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MEXICHEM is a group of Mexican chemical and
petrochemical companies that are leaders in the
Latin American market. Our annual sales are almost
USD1.2 billion, and we export to more than 50 countries. With more than 50 years of growth and 28 years
on the Mexican stock exchange, we actively contribute to Mexico’s development as our principal products
have a broad market in the most dynamic growth sectors—construction, housing, infrastructure, urban water, and sewage—in Mexico, the United States, and
Latin America.
Mexichem is one of the five most efficient manufacturers in the world. We have the most important chlorine,
soda, and PVC plants in Latin America, as well as the
largest fluorspar mine in the world. We are the only
company in Mexico that manufactures, distributes,
and sells its own raw materials and the largest vertically integrated producer of hydrofluoric acid in America.
In addition, thanks to our recently announced acquisitions, we are the principal producer of PVC pipe in
Latin America, with plants in 19 countries and sales in
practically all of Latin America.
Mexichem, S.A.B. de C.V.
Corporate offices
Río San Javier 10.
Fracc. Viveros del Río Tlalnepantla,
Estado de México C.P. 54060
Tel. 52+ (55) 53 66 40 00
Fax. 52+ (55) 53 97 88 36
Distribution
17%
Sales 2006
MXN12.074
billion
EBITDA 2006:
MXN2.445
billion
We are making chemistry the
cornerstone of construction
Contents
Annual Report 2006
02
02
04
06
08
10
12
14
15
17
19
19
20
Chlorine-Vinyl
68%
Distribution
2%
Currently, the group’s strategic position is focused on
the chemical sector through two productive chains: the
chlorine-vinyl chain, which comprises the companies
Unión Minera del Sur, Cloro de Tehuantepec, Mexichem Derivados, Mexichem Colombia, Mexichem
Resinas Vinílicas, Mexichem Estireno, Poliespuma de
México, and Bayshore Group; and the fluorine chain,
which consists of Mexichem Flúor. We also have a distribution chain for chemical, plastic, and food products represented by Dermet de México.
www.mexichem.com.mx
Fluorine
15%
Financial highlights
Relevant events
Message to the shareholders
Mexichem in construction
Mexichem in industry and consumer goods
Mexichem in construction of infrastructure
Mexichem in construction of urban infrastructure and irrigation
Social responsibility
Analysis and discussion of results
Per-share information
Board of directors
Corporate governance
Audited financial statements
Fluorine
31%
Chlorine-Vinyl
67%
Latin America.
Corporate offices
Río San Javier 10.
Tel. 52+ (55) 53 66 40 00
Fax. 52+ (55) 53 97 88 36
Distribution
17%
Sales 2006
MXN12.074
billion
EBITDA 2006:
MXN2.445
billion
Contents
Annual Report 2006
02
02
04
06
08
10
12
14
15
17
19
19
20
Chlorine-Vinyl
68%
Distribution
2%
www.mexichem.com.mx
Fluorine
15%
Relevant events
Board of directors
Fluorine
31%
Chlorine-Vinyl
67%
In Mexico, construction has been one of the pillars of both physical and
economic growth. In 2006, companies in the housing sector grew 27%
on average at the operational level, and the outlook for 2007 continues to
be positive. The federal government expects to deliver six million houses
over the next five years—in 2007 more than 800 thousand mortgages may
be issued—and to support workers who earn less than three times the
minimum wage with subsidies. Accordingly, companies in the sector are
expected to record an average increase in EBITDA of 18%. // On the other
hand, the growth potential in tourism and retirement housing, as well as
greater participation of the commercial banking sector due to more competitive interest rates, will continue to boost the construction sector’s
growth. In addition, the federal government has announced important
investments in infrastructure, which will further drive the construction
sector. // Mexichem produces essential raw materials for the development of the construction industry. Therefore, at Mexichem we say that,
“we are making chemistry the cornerstone of construction.”
1
1,412
Salt
Chlorine
205
2,809
Natural
gas
(45)
02
03
04
05
06
02
03
04
05
Symbol on the BMV
Soda
Natural
gas
2,345
PVC is used to manufacture a broad range of products, mainly for the construction industry. For example, almost 40% of
the components in a house have PVC: pipe, cable insulation,
window frames, doors, floors, kitchen coatings, closets, bathrooms, ceilings, and facings. Infrastructure projects also use a
broad variety of Mexichem products, such as large pipelines, to
transport water or sewage and electrical or telephone wiring.
7,816
The principal application of chlorine is, however, to make PVC. To do this,
we extract gas from the earth and transform it into ethane, which is then
combined with chlorine to produce vinyl chloride monomer, better
known as VCM. This product is very similar to the links of a chain,
and when it undergoes a process of chemical transformation, it
forms polymer chains, which become PVC resins.
Million Mexican pesos
1,393
1,971
Chlorinevinyl
chain
Operating income
Chlorine-vinyl chain
325
Soda is used for water treatment and to manufacture soap, shampoo, creams, and detergents. Chlorine is used to make cleaners, purify water, disinfect floors and walls, bleach
paper, and make white pigments.
Sales Chlorinevinyl chain
8,219
Salt is the origin of the chlorine-vinyl chain, as chlorine and soda are obtained by the electrolysis of salt. This chain produces a great many products that we use every day.
Markets where quoted
Bolsa Mexicana de Valores, BMV
(Mexican stock exchange), Mexico
06
MEXCHEM
Electricity
Vinyl
chloride
Polyvinyl
chloride
Subscription date
September 1978
Number of outstanding shares
490 million
Ethane
Ethylene
Independent auditor
Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member of Deloitte Touche Tohmatsu
Principal competitors in the chlorine-vinyl chain include
Oxy Vinyls, Formosa Plastics, Shintec Inc., and Policyd.
Other PVC products help to give life or even save it, as PVC is used to make catheters and bags for blood storage and dialysis.
PVC has many other uses, including the manufacture of toys, balls, containers,
hoses, chairs, and decorative goods.
The increase in sales for
this chain was
The increase in operating
income was
5.2%
1.3%
Sales Fluorine chain
681
1,789
217
354
Hydrofluoric
acid
Fluorspar
150
544
Sulfuric
acid
409
1,442
1,060
02
Sulfur
03
04
05
06
02
03
04
05
06
The sales increase for
this chain was
income was
24%
67%
Principal competitors in the fluorine chain include
Honeywell, Dupont, Arkema, and China, which, as a
country, has 1,500 producers equivalent to our single
fluorspar mine.
Design: www.signi.com.mx
It bears another mention that both chains have enormous potential for
the construction industry, and that growth in both infrastructure and housing favors Mexichem’s growth.
406
Fluorine
chain
Operating Income
Fluorine chain
Calcium fluoride, better known as fluorspar, is a nonmetallic mineral whose
essential function is that of a flux. In its natural form, this mineral, which is
extracted from the earth, is used in the steel, cement, glass, and ceramic industries due to its important energy-saving properties. Metallurgical-grade
fluorspar also is utilized in construction.
Acid-grade fluorspar is a concentrated mineral from which
some impurities have been eliminated. Combining acid-grade
fluorspar with sulfuric acid, which comes from sulfur, creates
hydrofluoric acid, which is used primarily to make refrigerant gases for air conditioners, refrigerators, and freezers. It
is also used as a propellant in gasoline; for pickling stainless
steel; in nuclear fuels, integrated circuits, and Teflon coatings;
and to produce fluoridated salts, including lithium salts used in
batteries and sodium-fluoride salts used in toothpaste.
Investor relations
Enrique Ortega Prieto
Director of Investor Relations
Tel. 52 (55) 52 51 59 98
Fax. 52 (55) 52 51 21 33
eortega@mexichem.com.mx
1,412
Salt
Chlorine
205
2,809
Natural
gas
(45)
02
03
04
05
06
02
03
04
05
Symbol on the BMV
Soda
Natural
gas
2,345
7,816
1,393
1,971
Chlorinevinyl
chain
Operating income
325
8,219
06
MEXCHEM
Electricity
Vinyl
chloride
Polyvinyl
chloride
Subscription date
September 1978
490 million
Ethane
Ethylene
Independent auditor
this chain was
income was
5.2%
1.3%
681
1,789
217
354
Hydrofluoric
acid
Fluorspar
150
544
Sulfuric
acid
409
1,442
1,060
02
Sulfur
03
04
05
06
02
03
04
05
06
this chain was
income was
24%
67%
fluorspar mine.
406
Fluorine
chain
Operating Income
Fluorine chain
Investor relations
Tel. 52 (55) 52 51 59 98
Fax. 52 (55) 52 51 21 33
Mexichem, S.A.B. de C.V. In millions of constant Mexican pesos as of December 31, 2006
Net sales
2006
MXN
12,074
MXN
2005
% Variation
9,258
30
Gross profit
3,216
2,515
28
Net majority income
1,144
667
72
Operating cash flow (EBITDA)
2,445
2,060
19
Free cash flow
1,709
1,737
0
10,354
9,263
12
448
681
Clients
2,281
1,938
18
Inventories
1,220
1,064
15
98
212
Long-term assets
6,307
5,368
17
Total liabilities
5,523
5,582
(1)
Current liabilities
3,566
3,491
2
Long-term liabilities
1,957
2,091
(6)
Consolidated stockholders’ equity
4,831
3,681
31
Minority interest
182
(26)
—
Majority interest
4,649
3,707
25
Total assets
Cash and short-term investments
Other liquid assets
RELEVANT
EVENTS
2
In MARCH 2007, we announced the acquisition of Group Amanco, a leading
conglomerate in Latin America that produces and sells solutions for conducting fluids, primarily water. Its products
are marketed in 29 countries in Latin
America, and it has 19 production plants
located in 14 countries on the American
continent. Its sales during 2006 were
USD800 million.
(34)
(54)
Also in MARCH 2007, we announced
the acquisition of Petroquímica Colombiana (PETCO), a Colombian company
that produces PVC resins. PETCO’s
products are marketed in various countries around the world. In 2006, its
sales were USD375 million.
Operating Income
Free Cash Flow
1,963
+30%
9,258
Operating
Income
609
4,067
666
1,128
+23%
03
04
05
06
02
(87)
56
391
3,048
2,551
02
Sales
1,594
1,709
12,074
1,737
Sales
03
In FEBRUARY 2006, we acquired Bayshore Group and began the internationalization of Mexichem Resinas Vinílicas
in the United States.
Dermet de México, S.A. de C.V., and
Tenedora Pochteca, S.A. de C.V., merged
in MARCH 2006; these two companies’
combined experience in product marketing will allow both to increase sales.
04
05
06
02
03
04
05
MAY 2006 marked the creation of the
Mexichem Centro de Investigación y
Desarrollo (Mexichem CID), our research and development center, which
is charged with the development of new
products and safety and reengineering
processes and the promotion of the improvement of Mexichem and all chemical and petrochemical companies in
Latin America.
06
MAY 2006 saw the conclusion of the
most important projects of the fluorine
chain: the expansion of the flotation process in the San Luis Potosí mine and the
startup of the fluorspar purifier at the
hydrofluoric acid plant in Matamoros,
Tamaulipas. Thanks to these new operations, Mexichem Flúor continues to be
the largest vertically integrated hydrogen
fluoride producer in the world.
3
Message to shareholders
After four consecutive years of strong
growth, the overall economy is currently
undergoing one of its strongest expansion periods since the Second World War.
There are some risks, however, such as
the United States’ large trade deficit and
the emergence of key economies such as
China, a country that is slowly moving toward exchange flexibility.
Even though the U.S. economy has
slowed, the reduction in energy prices has
supported rising employment and consumption. This is a situation that favorably affects other economies.
In the case of Mexico, the economy has
developed in a stable environment despite
external events such as price increases in
basic products such as corn and wheat,
which affected the trade balance and inflation in the final months of the year. The
reduction in oil prices during the third
quarter of 2006 did not significantly affect
public finances, however, because income
during the first eight months of the year
was sufficient to maintain a surplus. In
addition, the average price per barrel was
USD36.5, higher than expected.
Even though inflation during the year—
4.05%—was higher than the previous
year’s inflation rate of 3.30%, the economy
maintained its excellent performance. The
peso-dollar exchange rate suffered a devaluation of 1.7%—MXN10.81 at the end
of 2006, compared with MXN10.63 at the
end of 2005. Over the course of the year,
however, industrial production increased
by 5.2%, bringing economic growth to
higher than 4.8 percent.
The chemical and petrochemical industries once again produced excellent results during 2006, as higher oil and gas
prices kept product prices in these industries very high.
4
In this favorable environment, Mexichem’s
results during the year were even stronger
than in 2005, which had been the most
successful and productive in our history.
In 2006, we consolidated the acquisitions
we made at the end of 2004 and during
2005 and 2006, capitalizing on various
synergies that allowed us to maintain our
leadership in our two productive chains
and in our distribution chain. Thanks to
the acquisition of Dermet and its merger
with Pochteca, our sales grew by 30%.
Moreover, with the conclusion of the fluorine chain projects—the flotation expansion at Mexichem Flúor, and the design
and construction of the fluorspar purification tower at our Matamoros plant,
using our own technology—we have now
become the largest vertically integrated
producer of hydrofluoric acid in the world.
At the same time, we achieved much during the year, including the reconstruction
and upgrade of our chlorine plant in Santa
Clara and our efforts to keep the Cloro de
Tehuantepec plant operating at maximum
capacity in spite of variations in VCM production in Pajaritos.
We met our estimated targets. Consolidated sales and operating income increased
by 30% and 23%, respectively, compared
with those of 2005. Moreover, net income
increased by 71% to MXN1.144 billion, or
MXN2.33 per share. Over the past three
years, total income, operating income,
and cash flow have increased at compounded annual rates of 50%, 59%, and
52%, respectively. These results are net
of the special item for MXN663 million,
which caused the early amortization of the
obligations convertible into shares and
which we carried out in September 2005.
We will continue to focus on our long-term
vision, keeping Mexichem a solid company by integrating products with higher
added value into our chains and increasing our global presence.
In 2006, we consolidated
the acquisitions we
made, capitalizing on the
synergies that have allowed
We have announced the acquisition of the
Amanco Group, a leading Latin American
conglomerate that produces and sells
solutions for conducting fluids, primarily
water. Amanco, whose products are marketed in 29 countries in Latin America,
has 19 production plants in 14 countries
in the Americas and more than 7 thousand employees. In 2006, Amanco sales
reached USD800 million. This acquisition
supports our strategy to provide greater
added value to our basic raw materials
and strengthens our position in Latin
America and our effort to become a global
company with operations in every part of
the American continent.
We also announced the acquisition of
Petroquímica Colombiana (PETCO), a
Colombian company with 310 employees
that is dedicated to the production of
PVC resins. PETCO markets its products
in various countries around the world; its
sales in 2006 reached USD375 million.
This acquisition strengthens our position
in Latin America in resin production and
commercialization and gives the business
the critical mass necessary to sustain our
regional leadership in PVC resins. It also
provides additional support for our fundamental strategy of adding greater value to
our basic raw materials.
Since being merely satisfied with what
we have accomplished would be taking a
step backward, our goals for 2007 are ambitious. We have decided to continue with
our aggressive growth plan. The diversity
of the countries in which we operate, as
well as the complexity and size of the
businesses we acquired, mean that we
will have to multiply our efforts and accelerate the production and pace of work at
our current companies. We will continue
to put our best efforts into our daily work
and demonstrate the capacity, strength,
and honesty of Mexican managers and
professionals.
We have built strong alliances with our principal
clients, giving them priority and participating in their
projects while establishing a
solid relationship that permits
us to achieve mutual success.
Our success depends on our
people, who are motivated individuals with passion for their work,
are committed to Mexico, and have
demonstrated their capacity to achieve
good results not bounded by their surroundings.
us to maintain leadership.
We wish to thank our shareholders, clients, vendors, and financial institutions,
and the communities in which our plants
are located, for the confidence they have
placed in us. We would especially like to
recognize our Mexichem personnel for
their dedication, creativity, and professionalism, which has been a driving factor in the excellent results we produced
in 2006.
Antonio Del Valle Ruiz
Chairman of the Board of Directors
5
Mexichem in
construction
FLOORS AND CARPETS. The laminated floor, a
beautiful carpet, and a vinyl floor lend attractive
touches to our bedroom, living room, and foyer.
Individual tastes aside, the presence of Mexichem
is the common denominator in these products
and, therefore, in our homes. All are made of resins, plasticizers, and PVC compounds fabricated
by Mexichem.
6
PAINT. A little bit of paint can provide the various
textures, colors, shades, and detail that lend beauty and distinction to both the exterior and interior
spaces of our homes. To manufacture them, Mexichem provides vinylic resins, plasticizers, chlorine, and other products that give them durability,
resistance, and color.
PIPES. Pipes are essential to our ability to bring
drinking water into our home and make it available in the bathroom, kitchen, or laundry room.
While different materials have been used to make
pipe over the years, PVC has proven to be the
best option. Mexichem manufactures resin and
pipes to carry potable water or sewage.
AIR CONDITIONING. Virtually all new construction projects—offices, commercial buildings,
and homes—have air conditioning, as this is becoming more of a necessity than a luxury. The hydrofluoric acid that Mexichem produces is used
to make refrigerant gases.
GLASS. The glass that covers our windows allows
us to admire the outdoors from inside, allows
sunlight to illuminate our homes, and enables
us to see rainfall without getting wet. Mexichem
produces fluorspar, an essential component in
the manufacture of glass. While this product has
a wide variety of applications, glass manufacture
tied to the housing sector represents a significant portion of the entire glass market given the
dynamism of the construction industry in Mexico and other parts of Latin America.
CEMENT. Our house is our refuge, where we are
protected and where we protect what we care
most about. Such protection would not be possible without the strength of cement. As with steel,
cement production is an energy-intensive process, and the fluorspar produced by Mexichem
plays an important part in facilitating and reducing the energy use associated with that process.
REINFORCING BARS. The core of our homes is
made of steel, which provides strength and resistance for many years. Fluorspar plays a very important role as a flux in the manufacture of steel
rods, facilitating the process and providing significant energy savings in what is otherwise a very energy-intensive process. Mexichem actively participates in this essential sector, providing fluorspar
extracted from the San Luis Potosí mine.
Housing shortages by country
2.6
Argentina
Chile
Ecuador
Peru
0.5
1.2
2.7
Colombia
1.2
2.9
Mexico
Brazil
billion meters
2004
2009
0.2
United States
CAGR ‘04–‘09
= 3.3 %
0.3
2.0
Housing sector
The expected growth in Mexico in the housing sector is calculated at about 15% annually for the next
few years. In addition, housing shortages in other
parts of Latin America, primarily in Brazil, Mexico,
and Venezuela, translate into a great growth opportunity going forward.
Growth in demand for plastic pipe
1.7
The housing deficit, urban development, and infrastructure projects have driven the construction
sector in Mexico and other parts of Latin America.
In addition, this sector should see more areas of
opportunity and growth in the short term, which
will mean tremendous growth for Mexichem.
Already in 2006, the construction sector represented 60% of our sales during the year. Thanks
to our new acquisitions, we expect that our exposure in this sector will increased by about 13%.
Venezuela
4.3
6.7
million houses
2004
2009
Latin America
CAGR ‘04–‘09
= 6.8 %
7
Mexichem in industrial
and consumer goods
WINDOW FRAMES. The structural harmony of
a room depends on the proper combination of
all of its elements. We can achieve this harmony
by using different materials, and PVC window
frames offer many possible combinations of not
only colors, shapes, and textures, but also of
functionality and elegance. The PVC resins Mexichem makes are used to make window frames
because they have stronger properties than wood
and aluminum and give the windows greater durability and resistance.
8
ELECTRICAL CABLES. The ability to connect and
use electrical appliances in our home depends on
access to electric power. That access would not be
possible without the cables and conduits that make
up the electrical system and allow us to conduct
electricity to where we need it. A good electrical network requires several ingredients: suitable gauge,
appropriate installation, and insulation, which is
critical to the safety, conductivity, and efficiency of
the system. Insulation is achieved by coating the
wires with different plastics. PVC is the best insulation and is used in combination with other plastics such as polyethylene. Mexichem makes PVC
compounds, resins, and plasticizers with dielectric
properties, which are used in conductor cables of
many different sizes as well as electrical sockets
and connectors.
AUTOMOBILE DASHBOARDS. A good dashboard must be smooth to the touch, a sensation
achieved with the compounds, PVC resins, and
plasticizers produced by Mexichem. Despite temperature changes and exposure to the sun, the innovation and technology offered by Mexichem will
keep them beautiful for a long time.
ELECTRICAL APPLIANCES. The manufacture of
aluminum, which is present in many electrical
appliances, requires fluorspar, which Mexichem
produces. Electrical insulation is provided by the
resins, compounds, and plasticizers produced
by Mexichem, which are present in all electrical
appliances in our homes.
INTEGRATED CIRCUITS. Control of many of the
appliances that we use every day depends to a
great degree on chips and integrated circuits,
which require hydrofluoric acid to produce and
to mark the layout of these components. With
the world’s second largest hydrofluoric acid
plant, Mexichem is the world’s largest vertically
integrated producer.
AUTOMOBILE HARNESSES. Technology also advances day by day in the automotive field. New
cars have trip computers, laser-guided cruise
control, tire air-pressure sensors, parking indicators, infrared sensors for night driving, and an
endless stream of other new technologies. With
each advance in technology, the harnesses for
these devices must become more sophisticated
in terms of capacity, durability, strength, insulation, and reliability.
KITCHEN TABLES AND COUNTERTOPS. Beauty, hygiene, and durability are just a few of the
characteristics of kitchen tables and countertops
made using Mexichem products, such as PVC
resins, plasticizers, compounds, and anhydrides.
Mexichem is present in our homes every day and
makes our lives easier.
4.5
Gross domestic product, at market prices
4.0
3.5
3.0
2.5
2.0
1.5
The growth in retail sales and the expansion in the
industrial sector are also growth drivers for Mexichem. That our products reach across not one but
at least three different sectors further supports
our growth. In 2006, the industrial sector represented about 20% of sales; consumer products
represented another 20%. The best indicator of
consumption in Mexico is global GDP, as it establishes a direct relationship between greater Mexican purchasing power and the growth of internal
consumption of goods and services.
1.0
0.5
0.0
-0.5
01
02
03
04
05
06
07
08
03
04
05
06
07
08
Total industrial GDP
5
4
3
2
1
0
-1
-2
-3
-4
01
02
9
Mexichem in the construction
of infrastructure
PIPES. The maintenance of highways and bridges
in good condition requires efficient drainage
systems that permit travel without delays and
provide greater durability. PVC pipe contributes
significantly by providing this drainage.
Mexichem manufactures PVC resins and pipe,
as well as other materials, in Mexico and in other
Latin American countries through Mexichem
Resinas Vinílicas, PETCO, and Amanco.
CEMENT. All large infrastructure projects require cement for strength and durability. Large
amounts of energy are needed to manufacture
cement, and Mexichem is important in this sector since it extracts fluorspar, a component of
cement.
10
PAINTS. The paints used for marking highways
must meet established standards to ensure
drivers’ safety. Mexichem provides the necessary raw materials to manufacture many of the
paints used in roadway marking.
STEEL CABLES. Steel cables provide not only
the necessary strength to support a bridge
even under the most adverse conditions, such
as hurricanes and earthquakes, but also add a
distinctive, beautiful touch to these structures.
The fluorspar that Mexichem extracts from the
ground helps to considerably reduce the amount
of energy used in the manufacture of the steel
used in these indispensable structures.
LIGHTING. Drivers depend on electrical networks and lighting on bridges and highways for
their safety. In turn, adequate highway lighting
depends on safe and reliable electrical cables
that meet established standards. Mexichem
manufactures compounds, resins, and plasticizers that form the insulating coating and provide
the necessary characteristics for use.
Physical volume index trend for industrial activity: construction
base 1993=100
140
135
The growth of the construction sector has also
been a strong driver of the increased infrastructure in the country. A large number of infrastructure projects such as bridges, highways, and
dams are added to our territory every year and
strengthen the country’s growth.
130
125
120
115
110
105
100
01
02
03
04
05
06
07
— Original series
— Trend
11
Mexichem in the construction of
urban infrastructure and irrigation
POTABLE WATER. Just as drinking water is essential to the development of any community,
large networks of pipe and sophisticated water
purification systems are required to bring potable water to all residents in a community. Mexichem produces systems of solutions for the
transportation of fluids as well as products to
aid in water purification processes. In turn, the
growth of cities drives the growth of Mexichem.
12
IRRIGATION SYSTEMS. One of the main challenges for agricultural systems is bringing water
to the land that needs it. Mexichem offers fluidconduction systems that enable Latin American
fields to produce more.
PROPERTY DEVELOPMENT. The growth of
both large and small cities is driven by property development. In Mexico, as in other Latin
American countries, this sector has had extraordinary growth. The development of new, more
durable construction materials, mainly for finishes, has accelerated the construction process
and, in some cases, reduced costs. PVC window
frames, laminated floors, facings, ceilings, and
walls made of plastic materials provide elegance, durability, and strength. Mexichem manufactures many of the materials that we see in
our homes every day.
DRAINAGE SYSTEMS. Drainage systems are indispensable to the operation of cities. Mexichem’s
products help to build urban sewage-management and treatment systems and solutions.
Conventional
48%
Without coverage
21%
4.2
3.9
3.7
2.8
Colombia
Brazil
Mexico
Argentina
1.8
4.6
World total
Venezuela
5.2
6.7
Northern Asia
Unconventional
“In-situ” 31%
United States
Sanitation Coverage in Latin America
China
7.0
Europe
21.1
PVC Consumption per capita
While urban development in Mexico and in Latin America has
impressive growth potential, such development demands greater
investment in infrastructure, potable water, sewage, electricity,
streets, and lighting. Today, more than 130 million people in Latin
America do not have drinking water.
The infrastructure for irrigation also has great potential, as evidenced by the current condition of Mexico’s fields: More than 80%
of the country’s fields are seasonal. The situation is very similar in
other Latin American countries.
13
Social
responsibility
Mexichem’s commitment to the principles
of social responsibility is ongoing. As a
responsible corporate citizen, Mexichem
supports the communities in which it develops its businesses. Mexichem contributes to sustainable human development
through the confidence that it places in its
employees and their families and works to
improve the social welfare and quality of
life of its local communities.
In 2006, Mexichem continued its monthly
support of Fundación Kaluz, A.C. With
this donation, the Foundation not only
develops its own projects but also offers
support for other institutions, generating
synergies that promote social welfare. This
year, in addition to consolidating its programs, the Foundation increased its contribution to education by just over 60%,
and tripled its support for housing reconstruction for the victims of disasters.
In cooperation with the Mexichem companies, Fundación Kaluz began a plan to improve the communities in which its plants
are located. Employees themselves selected the projects. The Foundation also ventured into issuing scholarships for higher
education, as well as support for students
who excel in sports.
The Mexichem companies meet and exceed the national and international stan-
14
dards for safety and environment. They
have Clean Industry certification; they are
part of the ANIQ integral responsibility
program (Asociación Nacional de la Industria Química, or National Chemical
Industry Association) and have ISO 14001
certification.
We also continue with our ecoefficiency
programs. In 2006, Cloro de Tehuantepec
won second prize in the National Energy
Savings Contest, in the area of Improvement of Installations, due to the investment made for efficient use of energy.
Mexichem Flúor won Second Prize in the
National Energy Savings Contest, in the
area of Best Practices, due to its efficient
energy use.
Another example of ecoefficiency is the
Santa Clara plant, where the production
process underwent a technology conversion. By using membrane cell technology
to eliminate the handling of mercury in the
processes of obtaining chlorine and caustic soda, we will reduce fixed and variable
costs and will increase efficiency, operational safety, and respect for the environment. This will eliminate all processes on
the road to obsolescence and generate a
10% increase in the installed capacity.
Analysis and
discussion of results
2006
Thousands of Mexican pesos
Net sales
MXN
Cost of sales
12,074,270
2005
MXN
9,257,993
8,858,334
6,742,933
Gross profit
3,215,936
2,515,060
Operating expenses
1,252,781
920,743
Operating income
Comprehensive financial cost
Special item and other
Net income from continuing operations before income taxes and profit sharing
1,963,155
1,594,317
(190,136)
(206,919)
(23,709)
(664,453)
722,945
1,749,310
Provisions for income taxes and profit sharing
608,087
281,837
Net income from continuing operations
1,141,223
441,108
Discontinued operations
—
265,090
Accumulated effects of change in accounting policy
—
Consolidated net income
MXN
Net income of minority stockholders
MEXICHEM CONSOLIDATED
Increase in sales
During 2006, sales rose to MXN12.074 billion, 30% more than
in 2005. The increase is due primarily to the group’s expansion
strategy: the group acquired Dermet on November 30, 2005,
and merged with Tenedora Pochteca on March 31, 2006. Both
companies reported sales of MXN2.064 billion in 2006. In
March, the group finalized the acquisition of Bayshore, which
reported sales of MXN290 million for 2006.
The chlorine-vinyl chain had accumulated sales of MXN8.219
billion in 2006, 5.2% more than in 2005. Sales volume was
1,304 thousand tons, 3.6% more than during 2005. The total
income of the fluorine chain was MXN1.789 billion; 24% more
than in 2005. Volume was 829 thousand tons; 3.5% more than
in 2005. The above was due to the startup of the hydrofluoric
acid purifier, which was able to use its own fluorspar beginning
in May 2006, thereby ensuring the supply of its main raw material. This project was implemented using proprietary technology of the Mexichem CID.
In our distribution chain, Dermet de México recorded accumulated sales by December of MXN2.057 billion (this figure does
not include intercompany sales).
MXN
(2,417)
Net majority income
EBITDA
1,141,223
(38,811)
—
667,387
1,143,640
MXN
2,444,742
667,387
MXN
2,059,650
with that of the previous year. The increase in gross profit was
due primarily to the synergies achieved through the integration
of Primex (Mexichem Resinas Vinílicas) and Bayshore Group
into our productive chains, as well as price increases in the
chlorine-vinyl chain and cost-reduction initiatives implemented
throughout the organization, including the fluorspar purification project, which has had a significant impact on the gross
margin, primarily in the fluorine chain. During 2006, we had
greater volumes and higher prices for practically all our products. For the chlorine-vinyl chain, the price increase in 2005 was
approximately 5.2%, while the price increase for the fluorine
chain was approximately 24%.
Growth in operating income
Operating income increased by 23%, to MXN1.963 billion. This
profit was driven primarily by the fluorine chain, in which operating income grew by 67%. Operating cash flow (EBITDA) was
MXN2.445 billion, 19% more than in 2005.
Expansion of plant utilization capacity
During 2006, we maintained the operation of our plants with
high utilization factors, thanks to improvements in operational
efficiency. This allowed us to reduce costs, consolidate synergies among our operations, decrease and eliminate redundant
costs, and maintain our world-class operating leadership.
Price strengthening
The gross profit reached MXN3.216 billion, an increase of 28%;
this represents a gross margin of 27%, which is flat compared
15
Expansion
Net income increased by 71% compared with the net income
reported in 2005, to MXN1.144 billion. The growth of MXN477
million is due primarily to favorable operating results, the inclusion in 2005 of net income from the sale of the cable and wire
business for MXN265 million, and the expenses for a special
item derived from the early amortization of the convertible obligations in the amount of MXN663 million.
Net debt at the end of 2006 was MXN1.382 billion, versus
MXN918 million reported for the same period in 2005. This
was the net effect of the early liquidation of part of the debt in
2005 and the net payment of the quarterly amortization, as well
as the acquisition of new debt as a result of the purchase of
Bayshore and the credits obtained by Dermet.
Mexichem and
subsidiaries
Total income
MXN
(in millions)
Growth vs.
2005 (%)
Operating
income MXN
(in millions)
Growth vs.
2005 (%)
Mexichem
consolidated
$12,074
30
$1,963
23
Mexichem Chlorine-Vinyl chain
$8,219
5
$1,412
1
Mexichem
Fluorine chain
$1,789
24
$681
67
Mexichem
distribution
$2,057
Na
$46
Na
Mexichem
services
$9
(176)
CHLORINE-VINYL CHAIN
Increase in sales
Net sales in 2006 grew by 5.2% compared with those of the previous year, driven primarily by the mix of prices that is reflected
in a 1.3% increase in operating income over that of 2005.
The energy sector in 2006 saw a 15% decrease in the average
price of natural gas compared with those of 2005, fundamentally as a result of high inventory levels. Electricity prices in 2006
increased by an average of 1.44%, while in 2005 the average
increase was 18.67%. As a result, we were able to maintain production costs at levels similar to those in 2005.
Markets
The balance between global supply and demand continues
to tip toward supply. In the North American region, however,
where increased energy prices have not brought an increase in
16
installed capacity, the balance is becoming more even and generates fewer surpluses. The result is reduced demand, which,
in turn, puts pressure on high prices. On the other hand, in
South America there remains a significant shortage, allowing
for a better balance between supply and new acquisitions and
generating an important Latin American regional market.
Growth
The acquisition of Petroquímica Colombiana will strengthen the
competitive position of the chlorine-vinyl chain, not only in Mexico but also in all of the Americas, and will provide a new growth
platform that will allow us to focus on new markets, products,
and services as well as the acquisition of other facilities that will
provide greater added value to our productive chain.
FLUORINE CHAIN
Increase in sales
During the year, sales rose to MXN1.789 billion, 24% more than
in 2005. In turn, recorded volume was 829 thousand tons, which
is an increase of 3.5%; EBITDA was MXN805 million, 54% more
than in 2005. The hydrofluoric acid purifier project was completed, and as a result we were able to use our own fluorspar
beginning in May, resolving the issue of our ability to supply
our principal raw material. We implemented this project using
proprietary technology from the Mexichem CID. The prices in
this chain increased by 24% compared with those of 2005, as
a result of a change in the product mix due to expansion of the
flotation capacity of the mine and current market conditions.
Markets
Mexichem owns the largest fluorspar mine in the world and
competes in the world market, primarily against China, whose
1,500 mines combined have roughly the same capacity as our
one mine. World demand for fluorspar continues to grow, especially high-purity fluorspar used in the manufacture of refrigerants. Increased demand has driven prices to levels higher than
those in 2005. We expect that this trend will continue.
Growth
Using fluorspar from our mine, we have achieved total vertical integration of this productive chain and have significantly
improved our margins. The vertical integration of this chain,
together with the increased flotation capacity of our San Luis
Potosí mine, will improve profitability in this chain and provide
a platform for much stronger growth in the sales of our highervalue-added products.
Per-share
information
Mexichem: attractive ownership structure
Attractive market float: USD239 million
before the
offering
after the
offering
Control Group
>>>
60.3%
>>>
53.8%
USD462 million
Related shareholders and others
>>>
29.1%
>>>
18.3%
USD157 million
Mexican stock exchange
>>>
10.6%
>>>
27.9%
USD239 million
Mexichem
100.0%
100.00%
Indicative fiscal year, with reference to a per-share price of MXN19.00 as of January 2, 2007. Exchange rate of MXN10.8495 per US dollar as of January 2, 2007.
Performance compared with that of other Mexican holding companies listed on the Mexican stock exchange.
instrument
performance last 12 months*
Mexchem*
106%
Alfa A
28%
Desc B
44%
GCarso A1
58%
*Prices on March 28, 2007.
The share price during 2006 had a yield greater than 51% and closed the year at MXN18.85 per share. Its enterprise value / EBITDA
closed at 4.45 times, a very attractive discount compared with its US and Brazilian equivalents, as the multiple of the first is above
8x and the second is higher than 6.5x.
450
400
350
300
250
200
150
100
2005
2006
— Share price
— Mexican Stock Exchange Prices and Quotations Index
17
2006
2005
Per-share information:
Mexican pesos of purchasing power as of December 31, 2006
Net income from
continuing operations
MXN
2.33
$
0.92
Net income (loss) from
discontinued operations
0.63
Effect at the start due to
changes in accounting
principles
$
(0.08)
Net income
MXN
2.33
$
1.47
Stockholders’ equity
(majority participation)
9.49
8.48
Dividends (**)
MXN
0.44
$
0.61
Closing price (a)
$
18.85
$
12.49
Closing price / net income
8.09
8.50
Closing price /
stockholders’ equity
1.99
1.47
Number of shares
outstanding (b)
490,000,000
490,000,000
Average shares
outstanding (c)
490,000,000
437,238,046
Other indicators
Liquidity ratio
Liabilities to total assets
Liabilities to stockholders’ equity
Consolidated net income to
average total assets
Consolidated net income to
average stockholders’ equity
Debt at cost, net from cash
to cash flow from continuing
operations (d)
Interest coverage, continuing
operations (e)
2002
$
0.79
$
0.28
$
(0.11)
$
(0.10)
$
0.07
$
0.18
$
$
(0.14)
0.55
$
$
0.00
0.35
$
$
0.05
0.12
$
$
5.95
0.17
5.90
10.73
$
$
$
5.52
0.15
4.50
12.86
$
$
$
5.17
0.30
2.69
22.42
0.99
0.82
0.52
426,489,016
415,789,416
415,789,416
422,922,483
415,789,416
415,789,416
1.12
60.26%
1.52
1.09
77.34%
3.41
1.50
48.86%
0.96
1.47
36.04%
0.56
11.63%
6.41%
2.12%
3.25%
1.08%
26.81%
21.19%
9.36%
6.35%
1.69%
0.57
0.45
2.17
1.66
1.33
14.51
7.86
8.45
18.55
11.95
Market price quoted on the Mexican stock exchange.
Equivalent to the number of shares outstanding as of December 31 of each year.
Average number of shares outstanding during the year.
Cash flow is defined as: operating income plus depreciation and amortization.
Cash flow / financial cost, net.
Figures in nominal pesos on the date they were declared.
7.7
4.2
7.2
6.7
6.1
Alfa
6.8
2.2
Mexichem
8.96
12
14.1
2.9
Enterprise value/EBITDA
2.9
P/VL
18.4
P/U
United
States
2003
1.13
53.34%
1.14
3.1
(a)
(b)
(c)
(d)
(e)
(**)
2004
International
Average
Mexichem
United
States
International
Average
desc
GCarso
Average
Mexichem has a very attractive dividend policy, which pays 10% of the EBITDA from the previous year.
Dividend history: pesos per share in pesos of purchasing power as of December 31, 2006:
18
2002
2003
2004
2005
2006
0.31
0.155
0.175
0.61
0.44
IPC
Mexichem
Board of
Directors
CHAIRMAN OF THE BOARD
Antonio del Valle Ruiz
Secretary
Fernando Ysita del Hoyo
Related Directors
Adolfo del Valle Ruiz
Ignacio del Valle Ruiz
Alain Jean Marie de Metz Simart
Ricardo Gutiérrez Muñoz
Jaime Ruiz Sacristán
Juan Pablo del Valle Perochena
Alternate Directors
Antonio del Valle Perochena
Adolfo del Valle Toca
José Ignacio del Valle Espinosa
Francisco Javier del Valle Perochena
María Blanca del Valle Perochena
Gerardo del Valle Toca
Guadalupe del Valle Perochena
CORPORATE GOVERNANCE
Our bylaws call for the existence of an audit committee and a corporate practices
committee to assist the board of directors in the performance of its functions.
Audit Committee
The audit committee is responsible
for evaluating the internal control and
internal audit system of the company,
identifying any important deficiency discovered; monitoring any corrective or
preventive measure taken as a result of
noncompliance with operational and accounting guidelines and policies; evaluating the performance of the external
auditors; describing and evaluating nonaudit services performed by the external
Independent Directors
Divo Milán Haddad
Fernando Ruiz Sahagún
Juan Beckmann Vidal
Armando Santacruz Baca
Valentín Diez Morodo
Alberto Barrenechea Guimón
Alternate Independent Directors
Jorge Corvera Gisbone
Juan Domingo Beckmann Legorreta
Carlos Barrenechea del Arenal
OFFICERS
Chief Executive Officer
Ricardo Gutiérrez Muñoz
Chief Financial Officer
Armando Vallejo Gómez
Director Fluorine Chain
Héctor Valle Martín
Audit Committee
Divo Milán Haddad
Juan Beckmann Vidal
Corporate Practices Committee
Divo Milán Haddad
Jaime Ruiz Sacristán
auditors; reviewing the company’s financial statements; evaluating the effects
of any modification to the accounting
policies approved during the tax period;
monitoring the measures taken regarding the observations by shareholders,
advisors, relevant directors, employees,
or third parties regarding accounting,
internal control systems, and internal
and external audits, as well as any claim
related to irregularities in administration, including anonymous and confidential methods for handling reports
expressed by employees; and supervising compliance with the decision of the
general shareholders meeting and the
board of directors.
Corporate Practices Committee
The corporate practices committee is
responsible for evaluating the performance of executive officers; reviewing
transactions between related parties; reviewing directors’ compensation; evaluating any waiver granted to directors or
executive officers so that they may take
advantage of business opportunities;
and performing the activities set forth in
La Ley del Mercado de Valores, the Mexican securities law.
According to our bylaws, all members of
the audit and corporate practices committee, including each chairman, shall
be independent directors.
19
Financial
statements
2006
Contents
21
22
23
24
26
27
40
20
Opinion of the Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Stockholders’ Equity
Consolidated Statements of Changes in Financial Position
Notes to Consolidated Financial Statements
Report of the Audit Committee
Independent Auditors’ Report
To the Board of Directors and Stockholders of Mexichem, S.A.B. de C.V.:
We have audited the accompanying consolidated balance sheets of Mexichem, S.A.B. de C.V. and Subsidiaries (the “Company”) as
of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and changes
in financial position for the year then ended. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial
statements of Dermet de México, S.A. de C.V. and Subsidiaries (a consolidated subsidiary) for the year ended December 31, 2005,
which statements reflect total assets constituting 8% of consolidated total assets for that year. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Dermet de
México, S.A. de C.V. and Subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
and that they are prepared in accordance with Mexican Financial Reporting Standards. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the financial
reporting standards used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mexichem,
S.A.B. de C.V. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations, changes in their stockholders’
equity and changes in their financial position for the years then ended in conformity with Mexican Financial Reporting Standards.
C.P.C. Carlos Moya Vallejo
March 6, 2007
(March 21, 2007 with respect to Note 22)
21
Consolidated Balance Sheets
MEXICHEM, S.A.B. DE C.V. AND SUBSIDIARIES • (A Subsidiary of Grupo Empresarial Kaluz, S.A. de C.V.)
As of December 31, 2006 and 2005
(Thousands of Mexican Pesos of purchasing power of December 31, 2006)
2006
Assets
Current:
Cash and cash equivalents
Accounts and notes receivable, net
Inventories, net
Prepaid expenses
Derived financial instruments
Total current assets
Property, plant and equipment, net
Other assets, net
Investment in shares of associated companies
Intangible assets, net
Goodwill
Intangible assets from employee benefits
Total
Liabilities and stockholders’ equity
Current liabilities:
Bank loans and current portion of long-term debt
Accounts payable to suppliers
Other accounts payable, provisions and accrued liabilities
Income tax and employee profit sharing payable
Derived financial instruments
Total current liabilities
Long-term debt
Other liabilities
Deferred income taxes
Employee retirement benefits and workers’ compensation
Total liabilities
$
$
$
Stockholders’ equity:
Paid-in capitalCapital stockNominal
Additional paid-in capital
Cumulative effect of restatement
Earned capitalRetained earnings
Cumulative effect of deferred income taxes
Reserve for reacquisition of shares
Cumulative effect of restatement
Financial instruments
Total majority stockholders’ equity
Minority interest
Total stockholders’ equity
Total
22 See accompanying notes to consolidated financial statements.
$
447,684
2,356,179
1,220,006
22,843
–
4,046,712
4,232,876
89,531
34,623
1,012,898
755,409
182,079
10,354,128
708,410
2,217,846
511,858
113,088
14,886
3,566,088
1,120,896
37,324
710,734
88,056
5,523,098
2005
$
$
$
680,584
1,997,697
1,064,276
5,147
148,329
3,896,033
3,444,120
70,388
24,340
1,163,172
485,483
180,044
9,263,580
310,564
2,233,816
681,830
264,523
–
3,490,733
1,288,104
51,169
651,780
100,445
5,582,231
466,823
1,283,444
673,794
2,424,061
466,823
1,283,444
673,794
2,424,061
2,999,209
(328,760)
448,770
(885,004)
(9,508)
2,224,707
4,648,768
182,262
4,831,030
10,354,128
2,070,026
(328,760)
341,381
(905,065)
105,314
1,282,896
3,706,957
(25,608)
3,681,349
9,263,580
$
Consolidated Statements of Income
For the years ended December 31, 2006 and 2005 • (Thousands of Mexican pesos of purchasing power of December 31, 2006)
(Except earnings per share expressed in pesos)
2006
Net sales
$
Cost of sales
12,074,270
2005
$
9,257,993
8,858,334
6,742,933
Gross profit
3,215,936
2,515,060
Operating expenses
1,252,781
920,743
1,963,155
1,594,317
(190,136)
(206,919)
(23,709)
(1,498)
Operating income
Comprehensive financing cost
Other expenses, net
Income from continuing operations before provisions
1,749,310
1,385,900
–
662,955
1,749,310
722,945
510,547
97,540
152,672
129,165
608,087
281,837
1,141,223
441,108
Income from discontinued operations
–
265,090
Cumulative initial effect of change in accounting principles
–
Special item
Income from continuing operations before provisions and cumulative
effect of change in accounting principles
Provisions for:
Income and asset taxes, net
Employee profit sharing
Income from continuing operations
Consolidated net income for the year
Allocation of consolidated net income:
Majority stockholders
Minority stockholders
Majority earnings (loss) per share:
From continuing operations
From discontinued operations
Cumulative initial effect of change in accounting principle
Basic majority earnings per common share
Weighted average common shares outstanding
See accompanying notes to consolidated financial statements.
(38,811)
$
1,141,223
$
667,387
$
1,143,640
(2,417)
$
667,387
–
$
1,141,223
$
667,387
$
2.33
–
–
$
1.00
0.60
(0.08)
$
2.33
$
1.52
490,000,000
437,238,046
23
Consolidated Statements of Changes
in Stockholders’ Equity
For the years ended December 31, 2006 and 2005
(Thousands of Mexican pesos of purchasing power of December 31, 2006)
Paid-in capital
Common Stock
Balances as of January 1, 2005
Initial cumulative effect of valuation
of derivative financial instruments
Dividends paid
Capital increase
Cancellation of treasury stock and
stockholders’ equity items from
convertible debentures
Comprehensive income (loss)Net income for the year
Restatement effect
Nominal
$ 693,067
$ (288,000)
–
–
61,756
Dividends declared
Additional capital contribution due to increase
of minority stockholders’ participation
Comprehensive income (loss)Net income for the year
Restatement effect
Adjustment of additional employee
retirement liability
$
–
–
–
(288,000)
Balances as of December 31, 2005
Balances as of December 31, 2006
Additional
paid-in
capital
Treasury
stock
288,000
Cumulative
effect of
restatement
586,990
$
633,464
–
–
756,909
–
–
43,993
(60,455)
(3,663)
Retained
earnings
$ 1,690,869
–
(282,086)
(6,144)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
667,387
–
–
667,387
466,823
–
1,283,444
673,794
2,070,026
–
–
–
–
–
–
–
–
1,143
–
–
–
–
–
–
–
–
–
–
–
–
1,143,640
–
–
–
–
–
–
–
–
–
–
–
1,143,640
673,794
$ 2,999,209
$ 466,823
$
–
$
1,283,444
$
(215,600)
Earned capital
Cumulative
initial
effect of
deferred
income taxes
$
(328,760)
Reserve
for
reacquisition
of shares
$
–
–
–
$
–
–
(120,792)
(833,164)
Total
majority
stockholders’
equity
Financial
instruments
$
–
$
2,616,639
Total
stockholders’
equity
Minority
interest
$
–
$
71,690
–
–
71,690
(282,086)
735,722
–
–
(64,118)
–
(64,118)
667,387
(71,901)
33,624
629,110
–
–
–
–
667,387
(71,901)
33,624
629,110
–
–
–
–
–
–
–
–
–
–
(71,901)
–
(71,901)
–
–
33,624
33,624
341,381
(905,065)
105,314
–
–
(25,608)
2,616,639
–
–
–
–
(328,760)
$
462,173
Cumulative
effect of
restatement
3,706,957
71,690
(282,086)
710,114
(25,608)
3,681,349
–
–
–
–
(215,600)
–
107,389
–
–
108,532
–
–
–
–
–
–
–
20,523
–
–
–
(114,822)
1,143,640
20,523
(114,822)
(2,417)
–
–
1,141,223
20,523
(114,822)
–
–
–
–
(462)
20,061
–
(114,822)
(462)
1,048,879
–
(2,417)
(462)
1,046,462
(328,760)
$
448,770
$
(885,004)
$
(9,508)
$
4,648,768
–
(215,600)
210,287
$
182,262
318,819
$
4,831,030
25
Consolidated Statements of Changes
in Financial Position
2006
Operating activities:
Income from continuing operations
Add (less) items which did not require (generate) resourcesDepreciation and amortization
Employee retirement obligations, net
Cumulative effect of changes in accounting principles
Net resources obtained from results
$
1,141,223
2005
$
441,108
481,587
(13,037)
31,671
–
1,641,444
465,333
(3,065)
(271,004)
38,811
671,183
(598,006)
(751,963)
Net resources generated by (used in) operating activities
before other effects
1,043,438
(80,780)
Cumulative effect of change in accounting principles
Net resources generated by (used in) operating activities
–
1,043,438
(38,811)
(119,591)
Net changes in working capital, except treasury, before other effects
Financing activities:
Banks loans, long-term debt and convertible debentures at nominal value
Decrease of bank loans and long-term debt due to effects of inflation
Capitalization and separation of stockholders’ equity items from
convertible debentures
Additional capital contribution due to increase of minority
stockholders’ participation
Other long-term liabilities
Adjustment of additional employee retirement liability
Dividends paid
Net resources used in financing activities
(1,703,012)
(107,678)
175,617
(61,783)
(64,118)
–
108,532
(13,845)
(114,822)
(462)
(215,600)
(122,363)
735,722
(61,510)
105,314
–
(282,086)
(1,377,368)
Investing activities:
Additions to property, plant and equipment, net of retirements
Sale of related parties
Investment in shares, net
Other assets, net
(1,026,034)
–
(165,769)
37,828
(255,289)
1,389,814
(283,049)
32,818
Net resources (used in) generated by investing activities
(1,153,975)
884,294
Net changes in cash and cash equivalents
(232,900)
(612,665)
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
1,293,249
680,584
$
447,684
$
680,584
Notes to Consolidated
Financial Statements
1.
Activities
Mexichem, S.A.B. de C.V. and Subsidiaries (collectively the “Company” or “Mexichem”) (formerly Mexichem, S.A. de C.V.) is a
group of companies engaged in the manufacturing of industrial chemical products (chlorine and caustic soda); the manufacturing
and marketing of polyvinyl and hydrofluoric acid; and the extraction, processing and sale of fluorspar.
2.
Significant events
a.
Acquisition of subsidiary - At a Board of Directors’ Meeting held on August 31, 2005, the Board approved the acquisition of the
majority of shares representing the capital stock of Dermet de México, S.A. de C.V. (“Dermet”). To execute this transaction,
during September 2005, the subsidiary Comercializadora Químico Minera, S.A. de C.V., acquired Dermet’s financial debt as
of such date. On November 30, 2005, 69.22% of Dermet’s outstanding stock was acquired through a public bid, generating
goodwill on the transaction of $22,750. On March 31, 2006, Comercializadora Químico Minera, S.A. de C.V. and Tenedora
Pochteca, S.A. de C.V. (related party) were absorbed by Dermet, using the purchase method, because they are independent
companies that are not under common control. In the preceding merger, the Company’s shareholding was diluted from
69.22% to 60% and goodwill of $42,126 was generated in Mexichem. The Company’s consolidated statements of income for
the year 2006 include the figures of Dermet, of which the most significant are sales of $2,064,183 and an operating profit of
$40,114. The Company’s 2005 consolidated financial statements do not include the results of Dermet, because the latter was
only incorporated in the consolidated balance sheet as of December 31, 2005.
On February 28, 2006, the Company acquired all the shares of Bayshore Vinyl Compounds, Inc., Bayshore Rigids, LLC
and Ricicla SA, LLC for U.S. $16 million, these companies are engaged in manufacturing and selling compounds for the
plastics industry and located in the United States. With such acquisitions, the Company begins the internationalization of its
operations in such country. The goodwill generated on the transaction was US $13.2 million, equivalent to $142,311.
b.
Financial restructuring of the group - As part of the Company’s restructuring plan, different transactions were performed
during 2006 with the intention of aligning the different corporate names of the group’s companies based on the business
sector to which they belong, as well as a series of mergers and splits derived from the synergies generated.
Furthermore, Mexichem Cid, S.A. de C.V. was incorporated on April 4, 2006, and is engaged in the research and development
of different projects that will help the group’s companies to carry out their operations more efficiently and productively.
c.
Early payment of convertible debt securities - On August 24, 2005, the Bondholders’ Meeting approved the early amortization
of all debt securities, paying $949,789 (amortization price), of which $662,955 refers to the difference between face value
and amortization price of the securities, which was recorded as a special item in the income statement, generating a
reimbursement of capital for the amount capitalized and a decrease in the liability for debt securities of $60,455.
d.
Mixed public offering - During a Stockholders’ Extraordinary Meeting held on September 21, 2005, the stockholders approved
the subscription of 63,247,744 Company shares in a Mixed Public Offering in the Mexican Securities Exchange. Such
subscription took place on October 19, 2005 and represented a 12.9% capital stock increase.
e.
Discontinued operations - Up to December 2005, the operations of the indirect subsidiaries Mexichem Estireno, S.A. de C.V.
and Poliespuma de México, S.A. de C.V., were presented as discontinued items in the consolidated financial statements,
because management intended to sell these businesses. As of 2006, management decided to continue operating these
businesses and for accounting purposes they were consolidated in the accompanying financial statements, generating
retroactive effects to the 2005 financial statements, in order to make the 2005 financial statements comparable with those
of 2006. The effect in the income statement was an increase in sales of $233,822 and in operating costs and expenses of
$210,989.
3.
Basis for presentation
a.
Explanation for translation into English - The accompanying consolidated financial statements have been translated from
Spanish into English for use outside of Mexico. These consolidated financial statements are presented in accordance with
Mexican Financial Reporting Standards (MFRS). Certain accounting practices applied by the Company that conform with
MFRS may not conform with accounting principles generally accepted in the country of use.
27
b.
Bases for consolidation of the financial statements - The consolidated financial statements include the financial results of
Mexichem, S.A.B. de C.V. and those subsidiaries under its control. The names and equity percentage held in the principal
subsidiaries are as follows. All significant intercompany balances and transactions within the Group have been eliminated in
the accompanying consolidated financial statements.
Subsidiary
Mexichem Resinas Vinílicas, S.A. de C.V.
Mexichem Derivados, S.A. de C.V.
Cloro de Tehuantepec, S.A. de C.V.
Unión Minera del Sur, S.A. de C.V.
Mexichem Colombia, S.A.
Mexichem Flúor, S.A. de C.V.
Dermet de México, S.A. de C.V. and subsidiaries
Mexichem Cid, S.A. de C.V.
Mexichem Servicios Administrativos, S.A. de C.V.
%
Ownership
100
100
100
100
100
100
60
100
100
Main
business
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Vinyl/ Chlorine
Fluorspar
Distribution
Investigation and development
Services
The equity in net income (loss) and changes in stockholders’ equity of those subsidiaries that were acquired or sold, has been
included in the consolidated financial statements as of or up to the date on which the transactions took place and are restated
at constant currency of the latest year presented.
c.
Translation of financial statements of foreign subsidiaries - The financial statements of foreign subsidiaries were translated
into Mexican pesos by using the translation method applicable for integrated foreign operations, because the foreign
subsidiaries are considered to be an integral part of the Mexican operations. As a result of this procedure, monetary balance
sheet accounts are translated at the year-end exchange rate, nonmonetary assets at the historical exchange rate, and profit
and loss accounts at the average exchange rate for the period. Any resulting translation gains and losses are recorded in
results of the year and presented in net comprehensive financing cost. The translated financial statements are then restated
for inflation using factors derived from the Mexican National Consumer Price Index (“NCPI”).
d.
Comprehensive income (loss) - Comprehensive income (loss) is comprised of the net consolidated income for the period
plus any gains or losses that under specific accounting regulations are recorded directly in stockholders’ equity. In 2006
and 2005 other comprehensive income (loss) is comprised of the gain or loss from restatement of Stockholders’ Equity, the
adjustment of additional employee retirement liability, and the valuation effect of the cash flow hedge.
e.
Reclassifications - Certain amounts in the consolidated financial statements as of and for the year ended December 31, 2005
have been reclassified in order to conform to the same presentation of the consolidated financial statements as of and for the
year ended December 31, 2006.
4.
Summary of significant accounting policies
New financial reporting standards - As of June 1, 2004, the function of establishing and issuing MFRS became the responsibility
of the Mexican Board for Research and Development of Financial Reporting Standards (“CINIF”). CINIF changed the terminology
referring to the body of mexican accounting principles from accounting principles generally accepted in Mexico, previously issued by
the Mexican Institute of Public Accountants (“IMCP”), to MFRS. As of December 31, 2005, eight Series A standards had been issued
(NIF A-1 to NIF A-8), representing the Conceptual Framework, intended to serve as the supporting rationale for the development
of such standards, and as a reference to resolve issues arising in practice; NIF B-1, “Accounting Changes and Correction of Errors”,
was also issued. The Series A NIFs and NIF B-1 took effect as of January 1, 2006. Application of the new MFRS did not have a
material impact on the Company’s financial position, results of operations or related disclosures.
The accompanying consolidated financial statements have been prepared in conformity with MFRS, which require that management
make certain estimates and use certain assumptions that affect the amounts reported in the financial statements and their related
disclosures; however, actual results may differ from such estimates. The Company’s management, upon applying professional
judgment, considers that estimates made and assumptions used were adequate under the circumstances. The significant
accounting policies of the Company are as follows:
a.
Recognition of the effects of inflation - The Company restates its financial statements to Mexican peso purchasing power of
the most recent balance sheet date presented. Accordingly, the financial statements of the prior year, that are presented for
comparative purposes, have also been restated to Mexican pesos of the same purchasing power and, therefore, differ from
those originally reported in the prior year. Recognition of the effects of inflation results mainly in inflationary gains or losses
on nonmonetary and monetary items that are presented in the financial statements under the following two line items.
Cumulative effect of restatement - Represents the accumulated monetary position result through the initial restatement
of the financial statements and the gain (loss) from holding nonmonetary assets which resulted from restating certain
nonmonetary assets above (below) inflation.
Monetary position result - Monetary position result, which represents the erosion of purchasing power of monetary
items caused by inflation, is calculated by applying NCPI factors to monthly net monetary position. Gains (losses) result
from maintaining a net monetary liability (asset) position, respectively.
28
b.
Cash and cash equivalents - This line item consists mainly of bank deposits in checking accounts and readily available
daily investments of cash surpluses. This line item is stated at nominal value, yields are recognized in results as they are
accrued.
c.
Inventories and cost of sales - Inventories are recorded at direct acquisition or production cost and are restated at replacement
cost based on the latest purchase, production or extraction cost, without exceeding net realizable value, except for those
which are slow moving. Cost of sales is determined at restated values using the replacement cost or the latest extraction price
at the time of sale.
d.
Property, plant and equipment - Property, plant and equipment are originally stated at acquisition or construction cost and
subsequently restated as follows: a) property, plant and equipment of domestic origin have been restated using indices based
on general price levels in Mexico and b) plant and equipment of foreign origin have been restated based on the exchange rate
fluctuation and inflation rate of the country of origin. Depreciation is calculated by applying the straight-line method to the
restated values, based on the estimated useful lives of each asset.
The average useful lives used by the Company were as follows:
Useful lives in years
Buildings and construction
Machinery and equipment
Vehicles
Furniture and fixtures
40
10 and 20
5
10
e.
Other assets - This item represents capitalized expenses incurred in preparing and developing the mine, such as: costs of
excavation, removal of excess soil, construction of roads, salaries, depreciation, etc., necessary to exploit new levels of the
mine, which are being amortized using the units of production method (based on the number of tons of mineral extracted)
over an estimated period of five years. This accounting method matches revenues and costs and it is in accordance with
accounting practices used by mining industry. Those assets are restated using factors derived from the NCPI.
f.
Investments in associated companies - Investments in associated companies in which the Company are accounted for using
the equity method, based on financial statements prepared on the same accounting principles as those of the Company.
g.
Intangible assets - This item refers to non - compete contracts, material supply contract, usufruct of real estate property, use
of trademarks and customer portfolio, which are amortized over the useful life of each asset. These assets are restated using
factors derived from the NCPI.
h.
Goodwill - Goodwill represents the excess of purchase cost over the fair value of subsidiary shares, as of the date of acquisition.
It is restated using the NCPI and at least once a year is subject to impairment tests.
i.
Impairment of long-lived assets in use - The Company reviews the carrying amounts of long-lived assets in use for an
impairment indicator suggests that such amounts might not be recoverable, considering the greater of the present value of
future net cash flows or the net sales price upon disposal. Impairment is recorded when the carrying amounts exceed the
greater of the amounts mentioned above.
j.
Derivative financial instruments - The Company recognizes all assets or liabilities that arise from transactions with derivative
financial instruments at fair value in the balance sheet, regardless of its intent for holding them. Fair value is determined using
prices quoted on recognized markets. If such instruments are not traded, fair value is determined by applying recognized
valuation techniques.
k.
Embedded derivates - The Company reviews all signed contracts to identify embedded derivatives that should be segregated
from the host contract for purposes of valuation and recording. When an embedded derivative is identified and the host
contract has not been stated at fair value and adequate elements for its valuation exist, the embedded derivative is segregated
from the host contract, stated at fair value and classified as trading or designated as a financial instrument for hedging. Initial
valuation and changes in the fair value of the embedded derivatives at the closing of each period are recognized in current
earnings.
When embedded derivatives are designated as hedging; for fair value, any changes in value of both, the derivative and the
open risk position are recognized in the period in which the change occurs; for cash flow hedges, the effective portion is
recognized temporarily under comprehensive income within stockholders’ equity, with subsequent reclassification to current
earnings at the same time it is affected by the hedged item. The ineffective portion is immediately recognized in current
earnings.
l
Provisions - Provisions are recognized for obligations that result from a past event, that are probable to result in the use of
economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the effect
of the discount is significant.
m.
Reserve for repurchase of shares - Share repurchases are recorded directly in the stock repurchase reserve at acquisition cost.
Upon resale, if there is a difference between the selling price and the acquisition cost, any such difference is recorded as a
share issue/purchase surplus or deficit. However, if the retirement of such shares is approved, they are recorded as a capital
reduction at the respective par value.
29
n.
Income tax, asset tax and statutory employee profit-sharing - Income taxes (“ISR”) and statutory employee profit sharing
(“PTU”) are recorded in results of the year in which they are incurred. Deferred income tax assets and liabilities are
recognized for temporary differences resulting from comparing the accounting and tax bases of assets and liabilities plus any
future benefits from tax loss carryforwards. Deferred ISR assets are recorded only when there is high probability of recovery.
Deferred PTU is derived from temporary differences between the accounting result and income for PTU purposes and is
recognized only when it can be reasonably assumed that such difference will generate a liability or benefit, and there is no
indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be realized.
Tax on assets (“IMPAC”) paid that is expected to be recoverable is recorded as an advance payment of ISR and is presented
in the balance sheet reducing deferred ISR.
o.
Employee retirement obligations - Liabilities from seniority premiums, pension plans and severance payments are recognized
as they accrue and are calculated by independent actuaries using the projected unit credit method at net discount rates.
Accordingly, the liability is being accrued which, at present value, will cover the obligation from benefits projected to the
estimated retirement date of the Company’s employees. During 2005 the initial effect from accruing severance payments was
$38,811, presented as a cumulative effect of a change in accounting principles.
p.
Foreign currency balances and transactions - Foreign currency transactions are recorded at the applicable exchange rate in
effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican
pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component
of net comprehensive financing cost in the consolidated statements of income.
q.
Revenue recognition - Revenues are recognized in the period in which the risk and rewards of ownership of the inventories are
transferred to the customers, which is generally when the inventories are delivered or shipped to customers and the customer
assumes responsibility for them.
r.
Earnings per share - (i) The basic earnings from each ordinary share is calculated by dividing the majority net income by the
weighted average of ordinary outstanding shares during the year; (ii) the earnings (losses) earnings from each ordinary share
due to the change in accounting policy is calculated by dividing the initial effect derived from the change of the accounting
policy by the weighted average of ordinary outstanding shares during the year; (iii) basic earnings (losses) per ordinary share
is calculated by dividing the net income attributable to majority stockholders by the weighted average number of ordinary
shares outstanding during the year.
5.
2006
Cash
Cash equivalents
$
$
6.
218,347
229,337
447,684
2005
$
$
Accounts and notes receivable
2006
Customers
Allowance for doubtful accounts
Others
30
153,330
527,254
680,584
$ 2,409,053
(128,019)
2,281,034
75,145
$ 2,356,179
2005
$
2,072,211
(133,617)
1,938,594
59,103
$ 1,997,697
7.
Inventories
2006
Finished products
Raw materials
Goods in-transit
Spare parts
$
830,038
336,979
21,699
69,459
1,258,175
(38,169)
$ 1,220,006
Less- Allowance for obsolete and slow-moving inventory
8.
2005
$
561,145
463,487
49,242
71,317
1,145,191
(80,915)
$ 1,064,276
Derivative financial instruments
Some of the Company’s subsidiaries contracted hedge options with Pemex Gas y Petroquímica Básica to protect themselves from
the volatility of the price of natural gas.
At the close of 2006 and 2005, the fair value of the natural gas hedges represents a liability of $14,886 and an asset of $148,329,
respectively, which was recorded in stockholders’ equity, net of its deferred tax. As of December 31 2006 and 2005, the favorable
effect recorded for the difference in the contract price compared to market value was $59,014 and $97,995, respectively.
Furthermore, certain subsidiary companies have contracts that fulfill the characteristics of embedded derivatives; however, because
the latter cannot be separated from the host contract, they were not valued or recorded.
9.
Property, plant and equipment
2006
Buildings and construction
Machinery and equipment
Vehicles
Furniture and fixtures
$
1,819,311
7,984,718
114,412
246,908
10,165,349
(7,324,765)
2,840,584
771,834
620,458
$ 4,232,876
Less- accumulated depreciation
Land
Construction in-progress
2005
$
1,803,540
7,783,662
114,332
254,828
9,956,362
(7,369,270)
2,587,092
725,466
131,562
$ 3,444,120
10. Intangible assets
2006
Non – compete contract
Materials supply contract
Customer portfolio
Use of trademark
Goods usufruct contract
$
143,765
42,131
541,055
235,329
50,618
$ 1,012,898
2005
$
$
191,687
84,311
582,949
248,549
55,676
1,163,172
Years of
Amortization
3
1
13
18
18
As of December 31, 2006 and 2005 the intangible assets shown above are net of their amortization.
31
11. Bank loans and long-term debt
As of December 31, bank loans and long-term debt consist of the following:
2006
Loans in foreign currency:
The Bank of Nova Scotia, Bhd.
Unsecured promissory note of U.S. $41 million bearing quarterly interest at the LIBOR
plus 1.5%. Principal is amortized in 20 quarterly payments of U.S. $2,050,000
beginning September 29, 2006, maturing on June 30, 2011.
$
Comerica Bank
Promissory notes of U.S. $16 million bearing quarterly interest at LIBOR plus 1.29%.
Principal is amortized in 16 quarterly payments of U.S. $1,000,000 beginning June 30,
2007, maturing on March 30, 2011.
392,699
$
453,538
172,986
–
15,212
21,791
Loans in Mexican pesos:
Banco Inbursa, S.A.
Unsecured promissory note bearing quarterly interest at the TIIE rate plus 1.75%. Principal is
amortized in 23 quarterly payments of $45,509, maturing on September 5, 2011.
831,250
1,046,701
HSBC México, S.A.
Unsecured promissory note bearing quarterly interest at the TIIE rate plus 4%. Principal
is amortized in 41 monthly payments of $400, maturing on May, 2011.
16,400
–
400,000
–
759
1,829,306
708,410
$ 1,120,896
76,638
1,598,668
310,564
$ 1,288,104
Citibank Colombia, S.A.
Loan of 4,500 million Colombian pesos bearing quarterly interest at the DTF rate plus 3.6%.
Principal is paid in 12 quarterly payments of 350 million Colombian pesos and one of 300
million Colombian pesos and matures in February 2009.
Stock certificates
Issuance of 4,000,000 short-term certificates at par value of $100, generating interest
at the TIIE plus 0.50%, maturing on November 1, 2007.
Others
Less- short-term borrowings from financial institutions and current portion of long-term debt
Long-term debt matures as follows:
Payable during-
2007
2008
2009
2010
2011
32
2005
$
708,410
318,463
313,143
304,901
184,389
$ 1,829,306
Bank loan contracted with The Bank of Nova Scotia, Bhd., Comerica Bank and Inbursa, S.A. establishes certain restrictions for the
Company. Such restrictions include the following:
a.
Maintain a liquidity ratio equal to or exceeding 1
b.
Certain restrictions regarding new liens
c.
Dividend payments must not exceed 10% of EBITDA
d.
Maintain a consolidated interest coverage ratio of not less than 3.5
e.
Maintain a debt ratio not exceeding 3.5
f.
Maintain stockholders’ equity of $2,800,000
g.
Maintain a maximum ratio of long-term liabilities to stockholders’ equity of 1.50
h.
Insure and maintain all equipment and properties in good operating condition.
i.
Comply with all applicable laws, rules, regulations and provisions
j.
Acquire, only with the prior authorization of the Bank, other companies, shares, business interests or assets of companies if
value of such transactions exceed US$ 20 million
The Company obtained authorization from its bank creditors to acquire the companies described in Note 20.
12. Employee retirement obligations
Prepaid employee retirement obligations result from the trust funds for employee retirement obligations, which cover pension,
seniority premiums and severance payments. The amount due resulting from independent actuarial calculations is calculated
using the projected unit credit method. The prepaid employee retirement obligations are analyzed as follows:
2006
Projected benefit obligation (“PBO”)
Fund assets
Excess of funds assets
Unamortized transition asset
Variation in unamortized actuarial loss
Projected net asset
$
$
(179,117)
230,217
51,100
19,994
22,929
94,023
2005
$
$
(197,125)
244,740
47,615
19,071
12,913
79,599
At December 31, 2006 and 2005, the amount of fund assets exceeds the amount of the accumulated benefit obligation (“ABO”),
(equal to the PBO without projecting the wages to the retirement date) by $76,746 and $76,708, respectively.
The net periodic (income) cost consists of:
2006
Labor cost
Financial cost
Return on fund assets
Amortization of transition asset
Effect of personnel reduction and early termination
Effect of reduction and extinction of debentures
Net income for the year
$
$
11,394
10,553
(18,183)
2,032
(19,437)
604
(13,037)
2005
$
$
17,253
10,462
(11,445)
4,561
(26,902)
3,006
(3,065)
The rates used in the actuarial calculations were as follows:
%
Yield on plan assets
Interest rate
Salary increase
5.0
5.5
1.5
33
The average amortization period of unamortized items is as follows:
Years remaining
Transition liability
Unrecognized actuarial loss
2006
2005
2 to 15
7 to 18
5 to 24
7 to 17
13. Stockholders’ equity
At a Stockholders’ Ordinary General Meeting held on December 6, 2006, the stockholders approved the following resolutions:
a.
Amend the corporate bylaws of Mexichem, basically to fulfill the requirements of the New Stock Market Law.
b.
Change the Mexichem’s denomination to Sociedad Anónima Bursátil de Capital Variable (“S.A.B. de C.V.”).
Common stock - At December 31, 2006 and 2005, common stock consists of 490,000,000 shares comprised of Class I nominative,
ordinary shares, at no par value, fully subscribed and paid. Variable capital consists of Class II nominative shares, at no par value,
which may not exceed 10 times minimum fixed capital without right for withdrawal. Subscribed common stock is as follows:
Minimum fixed capital without right for withdrawal
Variable
Class I
Number of shares
Class II
426,752,256
–
426,752,256
–
63,247,744
63,247,744
Amount
$
$
406,567
60,256
466,823
Earned Capital - At the Stockholders’ Ordinary General Meeting held on December 6, 2006, the stockholders, approved a declaration
of dividends for $215,600 ($215,000 at face value) applied to the net tax income account. Such dividends will be settled in four
payments made during January, April, July, and October 2007.
At the Stockholders’ Ordinary General Meeting of April 27, 2005, the stockholders approved a declaration of dividends for $77,024 ($72,503
at face value) applied to the retained earnings account. Such dividend was settled in a single payment made on May 16, 2005.
At a Stockholders’ Ordinary General Meeting held on November 30, 2005, the stockholders declared dividends for $205,062
($196,000 at nominal values) applied to the net tax income account. Such dividends were settled in four payments made during
January, April, July, and October 2006.
Stockholders’ equity, except restated paid-in capital and tax retained earnings will be subject to income tax payable by the Company
at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and estimated income
taxes of the year in which the tax on dividends is paid and the following two fiscal years.
Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income of the year
be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The legal reserve may
be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for
any reason. At December 31, 2006 and 2005, the legal reserve, at historical pesos, was $54,876 y $22,796, respectively.
14. Comprehensive financing cost
2006
Interest income
Interest expense
Exchange (loss) gain, net
Monetary position gain
$
$
34
18,643
(187,136)
(26,747)
5,104
(190,136)
2005
$
$
56,622
(318,528)
27,199
27,788
(206,919)
15. Foreign currency balances and transactions
At December 31, 2006 and 2005, foreign currency assets and liabilities were mainly represented by U.S. dollars and were translated
at the year-end exchange rate of $10.8116 and $10.6344, respectively. The foreign currency monetary position of the Mexican
companies subject to exchange fluctuations is:
Thousands of
U.S. dollars
Current assets
LiabilitiesCurrent
Long-term
Total
Net monetary liability position
2006
2005
106,230
102,846
(174,176)
(32,449)
(206,625)
(100,395)
(145,867)
(36,900)
(182,767)
(79,921)
These amounts do not include the balances of Mexichem Colombia, S.A., which are expressed in Colombian pesos and as of
December 31, 2006 and 2005 are immaterial.
At March 6, 2007, the date of the independent auditors’ report, the unaudited foreign currency position is similar to that of yearend, and the exchange rate was $11.1762 pesos per U.S. dollar.
The principal transactions carried out by the Mexican companies in foreign currency, excluding purchases of machinery and
equipment, are:
Thousands of
U.S. dollars
2006
Sales
Purchases
Net
2005
329,218
(279,981)
49,237
476,516
(426,593)
49,923
The prices of the main products of the companies are based on conditions in the international market.
16. Balances and transactions with related parties
Balances payable to related parties are as follows:
2006
Grupo Empresarial Kaluz, S.A. de C.V.
Servicios Kaluz, S.A. de C.V.
Compañía Mexicana Vamexin, S.A. de C.V.
Others
$
$
132,806
1,309
–
1,049
135,164
2005
$
$
122,997
1,233
4,840
4,091
133,161
Accounts payable to related parties were included under the heading of other accounts payable, provisions and accumulated
liabilities in the accompanying consolidated balance sheet.
The Company carried out the following transactions with related parties:
2006
Revenues fromSales
Administrative services
Interest
$
$
Expenses fromAdministrative services
Donations
Other
$
$
2005
4,183
1,719
1,344
7,246
$
105,679
9,826
2,616
118,121
$
$
$
–
225
–
225
99,556
10,182
1,456
111,194
35
17. Income tax, asset tax and employee statutory profit sharing
In accordance with Mexican tax law, the Company is subject to ISR and IMPAC. ISR is computed taking into consideration the
taxable and deductible effects of inflation, such as depreciation calculated on restated asset values. Taxable income is increased or
reduced by the effects of inflation on certain monetary assets and liabilities through the inflationary component, which is similar
to the gain or loss from monetary position. In 2005 and 2006, ISR tax rate was 30% and 29%, respectively, and as of 2007, such
rate will be 28%. Due to changes in the tax legislation effective January 1, 2007, taxpayers who file tax reports and meet certain
requirements may obtain a tax credit equivalent to 0.5% or 0.25% of taxable income. In addition, as a result of changes in the
tax law effective in 2005, cost of sales is deducted instead of inventory purchases. Taxpayers had the option, in 2005, to ratably
increase taxable income over a period from four to ten years by the tax basis of inventories as of December 31, 2004, determined
in conformity with the respective tax rules, and taking into account inventory turnover. Such inventory was decreased by tax loss
carryforwards, whose net balance as of December 31, 2006 and 2005 was $275,375 and $379,936, respectively. As of 2006, PTU paid
is fully deductible. The PTU rate is 10%.
Through 2006, IMPAC was calculated by applying 1.8% on the net average of the majority of restated assets less certain liabilities,
including liabilities payable to banks and foreign entities. IMPAC is payable only to the extent that it exceeds ISR payable for the
same period; any required payment of IMPAC is creditable against the excess of ISR over IMPAC of the following ten years. As of
January 1, 2007, the IMPAC rate will be 1.25% on the value of assets for the year, without deducting any liabilities.
The Company files consolidated ISR and IMPAC tax returns, including its Mexican subsidiaries in the percentage that it holds the
voting stock of the subsidiaries at the close of the year.
The provision for statutory employee profit sharing has been determined based on the individual results of each company, rather
than on a consolidated base.
Tax system in other countries - Income tax for the foreign subsidiaries is incurred in accordance with the rules of the respective
income tax law in such countries.
Income and asset tax consists of the following:
2006
Income and asset tax expense (benefit):
Current
Deferred
$
$
478,876
31,671
510,547
2005
$
$
423,676
(271,004)
152,672
Effective tax rate is different from legal tax rate due to certain permanent differences between MFRS and tax rules, such as non
deductible expenses and inflation effects.
At December 31, 2006 and 2005, the main items comprising the (asset) liability balance of deferred income tax are as follows:
2006
Excess of book over tax value of property, plant and equipment
Inventories, net
Other
Accrued liabilities which will be deductible when paid
Deferred effect of tax loss carryforwards
Recoverable asset tax
Estimate allowance for asset tax
Employee profit sharing
Net deferred tax liability
$
$
726,059
74,779
82,148
(83,163)
(24,344)
(63,104)
(4,168)
28,830
(26,303)
710,734
2005
$
$
642,991
109,660
167,224
(166,786)
(42,811)
(107,729)
43,016
42,744
(36,529)
651,780
To determine deferred ISR at December 31, 2006 and 2005, the Company applied the different tax rates to temporary differences
according to their estimated dates of reversal.
36
Movements of deferred tax liabilities during the year were as follows:
2006
Beginning balance
Deferred income tax provision applied to results
Accumulated deficit from restatement
Deferred effect of assets and liabilities of acquired companies
Cumulative effect of change in accounting principle
Others
$
$
651,780
31,671
10,230
38,616
–
(45,447)
23,884
710,734
2005
$
$
997,137
(271,004)
(15,137)
(96,644)
(14,971)
43,016
9,383
651,780
Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, of the individual
entities, have been recognized can be recovered subject to certain conditions. Restated amounts as of December 31, 2006 and
expiration dates are:
Year of Expiration
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Tax Loss
Carry forwards
$
$
–
–
–
–
12,810
9,789
25,182
40,689
9,611
24,085
122,166
Recoverable
IMPAC
$
$
643
3,787
6,237
2,869
8,775
10,721
11,300
6,630
6,297
7,563
64,822
18. Discontinued operations
On June 17, 2005, negotiations concluded for the sale of the cable and wire business, this activity was performed through the
Company’s subsidiary Aceros Camesa, S.A. de C.V. and affiliates. This transaction generated a gain on the sale of shares for
$204,375, net of the respective income tax. This result is included in the accompanying consolidated statements of income under
the line item income from discontinued operations. Following is a summary of the discontinued operations:
2005
Revenues from discontinued operations
Cost and expenses
Net comprehensive financing cost
Other expenses
Income taxes and employee profit sharing
Gain on sale of shares
Net income from discontinued operations
$
$
806,043
(678,773)
(6,183)
(23,291)
(37,081)
204,375
265,090
37
19. Information by industry segment
The Company has three business segments in different geographical areas of Mexico. Below is a summary of the most significant
line items of the consolidated financial statements for each operating chain as of December 31, 2006 and 2005:
2006
Vinyl/ Chlorine
Fluorine
Holding
Company
Distribution
Total
Total assets
$ 6,983,312
$ 1,710,029
$ 1,334,827
$
325,960
$ 10,354,128
Net sales
$ 8,218,934
$ 1,789,169
$ 2,056,570
$
9,597
$ 12,074,270
Operating income (loss)
$ 1,411,644
$
681,239
$
45,980
$
(175,708)
$
1,963,155
$
623,035
$
410,619
$
1,825
$
105,744
$
1,141,223
EBITDA
$ 1,693,874
$
811,595
$
63,206
$
(123,933)
$ 2,444,742
EBITDA per share
$
$
1.66
$
0.13
$
3.45
(0.25)
$
4.99
2005
Vinyl/ Chlorine
Fluorine
Total assets
$ 6,697,093
$ 1,391,866
$
Net sales
$ 7,815,977
$ 1,442,016
$
Operating income (loss)
$
1,393,561
$
408,640
$
$
413,992
$
89,900
$
EBITDA
$ 1,685,475
$
527,296
$
EBITDA per share
$
$
1.21
$
3.79
Holding
Company
Distribution
746,627
$
–
$
(199)
9,460
(199)
–
Total
427,994
$ 9,263,580
–
$ 9,257,993
$
(207,685)
$
1,594,317
$
154,035
$
667,387
$
(152,922)
$
(0.35)
$ 2,059,650
$
4.65
20. Subsequent event
Acquisition of subsidiaries - On February 23, 2007, Mexichem signed a share purchase and sale agreement to acquire 100% of the
outstanding shares of Amanco Holding, Inc. (“Amanco”) and on February 22, 2007 signed a letter of intention to acquire 100%
of the shares of Petroquímica Colombiana, S.A. (“Petco”). Amanco is engaged in the production and sale of solutions for the
conduction of fluids, principally water, and is an industry leader in Latin America. Petco is engaged in the production and sale of
vinyl polychlorinated resins and related compounds in Colombia.
With these acquisitions Mexichem continues its strategy of providing greater added value to its basic raw materials, strengthening
its position in Latin America, and becoming a global company with operations throughout almost all of the American continent.
Following is pro forma (unaudited) consolidated financial information of Amanco Holding Inc. and Petroquímica Colombiana, S.A.
as if the transactions had taken place December 31, 2006. This pro forma information does not necessarily represent the actual
figures that would have been obtained if the acquisition had been performed on that date.
38
Condensed balance sheet
Mexichem
Amanco
Petco
Accounts receivable, net
Inventories, net
Other current assets
Fixed assets, net
Intangible assets, net
Goodwill
Other assets, net
Total
$
447,684
2,356,179
1,220,006
22,843
4,232,876
1,012,898
755,409
306,233
$ 10,354,128
$
625,527
2,158,557
1,450,776
50,296
2,687,796
177,559
–
211,140
$ 7,361,651
69,973
1,198,400
437,600
3,146
1,017,599
–
–
117,068
$ 2,843,786
Notes payable to financial institutions
Accounts payable to suppliers
Other accounts payable
Long-term debt
Other liabilities
Total liabilities
Stockholders’ equity
Total
$
$
$
708,410
2,217,846
639,832
1,120,896
710,734
125,380
5,523,098
4,831,030
$ 10,354,128
571,015
1,440,970
651,507
1,040,368
168,228
191,884
4,063,972
3,297,679
$ 7,361,651
$
500,761
779,170
143,265
313,158
–
8,876
1,745,230
1,098,556
$ 2,843,786
Condensed statement of income
Mexichem
Amanco
Petco
Net sales
Cost of sales
Operating expenses
Other (expenses) income, net
Comprehensive financing cost
Income tax expense
Net income
$ 12,074,270
(8,858,334)
(1,252,781)
(23,709)
(190,136)
(608,087)
$ 1,141,223
$ 8,829,617
(4,598,530)
(3,607,269)
8,195
(169,753)
(205,431)
$
256,829
$ 4,066,794
(3,750,101)
(171,407)
8,465
(72,308)
(25,094)
$
56,349
21. New accounting principles
When Mexican NIF Series A went into effect on January 1, 2006, which represents the Conceptual Framework described in Note
4, some of its provisions created divergence with specific MFRS already in effect. Consequently, in March 2006, CINIF issued
Interpretation Number 3 (INIF No. 3), “Initial Application of Mexican Financial Reporting Standards”, establishing, that provisions
set forth in specific MFRS that have not been amended should be followed until their adaptation to the Conceptual Framework is
complete. For example, in 2006, revenues, costs and expenses were not required to be classified as ordinary and non-ordinary in
the statement of income and other comprehensive income items in the statement of stockholders’ equity were not required to be
reclassified into the statement of income at the time net assets that gave rise to them were realized.
CINIF continues to pursue its objective of moving towards a greater convergence with International Financial Reporting Standards. To
this end, on December 22, 2006, it issued the following MFRS, which will become effective for fiscal years beginning on January 1, 2007:
NIF B-3, Statement of Income
NIF B-13, Events Occurring after the Date of the Financial Statements
NIF C-13, Related Parties
NIF D-6, Capitalization of Comprehensive Financing Result
At the date of issuance of these consolidated financial statements, the Company has not fully assessed the effects of adopting these
new standards on its financial information. Management of the Company thinks that those changes will not impact Company’s
financial information in a significant manner.
22. Financial statements issuance authorization
These consolidated financial statements were authorized for issuance on March 21, 2007 by the Company’s Audit Committee and
are subject to approval at the Company’s Board of Directors and its Stockholders’ Ordinary General Meeting, where such financial
statements may be modified as established in the General Companies Law.
39
Report of the Audit Committee
MEXICHEM, S.A.B. DE C.V., AND SUBSIDIARIES
Mexico City, April 16, 2007
To the members of the Board of Directors of Mexichem, S.A.B. de C.V., and Subsidiaries:
As Chairman of the Audit Committee (the Committee) of Mexichem, S.A.B. de C.V., and its Subsidiaries (Mexichem), I report the
following:
During the period, six sessions of the Committee were held, on the following dates: July 17, October 9, and December 7, 2006, and
January 11, February 19, and March 21, 2007, which sessions were attended by all the members of the Audit Committee, the external
auditors, the internal audit manager, and the Mexichem officials who appeared at the request of this Committee. The Committee
approved the activities and resolutions agreed upon for each respective act.
In compliance with article 43, part II, sections (a) to (h) of the new Mexican Securities Market Law and the Law on Internal
Regulation, I hereby submit the report of activities corresponding to the period ending December 31, 2006.
I. Evaluation of the Internal Control System
The Committee, considering the results of the evaluations of the operation of the internal control system issued by the Internal
Auditor, the External Auditor, and the Chief Executive Officer in compliance with the applicable legal provisions, considers that
the internal accounting control system maintained by Mexichem meets the objectives of control of the Administration and offers
reasonable security, in all important aspects, that errors or irregularities during the normal course of operations will be prevented
or detected.
II. Evaluation of the Internal Audit function
The Committee has remained attendtive to the needs of the Internal Audit Area, so that it has sufficient human and material
resources for the suitable performance of its duties. In this respect, the work programs and activities during the year 2006 were
satisfactorily completed, and the work plan for 2007 was approved. Similarly, the members of the Committee have met the manager
of Internal Audit outside the presence of other Company officials to receive the information that they have considered.
III. Evaluation of the performance of External Auditing
The External Auditor received the financial statements as of December 31, 2006 without observations, which highlighted the
cooperation by all areas of the Company for the completion of this task. Similarly, the work of the external auditors Galaz, Yamazaki,
Ruiz Urquiza, S.C. (Deloitte) was evaluated, along with that of Mr. Carlos Moya Vallejo, the partner charged with this audit, and
such work was considered satisfactory. The External Auditors confirmed their independence.
The members of the Committee have met the External Auditor outside the presence of Company officials and received his full
cooperation to receive additional information when requested on the subjects discussed.
IV. Financial information
The Committee discussed the financial statements of the Company with the executives responsible for their preparation and
review; there were no observations to the financial information corresponding to the quarters ending in March, June, September,
and December 2006. The Committee approved the statements before their delivery to the Mexican Stock Exchange.
For the preparation of this report we have heard from the relevant directors of the Company, and there was no difference of opinion
among them.
V. Accounting policies
The Committee reviewed and approved the principal accounting policies followed by Mexichem in terms of the information received
by reason of the new regulations.
The accounting policies, criteria, and information observed by Mexichem are adequate and sufficient and applied on consistent bases.
VI. Report from the Chief Executive Officer
The Committee received and approved the report from the Chief executive officer on the activities of the year 2006.
VII. Legal report
The Committee received the legal report on the status of current topics and litigation.
VIII. Proposal
Based on the work performed, the Committee recommends that the Board of Directors submit the audited financial statements of
Mexichem for the approval of the shareholders meeting for the fiscal year ending December 31, 2006.
Sincerely
Divo Milán Haddad
Chairman of the Audit Committee
40
1,412
Salt
Chlorine
205
2,809
Natural
gas
(45)
02
03
04
05
06
02
03
04
05
Symbol on the BMV
Soda
Natural
gas
2,345
7,816
1,393
1,971
Chlorinevinyl
chain
Operating income
325
8,219
06
MEXCHEM
Electricity
Vinyl
chloride
Polyvinyl
chloride
Subscription date
September 1978
490 million
Ethane
Ethylene
Independent auditor
this chain was
income was
5.2%
1.3%
681
1,789
217
354
Hydrofluoric
acid
Fluorspar
150
544
Sulfuric
acid
409
1,442
1,060
02
Sulfur
03
04
05
06
02
03
04
05
06
this chain was
income was
24%
67%
fluorspar mine.
406
Fluorine
chain
Operating Income
Fluorine chain
Investor relations
Tel. 52 (55) 52 51 59 98
Fax. 52 (55) 52 51 21 33
Latin America.
Corporate offices
Río San Javier 10.
Tel. 52+ (55) 53 66 40 00
Fax. 52+ (55) 53 97 88 36
Distribution
17%
Sales 2006
MXN12.074
billion
EBITDA 2006:
MXN2.445
billion
Contents
Annual Report 2006
02
02
04
06
08
10
12
14
15
17
19
19
20
Chlorine-Vinyl
68%
Distribution
2%
www.mexichem.com.mx
Fluorine
15%
Relevant events
Board of directors
Fluorine
31%
Chlorine-Vinyl
67%

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