ps1.0 billion in 2010 to a loss of approximately Ps4.1 billion in 2011. This loss resulted primarily from negative valuations of equity derivatives related to shares of CEMEX, S.A.B. de C.V. and Axtel, S.A.B. de C.V. Our foreign exchange result

 

A-40


decreased, from a gain of approximately Ps926 million in 2010 to a loss of approximately Ps1.8 billion in 2011, mainly due to the depreciation of the Mexican Peso against the Dollar during 2011. Our monetary position result (generated by the recognition of inflation effects over monetary assets and liabilities) decreased approximately 40%, from a gain of Ps266 million during 2010 to a gain of Ps159 million during 2011, primarily attributable to our operations in Egypt.

Derivative Financial Instruments. For the years ended December 31, 2010 and 2011, our derivative financial instruments that had a potential impact on our comprehensive financing result consisted of equity forward contracts, a forward instrument over the Total Return Index of the Mexican Stock Exchange and interest rate derivatives related to energy projects as discussed in note 12D to our consolidated financial statements included in the 6-K.

For the year ended December 31, 2011, we had a net loss of approximately Ps4.1 billion under the item “Results from financial instruments” compared to a net loss of approximately Ps956 million in 2010. The loss in 2011 is mainly attributable to changes in the fair value of derivative instruments related to shares of CEMEX, S.A.B. de C.V. and Axtel, S.A.B. de C.V. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Equity Forward Arrangements.”

Income Taxes. Our income tax effect in the statement of operations, which is primarily comprised of current income taxes plus deferred income taxes, decreased from an expense of approximately Ps4.5 billion in 2010 to an expense of Ps3.3 billion in 2011, mainly attributable to a decrease in taxable earnings in our operations in Central America, Egypt and the Philippines. Our current income tax expense decreased 2%, from approximately Ps8.0 billion in 2010 to Ps7.9 billion in 2011. Our deferred tax benefit increased from approximately Ps3.5 billion in 2010 to Ps4.6 billion in 2011. The increase was primarily attributable to the decrease in valuation allowances relating to tax loss carryforwards in certain countries. For each of the years ended December 31, 2010 and 2011, our statutory income tax rate was 30%. Our effective tax rate in 2010 resulted in a negative tax rate of 37.6%, considering a loss before income tax of approximately Ps12.0 billion, while our effective tax rate in 2011 resulted in a negative tax rate of 20.8%, considering a loss before income tax of approximately Ps15.9 billion. See “Risk Factors—Risks Relating to Our Business—The Mexican tax consolidation regime may have an adverse effect on cash flow, financial condition and net income.”

Consolidated Net Loss. For the reasons described above, our consolidated net loss (before deducting the portion allocable to non-controlling interest) for 2011 increased 16%, from a consolidated net loss of approximately Ps16.5 billion in 2010 to a consolidated net loss of approximately Ps19.2 billion.

Non-controlling Interest Net Loss. Changes in non-controlling interest net income (loss) in any period reflect changes in the percentage of the stock of our subsidiaries held by non-associated third parties as of the end of each month during the relevant period and the consolidated net income (loss) attributable to those subsidiaries. Non-controlling interest net income decreased significantly, from a gain of Ps27 million in 2010 to a loss of Ps37 million in 2011, mainly as a result of a significant decrease in the net income of the consolidated entities in which others have a non-controlling interest.

Controlling Interest Net Loss. Controlling interest net loss represents the difference between our consolidated net loss and non-controlling interest net income (loss), which is the portion of our consolidated net income (loss) attributable to those of our subsidiaries in which non-associated third parties hold interests. Controlling interest net loss increased 16%, from a net loss of approximately Ps16.5 billion in 2010 to a controlling interest net loss of approximately Ps19.1 billion in 2011. As a percentage of revenues, controlling interest net loss in 2010 and 2011, represented 9% and 10%, respectively.

Liquidity and Capital Resources

Operating Activities

We have satisfied our operating liquidity needs primarily through operations of our subsidiaries and expect to continue to do so for both the short and long-term. Although cash flow from our operations has historically met our overall liquidity needs for operations, servicing debt and funding capital expenditures and acquisitions, our subsidiaries are exposed to risks from changes in foreign currency exchange rates, price and currency controls, interest rates, inflation, governmental spending, social instability and other political, economic and/or social developments in the countries in which they operate, any one of which may materially reduce our net income and cash from operations. Consequently, in order to meet our liquidity needs, we also rely on cost-cutting and operating

 

A-41


improvements to optimize capacity utilization and maximize profitability, as well as borrowing under credit facilities, proceeds of debt and equity offerings, and proceeds from asset sales. Our consolidated net cash flows provided by operating activities from continuing operations were approximately Ps33.7 billion in 2009, Ps21.8 billion in 2010 and Ps22.6 billion in 2011. See our statement of cash flows included in the 6-K.

Sources and Uses of Cash

Our review of sources and uses of resources below refers to nominal amounts included in our statement of cash flows for 2009, 2010 and 2011.

Our primary sources and uses of cash during the years ended December 31, 2009, 2010 and 2011 were as follows:

 

     2009     2010     2011  
     (in millions of Pesos)  

Operating activities

      

Controlling interest net income (loss)

     1,649        (16,489     (19,164

Discontinued operations

     (4,276     —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     5,925        (16,489     (19,164

Non-cash items

     34,603        42,537        43,226   

Changes in working capital, excluding income taxes

     (2,599     100        2,327   
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by continuing operations before taxes

     37,929        26,148        26,389   

Income taxes paid in cash

     (4,201     (4,310     (3,778
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by continuing operations

     33,728        21,838        22,611   

Net cash flow provided by discontinued operations

     1,023        —          —     

Net cash flows provided by operating activities

     34,751        21,838        22,611   

Investing activities

      

Property, machinery and equipment, net

     (6,655     (4,726     (3,198

Disposal of subsidiaries and associates, net

     21,115        1,172        1,232   

Other investments

     (8,254     1,692        468   
  

 

 

   

 

 

   

 

 

 

Net cash flows (used in) provided by investing activities of continuing operations

     6,206        (1,862     (1,498

Net cash flows used in investing activities of discontinued operations

     (491     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash flows (used in) provided by investing activities

     5,715        (1,862     (1,498

Financing activities

      

Issuance (repayment) of debt and other financial obligations, net

     (35,812     (9,615     5,702   

Financial expense paid in cash including coupons on perpetual debentures

     (14,607     (14,968     (13,352

Issuance of common stock

     23,953        5        11   

Derivative financial instruments

     (8,513     69        (5,464

Non-current liabilities and others, net

     (2,795     122        1,430   
  

 

 

   

 

 

   

 

 

 

Net cash flows used in financing activities of continuing operations

     (37,774     (24,387     (11,673

Net cash flows provided by financing activities of discontinued operations

     628        —          —     
  

 

 

   

 

 

   

 

 

 

Net cash flows used in financing activities

     (37,146     (24,387     (11,673
  

 

 

   

 

 

   

 

 

 

Conversion effects

     (2,116     (1,339     (1,666

Increase (decrease) in cash and investments of continuing operations

     2,160        (4,411     9,440   

Increase in cash and investments of discontinued operations

     1,160        —          —     

Cash and investments at beginning of year

     12,900        14,104        8,354   
  

 

 

   

 

 

   

 

 

 

Cash and investments at end of year

     Ps14,104        Ps 8,354        Ps16,128   
  

 

 

   

 

 

   

 

 

 

2011. During 2011, in nominal Peso terms, and including the negative foreign currency effect of our initial balances of cash and investments generated during the period of approximately Ps1.7 billion, there was an increase in cash and investments of continuing operations of approximately Ps9.4 billion. This increase was generated by our net cash flows provided by operating activities, which after income taxes paid in cash of approximately Ps3.8 billion, amounted to approximately Ps22.6 billion, partially offset by net cash flows used in financing activities of approximately Ps11.7 billion and by net cash flows used in investing activities of approximately Ps1.5 billion.

For the year ended December 31, 2011, our net cash flows provided by operating activities included a net reduction in working capital of approximately Ps2.3 billion, which was primarily generated by decreases in accounts

 

A-42


receivable and increases in other accounts payable and accrued expenses for an aggregate amount of approximately Ps2.9 billion, partially offset by increases in inventories and decreases in accounts payable for an aggregate amount of approximately Ps536 million.

During 2011, our net cash flows provided by operating activities of approximately Ps22.6 billion and the resources provided by the issuance of debt and other financial obligations (net of repayments of approximately Ps5.7 billion) were disbursed mainly in connection with: a) repayments of debt, as described above; b) capital expenditures of approximately Ps3.2 billion; c) financial expenses paid in cash, including perpetual instruments, of approximately Ps13.4 billion and d) disbursements related to our financial derivative instruments for an aggregate amount of approximately Ps5.5 billion related primarily to the purchase of a capped call and the settlement of options based on the price of our ADSs.

2010. During 2010, in nominal Peso terms, and including the negative foreign currency effect of our initial balances of cash and investments generated during the period of approximately Ps1.3 billion, there was a decrease in cash and investments of continuing operations of approximately Ps4.4 billion. This decrease was generated by net cash flows used in financing activities of approximately Ps24.4 billion and by net cash flows used in investing activities of approximately Ps1.9 billion, partially offset by our net cash flows provided by operating activities, which after income taxes paid in cash of approximately Ps4.3 billion, amounted to approximately Ps21.8 billion.

For the year ended December 31, 2010, our net cash flows provided by operating activities included a net reduction in working capital of approximately Ps100 million, which was primarily generated by increases in accounts payable and accrued expenses and decreases in accounts receivable and inventories of an aggregate amount of approximately Ps2.8 billion, partially offset by increases in other accounts receivable and other assets for an aggregate amount of approximately Ps2.7 billion.

During 2010, our net cash flows used in financing activities of approximately Ps24.4 billion included payments of debt of approximately Ps9.6 billion. The net cash flows provided by operating activities were disbursed mainly in connection with: a) repayments of debt, as described above; b) capital expenditures of approximately Ps4.7 billion; and c) financial expenses paid in cash, including perpetual instruments, of approximately Ps15.0 billion.

2009. During 2009, in nominal Peso terms and including the negative foreign currency effect of our initial balances of cash and investments generated during the period of approximately Ps2.1 billion, there was an increase in cash and investments of continuing and discontinued operations of Ps2.2 billion and Ps1.2 billion, respectively. This increase was generated by net cash flows provided by operating activities, which after income taxes paid in cash of approximately Ps4.2 billion, amounted to approximately Ps34.8 billion, and by net cash flows provided by investing activities of approximately Ps5.7 billion, which were partially offset by net cash flows used in financing activities of approximately Ps37.1 billion.

For the year ended December 31, 2009, our net cash flows provided by operating activities included a net increase in working capital of approximately Ps2.6 billion, which was mainly generated by decreases in accounts payable and accrued expenses for an aggregate amount of approximately Ps10.6 billion, partially offset by decreases in accounts receivable and decreases in inventories for an aggregate amount of approximately Ps8.0 billion.

During 2009, our net cash flows used in financing activities of approximately Ps37.1 billion included new borrowings of approximately Ps40.2 billion which, in conjunction with net cash flows provided by operating activities and resources obtained from the sale of subsidiaries and affiliates of approximately Ps21.1 billion and the equity issuance of approximately Ps24.0 billion, were disbursed mainly in connection with: a) debt repayments of approximately Ps76.0 billion; b) net losses realized in derivative financial instruments of approximately Ps8.5 billion; c) capital expenditures of approximately Ps8.7 billion; d) financial expenses, including perpetual instruments, for approximately Ps14.6 billion; and e) restructuring fees for approximately Ps8.4 billion.

The resources obtained during 2009 from the sale of subsidiaries and associates for approximately Ps21.1 billion principally consisted of the sale of our Australian operations (see note 3B to our consolidated financial statements included in the 6-K).

The table below shows the amount of cash and cash equivalents held by our U.S. subsidiaries, the holding company and our other subsidiaries for the years ended December 31, 2009, 2010 and 2011.

 

A-43


 

     2009      2010      2011  
     (in millions of Pesos)  

Cash and Cash Equivalents

        

Held by the Holding Company

     Ps     —           195         4,130   

Held by U.S. subsidiaries

     898         4,583         6,278   

Held by other subsidiaries

     13,206         3,576         5,747   
  

 

 

    

 

 

    

 

 

 
     Ps 14,104         8,354         16,128   
  

 

 

    

 

 

    

 

 

 

We would need to accrue and pay taxes on any funds repatriated to the United States. During the years ended December 31, 2009, 2010 and 2011, we did not repatriate any funds to the United States and we do not intend to do so for the foreseeable future.

Capital Expenditures

As of December 31, 2011, in connection with our significant projects, we had contractually committed capital expenditures of approximately U.S.$594 million, including our capital expenditures estimated to be incurred during 2012. This amount is expected to be incurred over the next 2 years, according to the evolution of the related projects. Our capital expenditures incurred for the years ended December 31, 2010 and 2011, and our expected capital expenditures during 2012, which include an allocation to 2012 of a portion of our total future committed amount, are as follows:

 

     Actual      Estimated
in 2012
 
     2010      2011     
     (in millions of U.S. Dollars)  

Mexico

     87         87         81   

United States

     75         66         69   

Northern Europe

        

United Kingdom

     53         47         41   

Germany

     47         26         26   

France

     23         22         11   

Rest of Northern Europe(1)

     44         39         49   

Mediterranean

        

Egypt

     25         13         17   

Spain

     46         39         28   

Rest of Mediterranean(2)

     18         22         23   

South America and the Caribbean

        

Colombia

     19         14         20   

Rest of South America and the Caribbean(3)

     63         38         40   

Asia

        

Philippines

     14         36         37   

Rest of Asia(4)

     5         5         5   

Others

     36         6         152   

Total Consolidated

     555         459         600   

Of which

        

Expansion capital expenditures

     126         136         135   

Base capital expenditures

     429         323         465   

 

(1) Refers mainly to our operations in Ireland, the Czech Republic, Austria, Poland, Hungary, Latvia as well as trading activities in Scandinavia and Finland.
(2) Includes our operations in Croatia, the United Arab Emirates and Israel.
(3) Includes our operations in Costa Rica, the Dominican Republic, Panama, Nicaragua, Puerto Rico, Guatemala and other assets in the Caribbean region.
(4) Includes our operations mainly in Thailand, Malaysia, Bangladesh and other assets in the Asian region.

For the years ended December 31, 2010 and 2011, we recognized U.S.$555 million and U.S.$459 million in capital expenditures, respectively. As of the date hereof, plans for 2012 capital expenditures totaled U.S.$600 million. Pursuant to the Financing Agreement, we are prohibited from making aggregate annual capital expenditures in excess of U.S.$800 million until the debt under the Financing Agreement has been repaid in full.

 

A-44


Our Indebtedness

As of December 31, 2011, we had approximately Ps239,118 million (U.S.$17,129 million) of Total Financial Obligations, not including approximately Ps13,089 million (U.S.$938 million) of notes issued in connection with the Debentures. See notes 12A, 12B and 16D to our consolidated financial statements included in the 6-K. Of our Total Financial Obligations approximately 2% were short-term (including current maturities of long-term debt) and 98% were long-term. As of December 31, 2011, approximately 77% of our Total Financial Obligations was Dollar-denominated, approximately 3% was Peso-denominated, approximately 20% was Euro-denominated and immaterial amounts were denominated in other currencies.

On August 14, 2009, we entered into the Financing Agreement, which extended the maturities of approximately U.S.$15.0 billion in syndicated and bilateral bank facilities and private placement obligations. Since entering into the Financing Agreement, we have successfully completed several capital markets transactions, the proceeds of which were substantially applied to reduce our debt thereunder and to address other debt maturities. As of December 31, 2011, our indebtedness under the Financing Agreement was approximately Ps100,442 million (U.S.$7,195 million), and our other debt and other financial obligations not subject to the Financing Agreement, which remains payable pursuant to its original maturities, was approximately Ps138,676 million (U.S.$9,934 million). As of December 31, 2011, we had reduced indebtedness under the Financing Agreement by approximately U.S.$7.7 billion (thereby satisfying all required amortization payments under the Financing Agreement through December 15, 2013), and we had an aggregate principal amount of outstanding debt under the Financing Agreement of approximately Ps6,812 million (U.S.$488 million) maturing on December 15, 2013; and approximately Ps93,630 million (U.S.$6,707 million) maturing on February 14, 2014.

As part of the Financing Agreement, we pledged the Collateral and all proceeds of such Collateral to secure our payment obligations under the Financing Agreement and under a number of other financing arrangements for the benefit of the participating creditors and holders of debt and other obligations that benefit from provisions in their instruments requiring that their obligations be equally and ratably secured. In addition, the guarantors under our existing bank facilities (other than CEMEX, Inc. (one of our subsidiaries in the United States)) have guaranteed the obligations to the participating creditors under the Financing Agreement.

The Financing Agreement requires us to comply with several financial ratios and tests, including a consolidated coverage ratio of EBITDA to consolidated interest expense (including interest expense of the Debentures) of not less than (i) 1.75:1 for each period of four consecutive fiscal quarters (measured semi-annually) up to and including the period ending December 31, 2012 and (ii) 2.00:1 for the remaining periods of four consecutive fiscal quarters (measured semi-annually) to December 31, 2013. In addition, the Financing Agreement allows us a maximum consolidated leverage ratio of total debt (including the Debentures) to EBITDA for each period of four consecutive fiscal quarters (measured semi-annually) not to exceed 7.00:1 for the period that ended December 31, 2011, 6.5:1 for the period ending June 30, 2012, 5.75:1 for the period ending December 31, 2012, 5.00:1 for the period ending June 30, 2013 and 4.25:1 for the period ending December 31, 2013. Based on our current expectations and assuming constant debt levels from December 31, 2011, in order to be in compliance with the June 30, 2012 consolidated leverage ratio test of 6.5:1, EBITDA for the six months ending June 30, 2012 would need to increase by approximately 4% from the prior year period. We currently anticipate that we will be in compliance with our covenants at June 30, 2012 through a combination of improved operating performance and/or debt reduction.

Some of our major subsidiaries provide guarantees of certain of our indebtedness, as indicated in the table below.

 

     April
2011 Notes
    January
2011 Notes
    May
2010 Notes
    December
2009 Notes
    Financing
Agreement
    Perpetual
Debentures

(2)
    CBs(3)     Eurobonds(4)  

Amount outstanding as of December 31, 2011(1)

    
 

 
 

U.S.$0.8
billion

(Ps11.2
billion)

  
  

  
  

   
 

 
 

U.S.$1.7
billion

(Ps23.0
billion)

  
  

  
  

   
 

 
 

U.S.$1.3
billion

(Ps18.6
billion)

  
  

  
  

   
 

 
 

U.S.$2.2
billion

(Ps30.8
billion)

  
  

  
  

   
 

 
 

U.S.$7.2
billion

(Ps100.4
billion)

  
  

  
  

   

 

 

 

U.S.$1.2

billion

(Ps16.1

billion)

  

  

  

  

   
 
 
 
U.S.$0.3
billion
(Ps4.6
billion)
  
  
  
  
   
 

 
 

U.S.$1.2
billion

(Ps16.3
billion)

  
  

  
  

CEMEX, S.A.B. de C.V.

     3        3        3        3        3        3        3     

CEMEX México

     3        3        3        3        3        3        3     

New Sunward

     3        3        3        3        3        3       

CEMEX España.

     3        3        3        3        3            3   

CEMEX Corp.

           3        3         

CEMEX Finance LLC

           3        3         

CEMEX Concretos, S.A.
de C.V.

           3        3         

Empresas Tolteca de
México, S.A. de C.V.

           3        3          3     

 

A-45


 

(1) Includes indebtedness held by CEMEX.
(2) CEMEX, S.A.B. de C.V., CEMEX México, and New Sunward provide guarantees in connection with approximately U.S.$1.2 billion (approximately Ps16.1 billion as of December 31, 2011) in notes issued in connection with the Debentures, which are accounted for as non-controlling interest under MFRS, but which are considered to be debt for purposes of U.S. GAAP, the Financing Agreement and the indentures governing the Existing Senior Secured Notes.
(3) Includes long-term secured CBs maturing during 2012 and long-term secured CBs maturing thereafter.
(4) 4.75% Notes due 2014, or the Eurobonds, issued by CEMEX Finance Europe B.V., a special purpose vehicle and wholly-owned subsidiary of CEMEX España, the sole guarantor of the Eurobonds.

Most of our outstanding indebtedness has been incurred to finance our acquisitions and to finance our capital expenditure programs. CEMEX México, our principal Mexican subsidiary and indirect owner of our international operations, has indebtedness (including other financial obligations) or has provided guarantees of our indebtedness (including other financial obligations), including under the Financing Agreement, the Existing Senior Secured Notes, CBs, and some capital leases, but excluding under the Debentures in the amount of approximately Ps191,067 million (U.S.$13,687 million) as of December 31, 2011. CEMEX España, a holding company for most of our international operations outside Mexico and our main operating subsidiary in Spain, has indebtedness (including other financial obligations) or has provided guarantees of our indebtedness (including other financial obligations), including under the Financing Agreement, the Senior Secured Notes and the Eurobonds, but excluding the Debentures, in the amount of approximately Ps200,560 million (U.S.$14,367 million) as of December 31, 2011.

Historically, we have addressed our liquidity needs (including funds required to make scheduled principal and interest payments, refinance debt, and fund working capital and planned capital expenditures) with operating cash flow, securitizations, borrowings under credit facilities, proceeds of debt and equity offerings and proceeds from asset sales.

The global equity and credit markets in the last few years have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective and outstanding debt financings to widen considerably. This volatility and illiquidity has materially and adversely affected a broad range of fixed income securities. As a result, the market for fixed income securities has experienced decreased liquidity, increased price volatility, credit downgrade events and increased defaults. Global equity markets have also been experiencing heightened volatility and turmoil, with issuers exposed to the credit markets being most seriously affected. The disruptions in the financial and credit markets may continue to adversely affect our credit rating and the market value of our common stock, our CPOs and our ADSs. If the current pressures on credit continue or worsen, and alternative sources of financing continue to be limited, we may be dependent on the issuance of equity as a source to repay our existing indebtedness, including meeting amortization requirements under the Financing Agreement. Although we have been able to raise debt, equity and equity linked capital following our entry into the Financing Agreement in August 2009, as capital markets recovered, previous conditions in the capital markets in 2008 and 2009 were such that traditional sources of capital were not available to us on reasonable terms or at all. As a result, there is no guarantee that we will be able to successfully raise additional debt or equity capital at all or on terms that are favorable.

If the global economic environment deteriorates and our operating results worsen significantly, if we were unable to complete debt or equity offerings or if our planned divestitures and/or our cash flow or capital resources prove inadequate, we could face liquidity problems and may not be able to comply with our upcoming principal payment maturities under our indebtedness or refinance our indebtedness. If we are unable to comply with our upcoming principal maturities under our indebtedness (including the Financing Agreement), or refinance or extend maturities of our indebtedness, our debt could be accelerated. Acceleration of our debt would have a material adverse effect on our business and financial condition. The failure to achieve a refinancing or extension of maturity of the Financing Agreement prior to its maturity in February 2014 would have a material adverse effect on our liquidity and on our ability to meet our other obligations, including our other indebtedness.

 

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We and our subsidiaries have sought and obtained waivers and amendments to several of our debt instruments relating to a number of financial ratios in the past. Our ability to comply with these ratios may be affected by current global economic conditions and high volatility in foreign exchange rates and the financial and capital markets. We may need to seek waivers or amendments in the future. However, we cannot assure you that any future waivers, if requested, will be obtained. If we or our subsidiaries are unable to comply with the provisions of our debt instruments, and are unable to obtain a waiver or amendment, the indebtedness outstanding under such debt instruments could be accelerated. Acceleration of these debt instruments would have a material adverse effect on our financial condition.

Relevant transactions related to our indebtedness during 2011

As of December 31, 2011, we had approximately Ps239,118 (U.S.$17,129 million) of Total Financial Obligations, not including approximately Ps13,809 million (U.S.$938 million) of notes issued in connection with the Debentures. Our financing activities through December 31, 2010 are described in our annual report on Form 20-F for the year ended December 31, 2010 (the “2010 Annual Report”). The following is a description of our most relevant transactions related to our indebtedness in 2011:

 

   

On January 11, 2011, we closed the offering of U.S.$1 billion aggregate principal amount of the January 2011 Notes, which were issued at 99.364% of face value, are callable beginning on their fourth anniversary, bear a 9% interest and mature in January 2018. The January 2011 Notes were issued by CEMEX, S.A.B. de C.V. and guaranteed by CEMEX México., New Sunward and CEMEX España. The January 2011 Notes share the collateral pledged to the lenders under the Financing Agreement and other senior secured indebtedness having the benefit of such collateral.

 

   

On March 4, 2011, we closed a private exchange transaction of approximately €119 million aggregate principal amount of the 6.277% Debentures for approximately U.S.$125 million (Ps1,491 million) aggregate principal amount of the Additional May 2010 Notes, which bear a 9.25% interest and mature in March 2020. The Additional May 2010 Notes were issued by CEMEX España, Luxembourg branch, and guaranteed by CEMEX, S.A.B. de C.V., CEMEX México and New Sunward. The Additional May 2010 Notes share the collateral pledged to the lenders under the Financing Agreement and other senior secured indebtedness bonding the benefit of such collateral. As a result of the private exchange, approximately €119 million in aggregate principal amount of the 6.277% Debentures were cancelled, generating in 2011 a gain of approximately Ps446 million, representing the difference between the notional amount of the reacquired debentures and the Additional May 2010 Notes issued in exchange, which was recognized within “Other equity reserves.”

 

   

On April 5, 2011, we closed the offering of U.S.$800 million aggregate principal amount of the April 2011 Notes, which were issued at 99.001% of face value, are floating rate notes and mature in April 2015. The April 2011 Notes were issued by CEMEX, S.A.B. de C.V. and guaranteed by CEMEX México, New Sunward and CEMEX España. The April 2011 Notes share the collateral pledged to the lenders under the Financing Agreement and other senior secured indebtedness bonding the benefit of such collateral.

 

   

On July 11, 2011, we closed the offering of U.S.$650 million aggregate principal amount of the Additional January 2011 Notes at 97.616% of face value plus any accrued interest. The Additional January 2011 Notes bear 9% interest and mature in January 2018. The Additional January 2011 Notes were issued by CEMEX, S.A.B. de C.V. and guaranteed by CEMEX México, New Sunward and CEMEX España. The Additional January 2011 Notes share the collateral pledged to the lenders under the Financing Agreement and other senior secured indebtedness bonding the benefit of such collateral.

We used a substantial portion of the proceeds from these transactions to repay debt under the Financing Agreement. Through these and prior repayments, we avoided a 0.5% interest rate increase that would have been otherwise applicable beginning in January 2012 pursuant to the Financing Agreement. In addition, we have addressed all maturities under the Financing Agreement until December 15, 2013.

During December 2011, we exchanged a portion of the PDVSA notes received in payment from the Government of Venezuela for perpetual and debt instruments issued by CEMEX. See note 9B to our consolidated

 

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financial statements included in the 6-K. Also in December 2011, we received from a third party, as a settlement of an account receivable, the equity interest of an entity whose assets where mainly comprised by perpetual and debt instruments issued by CEMEX. As a result, as of December 31, 2011, CEMEX, S.A.B. de C.V. netted in its balance sheet a portion of several series of its subsidiaries’ debt instruments, held by the newly acquired entity and its other subsidiaries, for an aggregate notional amount of approximately Ps977 million, including portions of U.S. dollar denominated notes issued in May 2010, described below, and U.S. dollar denominated notes issued in April 2011, described below, as well as portions of several series of perpetual debentures for an aggregate notional amount of approximately Ps3,029 million, among others. See note 16D to our consolidated financial statements included in the 6-K. Considering the difference between the fair value of the instruments and their notional amount, as part of this cancellation, we recognized gains, net of certain commissions, for approximately Ps1,630 million, of which, approximately Ps239 million associated with our debt instruments, were recognized within “other expenses, net,” and approximately Ps1,391 million, associated with the perpetual debentures, were recognized in stockholders’ equity as part of “other equity reserves.”

Our Other Financial Obligations

Other financial obligations in the consolidated balance sheet as of December 31, 2010 and 2011 are detailed as follows:

 

     2010      2011  
     Short-term      Long-term      Short-term      Long-term  

I. Convertible subordinated notes due 2018

     Ps —           —           —           7,542   

I. Convertible subordinated notes due 2016

     —           —           —           11,364   

II. Convertible subordinated notes due 2015

     —           7,690         —           8,936   

III. Convertible securities due 2019

     113         1,881         131         1,749   

IV. Capital leases

     19         52         528         1,471   
     Ps 132         9,623         659         31,062   

As mentioned in note 2K to our consolidated financial statements included in the 6-K, financial instruments convertible into our CPOs contain components of both liability and equity, which are recognized differently depending if the instrument is mandatorily convertible, or is optionally convertible by election of the note holders. Beginning in 2011, CEMEX, S.A.B. de C.V. presents all convertible instruments and capital leases within “Other financial obligations.” The information of these items as of December 31, 2010 was reclassified accordingly.

 

I. Optional convertible subordinated notes due in 2016 and 2018

On March 15, 2011, CEMEX, S.A.B. de C.V. closed the offering of U.S.$978 million (Ps11,632 million) aggregate principal amount of 3.25% convertible subordinated notes due in 2016 (the “2016 Optional Convertible Notes”) and U.S.$690 million (Ps8,211 million) aggregate principal amount of 3.75% convertible subordinated notes due in 2018 (the “2018 Optional Convertible Notes”). The aggregate principal amounts reflect the full exercise of the U.S.$177.5 million and U.S.$90 million over-allotment option granted to the relevant initial purchasers of the 2016 Optional Convertible Notes and the 2018 Optional Convertible Notes, respectively. The notes are subordinated to all of CEMEX’s liabilities and commitments. The initial conversion price was equivalent to an approximate 30% premium to the closing price of our ADSs on March 9, 2011, and the notes are convertible into our ADSs, at any time after June 30, 2011. A portion of the net proceeds from this transaction were used to fund the purchase of capped call transactions (note 12D to our consolidated financial statements included in the 6-K), which are generally expected to reduce the potential dilution cost to CEMEX, S.A.B. de C.V. upon future conversion of the 2016 Optional Convertible Notes and the 2018 Optional Convertible Notes. As a result of the issuance, substantially all the new shares approved at CEMEX, S.A.B. de C.V.’s extraordinary shareholders’ meeting on February 24, 2011 (note 16 to our consolidated financial statements included in the 6-K) were reserved by CEMEX, S.A.B. de C.V. to satisfy conversion of these notes. The equity component of the transaction amounted to approximately Ps3,959 million and was recognized upon issuance within “Other equity reserves.” After antidilution adjustments, the conversion rate as of December 31, 2011 was 92.1659 ADS per each U.S.$1,000 principal amount of such notes.

 

II. Optional convertible subordinated notes due in 2015

On March 30, 2010, CEMEX, S.A.B. de C.V. issued U.S.$715 million (Ps8,837 million) aggregate principal amount of 4.875% Optional Convertible Subordinated Notes due 2015 (the “2015 Notes”), including the full exercise of the U.S.$65 million over-allotment option granted to the initial purchasers of the notes. The 2015 Notes are subordinated to all of CEMEX’s liabilities and commitments. The holders of the 2015 Notes have the

 

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option to convert their notes for our ADSs at a conversion price per ADS 30% higher than the ADS price at the pricing of the transaction. In connection with the offering, CEMEX, S.A.B. de C.V. entered into a capped call transaction expected to generally reduce the potential dilution cost to CEMEX, S.A.B. de C.V. upon future conversion of the 2015 Notes (note 12D to our consolidated financial statements included in the 6-K). The equity component amounted to Ps1,232 million and was recognized upon issuance within “Other equity reserves.” After antidilution adjustments, the conversion rate as of December 31, 2011 was 79.5411 ADS per each U.S.$1,000 principal amount of such notes.

 

III. Mandatorily convertible securities due in 2019

In December 2009, CEMEX, S.A.B. de C.V. completed its offer to exchange CBs issued in Mexico with maturities between 2010 and 2012, into Mandatorily Convertible Notes for approximately Ps4,126 million (U.S.$315 million). Reflecting antidilution adjustments, at their scheduled conversion in ten years or earlier if the price of the CPO reaches approximately $34.50, the securities will be mandatorily convertible into approximately 179.4 million CPOs at a conversion price of approximately $23.00 per CPO. During their tenure, the securities yield a 10% interest payable quarterly. Holders have an option to voluntarily convert their securities, after the first anniversary of their issuance, on any interest payment date into CPOs. The equity component for Ps1,971 million was recognized within “Other equity reserves.” See note 12B to our consolidated financial statements included in the 6-K.

 

IV. Capital leases

As of December 31, 2010 and 2011, we held several operating assets, mainly mobile equipment, under capital lease contracts for a total of approximately U.S.$6 million (Ps71 million) and U.S.$143 million (Ps1,999 million) respectively. Future payments associated with these contracts are presented in note 19E to our consolidated financial statements included in the 6-K.

Our Equity Forward Arrangements

In connection with the sale of CPOs of Axtel (note 9A to our consolidated financial statements included in the 6-K) and in order to maintain exposure to changes in the price of such entity, in March 2008, we entered into a forward contract to be settled in cash over the price of 119 million CPOs of Axtel (59.5 million CPOs with each counterparty), which was originally set to mature in April 2011. During 2009, in order to reset the exercise price included in the contract, we instructed the counterparties to definitively dispose of the deposits in margin accounts for approximately Ps207 million, and each of the counterparties exercised an option to maintain the contract over their respective 59.5 million CPOs of AXTEL until October 2011. During 2010, one of the counterparties further extended the maturity of 50% of the notional amount of this forward contract to April 2012. Changes in the fair value of this instrument generated losses of approximately U.S.$43 million (Ps545 million) in 2010, and approximately U.S.$34 million (Ps424 million) in 2011.

Our Perpetual Debentures

As of December 31, 2009, 2010 and 2011, non-controlling interest stockholders’ equity included approximately U.S.$3,045 million (Ps39,859 million), U.S.$1,320 million (Ps16,310 million) and U.S.$938 million (Ps13,089 million), respectively, representing the principal amount of the Debentures. The Debentures have no fixed maturity date and do not represent a contractual payment obligation for us. Based on their characteristics, the Debentures, issued through special purpose vehicles, or SPVs, qualify as equity instruments under MFRS and are classified within non-controlling interest as they were issued by consolidated entities, considering that there is no contractual obligation to deliver cash or any other financial asset, the Debentures do not have any maturity date, meaning that they were issued to perpetuity, and, if the conditions to interest deferred are satisfied, we have the unilateral right to defer indefinitely the payment of interest due on the Debentures. Issuance costs, as well as the interest expense, which is accrued based on the principal amount of the Debentures, are included within “Other equity reserves” and represented expenses of approximately Ps2,704 million in 2009, Ps1,624 million in 2010 and Ps1,010 million in 2011. The different SPVs were established solely for purposes of issuing the Debentures and are included in our consolidated financial statements. As of December 31, 2011, the Debentures were as follows:

 

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Issuer

   Issuance Date      Nominal
Amount
(in millions)
     Nominal
Amount
Outstanding
as of
December 31,
2011
(in millions)(2)
     Repurchase Option      Interest
Rate
 

C5 Capital (SPV) Ltd (1).

     December 2006       U.S.$ 350       U.S.$ 111         Fifth anniversary         6.196

C8 Capital (SPV) Ltd.

     February 2007       U.S.$ 750       U.S.$  288         Eighth anniversary         6.640

C10 Capital (SPV) Ltd.

     December 2006       U.S.$  900       U.S.$ 349         Tenth anniversary         6.722

C10-EUR Capital (SPV) Ltd.

     May 2007       730       147         Tenth anniversary         6.277

 

(1) Because we did not exercise our repurchase option by December 31, 2011, the annual interest rate of this series changed to 3-month LIBOR plus 4.277%, which will be reset quarterly. Interest payments on this series will be made quarterly instead of semi-annually. We are not permitted to call these debentures under the Financing Agreement. As of December 31, 2011, 3-month LIBOR was approximately 0.581%.
(2) Excludes the notional amount of Debentures held by subsidiaries, acquired in December 2011 through a series of asset swaps. See notes 12A and 16D to our consolidated financial statements included in the 6-K.

Under U.S. GAAP, the Debentures are recognized as debt and interest payments are included as financing expense, as part of the comprehensive financial result in the statement of operations.

As described below and in note 12D to our consolidated financial statements included in the 6-K, on July 15, 2009, in connection with the derivative financial instruments associated with the Debentures, by means of which we changed the risk profile of the interest rates and the currencies of the Debentures from the U.S. Dollar and the Euro to the Yen, and in order to eliminate our exposure to the Yen and the Yen interest rate, we settled our Yen cross currency swap derivatives, as well as the forward contracts for U.S.$196 million as of December 2008, negotiated to eliminate the variability of cash flows in Yen to be incurred through the cross currency swap until 2010, in which CEMEX received cash flows in Yen and paid U.S. Dollars. As a result, a total amount of approximately U.S.$94 million was deposited with trustees for the benefit of the Debenture holders. This amount is being used to pay CEMEX’s coupons on the Debentures. As a result of this settlement, during 2009, we recognized a loss from changes in the fair value of the instruments of approximately U.S.$162 million (Ps2,203 million).

Our Receivables Financing Arrangements

Our subsidiaries in Spain, the United States, Mexico, France and United Kingdom are parties to sales of trade accounts receivable programs with financial institutions, referred to as securitization programs. Through the securitization programs, our subsidiaries effectively surrender control, risks and the benefits associated with the accounts receivable sold; therefore, the amount of receivables sold is recorded as a sale of financial assets and the balances are removed from the balance sheet at the moment of sale, except for the amounts that the counterparties have not paid, which are reclassified to other accounts receivable. See notes 5 and 6 to our consolidated financial statements included in the 6-K. The balances of receivables sold pursuant to these securitization programs as of December 31, 2009, 2010 and 2011 were Ps9,624 million (U.S.$735 million), Ps9,968 million (U.S.$807 million) and Ps11,779 million (U.S.$844 million), respectively, of which, the funded amount as of December 31, 2011 was Ps8,598 million (U.S.$616 million). Unfunded amounts of receivables sold are not derecognized but are reclassified from trade receivables to other accounts receivable in the balance sheet (see notes 5 and 6 to our consolidated financial statements included in the 6-K). The accounts receivable qualifying for sale do not include amounts over specified days past due or concentrations over specified limits to any one customer, according to the terms of the programs. Expenses incurred under these programs, originated by the discount granted to the acquirers of the accounts receivable, are recognized in the statement of operations as financial expense and were approximately Ps645 million (U.S.$47 million) in 2009, Ps368 million (U.S.$29 million) in 2010 and Ps390 million (U.S.$31 million) in 2011. CEMEX’s securitization programs are negotiated for specific periods and should be renewed at their maturity. The securitization programs outstanding as of December 31, 2011 in Mexico, the United States, Spain, France and the United Kingdom, mature in October 2015, May 2013, May 2016 and March 2013, respectively.

 

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Stock Repurchase Program

Under Mexican law, our shareholders may authorize a stock repurchase program at our annual shareholders’ meeting. Unless otherwise instructed by our shareholders, we are not required to purchase any minimum number of shares pursuant to such program.

In connection with our 2009, 2010 and 2011 annual shareholders’ meetings held on April 29, 2010, February 24, 2011 and February 23, 2012, respectively, no stock repurchase program was proposed between April 2009 and April 2010, between April 2010 and February 2011 and between February 2011 and February 2012, respectively. Subject to certain exceptions, we are not permitted to repurchase shares of our capital stock under the Financing Agreement.

Research and Development, Patents and Licenses, etc.

Our research and development, or R&D, efforts help us in achieving our goal of increasing market share in the markets in which we operate. The department of the Vice President of Technology is responsible for developing new products for our cement and ready-mix concrete businesses that respond to our clients’ needs. The department of the Vice President of Energy has the responsibility for developing new processes, equipment and methods to optimize operational efficiencies and reduce our costs. For example, we have developed processes and products that allow us to reduce heat consumption in our kilns, which in turn reduces energy costs. Other products have also been developed to provide our customers a better and broader offering of products in a sustainable manner. We believe this has helped us to keep or increase our market share in many of the markets in which we operate.

We have 10 laboratories dedicated to our R&D efforts. Nine of these laboratories are strategically located in close proximity to our plants to assist our operating subsidiaries with troubleshooting, optimization techniques and quality assurance methods. One of our laboratories is located in Switzerland, where we are continually improving and consolidating our research and development efforts in the areas of cement, concrete, aggregates, admixtures, mortar and asphalt technology, as well as in business processes, information technology and energy management. We have several patent registrations and pending applications in many of the countries in which we operate. These patent registrations and applications relate primarily to different materials used in the construction industry and the production processes related to them, as well as processes to improve our use of alternative fuels and raw materials.

Our Information Technology divisions have developed information management systems and software relating to cement and ready-mix concrete operational practices, automation and maintenance. These systems have helped us to better serve our clients with respect to purchasing, delivery and payment.

R&D activities comprise part of the daily routine of the departments and divisions mentioned above; therefore, the costs associated with such activities are expensed as incurred. However, the costs incurred in the development of software for internal use are capitalized and amortized in operating results over the estimated useful life of the software, which is approximately five years.

In 2009, 2010 and 2011, the combined total expense of the departments of the Vice President of Energy and the Vice President of Technology, which includes R&D activities, amounted to approximately Ps408 million (U.S.$30 million), Ps519 million (U.S.$41 million) and Ps487 million (U.S.$39 million), respectively.

Summary of Material Contractual Obligations and Commercial Commitments

The Financing Agreement

On August 14, 2009, we entered into the Financing Agreement. The Financing Agreement extended the maturities of approximately U.S.$15.0 billion in syndicated and bilateral bank facilities and private placement obligations, providing for a semi-annual amortization schedule, with a final amortization payment of approximately U.S.$6.7 billion on February 14, 2014, based on prevailing exchange rates as of December 31, 2011. The Financing Agreement is secured by a first-priority security interest over the Collateral and all proceeds of such Collateral.

The Financing Agreement requires us to comply with several financial ratios and tests, including a consolidated coverage ratio of EBITDA to consolidated interest expense (including interest expense of the Debentures) of not less than (i) 1.75:1 for each period of four consecutive fiscal quarters (measured semi-annually) up to and including the period ending December 31, 2012 and (ii) 2.00:1 for the remaining periods of four consecutive fiscal quarters (measured semi-annually) to December 31, 2013. In addition, the Financing Agreement allows us a maximum consolidated leverage ratio of total debt (including the Debentures) to EBITDA for each

 

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period of four consecutive fiscal quarters (measured semi-annually) not to exceed 7.00:1 for the period that ended December 31, 2011, 6.5:1 for the period ending June 30, 2012, 5.75:1 for the period ending December 31, 2012, 5.00:1 for the period ending June 30, 2013 and 4.25:1 for the period ending December 31, 2013. Our ability to comply with these ratios may be affected by current economic conditions and high volatility in foreign exchange rates and the financial and capital markets. For the period ended December 31, 2011, we expect to report to the lenders under the Financing Agreement a consolidated coverage ratio of approximately 1.88:1 and a consolidated leverage ratio of approximately 6.64:1, each as calculated pursuant to the Financing Agreement. Pursuant to the Financing Agreement, we are prohibited from making aggregate annual capital expenditures in excess of U.S.$800 million. In addition, we have addressed all maturities under the Financing Agreement until December 15, 2013.

On April 13, 2011, the Financing Agreement was amended so that we can retain funds in the CBs reserve from disposal proceeds, permitted fundraisings and cash in hand, to pay for CBs maturing in April and September 2012.

For a discussion of restrictions and covenants under the Financing Agreement, see “Risk Factors—Risks Relating to Our Business—The Financing Agreement contains several restrictions and covenants. Our failure to comply with such restrictions and covenants could have a material adverse effect on us.”

Mandatory Convertible Notes

On December 10, 2009, CEMEX, S.A.B. de C.V. issued approximately Ps4.1 billion (approximately U.S.$315 million) in Mandatory Convertible Notes, in exchange for CBs maturing on or before December 31, 2012, pursuant to an exchange offer conducted in Mexico, in transactions exempt from registration pursuant to Regulation S under the Securities Act. The Mandatory Convertible Notes are mandatorily convertible into newly issued CPOs at a conversion price per CPO (calculated as the volume-weighted average price of the CPO for the ten trading days prior to the closing of the exchange offer multiplied by a conversion premium of approximately 1.65), accrue interest, payable in cash, at 10% per annum, provide for the payment of a cash penalty fee, equal to approximately one year of interest, upon the occurrence of certain anticipated conversion events, and mature on November 28, 2019. After giving effect to any dilution adjustments in respect of the recapitalization of earnings approved by shareholders at the 2010 shareholders’ meeting, the conversion ratio for the Mandatory Convertible Notes as of the date hereof is 402.3552 CPOs per Ps8,900 of principal amount of Mandatory Convertible Notes.

December 2009 Notes

On December 14, 2009, our subsidiary, CEMEX Finance LLC, issued U.S.$1,250,000,000 aggregate principal amount and €350,000,000 aggregate principal amount of the December 2009 Notes in transactions exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. On January 19, 2010, CEMEX Finance LLC issued an additional U.S.$500,000,000 aggregate principal amount of the December 2009 Notes. CEMEX, S.A.B. de C.V., CEMEX México, CEMEX España, CEMEX Corp., CEMEX Concretos, S.A. de C.V., Empresas Tolteca de México, S.A. de C.V. and New Sunward have fully and unconditionally guaranteed the performance of all obligations of CEMEX Finance LLC under the December 2009 Notes on a senior basis. The payment of principal, interest and premium, if any, on such notes is secured by a first-priority security interest over the Collateral and all proceeds of such Collateral.

2010 Optional Convertible Subordinated Notes

On March 30, 2010, CEMEX, S.A.B. de C.V. issued U.S.$715,000,000 aggregate principal amount of the 2010 Optional Convertible Subordinated Notes, including the initial purchasers’ exercise in full of their over-allotment option, in transactions exempt from registration pursuant to Rule 144A under the Securities Act. The conversion rate has been adjusted to 79.5410 ADSs per U.S.$1,000 principal amount of 2010 Optional Convertible Subordinated Notes, reflecting the issuance of CPOs in connection with the recapitalization of earnings approved by shareholders at the 2010 annual shareholders’ meeting. We used a portion of the net proceeds from the offering of the 2010 Optional Convertible Subordinated Notes to fund the purchase of a capped call transaction, which are expected generally to reduce the potential cost to CEMEX upon future conversion of the 2010 Optional Convertible Subordinated Notes.

May 2010 Notes

On May 12, 2010, CEMEX España, acting through its Luxembourg branch, issued U.S.$1,067,665,000 aggregate principal amount and €115,346,000 aggregate principal amount of the May 2010 Notes, in exchange for a majority in principal amount of the then outstanding Debentures pursuant to exchange offers, in private transactions

 

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exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation S under the Securities Act. In addition, on March 4, 2011, CEMEX España, acting through its Luxembourg branch, issued an additional U.S.$125,331,000 aggregate principal amount of the Additional May 2010 Notes, in exchange for €119,350,000 aggregate principal amount of the 6.277% Debentures, pursuant to an exchange offer, in a private transaction exempt from registration pursuant to Regulation S under the Securities Act. CEMEX, S.A.B. de C.V., CEMEX México and New Sunward have fully and unconditionally guaranteed the performance of all obligations of CEMEX España under the May 2010 Notes, including the Additional May 2010 Notes, on a senior basis. The payment of principal, interest and premium, if any, on such notes is secured by a first-priority security interest over the Collateral and all proceeds of such Collateral.

January 2011 Notes

On January 11, 2011, CEMEX, S.A.B. de C.V. issued U.S.$1,000,000,000 aggregate principal amount of the January 2011 Notes in transactions exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. On July 11, 2011, CEMEX, S.A.B. de C.V. issued an additional U.S.$650,000,000 aggregate principal amount of the Additional January 2011 Notes. CEMEX México, New Sunward and CEMEX España have fully and unconditionally guaranteed the performance of all obligations of CEMEX, S.A.B. de C.V. under the January 2011 Notes, including the Additional January 2011 Notes, on a senior basis. The payment of principal, interest and premium, if any, on such notes is secured by a first-priority security interest over the Collateral and all proceeds of such Collateral.

2011 Optional Convertible Subordinated Notes

On March 15, 2011, CEMEX, S.A.B. de C.V. issued U.S.$1,667,500,000 aggregate principal amount of the 2011 Optional Convertible Subordinated Notes, including the initial purchasers’ exercise in full of their over-allotment options, in transactions exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. The 2011 Optional Convertible Subordinated Notes are convertible into ADSs, at any time after June 30, 2011. The initial conversion price for the 2011 Optional Convertible Subordinated Notes was equivalent to approximately U.S.$11.28 per ADS, a 30% premium to the closing price of ADSs on March 9, 2011. The conversion rate has been adjusted to 92.1659 ADSs per U.S.$1,000 principal amount of 2011 Optional Convertible Subordinated Notes, reflecting the issuance of CPOs in connection with the recapitalization of earnings approved by shareholders at the 2010 annual shareholders’ meeting. We used a portion of the net proceeds from the offering of the 2011 Optional Convertible Subordinated Notes to fund the purchase of capped call transactions, which are expected generally to reduce the potential cost to CEMEX upon future conversion of the 2011 Optional Convertible Subordinated Notes.

April 2011 Notes

On April 5, 2011, CEMEX, S.A.B. de C.V. issued U.S.$800,000,000 aggregate principal amount of the April 2011 Notes in transactions exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. CEMEX México, New Sunward and CEMEX España have fully and unconditionally guaranteed the performance of all obligations of CEMEX, S.A.B. de C.V. under the April 2011 Notes. The payment of principal, interest and premium, if any, on such notes is secured by a first-priority security interest over the Collateral and all proceeds of such Collateral.

Existing Senior Secured Notes — General

The indentures governing the Existing Senior Secured Notes impose significant operating and financial restrictions on us. These restrictions will limit our ability, among other things, to: (i) incur debt; (ii) pay dividends on stock; (iii) redeem stock or redeem subordinated debt; (iv) make investments; (v) sell assets, including capital stock of subsidiaries; (vi) guarantee indebtedness; (vii) enter into agreements that restrict dividends or other distributions from restricted subsidiaries; (viii) enter into transactions with affiliates; (ix) create or assume liens; (x) engage in mergers or consolidations; and (xi) enter into a sale of all or substantially all of our assets.

Commercial Commitments

As of December 31, 2010 and 2011, we had commitments for the purchase of raw materials for an approximate amount of U.S.$288 million and U.S.$184 million, respectively.

In 2006, in order to take advantage of the high wind potential in the “Tehuantepec Isthmus,” CEMEX and the Spanish company ACCIONA formed an alliance to develop a wind farm project for the generation of 250

 

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Megawatts (MW) in the Mexican state of Oaxaca. We acted as promoter of the project, which was named EURUS. ACCIONA provided the required financing, constructed the facility and currently operates the wind farm. The installation of 167 wind turbines in the farm was finished on November 15, 2009. The agreements between CEMEX and ACCIONA established that CEMEX’s plants in Mexico will acquire a portion of the energy generated by the wind farm for a period of at least 20 years, which began in February 2010, when EURUS reached the committed limit capacity. For the years ended December 31, 2010 and 2011, EURUS supplied approximately 20% and 23%, respectively, of CEMEX’s overall electricity needs in Mexico during such year. This agreement is for CEMEX’s own use and there is no intention of trading in energy by CEMEX.

In 1999, CEMEX entered into an agreement with an international partnership, which built and operated an electrical energy generating plant in Mexico called “Termoeléctrica del Golfo,” or TEG. In 2007, another international company replaced the original operator. The agreement established that CEMEX would purchase the energy generated for a term of not less than 20 years, which started in April 2004. In addition, CEMEX committed to supply TEG all fuel necessary for its operations, a commitment that has been hedged through a 20-year agreement entered with Petróleos Mexicanos, or PEMEX, which terminates in 2024. With the change of the operator in 2007, CEMEX extended the term of its agreement with TEG until 2027. Consequently, for the last 3 years of the agreement, CEMEX intends to purchase the required fuel in the market. For the years ended December 31, 2009, 2010 and 2011, the power plant has supplied approximately 74%, 73% and 69%, respectively, of CEMEX’s overall electricity needs during such years for its cement plants in Mexico.

In March 1998, we entered into a 20-year contract with PEMEX providing that PEMEX’s refinery in Cadereyta would supply us with 0.9 million tons of petcoke per year, commencing in 2003. In July 1999, we entered into a second 20-year contract with PEMEX providing that PEMEX’s refinery in Madero would supply us with 0.85 million tons of petcoke per year, commencing in 2002. We expect the PEMEX petcoke contracts to reduce the volatility of our fuel costs and provide us with a consistent source of petcoke throughout their 20-year terms (which expire in July 2023 for the Cadereyta refinery contract and October 2022 for the Madero refinery contract).

Contractual Obligations

As of December 31, 2010 and 2011, we had the following material contractual obligations:

 

(U.S. dollars millions)    2010      2011  

Obligations

   Total      Less
than

1 year
     1-3Years      3-5Years      More
than
5 Years
     Total  

Long-term debt

   U.S.$ 15,694         325         8,512         2,523         3,621         14,981   

Capital lease obligations(1)

     6         47         85         12         38         182   

Convertible notes(2)

     784         9         24         1,486         610         2,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and other financial obligations(3)

   U.S.$ 16,484         381         8,621         4,021         4,269         17,292   

Operating leases(4)

     731         166         219         97         83         565   

Interest payments on debt(5)

     4,183         984         1,764         931         432         4,111   

Pension plans and other benefits(6)

     1,579         156         310         316         1,107         1,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   U.S.$ 22,977         1,687         10,914         5,365         5,891         23,857   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Ps 283,998         23,551         152,359         74,895         82,238         333,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The amounts of payments under capital leases have been determined on the basis of nominal cash flows. As of December 31, 2011, the net present value of future payments under such leases is approximately U.S.$143 million (Ps1,999 million), of which, approximately U.S.$44 million (Ps613 million) refers to cash flows from 1 to 3 years, and approximately U.S.$73 million (Ps1,023 million) refer to cash flows from 3 to 5 years.
(2) Refers to the convertible notes and assumes repayment at maturity and no conversion of the notes. See note 12B to our consolidated financial statements included in the 6-K.
(3) The schedule of debt payments, which includes current maturities, does not consider the effect of any refinancing of debt that may occur during the following years. In the past, CEMEX has replaced its long-term obligations for others of a similar nature.
(4) The amounts for operating leases have been determined on the basis of nominal cash flows. CEMEX has operating leases, primarily for operating facilities, cement storage and distribution facilities and certain transportation and other equipment, under which annual rental payments are required plus the payment of certain operating expenses. Rental expense was U.S.$243 million (Ps3,305 million) U.S.$199 million (Ps2,521 million) and U.S.$256 million (Ps3,195 million), in 2009, 2010 and 2011, respectively.

 

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(5) For the determination of the future estimated interest payments on floating rate denominated debt, CEMEX used the floating interest rates in effect as of December 31, 2010 and 2011.
(6) Represents estimated annual payments under these benefits for the next 10 years. Future payments include the estimate of new retirees during such future years. See note 14 to our consolidated financial statements included in the 6-K.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, operating results, liquidity or capital resources.

CEMEX Venezuela

On August 18, 2008, the Government of Venezuela expropriated all business, assets and shares of CEMEX in Venezuela and took control of its facilities. CEMEX controlled and operated CEMEX Venezuela until August 17, 2008. In October 2008, CEMEX submitted a request to the International Centre for Settlement of Investment Disputes (“ICSID”), seeking international arbitration claiming that the nationalization and seizure of the facilities located in Venezuela and owned by CEMEX Venezuela did not comply with the terms of the treaty for the protection of investments signed by the Government of Venezuela and the Netherlands and with international law because CEMEX had not received any compensation and no public purpose was proven. On November 30, 2011, following negotiations with the Government of Venezuela and its public entity Corporación Socialista de Cemento, S.A., a settlement agreement was reached between CEMEX and the Government of Venezuela that closed on December 13, 2011. Under this settlement agreement, CEMEX received compensation for the expropriation of CEMEX Venezuela and administrative services provided after the expropriation in the form of: (i) a cash payment of U.S.$240 million; and (ii) notes issued by Petróleos de Venezuela, S.A. (“PDVSA”), with nominal value and interest income to maturity totaling approximately U.S.$360 million. Additionally, as part of the settlement, claims among all parties and their affiliates were released and all intercompany payments due from or to CEMEX Venezuela to and from CEMEX were cancelled, resulting in the cancellation for CEMEX of accounts payable, net of approximately U.S.$154 million. Pursuant to this settlement agreement, CEMEX and the government of Venezuela agreed to withdraw the ICSID arbitration. As a result of this settlement, CEMEX cancelled the book value of its net assets in Venezuela of approximately U.S.$503 million and recognized a settlement gain in the statement of operations of approximately U.S.$150 million, which includes the write-off of the currency translation effects accrued in equity.

As of December 31, 2011, CEMEX maintained PDVSA notes as available-for-sale investments with a notional amount of approximately U.S.$203 million (Ps2,834 million) and a fair value of approximately U.S.$180 million (Ps2,513 million). During 2011, changes in valuation of these investments generated a loss of approximately Ps58 million recognized as part of other comprehensive loss within other equity reserves.

See note 9B to our consolidated financial statements included in the 6-K.

See “Regulatory Matters and Legal Proceedings — Other Legal Proceedings — Expropriation of CEMEX Venezuela and ICSID Arbitration.”

Qualitative and Quantitative Market Disclosure

Our Derivative Financial Instruments

For the years ended December 31, 2009, 2010 and 2011, we had a net loss related to the recognition of changes in fair values of derivative financial instruments during the applicable period for approximately Ps2,160 million (U.S.$141 million), Ps849 (U.S.$67 million) and Ps3,994 million (U.S.$320 million), respectively.

Since the beginning of 2009, with the exception of our capped call transactions entered into in March 2010 and March 2011, we have been reducing the aggregate notional amount of our derivatives, thereby reducing the risk of cash margin calls. This initiative has included closing substantially all notional amounts of derivative instruments related to our debt (currency and interest rate derivatives) and the settlement of our inactive derivative financial instruments (see note 12D to our consolidated financial statements included in the 6-K), which we finalized during April 2009. The Financing Agreement significantly restricts our ability to enter into derivative transactions.

 

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We use derivative financial instruments in order to change the risk profile associated with changes in interest rates, the exchange rates of debt, or both; as an alternative source of financing and as hedges of: (i) highly probable forecasted transactions and (ii) our net investments in foreign subsidiaries. Before entering into any transaction, we evaluate, by reviewing credit ratings and our business relationship according to our policies, the creditworthiness of the financial institutions and corporations that are prospective counterparties to our derivative financial instruments. We select our counterparties to the extent we believe that they have the financial capacity to meet their obligations in relation to these instruments. Under current financial conditions and volatility, we cannot make assurances that the risk of non-compliance with the obligations agreed to with such counterparties is minimal.

The fair value of derivative financial instruments is based on estimated settlement costs or quoted market prices and supported by confirmations of these values received from the counterparties to these financial instruments. The notional amounts of derivative financial instrument agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss.

 

     At December 31, 2010     At December 31, 2011      Maturity Date  
   Notional
amount
     Estimated
fair value
    Notional
amount
     Estimated
fair value
    
     (in millions of Dollars)         

Interest rate swaps

     196         35        189         52         April 2015   

Equity forwards on third party shares

     53         15        46         1         April 2012   

Forward instruments over indexes

     16         1        5         —           October 2010   

Options on our own shares

     1,575         (71     2,742         93         September 2022   

Our Interest Rate Swaps. As of December 31, 2010 and 2011, we had an interest rate swap maturing in September 2022 with notional amounts of U.S.$196 million and U.S.$189 million, respectively, negotiated to exchange floating for fixed rates in connection with agreements we entered into for the acquisition of electric energy in Mexico. See note 19C to our consolidated financial statements included in the 6-K. As of December 31, 2010 and 2011, the fair value of the swap represented assets of approximately U.S.$35 million and U.S.$52 million, respectively. Pursuant to this instrument, during the tenure of the swap and based on its notional amount, we will receive a fixed rate of 5.4% and will pay a LIBOR, which is the international reference for debt denominated in U.S. Dollars. As of December 31, 2010 and 2011, LIBOR was 0.46% and 0.81%, respectively. Changes in the fair value of interest rate swaps, including those settled in April 2009, generated gains of approximately U.S.$9 million (Ps114 million) in 2010 and U.S.$17 million (Ps212 million) in 2011, which were recognized in the statement of operations for each year.

Our Equity Forwards on Third Party Shares. As of December 31, 2010 and 2011, we had forward contracts to be settled in cash over the price of 119 million CPOs of Axtel (59.5 million CPOs with each counterparty) with an aggregate notional amount of U.S.$53 million and U.S.$46 million, respectively. Both tranches are due in April 2012. These transactions were intended to maintain exposure to changes in the price of such entity after our sale of 119 million CPOs of Axtel in March 2008. The sale represented approximately 9.5% of the equity capital of Axtel as of the sale date and nearly 90% of our position in Axtel, which had been part of our investments in associates. Changes in the fair value of this instrument generated losses of approximately U.S.$43 million (Ps545 million) in 2010 and U.S.$34 million (Ps424 million) in 2011, which were recognized in the statement of operations for each year.

Our Forward Instruments Over Indexes. As of December 31, 2010 and 2011, we held forward derivative instruments over the TRI (Total Return Index) of the Mexican Stock Exchange, which matured in October 2011 and were extended until October 2012, through a payment of approximately U.S.$1 million (Ps12 million). By means of these instruments, we maintained exposure to increases or decreases of such index. TRI expresses the market return on stocks based on market capitalization of the issuers comprising the index. Changes in the fair value of these instruments generated a gain of approximately U.S.$5 million (Ps63 million) in 2010 and a loss of approximately U.S.$1 million (Ps12 million) in 2011, which were recognized in the statement of operations for each year.

Our Options on our own shares. In August 2011, upon their maturity, we settled through a payment of approximately U.S.$188 million (Ps2,346 million), options based on the price of our ADS for a notional amount of U.S.$500 million, structured within a debt transaction of U.S.$500 million (Ps6,870 million) issued in June 2008. By means of these options, considering that the price per ADS remained below approximately U.S.$21, as adjusted as of December 31, 2010, we paid the maximum net interest rate of 12% on the related debt transaction. We could have gradually obtained a net interest rate of zero on this debt had the ADS price exceeded approximately U.S.$30,

 

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as adjusted as of December 31, 2010. As of December 31, 2010, the fair value represented a liability of approximately U.S.$71 million (Ps878 million), which included deposits in margin accounts of approximately U.S.$105 million (Ps1,298 million). Changes in the fair value were recognized in the statements of operations for each year within “Results from financial instruments,” representing losses of approximately U.S.$21 million (Ps266 million) in 2010 and U.S.$1 million (Ps12 million) in 2011.

On March 15, 2011, in connection with the offering of the 2016 Optional Convertible Notes and the 2018 Optional Convertible Notes and to effectively increase the conversion price for our CPOs under such notes, CEMEX, S.A.B. de C.V. entered into a capped call transaction over approximately 148 million ADSs (87 million ADSs maturing in March 2016 and 61 million ADSs maturing in March 2018), by means of which, for the 2016 Optional Convertible Notes, at maturity of the notes in March 2016, if the price per ADS is above U.S.$11.284, we will receive in cash the difference between the market price of the ADS and U.S.$11.284, with a maximum appreciation per ADS of U.S.$5.21. Likewise, for the 2018 Notes, at maturity of the notes in March 2018, if the price per ADS is above U.S.$11.284, we will receive in cash the difference between the market price of the ADS and U.S.$11.284, with a maximum appreciation per ADS of U.S.$6.94. We paid a total premium of approximately U.S.$222 million. As of December 31, 2011, the fair value of such options represented an asset of approximately U.S.$85 million (Ps1,187 million). During 2011, changes in the fair value of these instruments generated a loss of approximately U.S.$137 million (Ps1,710 million), which was recognized within the statements of operations for 2011.

On March 30, 2010, in connection with the offering of the 2010 Optional Convertible Subordinated Notes and to effectively increase the conversion price for our CPOs under such notes, CEMEX, S.A.B. de C.V. entered into a capped call transaction over approximately 52.6 million ADSs maturing in March 2015, by means of which, at maturity of the notes, if the price per ADS is above U.S.$13.60, we will receive in cash the difference between the market price of the ADS and U.S.$13.60, with a maximum appreciation per ADS of U.S.$5.23. We paid a premium of approximately U.S.$105 million. As of December 31, 2010 and 2011, the fair value of such options represented an asset of approximately U.S.$95 million (Ps1,174 million) and U.S.$12 million (Ps168 million) respectively. During 2010 and 2011, changes in the fair value of this contract generated losses of approximately U.S.$11 million (Ps139 million) and U.S.$83 million (Ps1,036 million) respectively, which were recognized in the statements of operations for each year.

As of December 31, 2010 and 2011, we had granted a guarantee for a notional amount of approximately U.S.$360 in both years, in connection with put option transactions on our CPOs entered into by Citibank with a Mexican trust that we established on behalf of its Mexican pension fund and certain of our directors and current and former employees in April 2008, as described in note 19C to our consolidated financial statements included in the 6-K. The fair value of such guarantee, net of deposits in margin accounts, represented liabilities of approximately U.S.$95 million (Ps1,174 million) in 2010 and U.S.$4 million (Ps56 million) in 2011. Changes in the fair value were recognized in the statements of operations for each year, representing losses of approximately U.S.$6 million (Ps76 million) in 2010 and U.S.$80 million (Ps998 million) in 2011. As of December 31, 2010 and 2011, cash deposits in margin accounts were approximately U.S.$55 million (Ps680 million) and U.S.$225 million (Ps3,141 million), respectively.

Interest Rate Risk, Foreign Currency Risk and Equity Risk

Interest Rate Risk. The table below presents tabular information of our fixed and floating rate long-term foreign currency-denominated debt as of December 31, 2011. See note 12A to our consolidated financial statements included in the 6-K. Average floating interest rates are calculated based on forward rates in the yield curve as of December 31, 2011. Future cash flows represent contractual principal payments. The fair value of our floating rate long-term debt is determined by discounting future cash flows using borrowing rates available to us as of December 31, 2011 and is summarized as follows:

 

Long-Term Debt(1)

   Expected maturity dates as of December 31, 2011         
   2012     2013     2014     2015     After 2016     Total      Fair Value  

Variable rate

   U.S.$ 213        498        6,408        760        9      U.S.$  7,889       U.S.$  7,729   

Average interest rate

     5.02     5.48     5.96     6.90     4.68     

Fixed rate

   U.S.$ 111        44        1.561        4        5,370      U.S.$ 7,092       U.S.$ 5,901   

Average interest rate

     8.40     8.35     8.37     9.20     9.07     

 

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(1) The information above includes the current maturities of the long-term debt. Total long-term debt as of December 31, 2011 does not include our other financial obligations and the Debentures for an aggregate amount of U.S.$2,225 million (Ps31,062 million) and U.S.$938 million (approximately Ps13,089 million), issued by consolidated entities. See notes 12B and 16D to our consolidated financial statements included in the 6-K.

As of December 31, 2011, we were subject to the volatility of floating interest rates, which, if such rates were to increase, may adversely affect our financing cost and our net income. As of December 31, 2011, 50% of our foreign currency-denominated long-term debt bears floating rates at a weighted average interest rate of LIBOR plus 454 basis points.

Foreign Currency Risk. Due to our geographic diversification, our revenues are generated in various countries and settled in different currencies. However, some of our production costs, including fuel and energy, and some of our cement prices, are periodically adjusted to take into account fluctuations in the Dollar/Peso exchange rate. For the year ended December 31, 2011, approximately 22% of our net sales, before eliminations resulting from consolidation, were generated in Mexico, 16% in the United States, 8% in the United Kingdom, 8% in Germany, 7% in France, 7% in our Rest of Northern Europe geographic segment, 4% in Spain, 3% in Egypt, 4% in our Rest of Mediterranean segment, 11% in South America and the Caribbean, 3% in Asia and 7% from our other operations.

As of December 31, 2011, approximately 77% of our Total Financial Obligations was Dollar-denominated, approximately 20% was Euro-denominated, approximately 3% was Peso-denominated and immaterial amounts were denominated in other currencies, not including approximately Ps13,089 million (U.S.$938 million) of notes issued in connection with the Debentures; therefore, we had a foreign currency exposure arising from the Dollar-denominated Total Financial Obligations, and the Euro-denominated Total Financial Obligations, versus the currencies in which our revenues are settled in most countries in which we operate. We cannot guarantee that we will generate sufficient revenues in Euros from our operations in Spain, Germany, France and the Rest of Northern Europe to service these obligations. As of December 31, 2010 and 2011, all cross-currency swaps had been settled.

Equity Risk. As described above, we have entered into equity forward contracts on Axtel CPOs. Upon liquidation, the equity forward contracts provide for cash settlement and the effects are recognized in the statement of operations. At maturity, if these forward contracts are not settled or replaced, or if we default on these agreements, our counterparties may sell the shares of the underlying contracts. Under these equity forward contracts, there is a direct relationship in the change in the fair value of the derivative with the change in value of the underlying asset.

As of December 31, 2011, the potential change in the fair value of these contracts that would result from a hypothetical, instantaneous decrease of 10% in the market price of Axtel CPOs would be a loss of approximately U.S.$4 million (Ps53 million).

In addition, we have entered into forward contracts on the TRI of the Mexican Stock Exchange through which we maintain exposure to changes of such index, until maturity in October 2012. Upon liquidation, these forward contracts provide for cash settlement of the estimated fair value and the effects are recognized in the statement of operations. Under these equity forward contracts, there is a direct relationship in the change in the fair value of the derivative with the change in value of the TRI of the Mexican Stock Exchange.

As of December 31, 2011, the potential change in the fair value of these contracts that would result from a hypothetical, instantaneous decrease of 10% in the aforementioned index would be a loss of approximately U.S.$1 million (Ps14 million).

As of December 31, 2011, we were subject to the volatility of the market price of our CPOs in relation to our options over our CPO price and our put option transactions on our CPOs, as described in “— Qualitative and Quantitative Market Disclosure — Our Derivative Financial Instruments — Our Other Equity Derivative Contracts.” A decrease in the market price of our CPOs may adversely affect our result from financial instruments and our net income.

As of December 31, 2011, the potential change in the fair value of these contracts that would result from a hypothetical, instantaneous decrease of 10% in the market price of our CPOs would be a loss of approximately U.S.$25 million (Ps352 million).

In connection with the offering of the 2010 Optional Convertible Subordinated Notes and the 2011 Optional Convertible Subordinated Notes issued in March 2010 and March 2011, respectively, we entered into capped call transactions with affiliates of the financial institutions involved on those transactions. See “— Qualitative and Quantitative Market Disclosure — Our Derivative Financial Instruments — Our Capped Call Transactions.”

 

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Investments, Acquisitions and Divestitures

The transactions described below represent our principal investments, acquisitions and divestitures completed during 2009, 2010 and 2011.

Investments and Acquisitions

As a result of Ready Mix USA’s exercise of its put option (See note 9A to our consolidated financial statements included in the 6-K) and after performance of the obligations by both parties under the put option agreement, effective August 1, 2011, CEMEX acquired for approximately U.S.$352 million (Ps4,914 million) its former joint venture partner’s interests in CEMEX Southeast, LLC and Ready Mix USA, LLC, including a non-compete and a transition services agreement. In accordance with the joint venture agreements, from the date in which Ready Mix USA exercised its put option until CEMEX’s acquisition date, Ready Mix USA continued to control and manage Ready Mix USA, LLC. Upon acquisition, the purchase price was assigned to each joint venture proportionately to CEMEX’s relative contribution interest in CEMEX Southeast, LLC and Ready Mix USA, LLC considering the original fair values as of the dates of the agreements in 2005. The acquisition of the minority interest in CEMEX Southeast, LLC, which was fully consolidated by CEMEX as of the acquisition date, and Ready Mix USA, LLC, generated an aggregate loss of approximately U.S.$31 million (Ps387 million), which, as a transaction between stockholders under MFRS, was recognized within “Other equity reserves.” As of December 31, 2011, CEMEX was in the process of completing the allocation of the purchase price of Ready Mix USA, LLC to the fair values of the assets acquired and liabilities assumed. Our consolidated financial statements include the balance sheet of Ready Mix USA, LLC as of December 31, 2011, based on the best estimate of the fair value of its net assets as of the acquisition date and its results of operations for the five-month period ended December 31, 2011. See note 11A to our consolidated financial statements included in the 6-K

According to CEMEX’s best estimate of the fair value of Ready Mix USA, LLC’s net assets as of December 31, 2011, CEMEX consolidated net assets of approximately Ps4,487 million, including cash and cash equivalents for approximately Ps912 million and debt for approximately Ps1,347 million.

Our total additions in property, machinery and equipment, as reflected in our consolidated financial statements (see note 10 to our consolidated financial statements included in the 6-K), excluding acquisitions of equity interests in subsidiaries and associates and including capital leases, was approximately U.S.$636 million in 2009, U.S.$555 million) in 2010 and U.S.$459 million in 2011. This capital expenditure in property, machinery and equipment has been applied to the construction and upgrade of plants and equipment and the maintenance of plants and equipment, including environmental controls and technology updates.

As of the date hereof, we have allocated over U.S.$600 million in our 2012 budget to continue with this effort.

Divestitures

During 2011 we sold assets for approximately U.S.$225 million comprised in part by real estate non-core business and equipment.

On August 27, 2010, we completed the sale of seven aggregates quarries, three resale aggregate distribution centers and one concrete block manufacturing facility in Kentucky to Bluegrass Materials Company, LLC for U.S.$88 million in proceeds.

On October 1, 2009, CEMEX sold its Australian operations to Holcim Ltd. for 2,020 million Australian dollars (U.S.$1,700 million). The assets divested consisted of 249 ready-mix concrete plants, 83 aggregate quarries, 16 concrete pipe plants, as well as CEMEX’s 25% interest in Cement Australia Pty Limited, with an aggregate cement production capacity of 5.1 million tons. As a result of this significant divestiture, the Australian operations for 2009 were reclassified to the single line item of “Discontinued operations,” which includes a loss on sale of approximately Ps5,901 million (U.S.$446 million), net of an income tax benefit of approximately Ps2,528 million (U.S.$191 million) and an expense of approximately Ps1,310 million (U.S.$99 million) from the reclassification of foreign currency translation effects accrued in equity until the moment of sale. See note 3B to our consolidated financial statements included in the 6-K.

On June 15, 2009, we sold three quarries (located in Nebraska, Wyoming and Utah) and our 49% joint venture interest in the operations of a quarry located in Granite Canyon, Wyoming, to Martin Marietta Materials, Inc. for U.S.$65 million.

 

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BUSINESS

CEMEX, S.A.B. de C.V. was founded in 1906 and was registered with the Mercantile Section of the Public Registry of Property and Commerce in Monterrey, N.L., Mexico, on June 11, 1920 for a period of 99 years. At our 2002 annual shareholders’ meeting, this period was extended to the year 2100. Beginning April 2006, CEMEX’s full legal and commercial name is CEMEX, Sociedad Anónima Bursátil de Capital Variable.

CEMEX is one of the largest cement companies in the world, based on annual installed cement production capacity as of December 31, 2011 of approximately 95.6 million tons. We are the largest ready-mix concrete company in the world with annual sales volumes of approximately 55 million cubic meters and one of the largest aggregates companies in the world with annual sales volumes of approximately 160 million tons, in each case based on our annual sales volumes in 2011. We are also one of the world’s largest traders of cement and clinker, having traded approximately 8.4 million tons of cement and clinker in 2011. CEMEX, S.A.B. de C.V. is a holding company primarily engaged, through our operating subsidiaries, in the production, distribution, marketing and sale of cement, ready-mix concrete, aggregates and clinker throughout the world.

We operate globally with operations in Mexico, the United States, Northern Europe, the Mediterranean, South America and the Caribbean and Asia. We had total assets of approximately Ps548 billion (U.S.$39 billion) as of December 31, 2011, and an equity market capitalization of approximately Ps98.8 billion (U.S.$7.7 billion) as of February 24, 2012.

As of December 31, 2011, our main cement production facilities were located in Mexico, the United States, Spain, Egypt, Germany, Colombia, the Philippines, Poland, the Dominican Republic, the United Kingdom, Croatia, Panama, Latvia, Puerto Rico, Thailand, Costa Rica and Nicaragua. As of December 31, 2011, our assets (after eliminations), cement plants and installed capacity, on an unconsolidated basis by region, were as set forth below. Installed capacity, which refers to theoretical annual production capacity, represents gray cement equivalent capacity, which counts each ton of white cement capacity as approximately two tons of gray cement capacity, and includes installed capacity of cement plants that have been temporarily closed.

 

     As of December 31, 2011  
     Assets After
Eliminations

(in Billions
of Pesos)
     Number of
Cement  Plants
     Installed  Cement
Production
Capacity
(Millions  of Tons
Per Annum)
 

Mexico(1)

     64         15         29.3   

United States

     246         13         17.1   

Northern Europe

        

United Kingdom(2)

     33         2         2.4   

Germany

     12         2         4.9   

France

     16         —           —     

Rest of Northern Europe(3)

     19         3         4.6   

Mediterranean

        

Spain

     58         8         11   

Egypt

     8         1         5.4   

Rest of Mediterranean(4)

     11         3         2.4   

South America and the Caribbean

        

Colombia

     12         6         4.8   

Rest of South America and the Caribbean(5)

     22         5         8.0   

Asia

        

Philippines

     9         2         4.5   

Rest of Asia(6)

     2         1         1.2   

Corporate and Other Operations

     36         —           —     

 

The above table includes our proportional interest in the installed capacity of companies in which we hold a non-controlling interest.

(1) “Number of cement plants” and “Installed cement production capacity” includes two cement plants that have been temporarily closed with an aggregate annual installed capacity of 2.6 million tons of cement.

 

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(2) “Number of cement plants” and “Installed cement production capacity” includes a cement plant which has been mothballed since November 2008, with an annual installed capacity of 0.3 million tons of cement.
(3) Refers primarily to our operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland. For purposes of the columns labeled “Assets after eliminations” and “Installed cement production capacity,” includes our approximate 33% interest, as of December 31, 2011, in a Lithuanian cement producer that operated one cement plant with annual installed capacity of 1.3 million tons of cement as of December 31, 2011.
(4) Refers primarily to our operations in Croatia, the UAE and Israel.
(5) Includes our operations in Costa Rica, Panama, Puerto Rico, the Dominican Republic, Nicaragua, Jamaica and other countries in the Caribbean, Guatemala and small ready-mix concrete operations in Argentina.
(6) Includes our operations in Thailand, Bangladesh, China and Malaysia.

During most of the last two decades, we embarked on a major geographic expansion program to diversify our cash flows and enter markets whose economic cycles within the cement industry largely operate independently from those of Mexico and which offer long-term growth potential. We have built an extensive network of marine and land-based distribution centers and terminals that give us marketing access around the world. The following are our only significant acquisitions over the last five years:

 

   

On July 1, 2007, we completed for accounting purposes the acquisition of 100% of the Rinker shares for a total consideration of approximately U.S.$14.2 billion (excluding the assumption of approximately U.S.$1.3 billion of Rinker’s debt). Rinker, then headquartered in Australia, was a leading international producer and supplier of materials, products and services used primarily in the construction industry, with operations primarily in the United States and Australia, and limited operations in China. Rinker operations in the United States consisted of two cement plants located in Florida with an installed capacity of 1.9 million tons of cement and 172 ready-mix concrete plants. In Australia, through its Readymix subsidiary, Rinker’s Australian operations, which we have since sold, comprised 344 operating plants including 84 quarries and sand mines, 243 concrete plants and 17 concrete pipe and product plants, as of the date of acquisition. In China, through its Readymix subsidiary, Rinker operated four concrete plants in the northern cities of Tianjin and Qingdao.

 

   

As a result of Ready Mix USA’s exercise of its put option (see note 9A to our consolidated financial statements included in the 6-K), effective August 1, 2011, we acquired our former joint venture partner’s interests in CEMEX Southeast, LLC and Ready Mix USA, LLC, including a non-compete and a transition services agreement, for approximately U.S.$352 million (Ps4,914 million). In accordance with the joint venture agreements, from the date on which Ready Mix USA exercised its put option until the date we acquired Ready Mix USA’s interest, Ready Mix USA continued to control and manage Ready Mix USA, LLC. Upon our acquisition, the purchase price was assigned to each joint venture in proportion to our relative contribution interest in CEMEX Southeast, LLC and Ready Mix USA, LLC, considering the original fair values as of the dates of the agreements in 2005. As of December 31, 2011, we were in the process of completing the allocation of the purchase price of Ready Mix USA, LLC to the fair values of the assets acquired and liabilities assumed. Our consolidated financial statements include the balance sheet of Ready Mix USA, LLC as of December 31, 2011, based on the best estimate of its net asset’s fair value as of the acquisition date, and its results of operations for the five-month period ended December 31, 2011.

As part of our strategy, we periodically review and reconfigure our operations in implementing our post-merger integration process, and we sometimes divest assets that we believe are less important to our strategic objectives. The following have been our most significant divestitures and reconfigurations over the last five years:

 

   

On September 30, 2010, Ready Mix USA exercised its put option right. As a result, on August 12, 2011, we acquired Ready Mix USA’s interest in CEMEX Southeast, LLC and Ready Mix USA LLC, which cement, aggregates, ready-mix and block assets located in the southeast region of the United States. CEMEX’s purchase price for Ready Mix USA’s interests, including a non-compete and a transition services agreement, was approximately U.S.$352 million. CEMEX also consolidated approximately U.S.$28 million in net debt held by one of the joint ventures.

 

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On August 27, 2010, we completed the sale of seven aggregates quarries, three resale aggregate distribution centers and one concrete block manufacturing facility in Kentucky to Bluegrass Materials Company, LLC for U.S.$88 million in proceeds.

 

   

On October 1, 2009, we completed the sale of our Australian operations to a subsidiary of Holcim Ltd. The net proceeds from this sale were approximately $2.02 billion Australian Dollars (approximately U.S.$1.7 billion).

 

   

On June 15, 2009, we sold three quarries (located in Nebraska, Wyoming and Utah) and our 49% joint venture interest in the operations of a quarry located in Granite Canyon, Wyoming, to Martin Marietta Materials, Inc. for U.S.$65 million.

 

   

On December 26, 2008, we sold our Canary Islands operations (consisting of cement and ready-mix concrete assets in Tenerife and 50% of the shares in two joint-ventures, Cementos Especiales de las Islas, S.A. (CEISA) and Inprocoi, S.L.) to several Spanish subsidiaries of Cimpor Cimentos de Portugal SGPS, S.A. for €162 million (approximately U.S.$227 million).

 

   

During 2008, we sold in several transactions our operations in Italy consisting of four cement grinding mill facilities for an aggregate amount of approximately €148 million (approximately U.S.$210 million).

 

   

As required by the Antitrust Division of the United States Department of Justice, pursuant to a divestiture order in connection with the Rinker acquisition, in December 2007, we sold to the Irish producer CRH plc, ready-mix concrete and aggregates plants in Arizona and Florida for approximately U.S.$250 million, of which approximately U.S.$30 million corresponded to the sale of assets from our pre-Rinker acquisition operations.

 

   

On January 11, 2008, in connection with the assets acquired from Rinker, and as part of our agreements with Ready Mix USA, a privately owned ready-mix concrete producer with operations in the Southeastern United States (described below), CEMEX contributed and sold to Ready Mix USA LLC, our ready-mix concrete joint venture with Ready Mix USA (described below) certain assets located in Georgia, Tennessee and Virginia, which had a fair value of approximately U.S.$437 million. We received U.S.$120 million in cash for the assets sold to Ready Mix USA LLC, and the remaining assets were treated as a U.S.$260 million contribution by us to Ready Mix USA LLC. As part of the same transaction, Ready Mix USA contributed U.S.$125 million in cash to Ready Mix USA LLC, which in turn received bank loans of U.S.$135 million. Ready Mix USA LLC made a special distribution in cash to us of U.S.$135 million. Ready Mix USA manages all the assets acquired.

In connection with our ongoing efforts to strengthen our capital structure and regain financial flexibility, we are continuing a process aimed at divesting several assets management regards as non-core, and we are currently engaged in marketing for sale additional assets in our portfolio, which we do not consider strategic.

Our Production Processes

Our Production Processes

Cement is a binding agent, which, when mixed with sand, stone or other aggregates and water, produces either ready-mix concrete or mortar. Mortar is the mixture of cement with finely ground limestone, and ready-mix concrete is the mixture of cement with sand, gravel or other aggregates and water.

Aggregates are naturally occurring sand and gravel or crushed stone such as granite, limestone and sandstone. Aggregates are used to produce ready-mix concrete, roadstone, concrete products, lime, cement and mortar for the construction industry, and are obtained from land based sources such as sand and gravel pits and rock quarries or by dredging marine deposits.

 

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Cement Production Process

We manufacture cement through a closely controlled chemical process, which begins with the mining and crushing of limestone and clay, and, in some instances, other raw materials. The clay and limestone are then pre-homogenized, a process which consists of combining different types of clay and limestone. The mix is typically dried, then fed into a grinder which grinds the various materials in preparation for the kiln. The raw materials are calcined, or processed, at a very high temperature in a kiln, to produce clinker. Clinker is the intermediate product used in the manufacture of cement.

There are two primary processes used to manufacture cement: the dry process and the wet process. The dry process is more fuel efficient. As of December 31, 2011, 57 of our 61 operative production plants used the dry process, four used the wet process. Our operative production plants that use the wet process are located in Colombia, Nicaragua, and the United Kingdom. In the wet process, the raw materials are mixed with water to form slurry, which is fed into a kiln. Fuel costs are greater in the wet process than in the dry process because the water that is added to the raw materials to form slurry must be evaporated during the clinker manufacturing process. In the dry process, the addition of water and the formation of slurry are eliminated, and clinker is formed by calcining the dry raw materials. In the most modern application of this dry process technology, the raw materials are first blended in a homogenizing silo and processed through a pre-heater tower that utilizes exhaust heat generated by the kiln to pre-calcine the raw materials before they are calcined to produce clinker.

Clinker and gypsum are fed in pre-established proportions into a cement grinding mill where they are ground into an extremely fine powder to produce finished cement.

Ready-Mix Concrete Production Process

Ready-mix concrete is a combination of cement, fine and coarse aggregates, and admixtures (which control properties of the concrete including plasticity, pumpability, freeze-thaw resistance, strength and setting time). The concrete hardens due to the chemical reaction when water is added to the mix, filling voids in the mixture and turning it into a solid mass.

User Base

Cement is the primary building material in the industrial and residential construction sectors of most of the markets in which we operate. The lack of available cement substitutes further enhances the marketability of our product. The primary end-users of cement in each region in which we operate vary but usually include, among others, wholesalers, ready-mix concrete producers, industrial customers and contractors in bulk. The end-users of ready-mix concrete generally include homebuilders, commercial and industrial building contractors and road builders. Major end-users of aggregates include ready-mix concrete producers, mortar producers, general building contractors and those engaged in roadbuilding activity, asphalt producers and concrete product producers.

For a description of our raw materials reserves, see “Item 4 – Information on the Company – Description of our raw materials reserves” in the 2010 Annual Report.

Our Business Strategy

We seek to continue to strengthen our global leadership by growing profitably through our integrated positions along the cement value chain and maximizing our overall performance by employing the following strategies:

Focus on our core business of cement, ready-mix concrete and aggregates

We plan to continue focusing on our core businesses, the production and sale of cement, ready-mix concrete and aggregates, and the vertical integration of these businesses, leveraging our global presence and extensive operations worldwide. We believe that managing our cement, ready-mix concrete and aggregates operations as an integrated business allows us to capture a greater portion of the cement value chain, as our established presence in ready-mix concrete secures a distribution channel for our cement products. Moreover, we believe that, in most cases, vertical integration brings us closer to the end consumer. We believe that this strategic focus has historically enabled us to grow our existing businesses and expand our operations internationally, particularly in high-growth markets and higher-margin products. In less than 20 years, we have evolved from primarily a Mexican cement producer to a global building materials company with a diversified product portfolio across a balanced mix of developed and emerging economies.

 

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We intend to continue focusing on our most promising, structurally attractive markets with considerable infrastructure needs and housing requirements, where we have substantial market share and benefit from competitive advantages. Despite the current economic and political turmoil, we believe that some of the countries in which we operate (particularly Mexico, the United States, Colombia, Poland and the Philippines) are poised for economic growth, as significant investments are made in infrastructure, notably by the economic stimulus programs that have been announced by governments in some of these markets.

We are focused on managing costs and maintaining profitability in the current economic environment, and we believe that we are well-positioned to benefit when the construction cycle recovers. A combination of continued government stimulus spending and renewed focus on infrastructure investment in many of our markets, along with some recovery for housing and for non-residential construction sectors, could translate into substantial growth in demand for our products.

We will continue to analyze our current portfolio and monitor opportunities for asset divestitures, as evidenced by the disposals we have made in the last few years in the United States, Spain, Italy, Australia and elsewhere.

Provide our customers with the best value proposition

We want CEMEX to be the supplier of choice for our customers, whether global construction firms or individuals building their family’s first home. We want to provide them with the most efficient and effective building solutions for their construction project, large or small. We seek a clear understanding of what they require to meet their needs.

We believe that by pursuing our objective of integrating our business along the cement value chain, we can improve and broaden the value proposition that we provide to our customers. We believe that by offering integrated solutions, we can provide our customers more reliable sourcing as well as higher quality services and products.

We continue to focus on developing new competitive advantages that will differentiate us from our competitors. We are evolving from a traditional supplier of building materials into a fully integrated turnkey solutions provider, mostly in infrastructure projects which make extensive use of our cement and concrete products. For example, in Mexico alone, we have paved more than 10,000 kilometers of concrete highways and roads. We have also recently provided tailor-made solutions for important infrastructure projects in the country, including the Baluarte Bicentennial Bridge and La Yesca Dam in Jalisco and Nayarit. We also continue innovating with new products, and recently launched two new global ready-mix brands designed using proprietary admixtures developed by our researchers.

We strive to provide superior building solutions in the markets we serve. To this end, we tailor our products and services to suit customers’ specific needs, from home construction, improvement and renovation to agricultural, industrial and marine/hydraulic applications. Our porous paving concrete, for example, is best suited for sidewalks and roadways because it allows rainwater to filter into the ground, reducing flooding and helping to maintain groundwater levels. In contrast, our significantly less permeable and highly resistant concrete products are well-suited for applications in coastal, marine and other harsh environments.

Our global building materials trading network, which is one of the largest in the world, plays a fundamental and evolving role in fulfilling our objectives. Our network of strategically located terminals allows us to build strong relationships with reliable suppliers and shippers around the world, which we believe translates into a superior value proposition for our customers. We can direct building materials (primarily cement, clinker and slag) from markets with excess capacity to markets where they are needed most and, in the process, optimize the allocation of our worldwide production capacity.

Maximize our operating efficiency

We have a long history of successfully operating world-class cement production facilities in developed and emerging markets and have demonstrated our ability to produce cement at a lower cost compared to industry standards in most of these markets. We continue to strive to reduce our overall cement production related costs and corporate overhead through disciplined cost management policies and through improving efficiencies by removing redundancies. We also implemented several worldwide standard platforms as part of this process. In addition, we implemented centralized management information systems throughout our operations, including administrative, accounting, purchasing, customer management, budget preparation and control systems, which have helped us to achieve cost efficiencies. In a number of our core markets, such as Mexico, we launched aggressive initiatives aimed at reducing the use of fossil fuels, consequently reducing our overall energy costs.

 

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Furthermore, significant economies of scale in key markets often allow us to obtain competitive freight contracts for key components of our cost structure, such as fuel and coal, among others.

Through a worldwide import and export strategy, we will continue to seek to optimize capacity utilization and maximize profitability by redirecting our products from countries experiencing economic downturns to target export markets where demand may be greater. Our global trading system enables us to coordinate our export activities globally and take advantage of demand opportunities and price movements worldwide. Should demand for our products in the United States improve, we believe we are well-positioned to service this market through our established presence in the southern and southwestern regions of the country and our ability to import to the United States.

Our industry relies heavily on natural resources and energy, and we use cutting-edge technology to increase energy efficiency, reduce carbon dioxide emissions and optimize our use of raw materials and water. We are committed to measuring, monitoring and improving our environmental performance. In the last few years, we have implemented various procedures to improve the environmental impact of our activities as well as our overall product quality, such as a reduction of carbon dioxide emissions, an increased use of alternative fuels to reduce our reliance on primary fuels, an increased number of sites with local environmental impact plans in place and the use of alternative raw materials in our cement.

Strengthen our capital structure and regain our financial flexibility

In light of the current global economic environment and our substantial amount of indebtedness, we have been focusing, and expect to continue to focus, on strengthening our capital structure and regaining financial flexibility through reducing our debt, improving cash flow generation and extending maturities. This ongoing effort has included the following key strategic initiatives:

Global Refinancing. On August 14, 2009, we entered into the Financing Agreement (including with lenders who are affiliates of J.P. Morgan and BofA Merrill Lynch), which extended the maturities of approximately U.S.$15.0 billion in syndicated and bilateral bank facilities and private placement obligations, of which U.S.$7,195 million remained outstanding as of December 31, 2011. Since entering into the Financing Agreement, we have successfully completed several capital markets transactions, the proceeds of which were substantially applied to reduce our debt thereunder and to address other debt maturities. As of December 31, 2011, we had principal payments due under the Financing Agreement of U.S.$488 million on December 15, 2013 and U.S.$6,707 million on February 14, 2014. We currently have funds available to address all of our significant scheduled maturities until the December 15, 2013 maturity under the Financing Agreement. Maintaining market terms and achieving an appropriate size, tenor and pricing for our overall corporate financing facilities is an ongoing objective of ours. Consistent with this objective, the Company maintains an ongoing dialogue with its creditors regarding refinancing alternatives for its upcoming maturities.

Asset Divestitures. We have continued a process to divest assets in order to reduce our debt and streamline operations, taking into account our cash liquidity needs and prevailing economic conditions and their impact on the value of the asset or business unit being divested. In 2012, our objective is to raise in excess of U.S.$500 million from asset sales.

Global Cost-Reduction Initiatives. In response to decreased demand in most of our markets as a result of the global economic recession, in 2008 we identified and began implementing global cost-reduction initiatives intended to reduce our annual cost structure to a level consistent with the decline in demand for our products. Such global cost-reduction initiatives encompass different undertakings, including headcount reductions, capacity closures across the cement value chain and a general reduction in global operating expenses. During the first half of 2011, CEMEX launched a company-wide program aimed at enhancing competitiveness, providing a more agile and flexible organizational structure and supporting an increased focus on the company’s markets and customers. CEMEX is targeting to generate approximately U.S.$400 million in annualized cost savings intended to improve our operating results by the end of 2012 through the implementation of this program, which contemplates an improvement in underperforming operations, a reduction in selling, general and administrative costs and the optimization of the company’s organizational structure.

 

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In connection with the implementation of our cost-reduction initiatives, and as part of our ongoing efforts to eliminate redundancies at all levels and streamline corporate structures to increase our efficiency and reduce operating expenses, we have reduced our global headcount by approximately 28%, from 61,545 employees as of December 31, 2007 to 44,104 employees as of December 31, 2011. Both figures exclude personnel from our operations in Australia sold in October 2009 and our operations in Venezuela, which were expropriated in 2008, but do not give effect to any other divestitures.

Also as part of these initiatives, during 2009, we temporarily shut down (for a period of at least two months) several cement production lines in order to rationalize the use of our assets and reduce the accumulation of our inventories. On January 22, 2010, we announced the permanent closure of our Davenport cement plant located in northern California, which had an installed cement production capacity of approximately 0.9 million tons per annum. The plant had been closed on a temporary basis since March 2009 due to economic conditions. We have been serving our customers in the region through our extensive network of terminals in northern California, which are located in Redwood City, Richmond, West Sacramento and Sacramento. Since March 2009, our state-of-the-art cement facility in Victorville, California has provided and will continue to provide cement to this market more efficiently than the Davenport plant. Opened in 1906, Davenport was the least efficient of our 14 plants in the United States. We have no other set plans for the Davenport facility at this time. Similar actions were taken in our ready-mix concrete and aggregates businesses. Such rationalizations included, among others, our operations in Mexico, the United States, Spain and the United Kingdom. During 2011, due to the low levels of construction activity and increased costs, we implemented a minimum margin strategy in our Arizona operations through the closure of under-utilized facilities and the reduction of headcount, among other actions designed to improve the profitability of our operations in the region.

Furthermore, during 2011, we achieved energy cost-savings by actively managing our energy contracting and sourcing, and by increasing our use of alternative fuels. We believe that these cost-saving measures better position us to quickly adapt to potential increases in demand and thereby benefit from the operating leverage we have built into our cost structure.

Lower Capital Expenditures. In light of the continued weak demand for our products throughout most of our markets, we reduced capital expenditures related to maintenance and expansion of our operations to approximately U.S.$459 million during 2011, from approximately U.S.$555 million during 2010 and approximately U.S.$636 million during 2009 (in each case excluding acquisitions and capital leases). This reduction in capital expenditures has been implemented to maximize our free cash flow generation available for debt service and debt reduction, consistent with our ongoing efforts to strengthen our capital structure, improve our conversion of operating EBITDA to free cash flow and regain our financial flexibility. Pursuant to the Financing Agreement, we are prohibited from making aggregate annual capital expenditures in excess of U.S.$800 million until the debt under the Financing Agreement has been repaid in full. We believe that these restrictions on capital expenditures do not diminish our world-class operating and quality standards.

Recruit, retain and cultivate world-class managers

Our senior management team has a strong track record operating diverse businesses throughout the cement value chain in emerging and developed economies globally.

We will continue to focus on recruiting and retaining motivated and knowledgeable professional managers. We encourage managers to regularly review our processes and practices, and to identify innovative management and business approaches to improve our operations. By rotating our managers from one country to another and from one area of our operations to another, we can increase their diversity of experience and knowledge of our business.

Our Corporate Structure

We are a holding company, and operate our business through subsidiaries that, in turn, hold interests in our cement and ready-mix concrete operating companies, as well as other businesses. The following chart summarizes our corporate structure as of December 31, 2011. The chart also shows, for each company, our approximate direct or indirect percentage equity ownership or economic interest. The chart has been simplified to show only our major holding companies in the principal countries in which we operate and does not include all our intermediary holding companies and our operating company’s subsidiaries.

 

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(1) Includes approximate 99.87% interest pledged as part of the Collateral.
(2) Includes approximate 99.99% interest pledged as part of the Collateral.
(3) Includes approximate 100% interest pledged as part of the Collateral.
(4) CEMEX, S.A.B. de C.V. and Centro Distribuidor de Cemento, S.A. de C.V. indirectly hold 100% of New Sunward through other intermediate subsidiaries.
(5) Includes the interest of New Sunward, CEMEX, S.A.B. de C.V. and other subsidiaries of the group.
(6) Includes approximate 99.63% interest pledged as part of the Collateral.
(7) Includes CEMEX España’s 69.39% interest and CEMEX France Gestion (S.A.S.) 30.61% interest.
(8) On March 15, 2011, EMBRA AS changed its legal name to CEMEX AS. CEMEX AS is an operational company and also the holding company for operations in Finland, Norway and Sweden.
(9) Includes CEMEX Asia Holdings Ltd.’s (“Cemex Asia Holdings”) 70% indirect economic interest and 30% equity ownership by CEMEX España.
(10) Represents CEMEX Asia Holdings’ indirect economic interest.
(11) Represents our economic interest in three UAE companies, CEMEX Topmix LLC, CEMEX Supermix LLC and CEMEX Falcon LLC. We own a 49% equity interest in each of these companies, and we have purchased the remaining 51% of the economic benefits through agreements with other shareholders.
(12) Includes CEMEX (Costa Rica), S.A.’s 98% interest and CEMEX España’s 2% indirect interest.
(13) Registered business name is CEMEX Ireland. On February 22, 2012, Readymix Investments, an indirect subsidiary of CEMEX, made an offer for all the shares in Readymix plc that are not already indirectly owned by CEMEX at a per share price of €0.25. The acquisition remains subject to, among other things, certain approvals by Readymix plc’s shareholders and other closing conditions.
(14) On December 4, 2009 Dalmacijacement d.d. changed its legal name to CEMEX Hrvatska d.d.
(15) Represents our 33.95% in ordinary shares and our 11.64% in preferred shares.
(16) Represents CEMEX Asia Holdings’ economic interest in 2 companies in China, CEMEX Tianjin and CEMEX Qingdao, with a 99% interest in CEMEX Tianjin and a 100% interest in CEMEX Qingdao.

Mexico

Overview. Our operations in Mexico represented approximately 22% of our net sales in Peso terms before eliminations resulting from consolidation. As of December 31, 2011, our business in Mexico represented approximately 31% of our total installed cement capacity and approximately 12% of our total assets.

As of December 31, 2011, we owned 100% of the outstanding capital stock of CEMEX México. CEMEX México is a direct subsidiary of CEMEX, S.A.B. de C.V. and is both a holding company for some of our operating companies in Mexico and an operating company involved in the manufacturing and marketing of cement, plaster, gypsum, groundstone and other construction materials and cement by-products in Mexico. CEMEX México, indirectly, is also the holding company for our international operations. CEMEX México, together with its subsidiaries, accounts for a substantial part of the revenues and operating income of our operations in Mexico.

In September 2006, we announced a plan to construct a new kiln at our Tepeaca cement plant in Puebla, Mexico. The current production capacity of the Tepeaca cement plant is approximately 3.3 million tons of cement per year. The construction of the new kiln, which is designed to increase our total production capacity in the Tepeaca cement plant to approximately 7.4 million tons of cement per year, is expected to be completed in 2013. We anticipate spending a total of approximately U.S.$570 million on the construction of this new kiln, which includes capital expenditures of approximately U.S.$303 million in 2008, approximately U.S.$30 million in 2009 and approximately U.S.$1 million in 2010. We did not make any capital expenditures for the construction of the new kiln in 2011. We expect to spend approximately U.S.$108 million through completion. We expect that this investment will be fully funded with free cash flow generated during the construction period.

In 2001, we launched the Construrama program, a registered brand name for construction material stores. Through the Construrama program, we offer to an exclusive group of our Mexican distributors the opportunity to sell a variety of products under the Construrama brand name, a concept that includes the standardization of stores, image, marketing, products and services. As of December 31, 2011, approximately 850 independent concessionaries with more than 2,500 stores were integrated into the Construrama program, with nationwide coverage.

 

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The Cement Industry in Mexico. According to INEGI, Mexico’s construction GDP remained flat in 2010 compared to 2009. For the full year 2010, total construction investment increased 0.7%, primarily as a result of a 6% increase in infrastructure spending, offset by an estimated decrease in the residential and non-residential sectors of 1.5% and 4.0%, respectively. INEGI has not yet published construction information for the full 2011 fiscal year.

Cement in Mexico is sold principally through distributors, with the remaining balance sold through ready-mix concrete producers, manufacturers of pre-cast concrete products and construction contractors. Cement sold through distributors is mixed with aggregates and water by the end user at the construction site to form concrete. Ready-mix concrete producers mix the ingredients in plants and deliver it to local construction sites in mixer trucks, which pour the concrete. Unlike more developed economies, where purchases of cement are concentrated in the commercial and industrial sectors, retail sales of cement through distributors in 2011 accounted for approximately 59% of Mexico’s demand. Individuals who purchase bags of cement for self-construction and other basic construction needs are a significant component of the retail sector. We estimate that about 30% of total demand in Mexico comes from individuals who address their own construction needs. We believe that this large retail sales base is a factor that significantly contributes to the overall performance of the Mexican cement market.

The retail nature of the Mexican cement market also enables us to foster brand loyalty, which distinguishes us from other worldwide producers selling primarily in bulk. We own the registered trademarks for our brands in Mexico, such as “Tolteca,” “Monterrey,” “Maya,” “Anáhuac,” “Campana,” “Gallo,” and “Centenario.” We believe that these brand names are important in Mexico since cement is principally sold in bags to retail customers who may develop brand loyalty based on differences in quality and service. In addition, we own the registered trademark for the “Construrama” brand name for construction material stores.

Competition. In the early 1970s, the cement industry in Mexico was regionally fragmented. However, over the last 40 years, cement producers in Mexico have increased their production capacity and the Mexican cement industry has consolidated into a national market, thus becoming increasingly competitive. The major cement producers in Mexico are CEMEX; Holcim Apasco, an affiliate of Holcim Ltd.; Sociedad Cooperativa Cruz Azul, a Mexican operator; Cementos Moctezuma, an associate of Ciments Molins; Grupo Cementos Chihuahua, a Mexican operator, whose holding company is 49% owned by us; and Lafarge Cementos, a subsidiary of Lafarge. The major ready-mix concrete producers in Mexico are CEMEX, Holcim Apasco, Sociedad Cooperativa Cruz Azul and Cementos Moctezuma.

Potential entrants into the Mexican cement market face various impediments to entry, including:

 

   

the time-consuming and expensive process of establishing a retail distribution network and developing the brand identification necessary to succeed in the retail market, which represents the bulk of the domestic market;

 

   

the lack of port infrastructure and the high inland transportation costs resulting from the low value-to-weight ratio of cement;

 

   

the distance from ports to major consumption centers and the presence of significant natural barriers, such as mountain ranges, which border Mexico’s east and west coasts;

 

   

the strong brand recognition and the wide variety of special products with enhanced properties;

 

   

the extensive capital expenditure requirements; and

 

   

the length of time required for construction of new plants, which is approximately two years.

Our Operating Network in Mexico

During 2011, we operated 13 out of a total of 15 plants (two were temporarily shut down given market conditions) and 87 distribution centers (including seven marine terminals) located throughout Mexico. We operate modern cement plants on the Gulf of Mexico and Pacific coasts, allowing us to take advantage of low-land transportation costs to export to U.S., Caribbean, Central and South American markets.

 

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Products and Distribution Channels

Cement. Our cement operations represented approximately 52% of net sales for our operations in Mexico before eliminations resulting from consolidation in 2011. Our domestic cement sales volume represented approximately 97% of our total cement sales volume in Mexico for 2011. As a result of the retail nature of the Mexican market, our operations in Mexico are not dependent on a limited number of large customers. The five most important distributors in the aggregate accounted for approximately 11% of our total cement sales in Mexico by volume in 2011.

 

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Ready-Mix Concrete. Our ready-mix operations represented approximately 22% of net sales for our operations in Mexico before eliminations resulting from consolidation in 2011. Our ready-mix operations in Mexico purchase all their cement requirements from our cement operations in Mexico. Ready-mix concrete is sold through our own internal sales force and facilities network.

Aggregates. Our aggregates operations represented approximately 4% of net sales for our operations in Mexico before eliminations resulting from consolidation in 2011.

Exports. Our operations in Mexico export a portion of their cement production, mainly in the form of cement and to a lesser extent in the form of clinker. Exports of cement and clinker by our operations in Mexico represented approximately 3% of our total cement sales volume in Mexico for 2011. In 2011, approximately 22% of our cement and clinker exports from Mexico were to the United States, 36% to Central America and the Caribbean and 42% to South America.

The cement and clinker exports by our operations in Mexico to the United States are marketed through subsidiaries of CEMEX Corp., the holding company of CEMEX, Inc. All transactions between CEMEX and the subsidiaries of CEMEX Corp., which act as our U.S. importers, are conducted on an arm’s-length basis.

Production Costs. Our cement plants in Mexico primarily utilize petcoke, but several are designed to switch to fuel oil and natural gas with minimum downtime. We have entered into two 20-year contracts with PEMEX pursuant to which PEMEX has agreed to supply us with a total of 1.75 million tons of petcoke per year, including TEG coke consumption, through 2022 and 2023. Petcoke is petroleum coke, a solid or fixed carbon substance that remains after the distillation of hydrocarbons in petroleum and that may be used as fuel in the production of cement. The PEMEX petcoke contracts have reduced the volatility of our fuel costs. In addition, since 1992, our operations in Mexico have begun to use alternative fuels, to further reduce the consumption of residual fuel oil and natural gas. These alternative fuels represented approximately 15.2% of the total fuel consumption for our operations in Mexico in 2011.

In 1999, we reached an agreement with the TEG consortium for the financing, construction and operation of a 230 megawatt (“MW”) energy plant in Tamuin, San Luis Potosí, Mexico. We entered into this agreement in order to reduce the volatility of our energy costs. The total cost of the project was approximately U.S.$360 million. The power plant commenced commercial operations in April 2004. In February 2007, the original members of the consortium sold their participations in the project to a subsidiary of The AES Corporation. As part of the original agreement, we committed to supply the energy plant with all fuel necessary for its operations, a commitment that has been hedged through a 20-year agreement we entered into with PEMEX. These agreements were reestablished under the same conditions in 2007 with the new operator and the term was extended until 2027. The agreement with PEMEX, however, was not modified and terminates in 2024. Consequently, for the last 3 years of the agreement, we intend to purchase the required fuel in the market. For the years ended December 31, 2009, 2010 and 2011 the power plant has supplied approximately 74%, 73% and 69% respectively, of our overall electricity needs during such years for our cement plants in Mexico.

In April 2007, we and Acciona formed an alliance to develop a wind farm project for the generation of 250 MW in Juchitan, Oaxaca, Mexico. We acted as sponsors of the project, which was named EURUS. Acciona provided the required financing, constructed the facility and currently operates the wind farm. The installation of 167 wind turbines in the farm was finished on November 15, 2009. The agreements between us and Acciona establish that our cement plants in Mexico should acquire a portion of the energy generated by the wind farm for a period of at least 20 years, which began in February 2010, when EURUS reached the committed limit capacity. The power plant had a cost of approximately U.S.$550 million. For the years ended December 31, 2011 and 2010, EURUS supplied approximately 23.7% and 20.1%, respectively, of CEMEX’s overall electricity needs in Mexico during such years.

We have, from time to time, purchased hedges from third parties to reduce the effect of volatility in energy prices in Mexico. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Description of Properties, Plants and Equipment. As of December 31, 2011, we had 15 wholly-owned cement plants located throughout Mexico, with a total installed capacity of 29.3 million tons per year, of which two

 

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were temporarily shut down given market conditions. We have exclusive access to limestone quarries and clay reserves near each of our plant sites in Mexico. We estimate that, as of December 31, 2010, the limestone and clay permitted proven and probable reserves of our operations in Mexico had an average remaining life of approximately 70 and 89 years, respectively, assuming 2006-2010 average annual cement production levels. As of December 31, 2011, all our production plants in Mexico utilized the dry process.

As of December 31, 2011, we had a network of 80 land distribution centers in Mexico, which are supplied through a fleet of our own trucks and rail cars, as well as leased trucks and rail facilities, and operated seven marine terminals. In addition, we had 323 ready-mix concrete plants throughout 79 cities in Mexico, more than 2,500 ready-mix concrete delivery trucks and 16 aggregates quarries.

As part of our global cost-reduction initiatives we have made temporary capacity adjustments and rationalizations in four of our cement plants in Mexico. In addition, in 2011, we closed approximately 11% of our production capacity in our ready-mix plants throughout Mexico.

Capital Expenditures. We made capital expenditures of approximately U.S.$84 million in 2009, U.S.$87 million in 2010 and U.S.$87 million in 2011 in our operations in Mexico. We currently expect to make capital expenditures of approximately U.S.$97 million in our operations in Mexico during 2012.

United States

Overview. Our operations in the United States represented approximately 16% of our net sales in Peso terms before eliminations resulting from consolidation. As of December 31, 2011, our business in the United States represented approximately 18% of our total installed cement capacity and approximately 45% of our total assets. As of December 31, 2011, we held 100% of CEMEX, Inc., the main holding company of our operating subsidiaries in the United States.

As of December 31, 2011, we had a cement manufacturing capacity of approximately 17.1 million tons per year in our operations in the United States, including 1.2 million tons in proportional interests through non-controlling holdings. As of December 31, 2011, we operated a geographically diverse base of 13 cement plants located in Alabama, California, Colorado, Florida, Georgia, Kentucky, Ohio, Pennsylvania, Tennessee and Texas. As of that date, we also operated 47 rail, truck or water served active cement distribution terminals in the United States. As of December 31, 2011, we had 444 ready-mix concrete plants located in the Carolinas, Florida, Georgia, Alabama, Tennessee, Texas, New Mexico, Nevada, Arizona, California, Oregon and Washington and aggregates facilities in North Carolina, South Carolina, Arizona, California, Florida, Georgia, Alabama, New Mexico, Nevada, Oregon, Texas, and Washington.

On July 1, 2005, we and Ready Mix USA, a privately owned ready-mix concrete producer with operations in the southeastern United States, established two jointly-owned limited liability companies, CEMEX Southeast, LLC, a cement company, and Ready Mix USA LLC, a ready-mix concrete company, to serve the construction materials market in the southeast region of the United States. Under the terms of the limited liability company agreements and related asset contribution agreements, we contributed two cement plants (Demopolis, Alabama and Clinchfield, Georgia) and 11 cement terminals to CEMEX Southeast, LLC, then representing approximately 98% of its contributed capital, while Ready Mix USA contributed cash to CEMEX Southeast, LLC, then representing approximately 2% of its contributed capital. In addition, we contributed our ready-mix concrete, aggregates and concrete block assets in the Florida panhandle and southern Georgia to Ready Mix USA LLC, then representing approximately 9% of its contributed capital, while Ready Mix USA contributed all its ready-mix concrete and aggregates operations in Alabama, Georgia, the Florida panhandle and Tennessee, as well as its concrete block operations in Arkansas, Tennessee, Mississippi, Florida and Alabama to Ready Mix USA LLC, then representing approximately 91% of its contributed capital. We owned a 50.01% interest, and Ready Mix USA owned a 49.99% interest, in the profits and losses and voting rights of CEMEX Southeast, LLC, while Ready Mix USA owned a 50.01% interest, and we owned a 49.99% interest, in the profits and losses and voting rights of Ready Mix USA LLC. CEMEX Southeast, LLC was managed and fully consolidated by us, and Ready Mix USA LLC was managed by Ready Mix USA and was accounted for by us under the equity method.

Under the Ready Mix USA LLC joint venture, we were required to contribute to the Ready Mix USA joint venture any ready-mix concrete and concrete block assets we acquired inside the joint venture region, while any aggregates assets acquired inside the region could be added to the Ready Mix USA joint venture at the option of the non-acquiring member. Building materials, pipe, transport and storm water treatment assets were not subject to the contribution clause under the Ready Mix USA joint venture. The value of the contributed assets was to be determined based on a formula by the Ready Mix USA joint venture.

 

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On September 1, 2005, we had sold 27 ready-mix concrete plants and four concrete block facilities located in the Atlanta, Georgia metropolitan area to Ready Mix USA LLC for approximately U.S.$125 million.

On January 11, 2008, in connection with the assets acquired from Rinker, and as part of our agreements with Ready Mix USA, CEMEX contributed and sold to Ready Mix USA LLC, certain assets located in Georgia, Tennessee and Virginia, which had a fair value of approximately U.S.$437 million. We received U.S.$120 million in cash for the assets sold to Ready Mix USA LLC and the remaining assets were treated as a U.S.$260 million contribution by us to Ready Mix USA LLC. As part of the same transaction, Ready Mix USA contributed U.S.$125 million in cash to Ready Mix USA LLC, which, in turn, received bank loans of U.S.$135 million. Ready Mix USA LLC made a special distribution in cash to us of U.S.$135 million. Ready Mix USA managed all the assets acquired. Following this transaction, Ready Mix USA LLC continued to be owned 50.01% by Ready Mix USA and 49.99% by CEMEX. The assets contributed and sold by CEMEX included: 11 concrete plants, 12 limestone quarries, four concrete maintenance facilities, two aggregate distribution facilities and two administrative offices in Tennessee; three granite quarries and one aggregates distribution facility in Georgia; and one limestone quarry and one concrete plant in Virginia. All these assets were acquired by us through our acquisition of Rinker.

On February 22, 2010, Ready Mix USA LLC completed the sale of 12 active quarries and certain other assets to SPO Partners & Co. for U.S.$420 million. The active quarries, which consist of two granite quarries in Georgia, nine limestone quarries in Tennessee and one limestone quarry in Virginia, were operated by Ready Mix USA LLC and were deemed non strategic by CEMEX and Ready Mix USA LLC. The proceeds from the sale were partly used to reduce debt held by Ready Mix USA LLC and to effect a cash distribution of approximately U.S.$100 million to each joint venture partner, including CEMEX.

Beginning on June 30, 2008, Ready Mix USA had a put option right, which, upon exercise, would require us to acquire Ready Mix USA’s interest in CEMEX Southeast, LLC and Ready Mix USA LLC at a price equal to the greater of a) eight times the companies’ operating cash flow for the trailing twelve months, b) eight times the average of these companies’ operating cash flow for the previous three years, or c) the net book value of the combined companies’ assets. On September 30, 2010, Ready Mix USA exercised its put option right. As of December 31, 2010, CEMEX did not recognize a liability for such put option right, as the fair value of the net assets exceeded the purchase price. Effective August 1, 2011, the put option exercise was completed and we acquired Ready Mix USA’s interest in CEMEX Southeast, LLC and Ready Mix USA LLC. CEMEX’s purchase price for Ready Mix USA’s interests, including a non-compete and a transition services agreement, was approximately U.S.$352 million, which brought approximately U.S.$28 million in net debt held by one of the joint ventures. As of December 31, 2011, CEMEX is consolidating the fully owned operations of CEMEX Southeast, LLC and Ready Mix USA LLC and is in the process of completing the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed.

On September 18, 2007, we announced our intention to begin the permitting process for the construction of a 1.7 million ton cement manufacturing facility near Seligman, Arizona. The state-of-the-art facility will manufacture cement to serve the future growth of Arizona, including the Phoenix metropolitan area. As a result of current market conditions and consistent with the reduction of our expansion capital expenditure program, we have delayed the completion of this project. As of December 31, 2009, we had spent a total of approximately U.S.$14 million on this project, and we did not incur capital expenditures in 2010 nor in 2011. We do not plan to incur capital expenditures in the construction of the Seligman Crossing Plant during 2012. During 2011, due to the low levels of construction activity and increased costs, we implemented a minimum margin strategy in our Arizona operations, closed under-utilized facilities and reduced headcount, to pursue improvement in the profitability of our operations in the region.

With the acquisition of Mineral Resource Technologies, Inc. in August 2003, we believe that we achieved a competitive position in the fly ash market. Fly ash is a mineral residue resulting from the combustion of powdered coal in electric generating plants. Fly ash has the properties of cement and may be used in the production of more durable concrete. Mineral Resource Technologies, Inc. is one of the six largest fly ash companies in the United States, providing fly ash to customers in 25 states. We also own regional pipe and precast businesses, along with concrete block and paver plants in the Carolinas and Florida.

 

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The Cement Industry in the United States. Demand for cement is derived from the demand for ready-mix concrete and concrete products which, in turn, is dependent on the demand for construction. The construction industry is composed of three major sectors, namely, the residential sector, the industrial and commercial sector, and the public sector. The public sector is the most cement intensive sector, particularly for infrastructure projects such as streets, highways and bridges. While overall cement demand is sensitive to the business cycle, demand from the public sector is more stable and has helped to soften the decline in demand during periodic economic recessions, including the recent recession.

The construction industry experienced the worst downturn in over 70 years as the fallout from the collapse of the housing boom caused massive losses in the financial sector, which resulted in a deep recession and extremely tight credit conditions. Under these conditions, cement demand declined 44% from 2006 to 2009. Expansionary monetary and fiscal policies pulled the economy out of the recession, with real GDP growth of 3% in 2010, which has continued at a more moderate pace of 1.5% in 2011 as of November 30, 2011. With the economy recovering, cement demand has stabilized with relatively flat demand for 2010 and 2011. After a 73% decline in housing starts from 2005 to 2009, the housing sector stabilized in the second half of 2009 and has increased moderately since then, from approximately 554,000 starts in 2009 to approximately 586,900 starts in 2010 and approximately 606,900 starts in 2011. Nominal construction spending for the industrial and commercial sector lagged the decline in the economy by a year, with declines of 24% in 2009, 32% in 2010 and 4% in 2011 as of November 30, 2011. The industrial and commercial sector has stabilized during 2011 from a year-over-year spending decline of 12% during the first half of the year to a positive 5% in the third quarter and is running at approximately 8% growth for the first two months of the fourth quarter. Industrial and commercial contract awards, which drive future spending for the sector, have increased by 3% in real terms through November 2011, compared to the same period of the prior year, which indicates that a moderate recovery in this sector may be emerging. Nominal construction spending for the public sector remained more resilient during the recession, increasing 9% in 2008 followed by flat spending in 2009 and declines of 7% in 2010 and 3% in 2011 as of November 30, 2011.

According to projections by the Portland Cement Association, cement demand will remain flat in 2012, return to growth of 7% in 2013 and experience double-digit growth in 2014 and 2015. Overall, we believe that the construction sector and cement demand have stabilized and should start growing again as the economic recovery leads to more job creation and better credit conditions.

Competition. The cement industry in the United States is highly competitive. We compete with national and regional cement producers in the United States Our principal competitors in the United States are Holcim, Lafarge, Buzzi-Unicem, Heidelberg Cement and Ash Grove Cement.

The independent U.S. ready-mix concrete industry is highly fragmented. According to the National Ready Mixed Concrete Association (“NRMCA”), it is estimated that there are about 6,000 ready-mix concrete plants that produce ready-mix concrete in the United States and about 70,000 ready-mix concrete mixer trucks that deliver the concrete to the point of placement. The NRMCA estimates that the value of ready-mix concrete produced by the industry is approximately U.S.$30 billion per year. Given that the concrete industry has historically consumed approximately 75% of all cement produced annually in the United States, many cement companies choose to develop concrete plant capabilities.

Aggregates are widely used throughout the United States for all types of construction because they are the most basic materials for building activity. The U.S. aggregates industry is highly fragmented and geographically dispersed. According to the U.S. Geological Survey, during 2011 an estimated 3,900 companies operated approximately 6,000 sand and gravel sites and 1,600 companies operated 4,000 crushed stone quarries and 91 underground mines in the 50 U.S. states.

 

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Our Operating Network in the United States

The maps below reflect the location of our operating assets, including our cement plants and cement terminals in the United States as of December 31, 2011.

 

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Products and Distribution Channels

Cement. Our cement operations represented approximately 30% of our operations in the United States’ net sales before eliminations resulting from consolidation in 2011. We deliver a substantial portion of cement by rail. Occasionally, these rail shipments go directly to customers. Otherwise, shipments go to distribution terminals where

 

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customers pick up the product by truck or we deliver the product by truck. The majority of our cement sales are made directly to users of gray Portland and masonry cements, generally within a radius of approximately 200 miles of each plant.

Ready-Mix Concrete. Our ready-mix concrete operations represented approximately 30% of our operations in the United States’ net sales before eliminations resulting from consolidation in 2011. Our ready-mix concrete operations in the United States purchase most of their cement requirements from our cement operations in the United States and roughly half of their aggregates requirements from our aggregates operations in the United States. Our ready-mix concrete products are mainly sold to residential, commercial and public contractors and to building companies.

Aggregates. Our aggregates operations represented approximately 17% of net sales for our operations in the United States before eliminations resulting from consolidation in 2011. We estimate that, as of December 31, 2010, the hard rock and sand/gravel permitted proven and probable reserves of our operations in the United States had an average remaining life of approximately 25 and 22 years, respectively, assuming 2006-2010 average annual cement production levels. Our aggregates are consumed mainly by our internal operations and by our trade customers in the ready-mix, concrete products and asphalt industries.

Production Costs. The largest cost components of our plants are electricity and fuel, which accounted for approximately 32% of our total production costs of our cement operations in the United States in 2011. We are currently implementing a program to gradually replace coal with more economic fuels, such as petcoke, tires and other alternative fuels, which has resulted in reduced energy costs. By retrofitting our cement plants to handle alternative energy fuels, we have gained more flexibility in supplying our energy needs and have become less vulnerable to potential price spikes. In 2011, the increased use of alternative fuels helped to offset the effect on our fuel costs of increasing coal prices. Power costs in 2011 represented approximately 16% of our cash manufacturing cost of our cement operations in the United States, which represents production cost before depreciation. We have improved the efficiency of our electricity usage of our cement operations in the United States, concentrating our manufacturing activities in off-peak hours and negotiating lower rates with electricity suppliers.

Description of Properties, Plants and Equipment. As of December 31, 2011, we operated 13 cement manufacturing plants in the United States, and had a total installed capacity of 17.1 million tons per year, including 1.2 million tons representing our proportional interests through associates in five other cement plants. We estimate that, as of December 31, 2011, the limestone and clay permitted proven and probable reserves of our operations in the United States had an average remaining life of approximately 63 and 89 years, respectively, assuming 2006-2010 average annual cement production levels. As of that date, we operated a distribution network of 47 cement terminals. All of our 13 cement production facilities in 2011 were wholly-owned except for the Louisville, Kentucky plant, which is owned by Kosmos Cement Company, a joint venture in which we own a 75% interest and a subsidiary of Dyckerhoff AG owns a 25% interest. As of December 31, 2011, we had 444 wholly-owned ready-mix concrete plants and operated 81 aggregates quarries. As of December 31, 2011, we distributed fly ash through 14 terminals and eight third-party-owned utility plants, which operate both as sources of fly ash and distribution terminals. As of that date, we also owned 139 concrete block, paver, pipe, precast, asphalt and gypsum products distribution facilities.

We have continued to take a number of actions to streamline our operations and improve productivity, including temporary capacity adjustments and rationalizations in some of our cement plants, and shutdowns of ready-mix and block plants and aggregates quarries. We are currently utilizing approximately 68% of our ready-mix plants, 75% of our block manufacturing plants and 77% of our aggregates quarries in the United States.

On January 22, 2010, we announced the permanent closure of our Davenport cement plant located in northern California. The plant had been closed on a temporary basis since March 2009 due to the economic conditions. We have been serving our customers in the region through our extensive network of terminals in northern California, which are located in Redwood City, Richmond, West Sacramento and Sacramento. Since March 2009, our state-of-the-art cement facility in Victorville, California has provided and will continue to provide cement to this market more efficiently than the Davenport plant. Opened in 1906, Davenport was the least efficient of our 14 plants in the United States to operate. We sold a portion of the Davenport facility in 2011 for U.S.$30 million.

Capital Expenditures. We made capital expenditures of approximately U.S.$60 million in 2009, U.S.$75 million in 2010 and U.S.$66 million in 2011 in our operations in the United States. We currently expect to make capital expenditures of approximately U.S.$69 million in our operations in the United States during 2012.

 

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Divestitures. In an ongoing effort to divest idle and non-core assets, we divested approximately U.S.$69 million of assets in 2011, comprised of U.S.$50 million of real estate (including the sale of a portion of the Davenport facility), U.S.$10 million of non-core businesses and U.S.$9 million of equipment.

Northern Europe

For the year ended December 31, 2011, our business in Northern Europe, which includes our operations in the United Kingdom, Germany, France and our Rest of Northern Europe segment, as described below, represented approximately 30% of our net sales before eliminations resulting from consolidation. As of December 31, 2011, our business in Northern Europe represented approximately 12% of our total installed capacity and approximately 14% of our total assets.

Our Operations in the United Kingdom

Overview. Our operations in the United Kingdom represented approximately 8% of our net sales in Peso terms, before eliminations resulting from consolidation, and approximately 6% of our total assets, for the year ended December 31, 2011.

As of December 31, 2011, we held 100% of CEMEX Investments Limited, the main holding company of our operating subsidiaries in the United Kingdom. We are a leading provider of building materials in the United Kingdom with vertically integrated cement, ready-mix concrete, aggregates and asphalt operations. We are also an important provider of concrete and precast materials solutions such as concrete blocks, concrete block paving, roof tiles, flooring systems and sleepers for rail infrastructure.

The Construction Industry in the United Kingdom. According to the U.K.’s Office for National Statistics, the level of GDP in 2011 as a whole in the United Kingdom is estimated at 0.8%, which is a decline compared to 1.8% in 2010. Total construction output is estimated to have risen 1.8% in 2011, as compared to an 8.2% decline in 2010 over the preceding year. Both private and public sector housing are estimated to have grown, but the total public construction sector is estimated to have decreased by 2.2%, while infrastructure construction is expected to have risen by 9.7%. According to the Mineral Products Association, domestic cement demand increased approximately 6% in 2011 compared to 2010. However, output in the industrial sector is estimated to be down 8.1%, with commercial construction activity flat and total repair and maintenance activity expected to be up slightly at 1.7%.

Competition. Our primary competitors in the United Kingdom are Lafarge, Heidelberg, Tarmac, and Aggregate Industries (a subsidiary of Holcim), each with varying regional and product strengths.

 

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Our Operating Network in the United Kingdom

 

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Products and Distribution Channels

Cement. Our cement operations represented approximately 15% of net sales for our operations in the United Kingdom before eliminations resulting from consolidation for the year ended December 31, 2011. About 82% of our U.K. cement sales were of bulk cement, with the remaining 18% in bags. Our bulk cement is mainly sold to ready-mix concrete, concrete block and pre-cast product customers and contractors. Our bagged cement is primarily sold to national builders’ merchants. During 2011, our operations in the United Kingdom imported approximately 66 thousand metric tons of clinker from our cement operations in Spain.

Ready-Mix Concrete. Our ready-mix concrete operations represented approximately 25% of net sales for our operations in the United Kingdom before eliminations resulting from consolidation in 2011. Special products, including self-compacting concrete, fiber-reinforced concrete, high strength concrete, flooring concrete and filling concrete, represented 16% of our 2011 U.K. sales volume. Our ready-mix concrete operations in the United Kingdom in 2011 purchased approximately 72% of their cement requirements from our cement operations in the United Kingdom and approximately 77% of their aggregates requirements from our aggregates operations in the United Kingdom. Our ready-mix concrete products are mainly sold to public, commercial and residential contractors.

Aggregates. Our aggregates operations represented approximately 23% of net sales for our operations in the United Kingdom before eliminations resulting from consolidation in 2011. In 2011, our U.K. aggregates sales were divided as follows: 53% were sand and gravel, 38% limestone and 9% hard stone. In 2011, 15% of our aggregates volumes were obtained from marine sources along the U.K. coast. In 2011, approximately 47% of our U.K. aggregates production was consumed by our own ready-mix concrete operations as well as our asphalt, concrete block and precast operations. We also sell aggregates to major contractors to build roads and other infrastructure projects.

Production Costs

Cement. In 2011, fixed production costs were reduced by 2%. Variable costs increased by 6%, primarily as a result of rising electricity costs. We continued to implement our cost reduction programs and increased the use of alternative fuels by 7% in 2011.

 

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Ready-Mix Concrete. In 2011, we reduced fixed production costs by 7% as compared to fixed production costs in 2010.

Aggregates. In 2011, we reduced fixed production costs by approximately 1%, while increasing sales by 4%.

Description of Properties, Plants and Equipment. As of December 31, 2011, we operated three cement plants and one clinker grinding facility in the United Kingdom (including Barrington, which remains mothballed since November 2008). Assets in operation at year-end 2011 represent an installed cement capacity of 2.4 million tons per year. We estimate that, as of December 31, 2010, the limestone and clay permitted proven and probable reserves of our operations in the United Kingdom had an average remaining life of approximately 57 and 59 years, respectively, assuming 2006-2010 average annual cement production levels. As of December 31, 2011, we also owned five cement import terminals and operated 234 ready-mix concrete plants and 61 aggregates quarries in the United Kingdom. In addition, we had operating units dedicated to the asphalt, concrete blocks, concrete block paving, roof tiles, sleepers and flooring businesses in the United Kingdom.

In order to ensure increased availability of blended cements, which are more sustainable based on their reduced clinker factor and use of by-products from other industries, we have built a new grinding and blending facility at the Port of Tilbury, located on the Thames River east of London. The new facility, which started operations during May 2009, has an annual grinding capacity of approximately 1.2 million tons per annum. In total, we spent approximately U.S.$93 million in the construction of this new grinding mill: U.S.$28 million in 2007, U.S.$41 million in 2008, U.S.$22 million in 2009 and U.S.$2 million in 2010.

Capital Expenditures. We made capital expenditures of approximately U.S.$58 million in 2009, U.S.$53 million in 2010 and U.S.$47 million in 2011 in our operations in the United Kingdom. We currently expect to make capital expenditures of approximately U.S.$41 million in our operations in the United Kingdom during 2012.

Our Operations in Germany

Overview. As of December 31, 2011, we held 100% of CEMEX Deutschland AG, our main subsidiary in Germany. We are a leading provider of building materials in Germany, with vertically integrated cement, ready-mix concrete, aggregates and concrete products operations (consisting mainly of prefabricated concrete ceilings and walls).

The Cement Industry in Germany. According to Euroconstruct, total construction output in Germany increased by 3.7% in 2011. Data from the Federal Statistical Office indicate an increase in construction investments of 5.4% for 2011. Construction in the residential sector increased by 5.9% during this period. Due to favorable weather in 2011, construction works increased significantly during the year. According to preliminary calculations, in 2011, the national cement consumption in Germany increased by 13.4% to 28.0 million tons, while the ready-mix concrete market showed an increase of 14.3% and the increase in the aggregates market was 8.4%.

Competition. Our primary competitors in the cement market in Germany are Heidelberg, Dyckerhoff (a subsidiary of Buzzi-Unicem), Lafarge, Holcim and Schwenk, a local German competitor. These competitors, along with CEMEX, represent a market share of about 82%, as estimated by us for 2011. The ready-mix concrete and aggregates markets in Germany are fragmented and regionally heterogeneous, with many local competitors. The consolidation process in the ready-mix concrete markets and aggregates market is moderate.

 

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Our Operating Network in Germany

 

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Description of Properties, Plants and Equipment. As of December 31, 2011, we operated two cement plants in Germany (not including the Mersmann plant). As of December 31, 2011, our installed cement capacity in Germany was 4.9 million tons per year (excluding the Mersmann plant cement capacity). We estimate that, as of December 31, 2010, the limestone permitted proven and probable reserves of our operations in Germany had an average remaining life of approximately 42 years, assuming 2006-2010 average annual cement production levels. As of that date, our operations in Germany included three cement grinding mills, 173 ready-mix concrete plants, 42 aggregates quarries, two land distribution centers for cement, five land distribution centers for aggregates and two maritime terminals. In 2006, we closed the kiln at the Mersmann cement plant, and we do not contemplate resuming operations at this plant.

Capital Expenditures. We made capital expenditures of approximately U.S.$31 million in 2009, U.S.$47 million in 2010 and U.S.$26 million in 2011 in our operations in Germany. We currently expect to make capital expenditures of approximately U.S.$26 million in our operations in Germany during 2012.

Our Operations in France

Overview. As of December 31, 2011, we held 100% of CEMEX France Gestion (S.A.S.), our main subsidiary in France. We are a leading ready-mix concrete producer and a leading aggregates producer in France. We distribute the majority of our materials by road and a significant quantity by waterways, seeking to maximize the use of this efficient and sustainable alternative.

The Cement Industry in France. According to the French cement producers association, total cement consumption in France reached 21.3 million tons in 2011, an increase of 7.9% compared to 2010. The increase was primarily driven by an increase of approximately 20% in the construction sector (both residential and non-residential), while the public works sector was flat.

 

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Competition. Our main competitors in the ready-mix concrete market in France include Lafarge, Holcim, Italcementi and Vicat. Our main competitors in the aggregates market in France include Lafarge, Italcementi, Colas (Bouygues) and Eurovia (Vinci). Many of our major competitors in ready-mix concrete are subsidiaries of French cement producers, whereas we must rely on sourcing cement from third parties.

Our Operating Network in France

 

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Description of Properties, Plants and Equipment. As of December 31, 2011, we operated 247 ready-mix concrete plants in France, one maritime cement terminal located in LeHavre, on the northern coast of France, 15 land distribution centers and 42 aggregates quarries.

Capital Expenditures. We made capital expenditures of approximately U.S.$15 million in 2009, U.S.$23 million in 2010 and U.S.$22 million in 2011 in our operations in France. We currently expect to make capital expenditures of approximately U.S.$11 million in our operations in France during 2012.

Rest of Northern Europe

Our operations in the Rest of Northern Europe, which as of December 31, 2011, consisted primarily of our operations in Ireland, the Czech Republic, Austria, Poland, Hungary and Latvia, as well as trading activities in Scandinavia and Finland, our other Northern European assets and our approximately 33% non-controlling interest in a Lithuanian company. These operations represented approximately 7% of our 2011 net sales in Peso terms, before eliminations resulting from consolidation, and approximately 3% of our total assets in 2011.

Our Operations in the Republic of Ireland

Overview. As of December 31, 2011, we held 61.2% of Readymix plc, our main subsidiary in the Republic of Ireland. On February 22, 2012, Readymix Investments, an indirect subsidiary of CEMEX, S.A.B. de C.V., made an offer for all the shares in Readymix plc that are not already indirectly owned by CEMEX at a per share price of €0.25. The acquisition remains subject to, among other things, certain approvals by Readymix plc’s shareholders and other closing conditions. Our operations in the Republic of Ireland produce and supply sand, stone and gravel as well as ready-mix concrete, mortar and concrete blocks. As of December 31, 2011, we operated 34 ready-mix concrete plants, 26 aggregates quarries and 15 block plants located in the Republic of Ireland, Northern Ireland and the Isle of Man. We import and distribute cement in the Isle of Man.

The Construction Industry in the Republic of Ireland. According to Euroconstruct, total construction output in the Republic of Ireland is estimated to have decreased by 17.5% in 2011. The decrease reflected the continued contraction in the housing sector. We estimate that total cement consumption in the Republic of Ireland and Northern Ireland reached 1.9 million tons in 2011, a decrease of 12% compared to total cement consumption in 2010.

Competition. Our main competitors in the ready-mix concrete and aggregates markets in the Republic of Ireland are CRH, the Lagan Group and Kilsaran.

 

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Capital Expenditures. We made capital expenditures of approximately U.S.$0.3 million in 2009, U.S.$1 million in 2010 and U.S.$1 million in 2011 in our operations in the Republic of Ireland. We currently expect to make capital expenditures of approximately U.S.$1 million in our operations in the Republic of Ireland during 2012.

Our Operations in Poland

Overview. As of December 31, 2011, we held 100% of CEMEX Polska Sp. ZO.O, or CEMEX Polska, our main subsidiary in Poland. We are a leading provider of building materials in Poland serving the cement, ready-mix concrete and aggregates markets. As of December 31, 2011, we operated two cement plants and one grinding mill in Poland, with a total installed cement capacity of three million tons per year. As of December 31, 2011, we also operated 41 ready-mix concrete plants, nine aggregates quarries, 11 land distribution centers and two maritime terminals in Poland.

The Cement Industry in Poland. According to the Central Statistical Office in Poland, total construction output in Poland increased by 16.3% in 2011. In addition, according to our estimates, total cement consumption in Poland reached approximately 19.5 million tons in 2011, an increase of 21.8% compared to 2010.

Competition. Our primary competitors in the cement, ready-mix concrete and aggregates markets in Poland are Heidelberg, Lafarge, CRH and Dyckerhoff, Miebach.

Capital Expenditures. We made capital expenditures of approximately U.S.$7 million in 2009, U.S.$10 million in 2010 and U.S.$21 million in 2011 in our operations in Poland. We currently expect to make capital expenditures of approximately U.S.$33 million in our operations in Poland during 2012.

Our Operations in the Czech Republic

Overview. As of December 31, 2011, we held 100% of CEMEX Czech Operations, s.r.o., our operating subsidiary in the Czech Republic. We are a leading producer of ready-mix concrete and aggregates in the Czech Republic. We also distribute cement in the Czech Republic. As of December 31, 2011, we operated 56 ready-mix concrete plants, six gravel pits and 12 aggregates quarries in the Czech Republic. As of that date, we also operated one cement grinding mill and one cement terminal in the Czech Republic.

The Cement Industry in the Czech Republic. According to the Czech Statistical Office, total construction output in the Czech Republic decreased by 4.8% in 2011. The decrease was primarily driven by a continued slowdown in civil engineering works. According to the Czech Cement Association, total cement consumption in the Czech Republic reached 3.9 million tons in 2011, a increase of 3.0% compared to 2010.

Competition. Our main competitors in the cement, ready-mix concrete and aggregates markets in the Czech Republic are Heidelberg, Dyckerhoff, Holcim, Skanska and Lafarge.

Capital Expenditures. We made capital expenditures of approximately U.S.$2 million in 2009, U.S.$5 million in 2010 and U.S.$4 million in 2011 in our operations in the Czech Republic. We currently expect to make capital expenditures of approximately U.S.$2 million in our operations in the Czech Republic during 2012.

Our Operations in Latvia

Overview. As of December 31, 2011, we held 100% of CEMEX SIA, our operating subsidiary in Latvia. We are the only cement producer and a leading ready-mix cement producer and supplier in Latvia. From our cement plant in Latvia we also supply markets in Estonia, Lithuania, Finland, northwest Russia and Belarus. As of December 31, 2011, we operated one cement plant in Latvia with an installed cement capacity of 1.2 million tons per year. As of that date, we also operated five ready-mix concrete plants in Latvia and one aggregates quarry.

In April 2006, we initiated an expansion project for our cement plant in Latvia in order to increase our cement production capacity by approximately 0.8 million tons per year to support strong demand in the region. The plant was fully commissioned during July 2010. Our total capital expenditure in the capacity expansion of this plant was approximately U.S.$411 million, which included U.S.$11 million, U.S.$86 million, U.S.$174 million, U.S.$113 million, U.S.$22 million and U.S.$5 million invested during 2006, 2007, 2008, 2009, 2010 and 2011.

Capital Expenditures. In total, we made capital expenditures of approximately U.S.$115 million in 2009, U.S.$24 million in 2010 and U.S.$8 million in 2011 in our operations in Latvia. We currently expect to make capital expenditures of approximately U.S.$9 million in our operations in Latvia during 2012.

 

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Our Equity Investment in Lithuania

Overview. As of December 31, 2011, we owned an approximate 33% interest in Akmenes Cementas AB, a cement producer in Lithuania, which operates one cement plant in Lithuania with an installed cement capacity of 0.4 million tons per year.

Our Operations in Austria

Overview. As of December 31, 2011, we held 100% of CEMEX Austria AG, our main subsidiary in Austria. We are a leading participant in the concrete and aggregates markets in Austria and also produce admixtures. As of December 31, 2011, we owned 32 ready-mix concrete plants and operated seven additional plants through joint ventures. We also owned 23 aggregates quarries, including six quarries which are currently operated by third parties, and had non-controlling interests in three quarries.

The Cement Industry in Austria. According to Euroconstruct, total construction output in Austria increased by 0.7% in 2011. The increase was primarily driven by slightly higher investments in residential and non-residential building construction. According to our estimates, the 2011 total cement consumption in Austria was stable compared to the previous year.

Competition. Our main competitors in the ready-mix concrete and aggregates markets in Austria are Asamer, Lafarge, Lasselsberger, Strabag and Wopfinger.

Capital Expenditures. We made capital expenditures of approximately U.S.$4 million in 2009, U.S.$3 million in 2010 and U.S.$3 million in 2011 in our operations in Austria. We currently expect to make capital expenditures of approximately U.S.$3 million in our operations in Austria during 2012.

Our Operations in Hungary

Overview. As of December 31, 2011, we held 100% of CEMEX Hungária Kft., our main subsidiary in Hungary. As of December 31, 2011, we owned 33 ready-mix concrete plants and five aggregates quarries, and we had non-controlling interests in eight other ready-mix concrete plants and two other aggregates quarries.

The Cement Industry in Hungary. According to the Hungarian Central Statistical Office, total construction output in Hungary decreased by 3% in 2011. The decrease was primarily driven by a lack of infrastructural projects in the country due to the slowdown of the economy. Total cement consumption in Hungary was 2.2 million tons in 2011, a decrease of 16% compared to 2010.

Competition. Our main competitors in the ready-mix concrete and aggregates markets in Hungary are Heidelberg, Strabag, Holcim and Lasselsberger.

Capital Expenditures. No significant capital expenditures were made in 2009 in our operations in Hungary, and we made capital expenditures of approximately U.S.$2 million in 2010 and U.S.$1 million in 2011. We currently expect to make capital expenditures of approximately U.S.$2 million in our operations in Hungary during 2012.

See “Regulatory Matters and Legal Proceedings” for a description of the ongoing arbitration relating to the proposed sale of our operations in Austria and Hungary.

Our Operations in Other Northern European Countries

Overview. As of December 31, 2011, we operated ten marine cement terminals in Finland, Norway and Sweden through CEMEX AS, a leading bulk-cement importer in the Nordic region.

Capital Expenditures. We made capital expenditures of approximately U.S.$0.1 million in 2009, U.S.$0.5 million in 2010 and U.S.$0.2 million in 2011 in our operations in other European countries. We currently do not expect to make any significant capital expenditures in our operations in other European countries during 2012.

Mediterranean

For the year ended December 31, 2011, our business in Mediterranean, which includes our operations in the Spain, Egypt and our Rest of Mediterranean segment, as described below, represented approximately 11% of our net sales before eliminations resulting from consolidation. As of December 31, 2011, our business in Mediterranean represented approximately 20% of our total installed capacity and approximately 14% of our total assets.

 

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Our Operations in Spain

Overview. Our operations in Spain represented approximately 4% of our net sales in Peso terms, before eliminations resulting from consolidation, and approximately 10% of our total assets, for the year ended December 31, 2011.

As of December 31, 2011, we held 99.88% of CEMEX España, our operating subsidiary in Spain. Our cement activities in Spain are conducted by CEMEX España. Our ready-mix concrete activities in Spain are conducted by Hormicemex, S.A., also a subsidiary of CEMEX España, and our aggregates activities in Spain are conducted by Aricemex S.A., a subsidiary of CEMEX España. CEMEX España is also a holding company for most of our international operations.

In March 2006, we announced a plan to invest approximately €47 million in the construction of a new cement mill and dry mortar production plant in the Port of Cartagena in Murcia, Spain, including approximately €11 million in 2006, €19 million in 2007, €3 million in 2008, and €0.2 million in 2009. The first phase, which includes the cement mill with production capacity of nearly one million tons of cement per year, was completed in the last quarter of 2007. Execution of the second phase, which includes the new dry mortar plant with a production capacity of 200,000 tons of dry mortar per year, is at an initial stage, with no material investments made during 2011 or expected to be made during 2012.

In February 2007, we announced that Cementos Andorra, a joint venture between us and Spanish investors (the Burgos family), intends to build a new cement production facility in Teruel, Spain. The new cement plant is expected to have an annual capacity in excess of 650,000 tons and will be completed depending on the improvement of market conditions in Spain. Our investment in the construction of the plant is expected to be approximately €138 million, including approximately €28 million in 2007, €58 million in 2008, €30 million in 2009, €3 million in 2010, €1 million in 2011 and an expected €1 million in 2012. We hold a 99.99% interest in Cementos Andorra, and the Burgos family holds a 0.01% interest.

On December 26, 2008, we sold our Canary Islands operations (consisting of cement and ready-mix concrete assets in Tenerife and our 50% equity interest in two joint-ventures, Cementos Especiales de las Islas, S.A. (CEISA) and Inprocoi, S.L.) to several Spanish subsidiaries of Cimpor Cimentos de Portugal SGPS, S.A. for €162 million (approximately U.S.$227 million).

The Cement Industry in Spain. According to our latest estimates, in 2011, investment in the construction sector in Spain fell by approximately 8% when compared to 2010, primarily as a result of the drop in investment in the non-residential construction sector (both public and private), which decreased approximately 11%. Investment in the residential construction sector fell approximately 5% in 2011. According to the latest estimates from the Asociación de Fabricantes de Cemento de España, or OFICEMEN, the Spanish cement trade organization, cement consumption in Spain in 2011 decreased 17.2% compared to 2010.

During the past several years, the level of cement imports into Spain has been influenced by the strength of domestic demand and fluctuations in the value of the Euro against other currencies. According to OFICEMEN, cement imports decreased 10.5% in 2007, 40% in 2008, 62% in 2009, 17% in 2010 and 30% in 2011. Clinker imports have been significant, with an increase of 26.8% in 2007, but experienced a sharp decline of 46% in 2008, 60% in 2009, 36% in 2010 and 45% in 2011. Imports primarily have had an impact on coastal zones, since transportation costs make it less profitable to sell imported cement in inland markets.

In the past years, Spain has traditionally been one of the leading exporters of cement in the world, exporting up to 13 million tons per year. However, as of December 31, 2011, cement exports decreased to approximately 3.9 million tons per year. In recent years, Spanish cement and clinker export volumes have fluctuated, reflecting the rapid changes in demand in the Mediterranean basin as well as the strength of the Euro and changes in the domestic market. According to OFICEMEN, these export volumes decreased 22% in 2006 and 3% in 2007, increased 102% in 2008, 22% in 2009 and 33% in 2010, and decreased 1% in 2011.

Competition. According to our estimates, as of December 31, 2011, we were one of the five largest multinational producers of clinker and cement in Spain. Competition in the ready-mix concrete industry is intense in large urban areas. The overall high degree of competition in the Spanish ready-mix concrete industry is reflected in the multitude of offerings from a large number of concrete suppliers. We have focused on developing value added products and attempting to differentiate ourselves in the marketplace. The distribution of ready-mix concrete remains a key component of CEMEX España’s business strategy.

 

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Our Operating Network in Spain

 

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Products and Distribution Channels

Cement. Our cement operations represented approximately 69% of net sales for our operations in Spain before eliminations resulting from consolidation in 2011. CEMEX España offers various types of cement, targeting specific products to specific markets and users. In 2011, approximately 15% of CEMEX España’s domestic sales volume consisted of bagged cement, and the remainder of CEMEX España’s domestic sales volume consisted of bulk cement, primarily to ready-mix concrete operators, which include CEMEX España’s own subsidiaries, as well as industrial customers that use cement in their production processes and construction companies.

Ready-Mix Concrete. Our ready-mix concrete operations represented approximately 19% of net sales for our operations in Spain before eliminations resulting from consolidation in 2011. Our ready-mix concrete operations in Spain in 2011 purchased almost 92% of thei