edible salt chlorine-caustic soda pvc resins pipes and

Transcription

EDIBLE SALT
CHLORINE-CAUSTIC SODA
PVC RESINS
Avenida Ricardo Margain Zozaya #565 B
Col. Parque Corporativo Santa Engracia
Garza Garcia, Nuevo Leon
Mexico 66267
internet address: www.cydsa.com
e-mail: [email protected]
PIPES AND FITTINGS
REFRIGERANT GASES
ACRYLIC YARNS
- Policyd (1997) Altamira
- Industria Quimica del Istmo (1998)
Coatzacoalcos
- Sales del Istmo (1999)
- Policyd (2000) La Presa
Monterrey, Tlaxcala
Coatzacoalcos
2 0 0 6
A N N U A L
R E P O R T
CYDSA’s two business segments include:
Chemicals and Plastics, and Yarns for
Textiles. Headquartered in Monterrey, Mexico,
the Company COMPRISES more than 20 subsidiaries
located in 12 cities and serves customers in more
than 30 countries.
1
2
10
14
18
20
Financial information:
Management Analysis of CYDSA’s Financial Statements
Independent Auditors’ Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
25
29
30
34
Design: Infobrand
Financial Highlights
Letter to Our Shareholders
Economic Environment
Chemical Division
Yarns Business
Board of Directors
Printing: Earthcolor, Houston
CONTENTS
FINANCIAL HIGHLIGHTS
Results
2006
2005
5,988
536
98
18%
612
365
55
17
7,981
96
69
4,641
16.2
8,497
120
99
4,577
16.7
(Millions of Mexican Pesos with purchasing power as of December 31, 2006)
Consolidated Sales
Consolidated Sales (millions of dollars)
Export Sales (millions of dollars)
Export Sales / Consolidated Sales
Operating Income
Net Income from Continuing Operations
Net Income (Loss)
Net Income (Loss) for Majority Interest
5,575
483
76
16%
470
369
(313)
(344)
Financial Position
(Millions of Mexican Pesos with purchasing power as of December 31, 2006)
Total Assets
Bank and Notes Debt (millions of dollars)
Bank and Notes Debt Net of Cash1 (millions of dollars)
Stockholders’ Equity
Book Value per Share (pesos)2
Cash Flow
(Millions of Current Pesos)
808
74
Operating Cash Flow (EBITDA) (Operating profit plus non-cash items)
Operating Cash Flow (EBITDA) (millions of dollars)
664
61
Indicators
10.3%
6.1%
0.9%
13.8%
4.50
0.23
0.73
16.2%
8.4%
6.6%
(5.6%)
12.6%
3.65
0.29
0.86
15.9%
Total Personnel
2,853
3,766
Exchange Rate (Pesos per US Dollar):
Annual average
End of year
10.90
10.81
10.89
10.63
Operating Income / Sales
Net Profit for Continuing Operations / Sales
Net Income (Loss) / Sales
Operating Cash Flow (EBITDA) / Sales
Operating Cash Flow (EBITDA) / Financial Expenses (ratio)
Bank and Notes Debt / Shareholders’ Equity (ratio)
Total Liabilities / Shareholders’ Equity (ratio)
Net Working Capital3 / Sales
CONSOLIDATED SALES
Millions of Dollars
2 Based on 273,667,498 shares outstanding
in 2005 and 285,831,000 in 2006.
OPERATING CASH FLOW (EBITDA)
Millions of Dollars
3 Due to the seasonal characteristic of several
of CYDSA’s markets, all measures related to
Working Capital performance are computed
with a methodology based on the last sales
required to complete the balance of trade receivables, inventories and trade payables.
BANK AND NOTES DEBT
Millions of Dollars at December 31st
398
381
402
451
483
536
43
15
26
43
61
74
465
409
390
163
120
96
01
02
03
04
05
06
01
02
03
04
05
06
01
02
03
04
05
06
Note: To provide comparability, figures exclude Divestitures and Discontinued Operations.
C Y D S A’ S A N N U A L R E P O R T 2 0 0 6
1 Debt Net of Cash corresponds to Total Debt
minus Cash and Marketable Securities. It is
expressed in US dollars as most of the debt is
dollar denominated.
TO OUR SHAREHOLDERS
Tomas Gonzalez Sada
Chairman of the Board, President
and Chief Executive Officer
DURING 2006, DOMESTIC AND ECONOMIC CONDITIONS PROVED FAVORABLE FOR THE BUSINESS
ENVIRONMENT. STRATEGIES IMPLEMENTED DURING RECENT YEARS, FOCUSED ON STRENGTHENING THE OPERATING AND FINANCIAL STRUCTURE, PRODUCED POSITIVE RESULTS FOR CYDSA. THE
GROUP ACHIEVED A FOURTH CONSECUTIVE YEAR OF INCREASED SALES AND OPERATING CASH
FLOW (EBITDA1), AS MOST OF ITS BUSINESSES PROGRESSED AND MANY KEY MEASUREMENTS OF
CYDSA’S OPERATIONAL AND FINANCIAL PERFORMANCE IMPROVED.
The next paragraphs summarize the most significant events of 2006, explained in subsequent sections.
Suspension of Operations of the Acrylic Fiber Business (Crysel) during January 2006.
As explained in the Economic Environment section of this Report (page 10), higher demand increased prices
of hydrocarbon products and their derivatives. This trend sharply accelerated during the second half of 2005,
triggered by the impact of hurricanes affecting US production and distribution facilities located in the Gulf of
Mexico.
The acrylic fiber industry comprises global companies competing against both synthetic fiber and cotton
producers. The exceptional increases in energy and acrylic fiber raw material costs affected only North American markets. Competitive pressures prevented the passing on of these higher prices to customers, as other
international manufacturers did not experience this level of increased cost. Initially, this situation reduced
profit margins and then escalated into a severe cash flow condition. Finally, on January 23 of 2006, Crysel
suspended all operations.
Advance Payment of Bank Debt.
As noted in previous Reports, on March 16, 2004, CYDSA and several of its subsidiaries concluded a Bank
Debt Restructuring Agreement with debt holders. The definitive restructure concluded on January 19, 2005,
covering US$162.8 million. Subsequent transactions, involving programmed and advance Debt and Notes
payments reduced this amount to US$120.1 million as of December 31, 2005.
In 2006, in addition to specified principal obligations, a US$12.2 million advanced payment occurred on
March 31st. These funds, primarily received from the Montreal Protocol and complemented with internally
generated cash, reduced Debt to US$96.4 on December 31, 2006. CYDSA’s Results of Operations and Financial Condition section of this Report (page 25), explains the positive impact of these transactions on the
Group’s financial position.
1 Operating Cash Flow or EBITDA refers to Profits before Total Financing Cost, Taxes, Employees’ Statutory Profit Sharing, Extraordinary
items in the Statement of Operations, Depreciation and Amortization. EBITDA is equivalent to Operating Profit plus non-cash items.
Approvals of General Shareholders Meetings
held on March 6, April 26 and December 15.
On March 6, 2006, a General Extraordinary Shareholders Meeting approved amendments to the corporate bylaws, reduced capital stock and cancelled
all treasury shares. The total prepayment of the
Convertible Debentures required these changes.
On April 26, 2006, the General Ordinary Shareholders Meeting reviewed and approved 2005 results. In addition, a General Extraordinary Meeting
authorized a capital stock increase equivalent to
US$4 million. This new capital, totally subscribed
and paid on May 17, strengthened CYDSA’s financial structure.
On December 15, 2006, the Extraordinary and
Ordinary Shareholders Meetings respectively approved the amendments to the corporate bylaws
and the election of the Board of Directors, complying with new Stock Market Regulations.
The restructuring of the Business Portfolio and progress in balancing Bank Debt with financial capability
reinforced the Group’s operating and strategic foundations. These actions strengthened the medium
term prospects of Value Creation for CYDSA’s Shareholders.
The following chapters describe the 2006 results and
identify improvements from previous years2:
• Sales and Income.
• Operating Cash Flow (EBITDA).
• Net Cash Flow.
• Bank Debt.
• Outlook.
Sales and Income
In accordance with Mexican Financial Reporting Standards, Sales, Costs and Operating Income figures for
both 2005 and 2006 exclude results from Divested
Businesses and Discontinued Operations.
Following these principles, Consolidated Sales totaled
5,988 million pesos in 2006, increasing 7.4% from
5,575 million the prior year. Domestic Sales reached
4,892 million pesos, 4.2% above the 4,695 million
achieved in 2005. Export Sales of US$98 million grew
28.9% from US$76 million the year before.
As explained in the Economic Environment section of
this Report (page 10), the domestic and international
markets served by CYDSA generally experienced favorable conditions in 2006. As a result, total unit sales
showed a weighted average growth of 6.6%, similar
to the sales increase in constant pesos.
In dollar terms, CYDSA’s Consolidated Sales for
2006 totaled US$536 million, an increase of
11.0% over the US$483 million in 2005. As depicted
in the graph of the next page, this performance made
four consecutive years of higher sales.
In most of the Group’s Businesses, the influence of
higher international pricing for chemicals and petrochemicals, offset increases in raw material and energy costs. Consequently, profit margins rose on most
products, particularly those distributed in the domestic market.
In addition, productivity improvement reduced expenses in Business and Staff Areas. These savings
and proceeds from a Refrigerant Gases Business
transaction, detailed in the next section, increased
Operating Profit3 to 612 million, up 30.2% from 470
million generated the previous year.
Despite the reduction in Bank Debt, Total Financing
Cost increased to 184 million pesos compared with
56 million in 2005. Exchange rate depreciation and,
to a lesser extent, increased interest rates, contributed
to this change.
Other Net Income in 2006 of 87 million pesos, derived mainly from a Montreal Protocol payment for
the early cessation of CFC production. Taxes and Employees’ Statutory Profit Sharing costs equaled 150
million pesos. The resultant Net Income from Continuing Operations totaled 365 million pesos in
2006, compared with a 369 million in 2005. A 310
million pesos charge associated with Discontinued
Operations, produced a Consolidated Net Profit
of 55 million pesos, compared to a 313 million
Loss in 2005.
2 All figures are expressed in pesos with purchasing power as of December 31, 2006 (constant pesos), unless otherwise stated. Foreign
exchange figures are expressed in US dollars.
3Operating Income equals Net Sales minus Cost of Sales and Operating Expenses.
On July 31, 2006, London, England based Standard Bank PLC assumed BBVA-Bancomer’s share
of the Group’s Debt. The transaction also included
the proportional rights of CYDSA’s commitment to
purchase, by January 2011, the portion of the Valores Quimicos subsidiary shares, currently owned
by the Creditor Banks.
TOTAL CONSOLIDATED SALES
Millions of Dollars
398
381
402
451
483
536
11.0%
01
Millions of Pesos
4,719
02
03
4,440 4,981
The 310 million pesos charge for Discontinued Operations in 2006, detailed in the Analysis of CYDSA’s
Results of Operations and Financial Condition of this
Report (page 25), relates primarily to the reassessment of Acrylic Fiber Business Fixed Assets. This unit
suspended operations in January 2006, as explained
in following paragraphs.
CYDSA’s Acrylic Fiber Business, globally recognized
as Crysel, represented a traditionally competitive
company with exports accounting for more than
50% of sales. In operation since 1967 in El Salto,
Jalisco, the company maintained a systematic productivity improvement philosophy.
In recent years, Crysel experienced a severe reduction in profit margins. Descending cotton prices and
escalating energy and raw materials costs, driven by
higher crude oil and natural gas prices, accounted
for this decline. The Business reacted by lowering
administrative expenses and reducing energy consumption and other variable production costs. Crysel
also developed new higher value added products
and minimized working capital requirements. Attempts to establish strategic alliances with domestic
and foreign producers proved unsuccessful.
These efforts failed to compensate for the dramatic
growth of energy costs in North America. Finally, the
Business became unable to obtain acrylonitrile, its
primary raw material, at viable international pricing
and terms of sales. This further deteriorated Crysel’s
competitiveness and prevented the generation of
positive operating cash flows. As a result, CYDSA
suspended operations of acrylic fiber production on
January 23, 2006.
04
05
06
5,619
5,575
5,988
Note:To provide comparability, figures exclude Divestitures and Discontinued
Operations.
In 2005, Crysel’s sales totaled 1,767 million pesos,
including exports of US$85 million. In accordance
with Mexican Financial Reporting Standards, 2005
Financial Statements incorporated the cost associated with the suspension of operations of this Business.
Operating Cash Flow (EBITDA)
In 2006, CYDSA’s Operating Cash Flow reached
the equivalent of US$74 million or 13.8% of Sales,
up from US$61 million in 2005. The results represent
the fourth consecutive annual growth, as depicted in
the chart of the next page.
The following three favorable and two unfavorable factors explain the US$13 million, or 21% increase in
EBITDA over 2005:
• Increase in demand and pricing of Chemicals
and Plastics: US$16 million.
Several CYDSA’s Businesses involve chemical and
petrochemical products where pricing in international markets affect both the final product and the
raw materials used in their manufacture.
In the second half of 2005, two extremely strong
hurricanes severely impacted US oil and gas production, processing and distribution facilities in the
Gulf of Mexico. These events abruptly distorted
North American chemical and petrochemical supplies, provoking significant price volatility and product scarcity.
Equilibrium returned to these markets during 2006,
as world oil prices significantly increased. The Economic Environment section of this report (page 10)
describes these circumstances. For most of the year
the conditions produced positive trends in pricing
and demand for many of CYDSA’s products. Improved profit margins and increased volume each
generated an additional US$8 million in operating
cash flow, increasing CYDSA’s EBITDA by US$16
million.
During 2006, several new investments provided
CYDSA with the capability for destroying the HFC23 gas, a by-product produced during the manufacture of HCFC-22 refrigerant gas. The new processes
complied with rules established by the Mexican
Ministry for Environment and Natural Resources
and International Environmental Organizations. As a
result, on November 14, 2006, the Kyoto Protocol
authorities granted Quimobasicos an initial package
of Carbon Certified Emission Reductions (CER’s).
At the end of December, Quimobasicos sold these
certificates in the international carbon market, increasing CYDSA’s EBITDA by US$10 million.
• Sale of Carbon Certified Emission Reductions:
US$10 million.
On September 9, 2005, CYDSA’s subsidiary Quimobasicos, a producer of refrigerant gases since 1963,
suspended chlorofluorocarbons (CFC’s) manufacturing. The cessation, announced to the domestic
and international community, took place almost five
years prior to Mexico’s original commitment to the
Montreal Protocol.
• Recovery of productivity standards in the Yarn
Business: US$4 million.
For several years, the Mexican Textile Industry has
suffered from imported Asian products, primarily of
Chinese origin, frequently utilizing unfair and often
illegal marketing practices. Faced with the continued decrease of acrylic yarn demand and distressed
prices in Mexico and the US, in late 2004, CYDSA’s
Yarn Business initiated a project to improve its
competitive position by consolidating all acrylic yarn
manufacturing in one location.
This event occurred on the International Day for
the Preservation of the Ozone Layer. Those in attendance included the minister of Mexico’s Environment and Natural Resources, the director for
Multilateral Environment Programmes of the United Nations Industrial Development Organization,
senior representatives of the Multilateral Fund for
the Implementation of the Montreal Protocol, the
Ozone Secretariat, the Ministry for Energy and other Mexican and international representatives concerned with environmental quality. Quimobasicos
continues to produce and distribute HCFC-22 and
other refrigerant gases, complying with applicable
regulations and meeting market requirements.
In January 2005 the San Luis Potosi plant suspended
production operations. Machinery and equipment
from four facilities transferred to one industrial center in Aguascalientes City. The transfer, completed at
the beginning of 2006, allowed the Yarn Business
to achieve lower operating costs while improving
capacity utilization.
OPERATING CASH FLOW (EBITDA)
MillIons of Dollars
43
15
26
43
61
74
13
Millions of Current Pesos
Operating Cash Flow /
Consolidates sales
01
02
400
132
10.7% 3.6%
03
04
05
06
279
483
664
808
6.5%
9.5%
12.6%
13.8%
Note:To provide comparability,
figures exclude Divestitures and Discontinued
Operations.
Supported by a more competitive production capability, the Business optimized customer and market
mix, positively impacting CYDSA’s 2006 EBITDA by
US$4 million.
These three programs favorably improved CYDSA’s
2006 EBITDA by US$30 million. The following unfavorable circumstances negatively impacted this figure.
• Fixed Costs increase due to inflationary effects and cyclical maintenance programs:
US$12 million.
A significant proportion of the Group Businesses’
sales and variable costs involve US dollars or transactions denominated in this currency. As a result,
profit margins usually experience little change from
peso-dollar exchange rate fluctuations. Conversely,
salaries and other cash fixed costs represent peso
denominated items and are influenced by Mexican
inflation.
Despite substantial reductions in the inflation rate,
unit costs increases combined with exchange rate
stability in 2006 negatively impacted the cash fixed
costs in dollar terms.
Strategies focused on cash fixed cost reduction in
Businesses and Staff Areas, represents a key element in CYDSA’s operational improvements. Cyclical preventive maintenance programs however,
required substantial outlays to assure proper operational and safety standards in several of the Group’s
chemical and petrochemical plants.
The impact of these programs as well as inflation
produced a US$12 million reduction in CYDSA’s
EBITDA.
• Energy Cost increase: US$5 million.
CYDSA production processes consume high levels
of energy, often representing a significant share of
total costs. Hydrocarbon price increases not only
directly affected diesel, fuel oil #6 and other derivatives, but also severely impacted the cost of electricity. Despite effective energy reduction programs,
these factors decreased CYDSA’s EBITDA by US$5
million.
In summary, these two negative factors reduced by
US$17 million the US$30 million provided by the
three positive items previously mentioned. The net
increase of US$13 million produced a US$74
million EBITDA in 2006, compared with US$61
million in 2005.
Net Cash Flow4
The following table summarizes the Net Cash Flow for
2006, differentiated between proceeds derived from
Operations and the amount generated from Financial
and Non-recurring Transactions.
Operating Cash Flow (EBITDA) of US$74 million provides the initial input to Net Cash Flow from Operations.
Net Working Capital of US$13 million, represents the
initial operative outlay. A receivable of US$10 million
associated with the year-end sale of Carbon Certified
Emission Reductions made up the majority of the
increase. The remaining US$3 million relates to Accounts Receivables and Inventories supporting higher
sales.
Other applications of cash included US$3 million in
Taxes, US$11 million in Net Interest and US$2 million of Financial Discounts to Customers for Prompt
Payments. Fixed Asset Investments totaled US$18
million, with US$6 million required in the Refrigerant
Gas Business, primarily to comply with the Kyoto Protocol regulations. The remainder covered operational
maintenance and productivity improvement projects
in Other Businesses. After considering Other Operational Items net outflows of US$3 million, Net Cash
Flow from Operations showed a positive US$24 million.
Positive Net Cash Flow from Financial and Nonrecurring Transactions comprises US$8 million covering the final net proceeds, granted by the Montreal
Protocol, for the early cessation of CFC refrigerant gas
production. Additionally, the Capital Stock Increase,
approved by the General Shareholders Meeting held
on April 26, 2006, provided US$4 million.
Financial and non-recurring cash outflows include
US$24 million for Bank Debt Principal Payments, and
US$6 million associated with Operational and Financial Restructuring. The latter primarily covers personnel downsizing in the Acrylic Fiber Business. These
4 Figures corresponding to Cash Flow are expressed in current pesos, this is, without inflation effects adjustments, in order to reconcile
the beginning and end of the year cash balances. Comparisons are expressed in U.S. dollars as most of the Interest Expense is dollar
denominated.
NET CASH FLOW 2006
Millions of Dollars
Net Cash Flow from Operations:
Operating Cash Flow (EBITDA)
74
Investments in Net Working Capital
(13)
Taxes
(3)
Net Interest Disbursements
(11)
Financial Discounts to Customers for Prompt Payments
(2)
Fixed Asset Investments
(18)
Other Operational Items
(3)
Net Cash Flow from Operations
24
Net Cash Flow from Financial and Non-recurring Transactions:
Net Extraordinary Income
8
Capital Stock Increase
4
Bank Debt Principal Payments
(24)
Non-recurring Transactions and Disbursements related with
Operational and Financial Restructuring
(6)
Net Cash Flow from Financial and Non-recurring
Transactions
(18)
Net Cash Flow
6
items contributed to a negative US$18 million in Net
Cash Flow from Financial and Non-recurring Transactions.
The US$24 million surplus in Net Cash Flow from Operations and the outflow of US$18 million in Net Cash
Flow from Financial and Non-recurring Transactions
produced a positive Net Cash Flow for 2006 of
US$6 million.
payments for US$12.2 million. As a result, CYDSA’s
Bank Debt as of December 31, 2006 totaled
US$96.4 million5. This represents a US$23.7 million
or 20% reduction from US$120.1 one year earlier.
The chart in the next page shows the 2006 Debt declining US$653 million or 87% from the total Debt
as of December 1993, and US$504 million or 84%
from 2000, the initial year of CYDSA’s strategy aimed
at restructuring the Group’s Business Portfolio.
Bank Debt
Contents of the 2006 Annual Report
As mentioned previously, on January 19, 2005
CYDSA concluded the restructuring of its Bank and
Notes Debt. The agreement covered Debt totaling
US$162.8 million with payments ending in 2011.
The sections devoted to the Operating Units of the Divisions include 2006 accomplishments for each
of CYDSA’s Business Units and information relative to their products and markets (page 13).
In 2005, CYDSA covered all programmed debt amortization, made advance payments on principal and on
December 15 liquidated the Convertible Debentures
issued in January of that year. These disbursements
reduced total Debt to US$120.1 million as of December 31, 2005.
The Economic Environment chapter covers the significant events of the year and its impact on CYDSA’s
markets (page 10). Management’s Discussion
and Analysis of CYDSA’s Results of Operations
and Financial Condition (page 25) precedes the
Audited Financial Statements (page 30).
Similarly, outlays in 2006 covered both US$11.5 million of required amortizations and advanced principal
5 CYDSA’s Debt restructure included the exchange of US$76.4 million in Bank Debt of the Group’s textile companies for a 16.45% interest in the subsidiary Valores Quimicos, S.A. de C.V. The Creditor Banks also received CYDSA’s commitment to purchase these shares on
or before January 11, 2011. The Balance Sheet shows the reclassification of this item from Bank Debt to Other Long Term Liabilities. As
a result, Bank Debt excludes US$76.4 million at December 2004 and 2005 as well as US$77.5 million at December 2006.
terials, as well as the adverse impact on fixed cost of
currency exchange fluctuations.
Outlook
CYDSA’s Shareholders: The results obtained in 2006,
derive primarily from the Group’s operational and
financial restructuring, implemented during the last
several years. It is important to note that the progress
occurred in the face of unfavorable competitive conditions related to high energy prices and the effects of
exchange rates on fixed costs. This progress improved
the outlook for profitable growth in the near future.
In addition to meeting all obligations on Bank Debt,
mandated by the January 19, 2005 restructuring
agreement, advanced payments supported by nonoperational cash flow further reduced Bank Debt in
2006.
Operationally, the restructuring of the Group’s Business Portfolio and the improvements in manufacturing, management and logistics processes produced
positive outcomes. These activities more than offset
the impact of price increases in energy and raw ma-
It is important to note the achievements obtained
from the joint participation of Mexico’s Government
and CYDSA, supporting the United Nations Industrial
Development Organization’s mission of providing a
cleaner and healthier environment for future generations. These efforts concluded a significant phase on
September 9, 2005, when Quimobasicos, CYDSA’s
subsidiary producing refrigerant gases since 1963,
suspended the manufacture of chlorofluorocarbons
(CFC’s), almost five years prior to Mexico’s original
commitment to the Montreal Protocol. During 2006,
the Business invested in technology and equipment
to capture and incinerate HFC-23 gas, a by-product of
the manufacturing process, in compliance with Kyoto
Protocol regulations. The sale of a Carbon Certified
Emission Reductions (CER’s) package, in the international carbon market at the end of 2006 represented
the first positive results of this initiative.
BANK AND NOTES DEBT5
MillIons of Dollars at December 31st
749
695
600
465
409
390
163
120
96
653
504
24
Bank and Notes Debt
Net of Cash6
93
94
00
01
02
03
04
05
06
681
648
554
382
380
349
136
99
69
6 Debt Net of Cash represents Total Debt minus Cash and Marketable Securities. It is expressed in US dollars, as most of the debt is
dollar denominated.
CYDSA continues to develop innovative products and
services to satisfy customer needs, while constantly
improving the productivity and effectiveness of operational and administrative processes. Emphasis remains on developing e-business markets and strategies, utilizing logistics as a competitive advantage,
while meeting or exceeding all quality and environmental standards.
During 2006, through the support of all employees,
CYDSA strengthened its financial and operating structure. Recently identified opportunities offer competitive enhancement and potential growth for its Business Portfolio. In 2007, management plans attentive
monitoring of the economic environment to assure
timely actions and smooth effective implementation.
The accumulated experience and professionalism of
CYDSA’s personnel, as well as the support of customers, suppliers and financial institutions, remain the
basis for the continued attainment of our ultimate objective, Creating Value for our Customers, Personnel
and Shareholders.
Sincerely,
Tomas Gonzalez Sada
Chairman of the Board, President
and Chief Executive Officer
Operating Cash Flow (EBITDA) improved for the
fourth consecutive year, reaching US$74 million. The
Group’s Management sees CYDSA in a significantly
enhanced position, to provide the flexibility needed
to deal with unfavorable cyclical conditions, characterizing the markets served by several of its Businesses.
Hiromi Yokoyama
ECONOMIC ENVIRONMENT
Advisor for Asia-Pacific
International Business and Trade
During 2006, the international economic activity maintained the expansion trend evident in previous years.
US Gross Domestic Product (GDP) grew 3.3%, supported by strong domestic consumption expenditures
and a significant rise in private investment. The results followed a 3.2% gain in 2005. Euro Zone economies
increased 2.7% in 2006, up from1.5% the previous year. Economic growth of 2.2% in Japan compared with
1.9% in 2005. In China, foreign capital inflows supported by an expanding domestic market, produced a fourth
consecutive double-digit increase, registering a 10.7% growth in GDP, compared to the prior year 10.4%.
Strong world economic growth in 2006 significantly increased energy demand and greatly influenced the international crude oil markets. Significant supply limitations, as well as speculation generated by political problems,
adverse climate conditions and the risk of terrorist attacks in some producing countries, provoked added price
pressures. Consequently, crude oil and derivative quotations rose steadily during 2006, reaching all time highs
during August. Despite subsequent stabilization, US Energy Department statistics showed an average 2006
world oil price of US$60.55 per barrel, 21% above the 2005 average of US$49.83 and 75% higher when
compared with the US$34.62 price in 2004.
Despite the high level of US natural gas production, increasing imbalances between supply and demand
again placed North American prices among the world’s highest. This situation continues to adversely affect
the Mexican economy, as south Texas quotations define natural gas prices in Mexico. In 2006, natural gas in
Mexico averaged US$6.32 per million BTU’s, down 6.9% from US$6.78 the preceding year. The 2006 levels
represented an 8.4% increase from the US$5.83 average in 2004 and more than twice the 2002 average of
US$3.03 per million BTU’s.
Sustained increases in prices forced CYDSA, and other Mexican companies to develop processes capable of
utilizing different energy sources. Fuel oil #6, a residual obtained from the crude oil distillation process, represents one such alternate. This fuel traditionally provided a lower cost potential for generating energy, despite
some higher requirements for transportation, storage and usage compared to other petroleum residuals.
The price of fuel oil #6, as with other crude oil derivatives, increased significantly during recent years. The
situation worsened during 2006, given the lack of an explicit price policy for Pemex consumers and insufficient investments in Mexico to increase production and refining capacity. As a result, the fuel oil #6 price for
industrial users in Mexico averaged US$7.75 per million BTU’s in 2006, up 33% from the US$5.82 average
in 2005. Of more significance, the 2006 price exceeded by 23% the natural gas equivalent of US$6.32 per
million BTU’s.
As explained in the Chairman’s Letter, these conditions limited the recovery of 2006 profit margins for some
CYDSA’s Businesses, due to their high-energy consumption processes and the requirements for raw materials
derived from crude oil or natural gas.
10
Mexican Business Environment
Favorable international economic conditions in 2006,
particularly in the US markets, encouraged growth in
the Mexican business environment. Following some
uncertainty and volatility associated with the July 2nd
presidential elections, the positive trends observed
early in the year continued after the recognition of
National Action Party’s (PAN) candidate Felipe Calderon Hinojosa as president of Mexico.
In foreign trade, total exports of Mexican products
reached record levels in 2006, benefiting in part
from increasing crude oil prices. Petroleum exports
grew 23% to US$39 billion. Non-oil exports, primarily manufactured goods for the US market, increased
16% to US$211 billion. In total, merchandise exports
of US$250 billion rose 17% over 2005.
Raw materials and machinery purchases as well as
greater domestic demand for foreign consumer
goods increased merchandise imports to US$256 billion, 15% above the previous year. The resultant trade
deficit of US$6 billion diminished from the US$8 billion reported in 2005.
Strong consumer expenditures, private investment
and external demand growth favorably influenced
domestic production activities. Growth rates of 4.8%
in the Agricultural sector, 5.0% in the Industrial sector
and 4.9% in the Services sector, produced a 2006
growth in Mexico’s Gross Domestic Product of
4.8%. As depicted in the following graph, this percentage represented the largest gain in the past six
years.
Inflation measured by the Consumer Price Index
during 2006 grew to 4.1%, above the previous
year’s 3.3%. The graph in the next page depicts these
results. The change reflects, in part, the extraordinary
price increases in several agricultural products caused
by adverse climatic conditions affecting summer harvests. As a result, since September, the inflation rate
surpassed 4%, the upper boundary of Banco de Mexico’s monetary policy objectives.
In the money market, interest rates stabilized after a
decline during the first quarter of 2006. The 28-day
Mexican Treasury Bills (CETES), averaged a nominal
annual yield of 7.2%, well below the 9.2% result experienced during 2005.
During the first half of 2006, the currency exchange
market reacted to the political campaigns preceding
the 2nd of July federal elections. Several periods of
uncertainty and volatility led to a depreciation of the
peso exchange rate versus the US dollar. A recovery
after the elections, followed by stability for the remainder of the year, produced an average exchange
rate of 10.90 pesos per dollar in 2006, very similar to
the 10.89 rate for 2005.
Finally, increased oil exports once more contributed
favorably to government finances. As a result, the
Public Sector deficit represented 0.02% of GDP in
2006, reducing from 0.09% the prior year.
MEXICO. GROSS DOMESTIC PRODUCT GROWTH
% annual
6.8%
4.9%
3.9%
6.6%
-0.2%
0.8%
1.4%
4.2%
2.8%
4.8%
97
98
99
00
01
02
03
04
05
06
11
MEXICO. CONSUMER PRICE INDEX
% end of year
15.7% 18.6% 12.3%
97
98
99
9.0%
4.4%
5.7%
4.0%
5.2%
3.3%
4.1%
00
01
02
03
04
05
06
CYDSA’s Markets
Almost all markets served by CYDSA’s Businesses reacted favorably to the positive trends shown in domestic and international economic activity.
The Chemical and Plastics Business Group experienced increased demand for chlorine, caustic soda,
PVC resins, pipes, fittings and irrigation systems. Minor declines occurred in edible salt and refrigerant
gases. The domestic Textile Industry continued to suf-
12
fer the adverse effects of imported apparel and textiles. These mostly Chinese goods, frequently utilizing
unfair and often illegal trade practices, negatively impacted acrylic yarn sales. Overall, CYDSA’s domestic
unit sales showed a weighted unit average increase
of 4.0% in 2006.
CYDSA’s foreign markets produced a weighted average unit export sales growth of 20.4%, increasing
CYDSA’s 2006 total weighted average unit sales
to 6.6%.
OPERATIVE DIVISIONS
13
CHEMICAL DIVISON
SALES DEL ISTMO, S.A. DE C.V. (SISA)
INDUSTRIA QUIMICA DEL ISTMO, S.A. DE C.V. (IQUISA)
14
IN 2006, THE CHEMICAL DIVISION DEVELOPED AND IMPLEMENTED PROGRAMS ENHANCING THE COMPETITIVENESS OF ITS BUSINESSES. BASIC STRATEGIES INCLUDED STRENGTHENING MARKET PRESENCE,
REDUCING ENERGY COST AND IMPROVING OPERATIONAL RELIABILITY.
EDIBLE SALT
1999 Shingo Prize for Excellence in Manufacturing, ISO-9002-2000
and ISO-14001 Certified.
PRODUCTS
Edible and Industrial
salts.
COATZACOALCOS PLANT
Complejo Industrial Pajaritos
Coatzacoalcos, Veracruz 96400
Tel. +52 (921) 211-3535
A description of the main initiatives executed in 2006 follows:
MARKETS
Domestic and exports
primarily to USA and
Central America.
MEXICO CITY OFFICE
Viaducto Rio Becerra 287
Col. Napoles,
Delegacion Benito Juarez
Mexico, D. F. 03810
Tel. +52 (55) 5340-1840
• Reinforced the La Fina leadership status and properly positioned the
Bakará, Cisne, Klara, Marfil and Gallo brands in regional markets.
Increased participation in supermarket chains with new programs focused on promotion, advertising, logistics, customer service
and end-consumer orientation.
• Established a Strategic Alliance with Morton Salt, the US market
leader, covering the distribution of La Fina brand salt in that country.
• New product developments included Salt Light and Salt Substitute for people wishing to control sodium intake as well as new
packaging and sizes for La Fina salt.
USES
Table salt, food industry
and industrial processes.
www.salesdelistmo.com.mx
TRADEMARKS
La Fina, Bakará, Cisne,
Klara, Marfil, Gallo.
• Reduced energy costs in the evaporation and refining processes by
investing in equipment allowing the alternate use of natural gas and fuel oil #6. Electrical generating systems limited
consumption during peak demand hours.
• Re-certified ISO-9002-2000 and ISO-14001 standards and renewed the Clean Industry Certification granted by the Ministry
for Environment and Natural Resources.
A summary of significant achievements realized during this year follows:
• Increased profit margins by reducing electricity consumption in
production processes and focusing sales efforts on differentiated
products.
• The Coatzacoalcos, Monterrey and Tlaxcala plants received re-certifications for ISO-9002-2000, ISO-14001, the US National Sanitary Foundation and the National Chemical Industry Association’s
(ANIQ) Integral Responsibility.
• The Monterrey and Tlaxcala plants renewed the Clean Industry
Certification awarded by the Ministry for Environment and Natural
Resources.
PRODUCTS
Chlorine, liquid and gas;
caustic soda, liquid and
solid; chlorine in cylinders,
sodium hypochlorite, synthetic hydrochloric acid
and muriatic acid.
MARKETS
Domestic and exports to
Central America.
USES
Chemical and petrochemical industries, textiles, cellulose, paper, pesticides,
bleach, detergents and
soaps, mining and extraction of metals, plastics,
pigments and paints.
MONTERREY OFFICE AND PLANT
Ave. Ruiz Cortines 2333 Pte.
Monterrey, N.L. 64400
Tel. +52 (81) 8158-2700
MEXICO CITY OFFICE
Viaducto Rio Becerra 287
Col. Napoles, Del. Benito Juarez
Mexico, D. F. 03810
Tel. +52 (55) 5687-6853
COATZACOALCOS PLANT
Complejo Industrial Pajaritos
Coatzacoalcos, Veracruz 96400
Tel. +52 (921) 211-3410
TLAXCALA PLANT
Carretera Apizaco-Huamantla
Km. 128, San Cosme Xalostoc
Tlaxcala 90460
Tel. +52 (241) 413-0736
HERMOSILLO PLANT
Calle del Plomo 45, Parque Industrial, Hermosillo, Sonora 83299
Tel. +52 (662) 251-1024
www.iquisa.com.mx
15
1998 Mexican National Quality Award; 1998 Shingo Prize for Excellence in Manufacturing (Coatzacoalcos Plant) and 2002 (Monterrey
and Tlaxcala Plants); ISO-9002-2000 and ISO-14001 Certified.
POLICYD, S.A. DE C.V.
PLASTICOS REX, S.A. DE C.V.
16
PVC RESINS
1996 Mexican National Quality Award; 1997 Shingo Prize for Excellence in Manufacturing (Altamira Plant) and 2000 (La Presa Plant);
Environmental Excellence Award 2006 (Altamira Plant); ISO-90022000 and ISO-14001-2004 Certified.
PRODUCTS
Polyvinyl chloride (PVC),
suspension: homopolymer and copolymer;
dispersion paste.
LA PRESA OFFICE AND PLANT
Av. La Presa 8
Col. Lazaro Cardenas
San Juan Ixhuatepec, Tlalnepantla,
Edo. de Mexico 54180
Tel. +52 (55) 5747-5500
The main initiatives executed in 2006 include the following:
MARKETS
to Central and South
America, Caribbean, USA,
Far East, New Zealand,
China and Africa.
ALTAMIRA PLANT
Carretera Tampico-Mante Km 32
Altamira, Tamaulipas 89600
Tel. +52 (833) 229-1300
• Increased exports of differentiated products in both traditional
and new markets.
• Implemented projects reducing energy consumption in production processes.
• Renegotiated supply agreements improving raw materials purchasing terms.
• The Altamira and La Presa plants became re-certified for ISO9002-2000, ISO-14001-2004 and National Chemical Industry
Association’s (ANIQ) Integral Responsibility.
• The Altamira plant received the Environmental Excellence Award
and renewed the Clean Industry Certification granted by the
Ministry for Environment and Natural Resources.
PIPES AND FITTINGS
ISO-9002-2000 Certified (Mexico City; Monterrey, Nuevo Leon; Poncitlan, Jalisco; Merida, Yucatan; and Los Mochis, Sinaloa plants).
Significant achievements realized in 2006 include:
• New PVC pipe manufacturing plant located in Los Mochis,
Sinaloa, strengthened market presence, reduced transportation
costs and improved service to northwestern Mexican customers.
• Growth in production capacity and new product lines increased market share for PVC Pipes and Fittings and Irrigation Systems.
• The Mexico City, Monterrey and Poncitlan plants received re-certifications for ISO-9002-2000.
• The Mexico City plant obtained the Safe Industry recognition,
granted by the Ministry of Labor, for the self-administered Program promoting Work Safety and Health.
• Accepted the Technological Entrepreneurship Culture award
granted by the National Council for Science and Technology
(CONACYT), for five years of participation in the tax incentive program and for efforts in research and development.
www.policyd.com.mx
USES
Construction industry,
footwear, toys and general plastics.
TRADEMARKS
Vinycel.
PRODUCTS
PVC pipes and fittings,
irrigation systems, polyethylene pipes.
MEXICO CITY PLANT
Av. Romulo O’Farril 434
Col. Olivar de los Padres
Mexico, D.F. 01780
Tel. +52 (55) 5377-4300
MARKETS
Domestic.
MONTERREY PLANT
Antigua Carretera a Roma Km 5
San Nicolas de los Garza, N.L.
66490
Tel. +52 (81) 8313-8383
USES
Construction industry,
agriculture and water
distribution systems.
TRADEMARKS
Rex, Rex-Netafin,
Unicople, Rex-ac, Ecotub,
Ecoplus, Insta-Rex.
PONCITLAN PLANT
Carretera Guadalajara-Ocotlan
Km 60.4
Poncitlan, Jalisco 45950
Tel. +52 (391) 921-0492
MERIDA PLANT
Calle 60 Diagonal No. 495
Col. Parque Industrial
Merida, Yucatan 97300
Tel. +52 (999) 941-0414
LOS MOCHIS PLANT
Calle de la Agricultura 1298
Col. Parque Ecologico Industrial
Los Mochis, Sinaloa 81256
Tel. +52 (668) 108-4016
www.plasticosrex.com.mx
17
• Established strategic alliances with customers thereby enhancing domestic market position.
Q U I M O BAS I CO S , S.A. DE C.V. Joint-venture with Honeyw e l l ( E UA )
YARNS BUSINESS
D E R I VA D O S AC R I LICOS, S.A. DE C.V.
18
A description of the main initiatives executed in 2006 follows:
PRODUCTS
Refrigerants, propellant and blowing gases.
Carbon Certified Emission
Reductions (CER’s).
• Quimobasicos manufactures HCFC-22 refrigerant gas, while
meeting customer needs by producing and distributing refrigerant, blowing and propellant gases in compliance with
strict environmental standards.
MARKETS
primarily Latin America.
REFRIGERANT GASES
Environmental Excellence Award 2004, ISO-9002-2000 and ISO14001 Certified.
• Invested in technology and equipment for capturing and incinerating the HFC-23 gas, an HCFC-22 refrigerant gas byproduct. The
processes complied with standards established by the Ministry for
Environment and Natural Resources and international environment
organizations. As a result, in November 14, 2006, Quimobasicos
received an initial package of Carbon Certified Emission Reductions (CER’s) issued by Kyoto Protocol authorities. These
certificates provide trading opportunities in the international carbon
credits market, primarily in Europe and Japan, through the Clean
Development Mechanism.
USES
Industrial, commercial and
domestic refrigeration,
home appliances, pharmaceutical industry.
MONTERREY PLANT
Ave. Ruiz Cortines 2333 Pte.
Col. Pedro Lozano
Monterrey, N.L. 64400
Tel. +52 (81) 8305-4600
MEXICO CITY OFFICE
Av. Norte Sur 12
Fracc. Alce Blanco
Naucalpan, Edo. de Mexico 53370
Tel. +52 (55) 5858-5980
www.quimobasicos.com.mx
TRADEMARKS
Genetron
• Re-certified for ISO-9002-2000, ISO-14001 and National
Chemical Industry Association’s (ANIQ) Integral Responsibility.
• Renewed the Clean Industry Certification granted by the Ministry
for Environment and Natural Resources.
IN 2006, THE YARNS BUSINESS COMPLETED A PROJECT, STARTED LATE IN 2004, CONSOLIDATING ALL
ACRYLIC YARN MANUFACTURING IN A SINGLE SITE. THROUGH THE TRANSFER OF EQUIPMENT AND MACHINERY, THE OUTPUT OF FOUR PRODUCTION FACILITIES NOW RESIDES IN THE AGUASCALIENTES CITY COMPLEX. THE PROJECT SIGNIFICANTLY INCREASED EQUIPMENT EFFICIENCY AND CUSTOMER SERVICE. THE
IMPROVEMENTS PARTIALLY OFFSET THE ADVERSE EFFECTS OF INCREASED TEXTILE IMPORTS, PRIMARILY FROM
ASIA.
Significant achievements realized in 2006 include:
• Fixed cost reductions in administrative, sales, production and logistics areas.
• An increase of five percentage points in profit margins through the
optimization of product mix.
• Restructured the customer base through a selection criteria
based on quality, service and profit margins.
• Improved Inventories and Accounts Payable.
• Increased Operating Cash Flow (EBITDA) on Sales.
PRODUCTS
Acrylic yarns, acrylic blends
with both natural and
synthetic fibers, fancy yarn,
knitting specialties.
MARKETS
Domestic and exports to
USA.
USES
Sweaters, baby clothes,
polo-shirts, sportswear,
socks, women’s apparel
and handcrafts.
TRADEMARKS
Dasa, San Marcos, Novacril,
Quetzal, Cotton Like, Pill
Guard, Festival, Hilatex,
Filolastic, Dasalastic.
USA OFFICE
Dasa Yarns Inc.
8701 Las Cruces Dr. Suite 2
Laredo, Texas 78045
Tel. +001 (956) 717-3995
AGUASCALIENTES PLANT
Av. Adolfo Lopez Mateos
1502 Pte.
Col. Circunvalacion Pte.
Aguascalientes, Ags.
Mexico 20210
Tel. +52 (449) 910-3300
www.dasa.com.mx
e-mail:
[email protected]
Call Center: (800) 614-5860
19
ACRYLIC YARNS
ISO-9002 Certified.
BOARD OF DIRECTORS
Tomas Gonzalez Sada, Chairman*
Chairman of the Board, President and Chief Executive Officer of CYDSA. Vice President of the
Mexican Institute for Competitiveness; Honorary Consul of Japan at Monterrey, Mexico; Treasurer
of the Fundacion Martinez Sada; Member of the Board of Trustees of Universidad Regiomontana;
Member of the Mexican Businessmen Round Table (CMHN); and Member of the Board of Directors of Vitro and Regio Empresas.
Herminio Blanco Mendoza**
Former Mexican Secretary of Trade and Industry and former Chief Negotiator for the North
American Free Trade Agreement. Founding Partner and President of Soluciones Estrategicas, a
business specialized in corporate consulting related to international commerce and assessment for
international corporations interested on investing in Mexico. Member of the International Advisory
Committee of Mitsubishi Corporation and the Board of Directors of Grupo Financiero Banorte and
the Banco Latinoamericano de Exportaciones.
Robert W. Chandler Jr.
Business Consultant. Former Director of Grupo Financiero Banorte. Former Member of the Board
of Latin America Debt Management Associates of Miami, Florida and subsidiaries of Grupo Financiero Banorte.
Adan Elizondo Elizondo
Retired Chief Operating Officer of CYDSA. Member of the Board of Directors of Grupo Industrial
Saltillo, Grupo Chapa and Seven Eleven Mexico, S.A. President of the Board of ENSIS Productos
Inteligentes, S. de R.L. de C.V. and Edgar Elizondo y Cia, S. de R.L. de C.V. Member of the Board of
Fundacion Ricardo, Andres y Jose Chapa, A.C.; Formacion Integral de Monterrey ABP and Orientacion Social Femenina de Monterrey, A.C. ABP.
Alejandro Garza Lagüera**
Member of the Executive Committee of Desarrollo Inmobiliario OMEGA, S.A. de C.V. Member of
the Board of Directors of: VITRO; Instituto Tecnologico y de Estudios Superiores de Monterrey,
Centro de Estudios en Economia y Educacion, Wharton School Latin American Board, Joseph H.
Lauder Institute of Pennsylvania.
20
Armando Garza Sada**
Corporate Development Director of ALFA and President of Alestra. Member of the Board of Directors of the Instituto Tecnologico y de Estudios Superiores de Monterrey. Member of the Board of
ALFA, Grupo Gigante, Grupo Lamosa, FRISA, El Puerto de Liverpool, MVS Comunicaciones and
FEMSA.
Tomas Gonzalez Casas*
Development Manager of Quimobasicos, CYDSA’s subsidiary. Member of the Board of
Directors of Honda Tecnologico and Restaurantes GONHA.
Pablo Gonzalez Sada*
Chairman of the Board and Chief Executive Officer of Uniexcel Chemical Solutions. Chief
Executive Officer of Aero Servicios Tecnicos Regiomontanos. Member of the Board of Directors of: Club Industrial and Regio Empresas. Member of the Board of: Cooperativa de Servicios Aereos North Airport, Instituto de Mandos Intermedios (IMI). Member of the Advisory
Council of the University of Texas School of Business.
Ricardo Guajardo Touche**
Former Chairman of the Board of Grupo Financiero BBVA-Bancomer. Chairman of Fondo
para la Paz and SOLFI. Member of the Board of Directors of the Tecnologico de Monterrey.
Member of the Board of Grupo Financiero BBVA-Bancomer, FEMSA, ALFA, El Puerto de
Liverpool, Coca Cola FEMSA (KOF), Grupo Coppel, Grupo Bimbo and Grupo Aeroportuario
del Sureste.
Humberto Jasso Barrera
President for Administrative Services of Grupo Cydsa. Member of Cydsa’s Executive Committee.
Mario Laborin Gomez**
Chief Executive Officer of Nacional Financiera and Banco Nacional de Comercio Exterior.
Member of the Mexican Presidential Cabinet. Member of the Board of Directors of the
Mexican Stock Exchange, the Instituto Tecnologico y de Estudios Superiores de Monterrey
and Chairman of Centro de Cirugia Ambulatoria.
21
Founding Partner of Consultoria Financiera Corporativa, specializing in financial and strategic
advisory to Industrial Groups and several State Governments of Mexico. Active in Real
State and Tourism Developments. Advisor of Nacional Financiera, Mayazul and Harinas de
Coahuila.
Abelardo Morales Puron
Alberto Mulas Alonso
Former President of Comision Nacional de Fomento a la Vivienda (Conafovi) of the Mexican Federal
Government. Founding Partner of CRESCE Consultores, a financial consulting company specializing
in projects. Member of the Board of Directors of Banco Nacional de Comercio Exterior, Sociedad
Hipotecaria Federal, Procura, Grupo Aeropuertario Centro Norte OMA, Cinepolis, Grupo Comex,
Empresas ICA, Acciones y Valores, Satmex and URBI.
Federico Patiño Marquez**
Deputy General Director for Investment Banking of Nacional Financiera, with responsibilities for
International Financing, Corporate Banking and Equity Investment areas.
Adrian G. Sada Gonzalez
Chairman of the Board of Vitro Group. Member of the Board of Directors of: ALFA, Gruma, Regio
Empresas, Wharton (Latin American Executive Board for the Wharton School of Finance), Consejo
Mexicano de Hombres de Negocios (CMHN), Grupo de Industriales de Nuevo León.
Alberto Santos de Hoyos**
Chairman of the Board of Empresas Santos. President of: Inmobiliaria Centro Deportivo y Centro
Santa Barbara. Member of the Board of Directors of: Banco de Mexico (Regional), ING Seguros
Comercial America, Axtel, Madisa, Grupo Senda; Instituto Nuevo Amanecer ABP, Casa Paterna La
Gran Familia, Andares ABP, ADMIC, Proexcel, Renace, Acciones por Mexico and Consejo de Desarrollo Social.
Alejandro von Rossum Garza
Chief Operating Officer of Cydsa’s Chemical Division. Chairman of the Board of Quimobasicos, S.A.
de C.V. Member of Cydsa’s Executive Committee. Member of the Board of Shingo Prize for Excellence in Manufacturing.
22
* Patrimonial ** Independent
COMMITTEES OF THE BOARD OF DIRECTORS
CYDSA, S.A.B. DE C.V.
CORPORATE GOVERNANCE PRACTICES
AND AUDIT COMMITTEE
Alberto Santos de Hoyos, President
Herminio Blanco Mendoza
Alejandro Garza Lagüera
Federico Patiño Marquez
COMPENSATION POLICIES COMMITTEE
From the Corporate Governance Practices and Audit Committee:
Alejandro Garza Lagüera
Herminio Blanco Mendoza
Other members:
Adrian Sada Gonzalez
FINANCE COMMITTEE
Tomas Gonzalez Sada, President
Armando Garza Sada
Pablo Gonzalez Sada
Tomas Gonzalez Casas
Ricardo Guajardo Touche
Mario Laborin Gomez
Adrian Sada Gonzalez
Alejandro von Rossum Garza
VALORES QUIMICOS, S.A. DE C.V.
FINANCIAL RESTRUCTURE TERMS
AND CONDITIONS COMMITTEE
23
Tomas Gonzalez Sada, President
Robert W. Chandler Jr.
Tomas Gonzalez Casas
Abelardo Morales Puron
Alberto Mulas Alonso
Federico Patiño Marquez
FINANCIAL INFORMATION
CONTENTS
Management Analysis of Cydsa’s Financial Statements
24
25
29
30
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF CYDSA’S
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The figures presented herein should be analyzed in
conjunction with CYDSA’s audited financial statements
and notes (pages 30 to 48 of this Report). Unless otherwise indicated, the figures represent constant pesos,
as of December 31, 2006, with foreign exchange figures expressed in US dollar terms.
Discontinued Businesses
Mexican Financial Reporting Standards required
the elimination of any discontinued Business
Segment from consolidated Operating Income.
Therefore, CYDSA’s Operating Income, Sales, Cost of
Sales and Operating Expenses for 2005 and 2006 exclude the results of Bioriented Polypropylene Film,
Folding Carton and Acrylic Fiber (Crysel); all Discontinued Operations.
Results
The next section details the main items of the Consolidated Statement of Operations, included on page 31
of this Report.
Dollar Sales for the year ending December 31, 2006
totaled US$536 million, up 11.0% from 2005.
Unit sales for 2006 grew 6.6% from the previous year.
The marketing of Carbon Certified Emission Reductions
(CER’s) by CYDSA’s subsidiary Quimobasicos, provided
a portion of CYDSA’s 2006 sales increase.
The Kyoto Protocol regulates the reduction of carbon
emissions into the atmosphere of certain member
states. Companies outside these countries may receive
compensation for capturing and incinerating carbon dioxide (CO2). During 2006, the Auditors of the Kyoto
Protocol granted Quimobasicos a CER certificate for incinerating HFC-23 gases. Quimobasicos sold the CER’s
in international markets last December.
Sales by Business Segment
The following chart depicts Total Sales by Business Segment.
Total Sales
Sales for Chemicals and Plastics grew to 5,603
million pesos during 2006, an 8.9% increase from
2005.
CYDSA’s Net Consolidated Sales for 2006 reached
5,988 million pesos, an increase of 7.4% when
compared in constant peso terms to 2005.
The improved sales originated from both higher prices
and units sold. Petrochemical products benefited from
relatively high levels of international quotations.
Total Sales by Business Segment *
2005 and 2006
Millions of Constant Pesos
5,144
5,603
430
8.9%
385
5,575
10.4%
5,988
7.4%
25
Millions of US Dollars
% Change
06
05
06
05
06
Yarn
(Acrylic Yarn)
CYDSA
Consolidated
446
37
483
502
12.6%
34
8.1%
* Consolidated figures eliminate inter-company sales.
536
11.0%
05
Chemicals and
Plastics
2006 Yarns Sales of 385 million pesos,
decreased 10.4% from the previous year.
Competition from imported Asian garments
and other textiles, frequently utilizing unfair
and often illegal market practices, produced
volume declines primarily in export markets.
Operating Income
1
Gross Margin amounted to 1,706 million pesos in 2006, an 8.6% increase from 1,571
million generated the previous year.
Operating Expenses totaled 1,094 million
pesos, decreasing 0.6% when compared to
1,101 million reported for 2005.
Consequently, the Operating Income (EBIT)
of 612 million pesos in 2006 increased
30.2% from the 470 million attained the previous year. Operating Income on Sales of 10.3%,
rose from 8.4% last year.
Operating Cash Flow
Operating Cash Flow (EBITDA)2 reached
808 million current pesos or 13.8% of
Sales. This compared to 664 million or 12.6%
on Sales reported for the prior year, a 21.8%
improvement. In dollar terms, EBITDA totaled US$74.3 million, 21.4% higher than
the US$61.2 million obtained in 2005.
Total Financing Cost
Total Financing Cost for 2006 of 184 million
pesos compares with 56 million reported for
2005, an increase of 128 million. As presented
in the following table, Net Foreign Exchange
Loss accounts for the majority of the change.
As noted below, Net Financial Expense grew
21 million pesos, due to increases in the Libor
interest rate and the depreciation of the peso
against the US dollar.
Financing Allowances to Clients dropped 3 million pesos when compared with 2005.
The Net Foreign Exchange difference of 101
million results from a 2006 Loss of 28 million
through a 1.7% depreciation of the Mexican
peso. During the previous year, a peso appreciation of 4.6% produced a 73 million gain.
Additionally, the reduced monetary base derived from Bank Debt payments in 2006, generated an unfavorable 9 million reduction in
Monetary Gain.
Other Income, Net
Other Income for 2006 totaled 87 million
pesos. The final net proceeds granted by the
Montreal Protocol to CYDSA for the early termination of CFC refrigerant gas production, provided the majority of this amount.
Income from Continuing Operations before
Taxes and Employee Statutory Profit Sharing
Income from Continuing Operations, before
Taxes and Employee Statutory Profit Sharing,
totaled 515 million pesos in 2006, increasing from 392 million reported for the previous
year. Reducing Operating Income of 612 million by 184 million of Total Financing Cost and
adding Other Income, Net of 87 million produces the 2006 figure.
Change
2006
2005
Millions of Pesos
Net Financial Expense
(171)
(150)
(21)
Financing Allowances to Clients
(20)
(23)
3
Net Foreign Exchange (Loss) Gain (28)
73
(101)
35
44
(9)
(184)
(56)
Net Monetary Gain
Total Financing Cost
(128)
26
1 Gross Margin is defined as Sales less Cost of Sales.
2 Operating Cash Flow or EBITDA equals Earnings before Total Financing Cost, Taxes & Profit Sharing, Depreciation and
Amortization. EBITDA is equivalent to Operating Profit plus non-cash items.
Financial Condition
charges reached 150 million pesos during
2006.
A summary of the relevant Balance Sheets
items as of December 31 of each year appears
below.
Income from Continuing Operations
Explanations of the major changes in the Balance Sheet accounts between the two years
follows.
Loss Derived from Discontinued Operations
(Net of Income Tax)
During 2006, Discontinued Operations (Net
of Income Tax) provided a 310 million pesos
Loss. The majority, 278 million, resulted from
decreases in the valuation of machinery and
equipment associated with the Acrylic Fiber
Business Unit.
Net Income
Reducing the 365 million Income from Continuing Operations by the 310 million Loss
Derived from Discontinued Operations (Net of
Income Tax), produces a 2006 Net Income
of 55 million, significantly improved from
the 313 million Net Loss reported for the
prior year.
Assets
Current Assets
Current Assets decreased 120 million pesos, moving from 2,514 million in December
of 2005 to 2,394 million at the close of 2006.
Two items make up the majority of the change
and both involve inventories and trade receivables. An increase of 154 million supports
added sales in 2006. A reduction of 329 million associates with discontinued operations
primarily in the Acrylic Fiber Business (Crysel).
Fixed and Deferred Assets
Fixed and Deferred Assets of 5,587 million
as of December 31, 2006 declined by 396
million pesos from the previous year-end.
The reduction derives primarily from the reassessment of machinery associated with the
Acrylic Fiber Business (Crysel).
2006
Increase
2005
(Decrease)
Current Assets
2,394
2,514 (120)
Fixed and Deferred Assets
5,587
5,983 (396)
Total Assets
7,981
8,497 (516)
Current Liabilities
1,204
1,612 (408)
Long-Term Liabilities
2,136
2,308 (172)
Total Liabilities
3,340
3,920 (580)
Shareholders’ Equity
4,641
4,577
64
27
During 2006, Income from Continuing Operations amounted to 365 million or 6.1% of
sales. This compares with 369 million obtained
for 2005.
Liabilities
During 2006, CYDSA’s year-end Total Liabilities decreased 580 million pesos,
from 3,920 million in 2005, to 3,340 million in 2006. The breakdown of the change
appears in the following table.
Millions
of Pesos
Payment of Debt to Creditor Banks
and Other Financial Institutions
(261)
Reductions in Trade Payables
of Discontinued Operations
Other Items
Total Liabilities Reduction
(301)
(18)
(580)
In addition to the contractual obligations, CYDSA
made a US$12.2 million advance payment to
Creditor Banks on March 31, 2006. CYDSA’s
Bank Debt decreased to US$96.4 million at
the end of December 2006.
The reduction in CYDSA’s Debt provided positive results in several key financial ratios. Bank
Debt3 to EBITDA improved from 1.92 in 2005
to 1.29 in 2006. The Interest Coverage4 ratio
increased from 3.65 to 4.50. Finally, Total Liabilities versus Shareholders’ Equity reduced
from 0.86 in 2005 to 0.73 in 2006.
Shareholders’ Equity
During 2006, Shareholders’ Equity increased by 64 million, reaching 4,641 million on December 31, 2006, compared with
4,577 million at the close of the previous year.
The increase derives mainly from 2006 Net
Income.
28
3 CYDSA’s Debt restructure included the exchange of US$76.4 million in Bank Debt of the Group’s textile companies
for a 16.45% interest in the subsidiary Valores Quimicos, S.A. de C.V. The Creditor Banks also received CYDSA’s
commitment to purchase these shares on or before January 11, 2011. The Balance Sheet shows the reclassification
of this item from Bank Debt to Other Long Term Liabilities. As a consequence, Bank Debt excludes US$76.4 million
at December 2005 and US$77.5 million at December 2006. The addition of this Liability to Bank Debt increases the
ratio of Bank Debt to EBITDA, to 3.15 in 2005 and 2.33 for 2006.
4 Interest Coverage ratio equals EBITDA divided by Financial Expenses and Financing Allowances to Clients.
INDEPENDENT AUDITORS’ REPORT
Galaz, Yamazaki,
Ruiz Urquiza, S.C.
Lázaro Cárdenas 2321 Poniente, PB
Residencial San Agustín
66260 Garza García, N.L.
México
Tel: +52 (81) 8133 7300
Fax: +52 (81) 8133 7383
www.deloitte.com/mx
To the Board of Directors and Shareholders of Cydsa, S.A.B. de C.V.
We have audited the accompanying consolidated balance sheets of Cydsa, S.A.B. de C.V.
and subsidiaries (previously Cydsa, S.A. de C.V. and subsidiaries) (the “Company”) as of
December 31, 2006 and 2005 and the related consolidated statements of operations, changes in shareholders’ equity and changes in financial position for the years then ended, all
expressed in millions of Mexican pesos of purchasing power of December 31, 2006. 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 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 accounting principles 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, the accompanying consolidated financial statements present fairly, in all
material respects, the financial position of Cydsa, S.A.B. de C.V. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations, changes in their shareholders’ equity and changes in their financial position for the years then ended in conformity with
Mexican Financial Reporting Standards.
The accompanying financial statements have been translated into English for the convenience of users.
Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member of Deloitte Touche Tohmatsu
29
March 8, 2007
A member firm of
Deloitte Touche Tohmatsu
C.P.C. Carlos H. Padilla Valdez
CYDSA, S.A.B. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(In millions of Mexican pesos of purchasing power as of December 31, 2006)
2006
ASSETS
Cash and marketable securities
$
259
$
Contractual obligation fund
Trade receivables, net 1,316
Other receivables
189
Inventories, net
559
Current assets from discontinued operations
71
Current assets
2,394
Long-term receivables
90
Investment in shares
29
Property, plant and equipment, net 3,632
Amortizable expenses, net
30
Goodwill
60
Other assets
71
Deferred income tax
548
Long-lived assets from discontinued operations 1,127
Total assets
$ 7,981
$
LIABILITIES
Current portion of long-term debt
$
146
$
Trade payables
790
Other payables
240
Current liabilities from discontinued operations
28
Current liabilities 1,204
Long-term debt 896
Employee retirement obligations
325
Other accounts payable
64
Share repurchase
838
Long-term liabilities from discontinued operations
13
Long-term liabilities 2,136
Total liabilities 3,340
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Majority shareholders’ equity:
Capital stock
3,714
Additional paid-in capital
462
(4,998)
Insufficiency in restatement of shareholders’ equity
Other equity accounts (32)
Retained earnings
5,378
(56)
Stock in trust
Total majority shareholders’ equity 4,468
Minority shareholders’ equity
173
Total shareholders’ equity 4,641
$ 7,981
$
2005
204
8
1,208
181
513
400
2,514
94
32
3,640
57
60
49
547
1,504
8,497
262
697
310
343
1,612
1,068
311
71
845
13
2,308
3,920
4,447
462
(5,740)
(30)
5,361
( 56)
4,444
133
4,577
8,497
The accompanying notes are a comprehensive part of these consolidated financial statements.
30
Ing. Tomás González Sada
Chairman of the Board, President and
Chief Executive Officer
C.P. José de Jesús Montemayor Castillo
Corporate Finance Director
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006
2005
Net sales
$ 5,988
$ 5,575
Cost of sales
(4,282) (4,004)
Operating expenses
(1,094) (1,101)
Operating income
612
470
Total financing cost
(184)
(56)
Other expenses, net 87
(22)
Income from continuing operations before taxes
and employee statutory profit sharing
515
392
Taxes and employee statutory profit sharing expense
(150)
(23)
Income from continuing operations
365
369
Loss from discontinued operations, net of taxes
(310)
(682)
Net income (loss)
$
55
$ (313)
Net income (loss) of majority shareholders
$
Net income of minority shareholders
$
17
$
38
55
$
(344)
31
(313)
Majority income (loss) per common shareNote1:
$
1.17
$
Loss from discontinued operations
(1.11)
Majority net income (loss)
$ 0.06
$
1.28
(2.59)
(1.31)
(1) In Mexican pesos, determined on the basis of a weighted average of 279,965,339 shares outstanding in 2006 and 263,569,939 in 2005
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Capital
Stock
Balance at
January 1, 2005
Additional
Paid-in
Capital
$ 4,447 $
444 $
Net comprehensive loss
Issuance of capital stock
Capitalization of the insufficiency in restatement of
shareholders’ equity
4,447
462
(5,738) $
Retained
Earnings
Stock in
Trust
(21) $ 5,705 $
(56) $
105 $ 4,886
(2)
(9)
(344)
(5,740)
(30)
5,361
(56)
28
(327)
133
4,577
45
(778)
$ 3,714 $
Total Shareholders’
Equity
18
778
462 $
(36)
(2)
17
(4,998) $
(32) $
5,378 $
32
Minority
Interest
45
Net comprehensive
income
Balances at
December 31, 2006
Other Equity
Accounts
18
Debt capitalization
Balances at
December 31, 2005
Insufficiency in
Restatement of
Shareholders’
Equity
40
(56) $
19
173 $ 4,641
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
2006
OPERATING ACTIVITIES:
$
365
$
Add (deduct) items not requiring funds:
Depreciation and amortization
190
Other non-cash items
(1)
Sub-total
554
Changes in working capital:
Trade receivables
(108)
Inventories
(51)
Trade payables
93
Other accounts receivable and payable
(81)
Net resources generated by operating activities before
discontinued operations
407
Discontinued operations
395
Assets and liabilities from discontinued operations
14
Net resources generated by operating activities 816
2005
369
190
34
593
(66)
(232)
(10)
285
210
324
819
INVESTING ACTIVITIES:
Property, plant, equipment
(198)
Contractual obligation fund
8
(328)
Net resources used in investing activities (518)
(156)
296
(274)
(134)
FINANCING ACTIVITIES:
Payment and amortization in actual terms of long-term debt
(281)
Increase in capital stock
45
Stock repurchase
(7)
Net resources used in financing activities
(243)
Increase in cash and marketable securities
55
204
Cash and marketable securities at beginning of year
Cash and marketable securities at end of year
$
259
$
(611)
18
(66)
(4)
(663)
22
182
204
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
a) The consolidated financial statements include all the companies where Cydsa, S.A.B. de C.V. (collectively called the “Company”) exercises direct or indirect control. On December 15, 2006, the Company changed its name as approved at a general extraordinary stockholders’ meeting from Cydsa, S.A.
de C.V. to Cydsa, S.A.B. de C.V. due to a requirement of the Mexican Securities Law issued on June
28, 2006. This new law requires every company that is listed on the Bolsa Mexicana de Valores, S.A.
de C.V. (“BMV” or Mexican Stock Exchange) to include “Bursátil” (publicly traded) in their legal name
or use the letter “B” after S.A.
b) The principal activities of the subsidiaries include production and marketing of chemical and plastic
products, and yarns.
The principal consolidated operating companies are:
• Sales del Istmo, S.A. de C.V.
• Industria Química del Istmo, S.A. de C.V.
• Policyd, S.A. de C.V.
• Plásticos Rex, S.A. de C.V.
• Quimobásicos, S.A. de C.V.
• Derivados Acrílicos, S.A. de C.V.
• Masterpak, S.A. de C.V. (ceased operations in June 2005)
• Celulosa y Derivados, S.A. de C.V. (suspended operations in December 2005)
c) Cydsa, S.A.B. de C.V. owns the entire stock of its subsidiaries except for Quimobásicos, S.A. de C.V.,
where it has a 51% interest.
d) Significant intercompany amounts and transactions have been eliminated in these consolidated financial statements and the investment in associated companies and unconsolidated subsidiares is
accounted for using the equity method.
e) Quimobásicos, S.A. de C.V .’s incineration project HFC-23 (“Quimobásicos”).
Beginning in March 2006, Quimobásicos invested in machinery and equipment to be able to potentially
participate in the protocol of Kyoto, which uses a series of gas discharge reduction instruments that
allows developed countries to accomplish their goals of gas discharge reduction, with flexibility and
reduced costs. The projects that reduce or capture gases that damage the environment (GEI) emissions
will generate Certified Emission Reduction (CER) certificates, which will be sold to developing countries.
The CER can be negotiated directly in the market, given their ownership rights and protection under
the regulation of the Convention Frame of the Climatic Change and the Protocol of Kyoto.
34
On December 14, 2006, Quimobásicos signed the Certified Emission Reductions Purchase and Sales
Agreement with a Japanese company for an amount of Euros $8.4 million (equivalent to $121). The
sale was recorded as income in the consolidated statements of operations in the month of December
2006 for an amount of $121.
f) Suspension of activities at the subsidiary Celulosa y Derivados S.A. de C.V. (“Crysel”).
Although efforts have been made such as: administrative cost reductions; searches for strategic alliances with Mexican and foreign manufacturers; development of new value added products; working
capital reduction; among others, the constant increase in energy prices in North America, combined
with the impossibility to obtain its principal raw material, acrylonitrile, at international prices and terms,
rapidly deteriorated Crysel’s competitiveness and prevented it from maintaining positive operating
cash flows. Thus, Crysel suspended its activities in December 2005.
In 2005, Crysel recognized a fixed asset and spare parts inventory impairment charge, in addition to
adjustments for estimated severance payments and allowances for doubtful accounts, amounting to
$468, net of income taxes, presented in the consolidated statement of operations within discontinued
operations.
Additionally, in 2006 the fixed assets were reevaluated and it was determined with the assistance
of independent appraisers to value the machinery and equipment at its salvage value and to record
such assets at the lesser of the net realizable value or the indexation value. As a result it recognized
an additional fixed asset impairment loss of $278, net of income taxes, presented in the consolidated
statement of operations within discontinued operations.
g) Masterpak, S.A. de C.V. (“Masterpak”) closing.
In June 2005, Masterpak, S.A. de C.V. ceased operations permanently. Masterpak was engaged in
manufacturing and converting polypropylene films, in addition to converting corrugated cardboard.
The final effect of the closing in 2005 was a loss of $30, net of income taxes, which is presented in
the consolidated statement of operations in discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 on the basis of 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.
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 decided to rename the accounting principles generally accepted in Mexico
(MEX GAAP), previously issued by the Mexican Institute of Public Accountants (“IMCP”), as Mexican Financial Reporting Standards. 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 B1, Accounting Changes and Correction of Errors, was also issued. The Series A NIFs and NIF B-1 went
into 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) Changes in accounting policies.
Severance payments at the end of the work relationship – Effective January 1, 2005, the Company
adopted the revised provisions of NIF D-3, “Labor Obligations”, related to recognition of the liability for
severance payments at the end of the work relationship for reasons other than restructuring, which
is recorded using the projected unit credit method, based on calculations by independent actuaries.
The accrued liability as of January 1, 2005 calculated by independent actuaries is $33. The Company
chose to record such amount as a transition liability to be amortized using the straight-line method
over 10 years, which represents the average labor life of employees expected to receive such benefits.
b) Recognition of the effects of inflation.
The consolidated financial statements of the Company have been prepared in accordance with NIF B10, “Recognition of Effects of Inflation on Financial Information”. All consolidated financial statements
of the prior year, that are presented for comparative purposes, have been restated to constant pesos
as of purchasing power of the most recent balance sheet presented.
35
The following is a description of the items that have been restated and the methods used:
• Inventories and Cost of Sales – Inventories are valued in the consolidated balance sheet at replacement cost without exceeding net realizable value. Cost of sales is determined based on the actual
cost at the date of the sale.
• Property, Plant and Equipment – Fixed assets are restated at the lower of indexed value or use value.
The Company applies the indexation method, which is calculated by applying factors derived from
the National Consumer Price Index (NCPI) to the net fixed asset replacement values as of December
31, 1996, determined by valuations performed by independent expert appraisers.
Depreciation is calculated using the straight-line method based on the remaining useful lives of the
related assets.
In 2005, the Company performed a detailed analysis of the useful lives of its fixed assets and also involved specialized personnel and third party appraisers to assist them. The result was a change to the
estimated useful lives of the Company’s assets, which was accounted for prospectively. Such change
in estimate resulted in a reduction of $24 in depreciation expense for the year ending December 31,
2005.
• Investment in Associated Companies – The investment in associated companies is accounted for
using the equity method, which includes cost of acquisition plus equity in undistributed earnings
(losses) subsequent to their acquisition, and restated shareholders’ equity. This restatement is inherent to the equity method because the financial statements of the associated company are also
prepared pursuant to NIF B-10.
• Insufficiency in Restatement of Shareholders’ Equity – Insufficiency in restatement of shareholders’
equity represents the accumulated result of holding non-monetary assets and is expressed in Mexican
pesos of purchasing power at the balance sheet date. This item is calculated by comparing the increase in the investment in shares and inventories restated at replacement costs, with the values that
would have been obtained if factors arising from the NCPI had been used. If the increase in restated
costs exceeds inflation, there is a gain; if not, there is a loss.
• Restatement of Capital Stock and Retained Earnings – Capital stock, retained earnings and net (loss)
or income are restated using the increase in factors arising from the NCPI from the respective dates
such capital was contributed or income generated to the date of the most recent consolidated balance sheet presented.
• Total Financing Cost – This item represents the actual financing cost incurred by the Company during
the year, including the effect of inflation on its net monetary position. This item primarily includes
interest income and expense, exchange loss (gain) and the gain (loss) on net monetary position.
• Gain on Net Monetary Position – Liabilities are associated with a gain of general purchasing power,
because the amount of money required to settle the liability represents a decrease in the amount of
purchasing power. The gain is obtained by applying the NCPI to the net monetary position at each
period end.
c) Cash, Marketable Securities and Contractual Obligation Fund.
Cash consists primarily of bank deposits in checking accounts and overnight deposits with immediate
availability. Cash is stated at its nominal value and marketable securities at acquisition cost plus accrued
interest.
The contractual obligation fund represents restricted set aside to make certain anticipated payments in
order to generate excess cash in accordance with preestablished formulas. It is valued at historical cost
plus accrued interest. At December 31, 2006 such amount was not segregated from cash.
36
d) Impairment of Long-lived Assets in Use.
The Company reviews the carrying amounts of long-lived assets in use when 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. The impairment indicators considered
for these purposes are, among others, the operating losses or negative cash flows in the period if they
are combined with a history or projection of losses, depreciation and amortization charged to results,
which in percentage terms in relation to revenues are substantially higher than that of previous years,
obsolescence, reduction in the demand for the products manufactured, competition and other legal and
economic factors.
e) Goodwill.
The difference between the acquisition cost and fair value of the shares issued by the subsidiaries is
determined at the acquisition date and is restated using the NCPI published by Banco de México.
As of January 1, 2005, goodwill ceased to be amortized under the provisions of NIF B-7 “Business Acquisitions” (“B-7”) and is now subject to annual impairment tests.
f) 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. The valuation of a financial asset or liability is recognized in
the consolidated results of operations in the corresponding period. Fair value is determined using prices
quoted in recognized markets. If such instruments are not traded, fair value is determined by applying
recognized technical valuation models.
While certain derivative financial instruments are contracted for hedging from an economic point of view,
they are not designated as hedges for accounting purposes. Changes in fair value of such derivative
instruments are recognized in current earnings as a component of total financing cost.
g) Employee Retirement Obligations.
Seniority premiums, pension plans and severance payments at the end of the work relationship, are
recognized as costs over employee years of service 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.
h) Revenue Recognition.
Revenues are recognized in the period in which the risks and rewards of ownership are transferred to customers, which generally coincides with the delivery of products to customers in satisfaction of orders.
i) Foreign Currency 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 total financing cost in the consolidated statements of operations.
j) Provisions.
Provisions are recognized for current obligations that result from a past event, are probable to result in
the future use of economic resources, and can be reasonably estimated.
k) Taxes and Employee Statutory Profit Sharing.
Provisions for income tax (ISR) and employee statutory profit sharing (PTU) are recorded in the consolidated results of the year in which they are incurred. Deferred income taxes are recognized for temporary
differences.
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.
37
Tax on assets (IMPAC) paid that is expected to be recoverable, is recorded as an advance payment of income tax and is presented in the balance sheet decreasing the liability or increasing the deferred income
tax asset.
Deferred PTU is recognized for temporary differences resulting from comparing the net accounting income for the year and the taxable income, only when it can 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 the benefits will not be realized. The effects of inflation do not affect the
determination of deferred PTU because they qualify as permanent differences
l) Reclassifications.
The financial statements for the year ended December 31, 2005 have been reclassified to conform to
the presentation utilized in 2006.
3. CASH AND MARKETABLE SECURITIES
Cash
$
Marketable securities
$
2006
85
$
174
259
$
2005
33
171
204
4. TRADE RECEIVABLES
The balance of trade receivables was reduced by $71 in 2006 and $82 in 2005 by the allowance for doubtful accounts.
5. INVENTORIES
Finished goods
$
Work in process
Raw materials and components
Spare parts and accessories
Other inventories
$
2006
331
$
45
101
56
26
559
$
2005
279
42
83
49
60
513
The balance of inventory was reduced by $22 in 2006 and $29 in 2005 for the allowance for slow-moving
and obsolete inventory.
6. DERIVATIVE FINANCIAL INSTRUMENTS
During 2006, the Company entered into an interest rate swap denominated in U.S. dollars amounting to
US$67.8, which expire in 2007. The fixed exchange rate is $11.035 Mexican pesos per U.S. dollar. The fair
value as of December 31, 2006 is $1.09 million U.S. dollars, which is included in the consolidated balance
sheet in other assets. The fluctuation in the fair value of $23 was recorded in total financing cost.
7.
PROPERTY, PLANT AND EQUIPMENT, NET
2005
2006
Restated
Value
38
Land
$
Buildings
352
Accumulated
Depreciation
$
1,275
Net Restated
Value
$
(741)
352
Restated
Value
$
534
Property,
plant and
equipment 8,459 (5,867) 2,592
Construction
in progress
154
$ 10,240
$ (6,608)
154
$ 3,632
352
Accumulated
Depreciation
$
1,273
Net Restated
Value
$
352
(723)
550
8,374 (5,746) 2,628
110
$ 10,109
$ (6,469)
110
$ 3,640
8. FOREIGN CURRENCY TRANSACTIONS
a) The exchange rates per U.S. dollar at the end of each year were $10.8116 in 2006 and $10.6344 in
2005. The exchange rate at March 8, 2007, the date of issuance of these consolidated financial statements, was $ 11.1426 per U.S. dollar.
b) The Company’s assets and liabilities include inventories and fixed assets of foreign origin and other monetary items that will be collected or paid in foreign currencies. These items expressed in millions of U.S.
dollars, are as follows:
Inventories
Plant and equipment
Monetary assets
Monetary liabilities (non-bank loans)
Bank loans
2006
10.4
129.3
44.7
112.6
96.4
2005
7.2
148.7
32.5
104.7
120.1
c) The Company had the following transactions denominated in foreign currencies (amounts expressed in
millions of U.S. dollars):
2006
Export sales and other revenues
98.5
Purchases (128.2)
(29.7)
Interest income
0.1
(10.9)
Interest expense
(10.8)
Balance of payments
(40.5)
2005
76.0
(115.1)
(39.1)
0.3
(11.3)
(11.0)
(50.1)
9. LIABILITIES
a) At December 31, consolidated long-term bank debt is as follows:
Interest
Rate*
U.S. dollar denominated loans with foreign
financial institutions:
Guaranteed bank loans (1)
9.35%
2006
$ 867
Interest
Rate*
2005
8.41%
$ 578
U.S. dollar denominated loans with Mexican financial
institutions and their foreign agencies:
Guaranteed bank loans
9.33% 175
8.45% 752
1,0421,330
Current portion of long-term debt 146 262
Long-term debt
$ 896
$1,068
(*) Weighted average rates (including income tax) as of December 31, 2006 and 2005.
(1) This liability corresponds to debts with Citibank N.A., Citibank (Banamex USA) (previously California Commerce Bank), Comerica Bank, Standard Bank Plc (transferor BBVA
Bancomer, S.A.) and General Electric Capital Corporation.
b) Maturities of long-term bank debt as of December 31, 2006:
39
Year Amount
2007
$
146
2008
199
2009
197
2010
197
2011 and thereafter
303
$
896
c) The loan agreement in U.S. dollars sets forth the obligation to make mandatory early payments if the
Company has excess cash on hand, pursuant to a formula provided, as well as other extraordinary items.
The loan agreement stipulates certain restrictions and financial covenants. The Company was in compliance with such restrictions and financial covenants as of December 31, 2006.
d) Debt prepayment.
In March 31, 2006, the Company prepaid a portion of the previously restructured debt. Due to this
prepayment, the financial debt of US$12.2 million is presented within the short-term section of the consolidated balance sheet.
10. STOCK REPURCHASE
As a result of the bank restructuring agreement dated March 16, 2004, the Company reached an agreement
with the banks to repurchase the entire 16.45941% of shares on a date that would not exceed 2011. The
price the Company will pay upon repurchase will be the original subscription value of $825.7 (US$76.4 million) plus a yield calculated from 2006 to 2011 at 1.5%.
11. COMMITMENTS AND CONTINGENCIES
a) The Company received an official letter from the Tax Administration Service (SAT) informing it that a
prejudicial action had been filed challenging the precedence of the tax on assets refund of $350 granted
by the authorities for fiscal years 1996,1997,1998 and 1999. The Company’s legal counsel believes it
has a strong position to sustain the judgement.
b) As of December 31, 2006, bank debts with a total value of $1,042 were collateralized by fixed assets
with a book value of $3,880 (which includes assets of discontinued companies that have not been sold
of $802).
c) As of December 31, 2006, the Company had outstanding warranty obligations of $30, the majority of
which secure the quality and delivery of products to customers.
d) The Company has lease agreements for offices, land, and other assets. Rental expense amounted to
US$6.6 million in 2006 and US $5.9 million in 2005. The agreements contain fixed term lease clauses.
Future minimum rentals due under the leases are as follows:
YearMillions of U.S. Dollars
2007
1.2
2008
0.8
2009
0.9
2010
0.9
2011 and thereafter
1.0
12. EMPLOYEE RETIREMENT OBLIGATIONS
Pension and retirement plans, seniority premium benefits and severance indemnities, based on independent actuary calculations, are summarized below:
40
Accumulated benefit obligation
$
Projected benefit obligation
$
Unrecognized transition obligation
Unrecognized adjustments from experience Net projected liability
$
2006
314
$
323
$
86
(15)
252
$
Additional liability
$
73
$
Intangible pension asset
71
Minimum pension liability adjustment
2
Decrease in shareholders’ equity discontinued operations Total decrease in shareholders’ equity
$
2
$
2005
309
323
96
(15)
242
69
49
20
10
30
The unrecognized transition obligation is amortized to the consolidated results of operations over 14 years;
the period corresponding to the average remaining service lives of employees expected to receive the benefits of the plan. Amortization was $11 during 2006 and 2005.
The intangible pension asset is included in other assets in the consolidated balance sheets.
The additional minimum pension liability included in other comprehensive loss in shareholders’ equity is
generated, because the sum of the transition obligation and the unrecognized prior service costs is less than
the accumulated benefit obligation for certain of the Company’s subsidiaries and is presented net of income
tax in the consolidated balance sheets.
Net period costs were $33 in 2006 and $37 in 2005. Seniority premiums, termination, pension, and retirement plan benefit payments were $23 in 2006 and $16 in 2005.
Net period cost is comprised as follows:
Service costs
$
Amortization of the transition obligation
Amortization of prior service costs
Amortization of variances in assumptions
Interest cost
Net period cost
$
2006
11
$
11
(3)
1
13
33
$
2005
11
11
2006
%
4.5%
0.5%
2005
%
4.0%
1.0%
15
37
Net discount rates used in actuarial calculations were as follows:
Discount rate at present value
Expected salary and wage increase 13. SHAREHOLDERS’ EQUITY
a) Pursuant to a resolution of the extraordinary shareholders’ meeting held on April 26, 2006, it was agreed
to decrease the Company’s capital stock by $778 ($755 at nominal value) by means of a credit in the
same amount to the insufficiency in restatement of shareholders’ equity account. Additionally, it was
agreed to increase the Company’s capital stock by $45 ($44 at nominal value). As a result of such resolutions, capital stock was comprised by $1,029 and attributed to the following:
• 148,997,251 common nominative, non-par value, voting Series “A” shares.
• 136,833,749 common nominative, Series “C” shares, without par value, and without voting rights,
necessarily convertible into Series “A” shares with full voting rights on May 1, 2008.
b) Pursuant to a resolution of the extraordinary shareholders’ meeting held on March 29, 2000, dividends
of $56 ($39 par value) were declared due and payable; however, at December 31, 2006, they had not
been paid yet. Such dividends will be paid when the Board of Directors decides to distribute them.
c) Cydsa, S.A.B. de C.V. currently has 2,000,000 Series “A” shares in a trust fund set up primarily to grant
purchase options to the employees in a non-compensatory plan. The market value of these Series “A”
shares at December 31, 2006 is $4.96 (Mexican pesos) per share.
d) Minority interest consists of the following:
2006
58
$
(162)
253
38
(14)
173
$
2005
58
(164)
221
32
(14)
133
41
Capital stock
$
Insufficiency in restated shareholders’ equity
Retained earnings
Net income Cumulative effect of deferred ISR
$
e) 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 when such payments are not from the
contributed capital account and net tax income account. The income tax rate was 29% in 2006; it will
decrease to 28% in 2007 and thereafter. As of December 31, 2006, capital contributions and taxable
income were $ 1,074 and $ 2,068, respectively.
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.
f) Restated shareholders’ equity, as well as its historical value, are shown below:
2005
2006
Historical
Restated
Restatement
value
value
Historical
value
Restatement
Restated
value
Capital stock Series “A”
$
536 $ 2,609 $ 3,145 $
390 $ 2,605 $ 2,995
Capital stock Series “C”
493
76
569 1,350
102 1,452
Additional paid-in capital
169
293
462
169
293
462
Legal reserve
30
142
172
30
142
172
Retained earnings (2,641) 7,830 5,189 (2,312) 7,845 5,533
Net income (loss) of the year
11
6
17 (329)
(15) (344)
Stocks in trust
(28)*
(28)
(56)
(28)*
(28)
(56)
* Share acquisition cost
g) Net comprehensive income (loss) presented in the accompanying consolidated statements of changes
in shareholders’ equity represents the Company’s total activity during each year, and includes the net
income (loss) of the year, plus other items, which, in accordance with MFRS, are presented directly in
shareholders’ equity without affecting the consolidated statement of operations. In 2006, and 2005,
comprehensive income (loss) consisted of the results of holding non-monetary assets and the additional
minimum pension obligation.
h) The result from holding non-monetary assets of the period, valued in Mexican pesos of purchasing power
of the consolidated balance sheet date, amounted to a loss of $36 in 2006 and a loss of $2 in 2005.
14. TOTAL FINANCING COST
2006
(165)
$
18
(20)
(23)
(29)
35
(184)
$
2005
(170)
21
(23)
(2)
73
45
(56)
2006
Fixed asset impairment
$
(1)
$
Loss on sale of shares
Restructuring expenses
Debt restructuring
(7)
Other income, net
95
$
87
$
2005
(20)
(21)
(17)
(23)
59
(22)
Interest expenses
$
Interest income
Prompt payment discount Loss from derivative financial instruments
Exchange (loss) gain Monetary gain
$
15. OTHER EXPENSES, NET
42
16. TAXES AND EMPLOYEE STATUTORY PROFIT SHARING
a) The Company computes its income tax on a consolidated basis in accordance with the Income Tax Law.
This allows the Company to use tax losses to offset taxable income of the Company’s majority interest to determine income tax on the basis of net consolidated taxable income. The Company can fully
compensate the tax results of the interest it holds in the capital stock of its subsidiaries (percentage of
consolidation).
b) As of December 31, 2006, the Company had tax loss carryforwards that could be offset against future
taxable income, in accordance with the Income Tax Law. There is also Tax on Assets that may be recovered in the future. The amounts and the years of expiration are as follows:
Tax loss carryforwards:
Year of origin Amount
Year of expiration
2001
$
1,739
2011
2002
417
2012
2003
245
2013
2004
134
2014
$ 2,535
Tax on assets:
Year of origin Amount
Year of expiration
1997
$
48
2007
1998
19
2008
2001
205
2011
2002
130
2012
2003
122
2013
2004
43
2014
2005
4
2015
$
571
c) The provision for income tax and employee statutory profit-sharing consists of the following:
2006
2005
Income tax:
Current
$ (121)
$
(30)
Deferred
(1)
(122)
Income tax benefit - e)
130
Cancellation of IMPAC valuation allowance, net
(27)
Statutory employee profit sharing
(1)
(1)
$ (150)
$
(23)
d) The statutory income tax rate was 29% in 2006 and 30% in 2005. The statutory rate applicable in 2007
and thereafter is 28%.
To calculate the deferred income tax as of December 31, 2006, the Company applied the different rates
that will be effective beginning January 1, 2007 to the temporary differences, according to their estimated
date of reversal. The result from applying the different rates is presented in the abovementioned chart.
e) In October 2004, the Company filed a request for a ruling with the SAT to be able to reduce from its
consolidated income taxes, the ISR previously paid, corresponding to the 40% interest Bayer A.G. has in
Industrias Cydsa Bayer, S.A. de C.V. (currently Industrias Cydsa Istmo, S.A. de C.V.) which is the Company
has owned since 2003. This request was made, pursuant to Article 75 of the Income Tax Law. On December 6, 2005, the SAT sent an official document whereby it resolved that the Company could apply
such tax against consolidated income tax for the year and until such amount is completely utilized. The
tax the Company can apply against its income tax amounts to $130.
43
f) The reconciliation of the statutory income tax rate and the effective income tax rate declared in the consolidated statement of operations is as follows:
2006
Statutory income tax rate
29.0%
Valuation allowance for tax loss carryforwards
Non-deductible expenses net of non-taxable income
2.3%
Effect of change in statutory rate on deferred ISR
Cancellation of valuation allowance for recoverable tax on assets (5.0)%
Other
2.6%
2005
30.0%
(33.7)%
2.0%
7.3%
Effective income tax rate
28.9%
5.6%
g) The deferred income tax shown on the consolidated balance sheet as of December 31, 2006 and 2005
was comprised of the following items:
2006
Deferred income tax liabilities (assets):
Property, machinery and equipment $
852
$
Tax loss carryforwards (710)
Inventories
17
Reserves and other liabilities
(136)
Sub-total
23
Creditable income tax according to e)
Tax on assets
(571)
Long-term deferred tax asset $ (548)
$
2005
832
(749)
(9)
(69)
5
(130)
(422)
(547)
17. DISCONTINUED OPERATIONS AND DIVESTITURES
In the consolidated balance sheets, assets and liabilities of discontinued operations have been identified
separately, as follows:
2006
2005
Assets
Cash
$
33
$
33
Trade receivables, net 8
236
Other current assets
30
131
Fixed assets 1,023 1,450
Deferred income taxes
100
50
Other non current assets
4
4
Total assets
$ 1,198
$ 1,904
Liabilities
Trade payables
$
12
$
222
Account payables
16
121
Other non current liabilities
13
13
Total liabilities
$
41
$
356
44
The consolidated statement of operations has also been restructured in order to present comparative figures
for all periods presented. A breakdown of results derived from discontinued operations is presented below.
2006
2005
Sales $
41
$ 1,739
Cost of sales
(59) (1,849)
(31)
(220)
Operating expenses
Operating loss
(49)
(330)
Total financing benefit
14
9
Other expenses, net
(400)
(623)
Loss before income taxes (435)
(944)
Income taxes
125
262
Net loss
$ (310)
$ (682)
18. INFORMATION BY BUSINESS SEGMENT
a) The Company is divided into two business segments, as described below with their primary products:
• Chemicals and Plastics: Salt, chlorine and caustic soda, PVC and PVC product manufacturing, PVC
pipes and fittings, pressurized irrigation systems, and refrigerant gases.
• Yarns: threads for knitting and sewing.
b) The relevant information by business segment is as follows:
2006
Chemical and
Plastics
Net sales by segment
Net intersegment sales
$ 5,601
Yarns
$
385
Corporate and
Eliminations
$
1
Net consolidated sales 5,600
385
811
28
Income (loss) from operations
165
Discontinued
Operations
Consolidated
Information
$
$ 6,151
162
3 5,988
(227)
Assets 4,272 1,426 1,085
Liabilities 2,232
Capital expenditures
(196)
154
163
52 1,015
612
1,198 7,981
41 3,340
(2) (198)
24
12
190
2005
Net sales by segment
$ 5,144
Net intersegment sales
Yarns
$
430
Corporate and
Eliminations
$
1
173
Discontinued
Operations
$
Consolidated
Information
$ 5,747
171
Net consolidated sales 5,143
430
Income (loss) from operations
(28) (249)
747
Assets 4,119 1,490
Liabilities 2,453
Capital expenditures
2 5,575
470
984
1,904 8,497
79 1,032
356 3,920
(155)
148
172
29
(1) (156)
13
190
45
Chemical and
Plastics
c) Export sales by segment are summarized as follows (in millions of U.S. dollars):
2006
Chemicals and
Plastics
Yarns
Consolidated
United States and Canada
42.2
2.7
44.9
45.6
Central and South America
21.0
21.0
21.3
Asia
12.5
12.5
12.7
Europe
20.1
20.1
20.4
Total
95.8
98.5
100.0
2.7
%
2005
Chemicals and
Plastics
Yarns
Consolidated
%
United States and Canada
33.1
8.1
41.2
54.2
Central and South America
24.0
24.0
31.6
Asia
6.5
6.5
8.6
Europe
4.3
4.3
5.6
76.0
100.0
Total
67.9
8.1
19. NEW ACCOUNTING PRINCIPLES
When Mexican NIF Series A went into effect on January 1, 2006, which represents the Conceptual Framework described in Note 3, 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 MFRS,
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:
46
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
Some of the significant changes established by these standards are as follows:
NIF B-3, Statement of Income, sets the general standards for presenting and structuring the statement
of income, the minimum content requirements and general disclosure standards. Consistent with NIF
A-5, Basic Elements of Financial Statements, NIF B-3 now classifies revenues, costs and expenses, into
ordinary and non-ordinary. Ordinary items (even if not frequent) are derived from the primary activities representing and entity’s main source of revenues. Non-ordinary items are derived from activities
other than those representing an entity’s main source of revenues. Consequently, the classification of
certain transactions as special or extraordinary, according to former NIF B-3, was eliminated. As part of
the structure of the statement of income, ordinary items should be presented first and, at a minimum,
present income or loss before income taxes, income or loss before discontinued operations, if any, and
net income or loss. Presenting operating income is neither required nor prohibited by NIF B-3. If presented, the line item other income (expense) is presented immediately before operating income. Cost
and expense items may be classified by function, by nature, or a combination of both. When classified by
function, gross income may be presented. Statutory employee profit sharing should now be presented
as an ordinary expense (within other income (expense) pursuant to INIF No. 4 issued in January 2007)
and no longer presented within income tax. Special items mentioned in particular MFRS should now
be part of other income and expense and items formerly recognized as extraordinary should be part of
non-ordinary items.
NIF B-13, Events Occurring after the Date of the Financial Statements, requires that for (i) asset and liability restructurings and (ii) creditor waivers to their right to demand payment in case the entity defaults on
contractual obligations, occurring in the period between the date of the financial statements and the date
of their issuance, only disclosure needs to be included in a note to the financial statements while recognition of these items should take place in the financial statements of the period in which such events take
place. Previously, these events were recognized in the financial statements instead in addition to their
disclosure. NIF A-7, Presentation and Disclosure, in effect as of January 1, 2006, requires, among other
things, that the date on which the issuance of the financial statements is authorized be disclosed as well
as the name of authorizing management officer(s) or body (bodies). NIF B-13 establishes that if the
entity owners or others are empowered to modify the financial statements, such fact should be disclosed.
Subsequent approval of the financial statements by the stockholders or other body does not change the
subsequent period, which ends when issuance of the financial statements is authorized.
NIF C-13, Related Parties, broadens the concept “related parties” to include a) the overall business in
which the reporting entity participates; b) close family members of key or relevant officers; and c) any
fund created in connection with a labor-related compensation plan. NIF C-13 requires the following
disclosures: a) the relationship between the controlling and subsidiary entities, regardless of whether
or not any intercompany transactions took place during the period; b) that the terms and conditions of
consideration paid or received in transactions carried out between related parties are equivalent to those
of similar transactions carried out between independent parties and the reporting entity, only if sufficient
evidence exists; c) benefits granted to key or relevant officers; and d) name of the direct controlling
company and, if different, name of the ultimate controlling company. Notes to comparative financial
statements of prior periods should disclose the new provisions of NIF C-13.
NIF D-6, Capitalization of Comprehensive Financing Result, establishes general capitalization standards
that include specific accounting for financing in domestic and foreign currencies or a combination of both.
Some of these standards include: a) mandatory capitalization of comprehensive financing cost (“RIF”) directly attributable to the acquisition of qualifying assets; b) in the instance financing in domestic currency
is used to acquire assets, yields obtained from temporary investments before the capital expenditure
is made are excluded from the amount capitalized; c) exchange gains or losses from foreign currency
financing should be capitalized considering the valuation of associated hedging instruments, if any; d) a
methodology to calculate capitalizable RIF relating to funds from generic financing; e) regarding land, RIF
may be capitalized if development is taking place; and f) conditions that must be met to capitalize RIF,
and rules indicating when RIF should no longer be capitalized. The entity may decide on whether to apply
provisions of NIF D-6 for periods ending before January 1, 2007, in connection with assets that are in the
process of being acquired at the time this NIF goes into effect.
On January 2007, CINIF issued Interpretation Number 4, (INIF No. 4), establishing that PTU should be presented in the statement of income as an ordinary expense within other income and expense. This interpretation will become effective for fiscal years beginning on January 1, 2007.
47
At the date of issuance of these financial statements, the Company has not fully assessed the effects of
adopting these new standards on its consolidated financial information.
20. FINANCIAL STATEMENTS ISSUANCE AUTHORIZATION
On February 28, 2007, the issuance of the consolidated financial statements was authorized by C.P. José
de Jesús Montemayor Castillo, Corporate Finance Director of the Company. These consolidated financial
statements are subject to the approval of the general ordinary shareholders’ meeting, who may modify the
financial statements, based on provisions set forth by the General Corporate Law.
48
CYDSA’s two business segments include:
Chemicals and Plastics, and Yarns for
Textiles. Headquartered in Monterrey, Mexico,
the Company COMPRISES more than 20 subsidiaries
located in 12 cities and serves customers in more
than 30 countries.
1
2
10
14
18
20
Financial information:
Management Analysis of CYDSA’s Financial Statements
25
29
30
34
Design: Infobrand
Financial Highlights
Letter to Our Shareholders
Economic Environment
Chemical Division
Yarns Business
Board of Directors
Printing: Earthcolor, Houston
CONTENTS
EDIBLE SALT
PVC RESINS
Avenida Ricardo Margain Zozaya #565 B
Col. Parque Corporativo Santa Engracia
Garza Garcia, Nuevo Leon
Mexico 66267
internet address: www.cydsa.com
PIPES AND FITTINGS
REFRIGERANT GASES
ACRYLIC YARNS
Coatzacoalcos
- Sales del Istmo (1999)
- Policyd (2000) La Presa
Monterrey, Tlaxcala
Coatzacoalcos
2 0 0 6
A N N U A L
R E P O R T

edible salt chlorine-caustic soda pvc resins pipes and

Transcription

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