UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 or 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March, 2018

Commission File Number: 001-14946

 

 

CEMEX, S.A.B. de C.V.

(Translation of Registrant’s name into English)

 

 

Avenida Ricardo Margáin Zozaya #325, Colonia Valle del Campestre,

San Pedro Garza García, Nuevo León 66265, México

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

 

 

 

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Contents

 

1.	CEMEX, S.A.B. de C.V.’s (NYSE:CX) and its subsidiaries consolidated financial statements for the years ended December 31, 2017, 2016 and 2015.

 

2.	CEMEX, S.A.B. de C.V.’s (NYSE:CX) individual financial statements for the years ended December 31, 2017, 2016 and 2015.

CEMEX, S.A.B. de C.V.’s consolidated and individual financial statements are subject to approval by CEMEX, S.A.B. de C.V.’s shareholders at the Ordinary General Shareholders Meeting to be held on April 5, 2018.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, CEMEX, S.A.B. de C.V. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

						CEMEX, S.A.B. de C.V.
						(Registrant)
Date: March 5, 2018				By:		/s/ Rafael Garza Lozano
						Name: Rafael Garza Lozano
						Title:   Chief Comptroller

 

3

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EXHIBIT INDEX

 

EXHIBIT NO.		DESCRIPTION
1.		CEMEX, S.A.B. de C.V.’s (NYSE:CX) and its subsidiaries consolidated financial statements for the years ended December 31, 2017, 2016 and 2015.
2.		CEMEX, S.A.B. de C.V.’s (NYSE:CX) individual financial statements for the years ended December 31, 2017, 2016 and 2015.

 

4

Exhibit 1

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2017, 2016 and 2015

(With Independent Auditor’s Report Thereon)

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INDEX

 

CEMEX, S.A.B. de C.V. and Subsidiaries:
Consolidated Income Statements for the years ended December 31, 2017, 2016 and 2015			1
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015			2
Consolidated Statements of Financial Position as of December 31, 2017 and 2016			3
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015			4
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015			5
Notes to the Consolidated Financial Statements			6
Independent Auditors’ Report – KPMG Cárdenas Dosal, S.C.			67

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Income Statements

(Millions of Mexican pesos, except for earnings per share)

 

						Years ended December 31,
		Notes				2017				2016				2015
Net sales			3			$	258,131				249,945				219,299
Cost of sales			2.16				(169,534	)			(160,433	)			(144,513	)
Gross profit							88,597				89,512				74,786
Operating expenses			5				(56,026	)			(53,969	)			(47,910	)
Operating earnings before other expenses, net			2.1				32,571				35,543				26,876
Other expenses, net			6				(3,815	)			(1,670	)			(3,032	)
Operating earnings							28,756				33,873				23,844
Financial expense			16				(19,301	)			(21,487	)			(19,784	)
Financial income and other items, net			7				3,616				4,489				(1,333	)
Share of profit of equity accounted investees			13.1				588				688				737
Earnings before income tax							13,659				17,563				3,464
Income tax			19				(520	)			(3,125	)			(2,368	)
Net income from continuing operations							13,139				14,438				1,096
Discontinued operations			4.2				3,499				768				1,028
CONSOLIDATED NET INCOME							16,638				15,206				2,124
Non-controlling interest net income							1,417				1,173				923
CONTROLLING INTEREST NET INCOME						$	15,221				14,033				1,201
Basic earnings per share			22			$	0.34				0.32				0.03
Basic earnings per share from continuing operations			22			$	0.26				0.30				0.01
Diluted earnings per share			22			$	0.34				0.32				0.03
Diluted earnings per share from continuing operations			22			$	0.26				0.30				0.01

The accompanying notes are part of these consolidated financial statements.

 

1

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Millions of Mexican pesos)

 

				Years ended December 31,
		Notes		2017				2016				2015
CONSOLIDATED NET INCOME				$	16,638				15,206				2,124
Items that will not be reclassified subsequently to the income statement
Net actuarial (losses) from remeasurements of defined benefit pension plans		18			3				(4,019	)			(748	)
Income tax recognized directly in other comprehensive income		19			(1	)			788				183
					2				(3,231	)			(565	)
Items that are or may be reclassified subsequently to the income statement
Effects from available-for-sale investments and derivative financial instruments designated as cash flow hedges		13.2, 16.4			275				36				335
Currency translation of foreign subsidiaries		20.2			(9,519	)			11,630				7,976
Income tax recognized directly in other comprehensive income		19			233				(696	)			453
					(9,011	)			10,970				8,764
Total items of other comprehensive income, net					(9,009	)			7,739				8,199
TOTAL COMPREHENSIVE INCOME					7,629				22,945				10,323
Non-controlling interest comprehensive income					1,928				5,164				3,221
CONTROLLING INTEREST COMPREHENSIVE INCOME				$	5,701				17,781				7,102
Out of which:
COMPREHENSIVE INCOME FROM DISCONTINUED OPERATIONS				$	2,342				2,882				1,387
COMPREHENSIVE INCOME FROM CONTINUING OPERATIONS				$	3,359				14,899				5,715

The accompanying notes are part of these consolidated financial statements.

 

2

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Statements of Financial Position

(Millions of Mexican pesos)

 

				December 31,
		Notes		2017				2016
ASSETS
CURRENT ASSETS
Cash and cash equivalents		8		$	13,741				11,616
Trade accounts receivables, net		9			30,478				30,160
Other accounts receivable		10			4,970				5,238
Inventories, net		11			18,852				18,098
Assets held for sale		12.1			1,378				21,029
Other current assets		12.2			1,946				2,300
Total current assets					71,365				88,441
NON-CURRENT ASSETS
Equity accounted investees		13.1			8,572				10,488
Other investments and non-current accounts receivable		13.2			5,758				7,120
Property, machinery and equipment, net		14			232,160				230,134
Goodwill and intangible assets, net		15			234,909				247,507
Deferred income tax assets		19.2			14,817				16,038
Total non-current assets					496,216				511,287
TOTAL ASSETS				$	567,581				599,728
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term debt		16.1		$	16,973				1,222
Other financial obligations		16.2			19,362				11,658
Trade payables					46,428				40,338
Income tax payable					5,129				5,441
Other current liabilities		17			24,287				22,530
Liabilities directly related to assets held for sale		12.1			—				815
Total current liabilities					112,179				82,004
NON-CURRENT LIABILITIES
Long-term debt		16.1			177,022				235,016
Other financial obligations		16.2			12,859				25,972
Employee benefits		18			23,653				23,365
Deferred income tax liabilities		19.2			15,801				19,600
Other non-current liabilities		17			15,649				17,046
Total non-current liabilities					244,984				320,999
TOTAL LIABILITIES					357,163				403,003
STOCKHOLDERS’ EQUITY
Controlling interest:
Common stock and additional paid-in capital		20.1			144,654				127,336
Other equity reserves		20.2			13,483				24,793
Retained earnings		20.3			6,181				1,612
Net income					15,221				14,033
Total controlling interest					179,539				167,774
Non-controlling interest and perpetual debentures		20.4			30,879				28,951
TOTAL STOCKHOLDERS’ EQUITY					210,418				196,725
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	567,581				599,728

The accompanying notes are part of these consolidated financial statements.

 

3

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Millions of Mexican pesos)

 

				Years ended December 31,
		Notes		2017				2016				2015
OPERATING ACTIVITIES
Consolidated net income				$	16,638				15,206				2,124
Discontinued operations					3,499				768				1,028
Net income from continuing operations				$	13,139				14,438				1,096
Non-cash items:
Depreciation and amortization of assets		5			15,992				15,991				14,658
Impairment losses		6			2,936				2,518				1,517
Share of profit of equity accounted investees		13.1			(588	)			(688	)			(737	)
Results on sale of subsidiaries, other disposal groups and others					(4,335	)			(2,132	)			(174	)
Financial income and other items, net					15,685				16,998				21,117
Income taxes		19			520				3,125				2,368
Changes in working capital, excluding income taxes					8,040				11,017				3,596
Net cash flow provided by operating activities from continuing operations before financial expense, coupons on perpetual debentures and income taxes					51,389				61,267				43,441
Financial expense and coupons on perpetual debentures paid		20.4			(15,759	)			(18,129	)			(17,865	)
Income taxes paid					(4,664	)			(5,183	)			(7,437	)
Net cash flow provided by operating activities from continuing operations					30,966				37,955				18,139
Net cash flow provided by operating activities from discontinued operations					144				1,192				977
Net cash flows provided by operating activities					31,110				39,147				19,116
INVESTING ACTIVITIES
Property, machinery and equipment, net		14			(10,753	)			(4,563	)			(8,930	)
Acquisition and disposal of subsidiaries and other disposal groups, net		4.1, 13.1			23,841				1,424				2,722
Intangible assets and other deferred charges		15			(1,607	)			(1,427	)			(908	)
Long term assets and others, net					128				(914	)			(764	)
Net cash flows used in investing activities from continuing operations					11,609				(5,480	)			(7,880	)
Net cash flows provided by (used in) investing activities from discontinued operations					—				1				(153	)
Net cash flows used in investing activities					11,609				(5,479	)			(8,033	)
FINANCING ACTIVITIES
Sale of non-controlling interests in subsidiaries		20.4			(55	)			9,777				—
Derivative instruments					246				399				1,098
Repayment of debt, net		16.1			(39,299	)			(46,823	)			(11,473	)
Other financial obligations, net		16.2			—				—				177
Securitization of trade receivables					169				(999	)			(506	)
Non-current liabilities, net					(3,745	)			(1,972	)			(1,763	)
Net cash flows used in financing activities					(42,684	)			(39,618	)			(12,467	)
Decrease in cash and cash equivalents from continuing operations					(109	)			(7,143	)			(2,208	)
Increase in cash and cash equivalents from discontinued operations					144				1,193				824
Cash conversion effect, net					2,090				2,244				4,117
Cash and cash equivalents at beginning of period					11,616				15,322				12,589
CASH AND CASH EQUIVALENTS AT END OF PERIOD		8		$	13,741				11,616				15,322
Changes in working capital, excluding income taxes:
Trade receivables, net				$	1,495				(4,386	)			(3,561	)
Other accounts receivable and other assets					1,120				(286	)			(1,986	)
Inventories					526				(1,239	)			(1,472	)
Trade payables					3,635				13,729				7,532
Other accounts payable and accrued expenses					1,264				3,199				3,083
Changes in working capital, excluding income taxes				$	8,040				11,017				3,596

The accompanying notes are part of these consolidated financial statements.

 

4

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Statements of Changes in Stockholders’ Equity

(Millions of Mexican pesos)

 

								Additional				Other								Total								Total
				Common				paid-in				equity				Retained				controlling				Non-controlling				stockholders’
		Notes		stock				capital				reserves				earnings				interest				interest				equity
Balance as of December 31, 2014				$	4,151				101,216				10,738				14,998				131,103				17,068				148,171
Net income					—				—				—				1,201				1,201				923				2,124
Total other items of comprehensive income		20.2			—				—				5,901				—				5,901				2,298				8,199
Effects of early conversion and issuance of convertible subordinated notes		16.2			3				5,982				(934	)			—				5,051				—				5,051
Capitalization of retained earnings		20.1			4				7,613				—				(7,617	)			—				—				—
Share-based compensation		20.1, 21			—				655				—				—				655				—				655
Effects of perpetual debentures		20.4			—				—				(432	)			—				(432	)			—				(432	)
Balance as of December 31, 2015					4,158				115,466				15,273				8,582				143,479				20,289				163,768
Net income					—				—				—				14,033				14,033				1,173				15,206
Total other items of comprehensive income		20.2			—				—				3,748				—				3,748				3,991				7,739
Capitalization of retained earnings		20.1			4				6,966				—				(6,970	)			—				—				—
Share-based compensation		20.1, 21			—				742				—				—				742				—				742
Effects of perpetual debentures		20.4			—				—				(507	)			—				(507	)			—				(507	)
Changes in non-controlling interest		20.4			—				—				6,279				—				6,279				3,498				9,777
Balance as of December 31, 2016					4,162				123,174				24,793				15,645				167,774				28,951				196,725
Net income					—				—				—				15,221				15,221				1,417				16,638
Total other items of comprehensive income, net		20.2			—				—				(9,520	)			—				(9,520	)			511				(9,009	)
Capitalization of retained earnings		20.1			5				9,459				—				(9,464	)			—				—				—
Effects of early conversion of convertible subordinated notes		16.2			4				7,059				(1,334	)			—				5,729				—				5,729
Share-based compensation		20.1, 21			—				791				26				—				817				—				817
Effects of perpetual debentures		20.4			—				—				(482	)			—				(482	)			—				(482	)
Balance as of December 31, 2017				$	4,171				140,483				13,483				21,402				179,539				30,879				210,418

The accompanying notes are part of these consolidated financial statements.

 

 

5

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

1)	DESCRIPTION OF BUSINESS

CEMEX, S.A.B. de C.V., founded in 1906, is a public stock corporation with variable capital (S.A.B. de C.V.) organized under the laws of the United Mexican States, or Mexico, holding company (parent) of entities whose main activities are oriented to the construction industry, through the production, marketing, distribution and sale of cement, ready-mix concrete, aggregates and other construction materials and services. In addition, in order to facilitate the acquisition of financing and run its operations in Mexico more efficiently, CEMEX, S.A.B. de C.V. carries out all businesses and operational activities of the cement, ready-mix concrete and aggregates sectors in Mexico.

The shares of CEMEX, S.A.B. de C.V. are listed on the Mexican Stock Exchange (“MSE”) as Ordinary Participation Certificates (“CPOs”) under the symbol “CEMEXCPO”. Each CPO represents two series “A” shares and one series “B” share of common stock of CEMEX, S.A.B. de C.V. In addition, CEMEX, S.A.B. de C.V.’s shares are listed on the New York Stock Exchange (“NYSE”) as American Depositary Shares (“ADSs”) under the symbol “CX.” Each ADS represents ten CPOs.

The terms “CEMEX, S.A.B. de C.V.” and/or the “Parent Company” used in these accompanying notes to the financial statements refer to CEMEX, S.A.B. de C.V. without its consolidated subsidiaries. The terms the “Company” or “CEMEX” refer to CEMEX, S.A.B. de C.V. together with its consolidated subsidiaries. The issuance of these consolidated financial statements was authorized by the Board of Directors of CEMEX, S.A.B. de C.V. on February 1, 2018. These financial statements will be submitted for authorization to the Annual General Ordinary Shareholders’ Meeting of CEMEX, S.A.B. de C.V. on April 5, 2018.

 

2)	SIGNIFICANT ACCOUNTING POLICIES

 

2.1)	BASIS OF PRESENTATION AND DISCLOSURE

The consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Presentation currency and definition of terms

The presentation currency of the consolidated financial statements is the Mexican peso, currency in which the Company reports periodically to the MSE. When reference is made to pesos or “$” it means Mexican pesos. The amounts in the financial statements and the accompanying notes are stated in millions, except when references are made to earnings per share and/or prices per share. When reference is made to “US$” or “dollars”, it means dollars of the United States of America (“United States”). When reference is made to “€” or “euros,” it means the currency in circulation in a significant number of European Union (“EU”) countries. When reference is made to “£” or “pounds”, it means British pounds sterling. When it is deemed relevant, certain amounts in foreign currency presented in the notes to the financial statements include between parentheses a convenience translation into dollars and/or into pesos, as applicable. Previously reported convenience translations of prior years are not restated unless the transaction is still outstanding, in which case those are restated using the closing exchange rates as of the reporting date. These translations should not be construed as representations that the amounts in pesos or dollars, as applicable, actually represent those peso or dollar amounts or could be converted into pesos or dollars at the rate indicated. As of December 31, 2017 and 2016, translations of pesos into dollars and dollars into pesos, were determined for statement of financial position amounts using the closing exchange rates of $19.65 and $20.72 pesos per dollar, respectively, and for statements of operations amounts, using the average exchange rates of $18.88, $18.72 and $15.98 pesos per dollar for 2017, 2016 and 2015, respectively. When the amounts between parentheses are the peso and the dollar, the amounts were determined by translating the euro amount into dollars using the closing exchange rates at year-end and then translating the dollars into pesos as previously described.

Amounts disclosed in the notes in connection with tax or legal proceedings (notes 19.4 and 24), which are originated in jurisdictions which currencies are different to the peso or the dollar, are presented in dollar equivalents as of the closing of the most recent year presented. Consequently, without any change in the original currency, such dollar amounts will fluctuate over time due to changes in exchange rates.

Discontinued operations

On April 5, 2017, in connection with the agreements entered into between CEMEX and Duna-Dráva Cement in August 2015 for the sale of CEMEX’s operations in Croatia, including assets in Bosnia and Herzegovina, Montenegro and Serbia, (jointly the “Croatian Operations”), the European Commission issued a decision that ultimately did not allow Duna-Dráva Cement to purchase the aforementioned operations. Consequently, the transaction was not concluded and CEMEX decided to maintain its Croatian Operations and continue to operate them for indefinite time. As of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, the Croatian Operations are consolidated line-by-line in the financial statements. The accompyning comparative financial statements including their notes for prior periods, in which CEMEX previously reported the Croatian Operations as “Discontinued Operations” and “Assets held for sale” have been re-presented in order to present the Croatian Operations as part of continuing operations. The Croatian Operations mainly consist of three cement plants with aggregate annual production capacity of approximately 2.4 million tons of cement, two aggregates quarries and seven ready-mix plants (note 4.2).

In addition, considering the disposal of entire reportable operating segments, CEMEX presents in the single line item of discontinued operations, the results of: a) its Pacific Northwest Materials Business operations in the United States sold on June 30, 2017; b) its Concrete Pipe Business operations in the United States sold on January 31, 2017; c) its operations in Bangladesh and Thailand sold on May 26, 2016; and d) its operations in Austria and Hungary sold on October 31, 2015 (note 4.2).

Discontinued operations are presented net of income tax.

 

6

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Income statements

CEMEX includes the line item titled “Operating earnings before other expenses, net” considering that it is a relevant measure for CEMEX’s management as explained in note 4.4. Under IFRS, the inclusion of certain subtotals such as “Operating earnings before other expenses, net” and the display of the statement of operations vary significantly by industry and company according to specific needs. The line item “Other expenses, net” consists primarily of revenues and expenses not directly related to CEMEX’s main activities, or which are of an unusual and/or non-recurring nature, including impairment losses of long-lived assets, results on disposal of assets and restructuring costs and others (note 6).

Statements of cash flows

The statements of cash flows exclude the following transactions that did not represent sources or uses of cash:

 

•

In 2017, 2016 and 2015, the increases in common stock and additional paid-in capital associated with: (i) the capitalization of retained earnings for $9,464, $6,970 and $7,617, respectively (note 20.1); and (ii) CPOs issued as part of the executive share-based compensation programs for $817, $742 and $655, respectively (note 20.1);

 

•

In 2017, 2016 and 2015, the increases in property, plant and equipment for $2,096, $7 and $63, respectively, associated with the finance leases during the year (note 14);

 

•

In 2017, the decrease in debt for $5,468, the net decrease in other equity reserves for $1,334, the increase in common stock for $4 and the increase in additional paid-in capital for $7,059, in connection with the early conversion of part of the 2018 optional convertible subordinated notes, which involved, the early conversion of optional convertible subordinated notes due in 2018. In addition, in 2015, the decrease in debt for $4,517, the net decrease in other equity reserves for $934, the increase in common stock for $3 and the increase in additional paid-in capital for $5,982, in connection with the issuance of optional convertible subordinated notes due in 2020, which involved, the exchange and early conversion of optional convertible subordinated notes due in 2016. These transactions involved the issuance of approximately 43 million ADSs in 2017 and 42 million ADSs in 2015 (note 16.2);

 

•

In 2016, the increase in debt and in other current accounts receivable for $148, in connection with a guarantee signed by CEMEX Colombia, S.A. (“CEMEX Colombia”) over the debt of a trust committed to the development of housing projects in Colombia and the related beneficial interest that in turn holds CEMEX Colombia in the assets of such trust, which are comprised by land; and

 

•

In 2015, the decrease in other current and non-current liabilities and in deferred tax assets in connection with changes in the tax legislation in Mexico effective as of December 31, 2015 (note 19.4).

 

2.2)	PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include those of CEMEX, S.A.B. de C.V. and those of the entities in which the Parent Company exercises control, including structured entities (special purposes entities), by means of which the Parent Company is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee’s relevant activities. Balances and operations between related parties are eliminated in consolidation.

Investments are accounted for by the equity method when CEMEX has significant influence which is generally presumed with a minimum equity interest of 20%. The equity method reflects in the financial statements, the investee’s original cost and CEMEX’s share of the investee’s equity and earnings after acquisition. The financial statements of joint ventures, which relate to those arrangements in which CEMEX and other third-party investors have joint control and have rights to the net assets of the arrangements, are recognized under the equity method. During the reported periods, CEMEX did not have joint operations, referring to those cases in which the parties that have joint control of the arrangement have rights over specific assets and obligations for specific liabilities relating to the arrangements. The equity method is discontinued when the carrying amount of the investment, including any long-term interest in the investee or joint venture, is reduced to zero, unless CEMEX has incurred or guaranteed additional obligations of the investee or joint venture.

Other permanent investments where CEMEX holds equity interests of less than 20% and/or there is no significant influence are carried at their historical cost.

 

2.3)	USE OF ESTIMATES AND CRITICAL ASSUMPTIONS

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements; as well as the reported amounts of revenues and expenses during the period. These assumptions are reviewed on an ongoing basis using available information. Actual results could differ from these estimates. The items subject to significant estimates and assumptions by management include impairment tests of long-lived assets, recognition of deferred income tax assets, as well as the measurement of financial instruments at fair value, and the assets and liabilities related to employee benefits. Significant judgment is required by management to appropriately assess the amounts of these concepts.

 

7

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

2.4)	FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

Transactions denominated in foreign currencies are recorded in the functional currency at the exchange rates prevailing on the dates of their execution. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the statement of financial position date, and the resulting foreign exchange fluctuations are recognized in earnings, except for exchange fluctuations arising from: 1) foreign currency indebtedness associated with the acquisition of foreign entities; and 2) fluctuations associated with related parties’ balances denominated in foreign currency, which settlement is neither planned nor likely to occur in the foreseeable future and as a result, such balances are of a permanent investment nature. These fluctuations are recorded against “Other equity reserves”, as part of the foreign currency translation adjustment (note 20.2) until the disposal of the foreign net investment, at which time, the accumulated amount is recycled through the statement of operations as part of the gain or loss on disposal.

The financial statements of foreign subsidiaries, as determined using their respective functional currency, are translated to pesos at the closing exchange rate for statement of financial position accounts and at the closing exchange rates of each month within the period for statements of operations accounts. The functional currency is that in which each consolidated entity primarily generates and expends cash. The corresponding translation effect is included within “Other equity reserves” and is presented in the statement of other comprehensive income for the period as part of the foreign currency translation adjustment (note 20.2) until the disposal of the net investment in the foreign subsidiary.

Considering its integrated activities, for purposes of functional currency, the Parent Company is considered to have two divisions, one related with its financial and holding company activities, in which the functional currency is the dollar for all assets, liabilities and transactions associated with these activities, and another division related with the Parent Company’s operating activities in Mexico, in which the functional currency is the peso for all assets, liabilities and transactions associated with these activities.

During the reported periods, there were no subsidiaries whose functional currency was the currency of a hyperinflationary economy, which is generally considered to exist when the cumulative inflation rate over the last three years is approaching, or exceeds, 100%. In a hyperinflationary economy, the accounts of the subsidiary’s statements of operations should be restated to constant amounts as of the reporting date, in which case, both the statement of financial position accounts and the income statement accounts would be translated to pesos at the closing exchange rates of the year.

The most significant closing exchange rates and the approximate average exchange rates for statement of financial position accounts and statement of operations accounts as of December 31, 2017, 2016 and 2015, were as follows:

 

		2017								2016								2015
Currency		Closing				Average				Closing				Average				Closing				Average
Dollar			19.6500				18.8800				20.7200				18.7200				17.2300				15.9800
Euro			23.5866				21.4122				21.7945				20.6564				18.7181				17.6041
British Pound Sterling			26.5361				24.4977				25.5361				25.0731				25.4130				24.3638
Colombian Peso			0.0066				0.0064				0.0069				0.0062				0.0055				0.0058
Egyptian Pound			1.1082				1.0620				1.1234				1.8261				2.2036				2.0670
Philippine Peso			0.3936				0.3747				0.4167				0.3927				0.3661				0.3504

The financial statements of foreign subsidiaries are initially translated from their functional currencies into dollars and subsequently into pesos. Therefore, the foreign exchange rates presented in the table above between the functional currency and the peso represent the implied exchange rates resulting from this methodology. The peso to U.S. dollar exchange rate used by CEMEX is an average of free market rates available to settle its foreign currency transactions. No significant differences exist, in any case, between the foreign exchange rates used by CEMEX and those exchange rates published by the Mexican Central Bank.

 

2.5)	CASH AND CASH EQUIVALENTS (note 8)

The balance in this caption is comprised of available amounts of cash and cash equivalents, mainly represented by highly-liquid short-term investments, which are readily convertible into known amounts of cash, and which are not subject to significant risks of changes in their values, including overnight investments, which yield fixed returns and have maturities of less than three months from the investment date. These fixed-income investments are recorded at cost plus accrued interest. Accrued interest is included in the income statement as part of “Financial income and other items, net.”

The amount of cash and cash equivalents in the statement of financial position includes restricted cash and investments, comprised of deposits in margin accounts that guarantee certain of CEMEX’s obligations, to the extent that the restriction will be lifted in less than three months from the statement of financial position reporting date. When the restriction period is greater than three months, such restricted cash and investments are not considered cash equivalents and are included within short-term or long-term “Other accounts receivable,” as appropriate. When contracts contain provisions for net settlement, these restricted amounts of cash and cash equivalents are offset against the liabilities that CEMEX has with its counterparties.

 

8

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

2.6)	FINANCIAL INSTRUMENTS

Beginning January 1, 2018, IFRS 9, Financial Instruments: classification and measurement is effective, see note 2.20. Until December 31, 2017, CEMEX’s policy for the recognition of financial instruments is set forth below:

Trade accounts receivable and other accounts receivable (notes 9 and 10)

Instruments under these captions are classified as loans and receivables and are recorded at their amortized cost representing the net present value (“NPV”) of the consideration receivable or payable as of the transaction date. Due to their short-term nature, CEMEX initially recognizes these receivables at the original invoiced amount less an estimate of doubtful accounts. Allowances for doubtful accounts were recognized based on incurred loss estimates against administrative and selling expenses.

Trade receivables sold under securitization programs, in which certain residual interest in the trade receivables sold in case of recovery failure and continued involvement in such assets is maintained, do not qualify for derecognition and are maintained on the statement of financial position.

Other investments and non-current accounts receivable (note 13.2)

As part also of loans and receivables, non-current accounts receivable and investments classified as held to maturity are initially recognized at their amortized cost. Subsequent changes in NPV are recognized in the income statement as part of “Financial income and other items, net”.

Investments in financial instruments held for trading, as well as those investments available for sale, are recognized at their estimated fair value, in the first case through the income statement as part of “Financial income and other items, net,” and in the second case, changes in valuation are recognized as part of “Other comprehensive income” for the period within “Other equity reserves” until their time of disposition, when all valuation effects accrued in equity are reclassified to “Financial income and other items, net,” in the income statement. These investments are tested for impairment upon the occurrence of a significant adverse change or at least once a year during the last quarter.

Debt and other financial obligations (notes 16.1 and 16.2)

Bank loans and notes payable are recognized at their amortized cost. Interest accrued on financial instruments is recognized within “Other accounts payable and accrued expenses” against financial expense. During the reported periods, CEMEX did not have financial liabilities voluntarily recognized at fair value or associated to fair value hedge strategies with derivative financial instruments. Direct costs incurred in debt issuances or borrowings, as well as debt refinancing or non-substantial modifications to debt agreements that did not represent an extinguishment of debt by considering that the holders and the relevant economic terms of the new instrument are not substantially different to the replaced instrument, adjust the carrying amount of the related debt and are amortized as interest expense as part of the effective interest rate of each instrument over its maturity. These costs include commissions and professional fees. Costs incurred in the extinguishment of debt, as well as debt refinancing or modifications to debt agreements when the new instrument is substantially different to the old instrument according to a qualitative and quantitative analysis are recognized in the income statement as incurred.

Finance leases are recognized as financing liabilities against a corresponding fixed asset for the lesser of the market value of the leased asset and the NPV of future minimum lease payments, using the contract’s implicit interest rate to the extent available, or the incremental borrowing cost. The main factors that determine a finance lease are: a) ownership title of the asset is transferred to CEMEX at the expiration of the contract; b) CEMEX has a bargain purchase option to acquire the asset at the end of the lease term; c) the lease term covers the majority of the useful life of the asset; and/or d) the NPV of minimum payments represents substantially all the fair value of the related asset at the beginning of the lease.

Financial instruments with components of both liabilities and equity (note 16.2)

The financial instrument that contains components of both liability and equity, such as notes convertible into a fixed number of the issuer’s shares and denominated its same functional currency, each component is recognized separately in the statement of financial position according to the specific characteristics of each transaction. In the case of instruments mandatorily convertible into shares of the issuer, the liability component represents the NPV of interest payments on the principal amount using a market interest rate, without assuming early conversion, and is recognized within “Other financial obligations,” whereas the equity component represents the difference between the principal amount and the liability component, and is recognized within “Other equity reserves”, net of commissions. In the case of instruments that are optionally convertible into a fixed number of shares, the liability component represents the difference between the principal amount and the fair value of the conversion option premium, which reflects the equity component (note 2.14). When the transaction is denominated in a currency different than the functional currency of the issuer, the conversion option is accounted for as a derivative financial instrument at fair value in the income statement.

Derivative financial instruments (note 16.4)

CEMEX recognizes all derivative instruments as assets or liabilities in the statement of financial position at their estimated fair values, and the changes in such fair values are recognized in the income statement within “Financial income and other items, net” for the period in which they occur, except for the effective portion of changes in fair value of derivative instruments associated with cash flow hedges, in which case, such changes in fair value are recognized in stockholders’ equity, and are reclassified to earnings as the interest expense of the related debt is accrued, in the case of interest rate swaps, or when the underlying products are consumed in the case of contracts on the price of raw materials and commodities. Likewise, in hedges of the net investment in foreign subsidiaries, changes in fair value are recognized in stockholders’ equity as part of the foreign currency translation result (note 2.4), which reversal to earnings would take place upon disposal of the foreign investment. During the reported periods, CEMEX did not have derivatives designated as fair value hedges. Derivative instruments are negotiated with institutions with significant financial capacity; therefore, CEMEX believes the risk of non-performance of the obligations agreed to by such counterparties to be minimal.

 

9

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Derivative financial instruments - continued

 

CEMEX reviews its contracts to identify the existence of embedded derivatives. Identified embedded derivatives are analyzed to determine if they need to be separated from the host contract and recognized in the statement of financial position as assets or liabilities, applying the same valuation rules used for other derivative instruments.

Put options granted for the purchase of non-controlling interests and associates

Represent agreements by means of which a non-controlling interest has the right to sell, at a future date using a predefined price formula or at fair market value, its shares in a subsidiary of CEMEX. When the obligation should be settled in cash or through the delivery of another financial asset, CEMEX recognizes a liability for the NPV of the redemption amount as of the reporting date against the controlling interest within stockholders’ equity. A liability is not recognized under these agreements when the redemption amount is determined at fair market value at the exercise date and CEMEX has the election to settle using its own shares.

In respect of a put option granted for the purchase of an associate, CEMEX would recognize a liability against a loss in the statements of operations whenever the estimated purchase price exceeds the fair value of the net assets to be acquired by CEMEX, had the counterparty exercised its right to sell. As of December 31, 2017 and 2016, there were no written put options.

Fair value measurements (note 16.3)

Under IFRS, fair value represents an “Exit Value” which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, considering the counterparty’s credit risk in the valuation. The concept of Exit Value is premised on the existence of a market and market participants for the specific asset or liability. When there is no market and/or market participants willing to make a market, IFRS establishes a fair value hierarchy that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

•

Level 1. - represent quoted prices (unadjusted) in active markets for identical assets or liabilities that CEMEX has the ability to access at the measurement date. A quote price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available.

 

•

Level 2. - are inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly, and are used mainly to determine the fair value of securities, investments or loans that are not actively traded. Level 2 inputs included equity prices, certain interest rates and yield curves, implied volatility and credit spreads, among others, as well as inputs extrapolated from other observable inputs. In the absence of Level 1 inputs, CEMEX determined fair values by iteration of the applicable Level 2 inputs, the number of securities and/or the other relevant terms of the contract, as applicable.

 

•

Level 3. - inputs are unobservable inputs for the asset or liability. CEMEX used unobservable inputs to determine fair values, to the extent there are no Level 1 or Level 2 inputs, in valuation models such as Black-Scholes, binomial, discounted cash flows or multiples of Operative EBITDA, including risk assumptions consistent with what market participants would use to arrive at fair value.

 

2.7)	INVENTORIES (note 11)

Inventories are valued using the lower of cost or net realizable value. The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. CEMEX analyzes its inventory balances to determine if, as a result of internal events, such as physical damage, or external events, such as technological changes or market conditions, certain portions of such balances have become obsolete or impaired. When an impairment situation arises, the inventory balance is adjusted to its net realizable value, whereas, if an obsolescence situation occurs, the inventory obsolescence reserve is increased. In both cases, these adjustments are recognized against the results of the period. Advances to suppliers of inventory are presented as part of other current assets.

 

2.8)	PROPERTY, MACHINERY AND EQUIPMENT (note 14)

Property, machinery and equipment are recognized at their acquisition or construction cost, as applicable, less accumulated depreciation and accumulated impairment losses. Depreciation of fixed assets is recognized as part of cost and operating expenses (note 5), and is calculated using the straight-line method over the estimated useful lives of the assets, except for mineral reserves, which are depleted using the units-of-production method. As of December 31, 2017, the average useful lives by category of fixed assets were as follows:

 

		Years
Administrative buildings			35
Industrial buildings			30
Machinery and equipment in plant			17
Ready-mix trucks and motor vehicles			9
Office equipment and other assets			6

CEMEX capitalizes, as part of the related cost of fixed assets, interest expense from existing debt during the construction or installation period of significant fixed assets, considering CEMEX’s corporate average interest rate and the average balance of investments in process for the period.

 

10

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Property, machinery and equipment - continued

 

All waste removal costs or stripping costs incurred in the operative phase of a surface mine in order to access the mineral reserves are recognized as part of the carrying amount of the related quarries. The capitalized amounts are further amortized over the expected useful life of exposed ore body based on the units of production method.

Costs incurred in respect of operating fixed assets that result in future economic benefits, such as an extension in their useful lives, an increase in their production capacity or in safety, as well as those costs incurred to mitigate or prevent environmental damage, are capitalized as part of the carrying amount of the related assets. The capitalized costs are depreciated over the remaining useful lives of such fixed assets. Periodic maintenance on fixed assets is expensed as incurred. Advances to suppliers of fixed assets are presented as part of other long-term accounts receivable.

The useful lives and residual values of property, machinery and equipment are reviewed at each reporting date and adjusted if appropriate.

 

2.9)	BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS (notes 4.1 and 15)

Business combinations are recognized using the acquisition method, by allocating the consideration transferred to assume control of the entity to all assets acquired and liabilities assumed, based on their estimated fair values as of the acquisition date. Intangible assets acquired are identified and recognized at fair value. Any unallocated portion of the purchase price represents goodwill, which is not amortized and is subject to periodic impairment tests (note 2.10). Goodwill may be adjusted for any correction to the preliminary assessment given to the assets acquired and/or liabilities assumed within the twelve-month period after purchase. Costs associated with the acquisition are expensed in the income statement as incurred.

CEMEX capitalizes intangible assets acquired, as well as costs incurred in the development of intangible assets, when future economic benefits associated are identified and there is evidence of control over such benefits. Intangible assets are recognized at their acquisition or development cost, as applicable. Indefinite life intangible assets are not amortized since the period in which the benefits associated with such intangibles will terminate cannot be accurately established. Definite life intangible assets are amortized on straight-line basis as part of operating costs and expenses (note 5).

Startup costs are recognized in the income statement as they are incurred. Costs associated with research and development activities (“R&D activities”), performed by CEMEX to create products and services, as well as to develop processes, equipment and methods to optimize operational efficiency and reduce costs are recognized in the operating results as incurred. Direct costs incurred in the development stage of computer software for internal use are capitalized and amortized through the operating results over the useful life of the software, which on average is approximately 5 years.

Costs incurred in exploration activities such as payments for rights to explore, topographical and geological studies, as well as trenching, among other items incurred to assess the technical and commercial feasibility of extracting a mineral resource, which are not significant to CEMEX, are capitalized when future economic benefits associated with such activities are identified. When extraction begins, these costs are amortized during the useful life of the quarry based on the estimated tons of material to be extracted. When future economic benefits are not achieved, any capitalized costs are subject to impairment.

CEMEX’s extraction rights have maximum useful lives that range from 30 to 100 years, depending on the sector and the expected life of the related reserves. As of December 31, 2017, except for extraction rights and/or as otherwise indicated, CEMEX’s intangible assets are amortized on a straight line basis over their useful lives that range on average from 3 to 20 years.

 

2.10)

IMPAIRMENT OF LONG LIVED ASSETS (notes 14 and 15)

Property, machinery and equipment, intangible assets of definite life and other investments

These assets are tested for impairment upon the occurrence of factors such as the occurrence of a significant adverse event, changes in CEMEX’s operating environment or in technology, as well as expectations of lower operating results, in order to determine whether their carrying amounts may not be recovered. An impairment loss is recorded in the income statement for the period within “Other expenses, net,” for the excess of the asset’s carrying amount over its recoverable amount, corresponding to the higher of the fair value less costs to sell the asset, and the asset’s value in use, the latter represented by the NPV of estimated cash flows related to the use and eventual disposal of the asset. The main assumptions utilized to develop estimates of NPV are a discount rate that reflects the risk of the cash flows associated with the assets and the estimations of generation of future income. Those assumptions are evaluated for reasonableness by comparing such discount rates to available market information and by comparing to third-party expectations of industry growth, such as governmental agencies or industry chambers.

When impairment indicators exist, for each intangible asset, CEMEX determines its projected revenue streams over the estimated useful life of the asset. In order to obtain discounted cash flows attributable to each intangible asset, such revenues are adjusted for operating expenses, changes in working capital and other expenditures, as applicable, and discounted to NPV using the risk adjusted discount rate of return. The most significant economic assumptions are: a) the useful life of the asset; b) the risk adjusted discount rate of return; c) royalty rates; and d) growth rates. Assumptions used for these cash flows are consistent with internal forecasts and industry practices. The fair values of these assets are very sensitive to changes in such significant assumptions. Certain key assumptions are more subjective than others. In respect of trademarks, CEMEX considers that the most subjective key assumption is the royalty rate. In respect of extraction rights and customer relationships, the most subjective assumptions are revenue growth rates and estimated useful lives. CEMEX validates its assumptions through benchmarking with industry practices and the corroboration of third party valuation advisors. Significant judgment by management is required to appropriately assess the fair values and values in use of the related assets, as well as to determine the appropriate valuation method and select the significant economic assumptions.

 

11

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Impairment of long lived assets - Goodwill

Goodwill is tested for impairment when required due to significant adverse changes or at least once a year, during the last quarter of such year. CEMEX determines the recoverable amount of the group of cash-generating units (“CGUs”) to which goodwill balances were allocated, which consists of the higher of such group of CGUs fair value less cost to sell and its value in use, the later represented by the NPV of estimated future cash flows to be generated by such CGUs to which goodwill was allocated, which are generally determined over periods of 5 years. However, in specific circumstances, when CEMEX considers that actual results for a CGU do not fairly reflect historical performance and most external economic variables provide confidence that a reasonably determinable improvement in the mid-term is expected in their operating results, management uses cash flow projections over a period of up to 10 years, to the point in which future expected average performance resembles the historical average performance, to the extent CEMEX has detailed, explicit and reliable financial forecasts and is confident and can demonstrate its ability, based on past experience, to forecast cash flows accurately over that longer period. If the value in use of a group of CGUs to which goodwill has been allocated is lower than its corresponding carrying amount, CEMEX determines the fair value of such group of CGUs using methodologies generally accepted in the market to determine the value of entities, such as multiples of Operating EBITDA and by reference to other market transactions. An impairment loss is recognized within “Other expenses, net”, if the recoverable amount is lower than the net book value of the group of CGUs to which goodwill has been allocated. Impairment charges recognized on goodwill are not reversed in subsequent periods.

The geographic operating segments reported by CEMEX (note 4.4), represent CEMEX’s groups of CGUs to which goodwill has been allocated for purposes of testing goodwill for impairment, considering: a) that after the acquisition, goodwill was allocated at the level of the geographic operating segment; b) that the operating components that comprise the reported segment have similar economic characteristics; c) that the reported segments are used by CEMEX to organize and evaluate its activities in its internal information system; d) the homogeneous nature of the items produced and traded in each operative component, which are all used by the construction industry; e) the vertical integration in the value chain of the products comprising each component; f) the type of clients, which are substantially similar in all components; g) the operative integration among components; and h) that the compensation system of a specific country is based on the consolidated results of the geographic segment and not on the particular results of the components. In addition, the country level represents the lowest level within CEMEX at which goodwill is monitored for internal management purposes.

Impairment tests are significantly sensitive to the estimation of future prices of CEMEX’s products, the development of operating expenses, local and international economic trends in the construction industry, the long-term growth expectations in the different markets, as well as the discount rates and the growth rates in perpetuity applied. For purposes of estimating future prices, CEMEX uses, to the extent available, historical data plus the expected increase or decrease according to information issued by trusted external sources, such as national construction or cement producer chambers and/or in governmental economic expectations. Operating expenses are normally measured as a constant proportion of revenues, following past experience. However, such operating expenses are also reviewed considering external information sources in respect of inputs that behave according to international prices, such as oil and gas. CEMEX uses specific pre-tax discount rates for each group of CGUs to which goodwill is allocated, which are applied to discount pre-tax cash flows. The amounts of estimated undiscounted cash flows are significantly sensitive to the growth rate in perpetuity applied. Likewise, the amounts of discounted estimated future cash flows are significantly sensitive to the weighted average cost of capital (discount rate) applied. The higher the growth rate in perpetuity applied, the higher the amount of undiscounted future cash flows by group of CGUs obtained. Conversely, the higher the discount rate applied, the lower the amount of discounted estimated future cash flows by group of CGUs obtained.

 

2.11)

PROVISIONS

CEMEX recognizes provisions when it has a legal or constructive obligation resulting from past events, whose resolution would imply cash outflows or the delivery of other resources owned by the Company. As of December 31, 2017 and 2016 some significant proceedings that gave rise to a portion of the carrying amount of CEMEX’s other current and non-current liabilities and provisions are detailed in note 24.1.

Considering guidance under IFRS, CEMEX recognizes provisions for levies imposed by governments until the obligating event or the activity that triggers the payment of the levy has occurred, as defined in the legislation.

Restructuring

CEMEX recognizes provisions for restructuring when the restructuring detailed plans have been properly finalized and authorized by management, and have been communicated to the third parties involved and/or affected by the restructuring prior to the statement of financial position date. These provisions may include costs not associated with CEMEX’s ongoing activities.

Asset retirement obligations (note 17)

Unavoidable obligations, legal or constructive, to restore operating sites upon retirement of long -lived assets at the end of their useful lives are measured at the NPV of estimated future cash flows to be incurred in the restoration process, and are initially recognized against the related assets’ book value. The increase to the assets’ book value is depreciated during its remaining useful life. The increase in the liability related to adjustments to NPV by the passage of time is charged to the line item “Financial income and other items, net.” Adjustments to the liability for changes in estimations are recognized against fixed assets, and depreciation is modified prospectively. These obligations are related mainly to future costs of demolition, cleaning and reforestation, so that quarries, maritime terminals and other production sites are left in acceptable condition at the end of their operation.

 

12

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Costs related to remediation of the environment (notes 17 and 24)

Provisions associated with environmental damage represent the estimated future cost of remediation, which are recognized at their nominal value when the time schedule for the disbursement is not clear, or when the economic effect for the passage of time is not significant; otherwise, such provisions are recognized at their discounted values. Reimbursements from insurance companies are recognized as assets only when their recovery is practically certain. In that case, such reimbursement assets are not offset against the provision for remediation costs.

Contingencies and commitments (notes 23 and 24)

Obligations or losses related to contingencies are recognized as liabilities in the statement of financial position only when present obligations exist resulting from past events that are expected to result in an outflow of resources and the amount can be measured reliably. Otherwise, a qualitative disclosure is included in the notes to the financial statements. The effects of long-term commitments established with third parties, such as supply contracts with suppliers or customers, are recognized in the financial statements on an incurred or accrued basis, after taking into consideration the substance of the agreements. Relevant commitments are disclosed in the notes to the financial statements. The Company does not recognize contingent revenues, income or assets, unless their realization is virtually certain.

 

2.12)

PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS (note 18)

Defined contribution pension plans

The costs of defined contribution pension plans are recognized in the operating results as they are incurred. Liabilities arising from such plans are settled through cash transfers to the employees’ retirement accounts, without generating future obligations.

Defined benefit pension plans and other post-employment benefits

The costs associated with employees’ benefits for: a) defined benefit pension plans; and b) other post-employment benefits, basically comprised of health care benefits, life insurance and seniority premiums, granted by CEMEX and/or pursuant to applicable law, are recognized as services are rendered, based on actuarial estimations of the benefits’ present value with the advice of external actuaries. For certain pension plans, CEMEX has created irrevocable trust funds to cover future benefit payments (“plan assets”). These plan assets are valued at their estimated fair value at the statement of financial position date. The actuarial assumptions and accounting policy consider: a) the use of nominal rates; b) a single rate is used for the determination of the expected return on plan assets and the discount of the benefits obligation to present value; c) a net interest is recognized on the net defined benefit liability (liability minus plan assets); and d) all actuarial gains and losses for the period, related to differences between the projected and real actuarial assumptions at the end of the period, as well as the difference between the expected and real return on plan assets, are recognized as part of “Other items of comprehensive income, net” within stockholders’ equity.

The service cost, corresponding to the increase in the obligation for additional benefits earned by employees during the period, is recognized within operating costs and expenses. The net interest cost, resulting from the increase in obligations for changes in NPV and the change during the period in the estimated fair value of plan assets, is recognized within “Financial income and other items, net.”

The effects from modifications to the pension plans that affect the cost of past services are recognized within operating costs and expenses over the period in which such modifications become effective to the employees or without delay if changes are effective immediately. Likewise, the effects from curtailments and/or settlements of obligations occurring during the period, associated with events that significantly reduce the cost of future services and/or reduce significantly the population subject to pension benefits, respectively, are recognized within operating costs and expenses.

Termination benefits

Termination benefits, not associated with a restructuring event, which mainly represent severance payments by law, are recognized in the operating results for the period in which they are incurred.

 

2.13)

INCOME TAXES (note 19)

The effects reflected in the income statement for income taxes include the amounts incurred during the period and the amounts of deferred income taxes, determined according to the income tax law applicable to each subsidiary. Consolidated deferred income taxes represent the addition of the amounts determined in each subsidiary by applying the enacted statutory income tax rate to the total temporary differences resulting from comparing the book and taxable values of assets and liabilities, considering tax assets such as loss carryforwards and other recoverable taxes, to the extent that it is probable that future taxable profits will be available against which they can be utilized. The measurement of deferred income taxes at the reporting period reflects the tax consequences that follow the manner in which CEMEX expects to recover or settle the carrying amount of its assets and liabilities. Deferred income taxes for the period represent the difference between balances of deferred income taxes at the beginning and the end of the period. Deferred income tax assets and liabilities relating to different tax jurisdictions are not offset. According to IFRS, all items charged or credited directly in stockholders’ equity or as part of other comprehensive income or loss for the period are recognized net of their current and deferred income tax effects. The effect of a change in enacted statutory tax rates is recognized in the period in which the change is officially enacted.

 

13

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Income taxes - continued

 

Deferred tax assets are reviewed at each reporting date and are reduced when it is not deemed probable that the related tax benefit will be realized, considering the aggregate amount of self-determined tax loss carryforwards that CEMEX believes will not be rejected by the tax authorities based on available evidence and the likelihood of recovering them prior to their expiration through an analysis of estimated future taxable income. If it is probable that the tax authorities would reject a self-determined deferred tax asset, CEMEX would decrease such asset. When it is considered that a deferred tax asset will not be recovered before its expiration, CEMEX would not recognize such deferred tax asset. Both situations would result in additional income tax expense for the period in which such determination is made. In order to determine whether it is probable that deferred tax assets will ultimately be recovered, CEMEX takes into consideration all available positive and negative evidence, including factors such as market conditions, industry analysis, expansion plans, projected taxable income, carryforward periods, current tax structure, potential changes or adjustments in tax structure, tax planning strategies, future reversals of existing temporary differences. Likewise, CEMEX analyzes its actual results versus the Company’s estimates, and adjusts, as necessary, its tax asset valuations. If actual results vary from CEMEX’s estimates, the deferred tax asset and/or valuations may be affected and necessary adjustments will be made based on relevant information in CEMEX’s income statement for such period.

The income tax effects from an uncertain tax position are recognized when is probable that the position will be sustained based on its technical merits and assuming that the tax authorities will examine each position and have full knowledge of all relevant information, and they are measured using a cumulative probability model. Each position has been considered on its own, regardless of its relation to any other broader tax settlement. The high probability threshold represents a positive assertion by management that CEMEX is entitled to the economic benefits of a tax position. If a tax position is considered not probable of being sustained, no benefits of the position are recognized. Interest and penalties related to unrecognized tax benefits are recorded as part of the income tax in the consolidated income statements.

The effective income tax rate is determined dividing the line item “Income Tax” by the line item “Earnings before income tax.” This effective tax rate is further reconciled to CEMEX’s statutory tax rate applicable in Mexico (note 19.3). A significant effect in CEMEX’s effective tax rate and consequently in the aforementioned reconciliation of CEMEX’s effective tax rate, relates to the difference between the statutory income tax rate in Mexico of 30% against the applicable income tax rates of each country where CEMEX operates.

For the years ended December 31, 2017, 2016 and 2015, the statutory tax rates in CEMEX’s main operations were as follows:

 

Country		2017				2016				2015
Mexico			30.0%				30.0%				30.0%
United States			35.0%				35.0%				35.0%
United Kingdom			19.3%				20.0%				20.3%
France			34.4%				34.4%				38.0%
Germany			28.2%				28.2%				29.8%
Spain			25.0%				25.0%				28.0%
Philippines			30.0%				30.0%				30.0%
Colombia			40.0%				40.0%				39.0%
Egypt			22.5%				22.5%				22.5%
Switzerland			9.6%				9.6%				9.6%
Others			7.8% - 39.0%				7.8% - 39.0%				7.8% - 39.0%

CEMEX’s current and deferred income tax amounts included in the income statement for the period are highly variable, and are subject, among other factors, to taxable income determined in each jurisdiction in which CEMEX operates. Such amounts of taxable income depend on factors such as sale volumes and prices, costs and expenses, exchange rates fluctuations and interest on debt, among others, as well as to the estimated tax assets at the end of the period due to the expected future generation of taxable gains in each jurisdiction.

 

2.14)

STOCKHOLDERS’ EQUITY

Common stock and additional paid-in capital (note 20.1)

These items represent the value of stockholders’ contributions, and include increases related to the capitalization of retained earnings and the recognition of executive compensation programs in CEMEX’s CPOs as well as decreases associated with the restitution of retained earnings.

Other equity reserves (note 20.2)

Groups the cumulative effects of items and transactions that are, temporarily or permanently, recognized directly to stockholders’ equity, and includes the comprehensive income, which reflects certain changes in stockholders’ equity that do not result from investments by owners and distributions to owners. The most significant items within “Other equity reserves” during the reported periods are as follows:

Items of “Other equity reserves” included within other comprehensive income:

 

•

Currency translation effects from the translation of foreign subsidiaries, net of: a) exchange results from foreign currency debt directly related to the acquisition of foreign subsidiaries; and b) exchange results from foreign currency related parties balances that are of a non-current investment class (note 2.4);

 

•

The effective portion of the valuation and liquidation effects from derivative instruments under cash flow hedging relationships, which are recorded temporarily in stockholders’ equity (note 2.6);

 

14

---

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Items of “Other equity reserves” included within other comprehensive income - continued

 

 

•

Changes in fair value of available-for-sale investments until their disposal (note 2.6); and

 

•

Current and deferred income taxes during the period arising from items whose effects are directly recognized in stockholders’ equity.

Items of “Other equity reserves” not included in comprehensive income:

 

•

Effects related to controlling stockholders’ equity for changes or transactions affecting non-controlling interest stockholders in CEMEX’s consolidated subsidiaries;

 

•

Effects attributable to controlling stockholders’ equity for financial instruments issued by consolidated subsidiaries that qualify for accounting purposes as equity instruments, such as the interest expense paid on perpetual debentures;

 

•

The equity component of securities which are mandatorily or optionally convertible into shares of the Parent Company (notes 2.6 and 16.2). Upon conversion, this amount will be reclassified to common stock and additional paid-in capital; and

 

•

The cancellation of the Parent Company’s shares held by consolidated entities.

Retained earnings (note 20.3)

Retained earnings represent the cumulative net results of prior years, net of: a) dividends declared; b) capitalization of retained earnings; and c) restitution of retained earnings when applicable.

Non-controlling interest and perpetual debentures (note 20.4)

This caption includes the share of non-controlling stockholders in the results and equity of consolidated subsidiaries. This caption also includes the nominal amount of financial instruments (perpetual notes) issued by consolidated entities that qualify as equity instruments considering that there is: a) no contractual obligation to deliver cash or another financial asset; b) no predefined maturity date; and c) an unilateral option to defer interest payments or preferred dividends for indeterminate periods.

 

2.15)

REVENUE RECOGNITION (note 3)

Beginning January 1, 2018, IFRS 15, Revenue from contracts with customers is effective, see note 2.20. Until December 31, 2017, CEMEX’s policy for revenue recognition is set forth below:

CEMEX’s consolidated net sales represent the value, before tax on sales, of revenues originated by products and services sold by consolidated subsidiaries as a result of their ordinary activities, after the elimination of transactions between related parties, and are quantified at the fair value of the consideration received or receivable, decreased by any trade discounts or volume rebates granted to customers.

Revenue from the sale of goods and services is recognized when goods are delivered or services are rendered to customers, there is no condition or uncertainty implying a reversal thereof, and they have assumed the risk of loss. Revenue from trading activities, in which CEMEX acquires finished goods from a third party and subsequently sells the goods to another third-party, are recognized on a gross basis, considering that CEMEX assumes the total risk on the goods purchased, not acting as agent or broker.

Revenue and costs related to construction contracts are recognized in the period in which the work is performed by reference to the contract’s stage of completion at the end of the period, considering that the following have been defined: a) each party’s enforceable rights regarding the asset under construction; b) the consideration to be exchanged; c) the manner and terms of settlement; d) actual costs incurred and contract costs required to complete the asset are effectively controlled; and e) it is probable that the economic benefits associated with the contract will flow to the entity.

The stage of completion of construction contracts represents the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs or the surveys of work performed or the physical proportion of the contract work completed, whichever better reflects the percentage of completion under the specific circumstances. Progress payments and advances received from customers do not reflect the work performed and are recognized as a short or long term advanced payments, as appropriate.

 

2.16)

COST OF SALES AND OPERATING EXPENSES (note 5)

Cost of sales represents the production cost of inventories at the moment of sale. Such cost of sales includes depreciation, amortization and depletion of assets involved in production, expenses related to storage in production plants and freight expenses of raw material in plants and delivery expenses of CEMEX’s ready-mix concrete business.

Administrative expenses represent the expenses associated with personnel, services and equipment, including depreciation and amortization, related to managerial activities and back office for the Company’s management.

Sales expenses represent the expenses associated with personnel, services and equipment, including depreciation and amortization, involved specifically in sales activities.

Distribution and logistics expenses refer to expenses of storage at points of sales, including depreciation and amortization, as well as freight expenses of finished products between plants and points of sale and freight expenses between points of sales and the customers’ facilities.

 

15

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

2.17)

EXECUTIVE SHARE-BASED COMPENSATION (note 21)

Share-based payments to executives are defined as equity instruments when services received from employees are settled by delivering shares of the Parent Company and/or a subsidiary; or as liability instruments when CEMEX commits to make cash payments to the executives on the exercise date of the awards based on changes in the Parent Company and/or subsidiary’s own stock (intrinsic value). The cost of equity instruments represents their estimated fair value at the date of grant and is recognized in the income statement during the period in which the exercise rights of the employees become vested. In respect of liability instruments, these instruments are valued at their estimated fair value at each reporting date, recognizing the changes in fair value through the operating results. CEMEX determines the estimated fair value at the date of grant of stock compensation programs with performance conditions using Monte Carlo simulations.

 

2.18)

EMISSION RIGHTS

In certain countries where CEMEX operates, such as EU countries, mechanisms aimed at reducing carbon dioxide emissions (“CO²”) have been established by means of which, the relevant environmental authorities have granted certain number of emission rights (“certificates”) free of cost to the different industries releasing CO², which must submit to such environmental authorities at the end of a compliance period, certificates for a volume equivalent to the tons of CO² released. Companies must obtain additional certificates to meet deficits between actual CO² emissions during the compliance period and certificates received, or they can dispose of any surplus of certificates in the market. In addition, the United Nations Framework Convention on Climate Change (“UNFCCC”) grants Certified Emission Reductions (“CERs”) to qualified CO² emission reduction projects. CERs may be used in specified proportions to settle emission rights obligations in the EU. CEMEX actively participates in the development of projects aimed to reduce CO² emissions. Some of these projects have been awarded with CERs.

CEMEX does not maintain emission rights, CERs and/or enter into forward transactions with trading purposes. CEMEX accounts for the effects associated with CO² emission reduction mechanisms as follows:

 

•

Certificates received for free are not recognized in the statement of financial position. Revenues from the sale of any surplus of certificates are recognized by decreasing cost of sales. In forward sale transactions, revenues are recognized upon physical delivery of the emission certificates.

 

•

Certificates and/or CERs acquired to hedge current CO2 emissions are recognized as intangible assets at cost, and are further amortized to cost of sales during the compliance period. In the case of forward purchases, assets are recognized upon physical reception of the certificates.

 

•

CEMEX accrues a provision against cost of sales when the estimated annual emissions of CO2 are expected to exceed the number of emission rights, net of any benefit obtained through swap transactions of emission rights for CERs.

 

•

CERs received from the UNFCCC are recognized as intangible assets at their development cost, which are attributable mainly to legal expenses incurred in the process of obtaining such CERs.

During 2017, 2016 and 2015, there were no sales of emission rights to third parties. In addition, in certain countries, the environmental authorities impose levies per ton of CO² or other greenhouse gases released. Such expenses are recognized as part of cost of sales as incurred.

 

2.19)

CONCENTRATION OF CREDIT

CEMEX sells its products primarily to distributors in the construction industry, with no specific geographic concentration within the countries in which CEMEX operates. As of and for the years ended December 31, 2017, 2016 and 2015, no single customer individually accounted for a significant amount of the reported amounts of sales or in the balances of trade receivables. In addition, there is no significant concentration of a specific supplier relating to the purchase of raw materials.

 

2.20)

NEWLY ISSUED IFRS NOT YET ADOPTED

There are a number of IFRS issued as of the date of issuance of these financial statements which have not yet been adopted, described as follow:

IFRS 9, Financial Instruments: classification and measurement (“IFRS 9”)

IFRS 9 sets forth the guidance relating to the classification and measurement of financial assets and liabilities, the accounting for expected credit losses of financial assets and commitments to extend credits, as well as the requirements for hedge accounting; and will replace IAS 39, Financial instruments: recognition and measurement (“IAS 39”). IFRS 9 is effective beginning January 1, 2018. Among other aspects, IFRS 9 changes the classification categories for financial assets under IAS 39 of: 1) held to maturity; 2) loans and receivables; 3) fair value through the income statement; and 4) available for sale; and replaces them with categories that reflect the measurement method, the contractual cash flow characteristics and the entity’s business model for managing the financial asset: 1) amortized cost, that will significantly comprise IAS 39 held to maturity and loans and receivables categories; 2) fair value through other comprehensive income, similar to IAS 39 held to maturity category; and 3) fair value through the income statement with the same IAS 39 definitions. The adoption of such classification categories under IFRS 9 will not have any significant effect on CEMEX’s operating results, financial situation and compliance of contractual obligations (financial restrictions).

In addition, under the new impairment model based on expected credit losses, impairment losses for the entire lifetime of financial assets, including trade accounts receivable, are recognized on initial recognition, and at each subsequent reporting period, even in the absence of a credit event or if the loss has not yet been incurred, considering for their measurement past events and current conditions, as well as reasonable and supportable forecasts affecting collectability. Changes in the allowance for doubtful accounts under the new expected credit loss model upon adoption of IFRS 9 on January 1, 2018 will be recognized through equity.

 

16

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Newly issued IFRS not yet adopted – IFRS 9 - continued

 

In this regard, CEMEX developed an expected credit loss model applicable to its trade accounts receivable that considers the historical performance, as well as the credit risk and expected developments for each group of customers, ready for the prospective adoption of IFRS 9 on January 1, 2018. The preliminary effects for adoption of IFRS 9 on January 1, 2018 related to the new expected credit loss model which do not represent any significant impact on CEMEX’s operating results, financial situation and compliance of contractual obligations (financial restrictions), represent an estimated increase in the allowance for doubtful accounts as of December 31, 2017 of $519 that will be recognized against equity.

In connection with hedge accounting under IFRS 9, among other changes, there is a relief for entities in performing: a) the retrospective effectiveness test at inception of the hedging relationship; and b) the requirement to maintain a prospective effectiveness ratio between 0.8 and 1.25 at each reporting date for purposes of sustaining the hedging designation, both requirements of IAS 39. Under IFRS 9, a hedging relationship can be established to the extent the entity considers, based on the analysis of the overall characteristics of the hedging and hedged items, that the hedge will be highly effective in the future and the hedge relationship at inception is aligned with the entity’s reported risk management strategy. Nonetheless, IFRS 9 maintains the same hedging accounting categories of cash flow hedge, fair value hedge and hedge of a net investment established in IAS 39, as well as the requirement of recognizing the ineffective portion of a cash flow hedge immediately in the income statement. CEMEX does not expect any significant effect upon adoption of the new hedge accounting rules under IFRS 9 beginning January 1, 2018.

Considering the prospective adoption of IFRS 9 as of January 1, 2018, according to the options provided in the standard, there may be lack of comparability beginning January 1, 2018, with the information of impairment of financial assets disclosed in prior years, however, the effects are not significant.

IFRS 15, Revenues from contracts with customers (“IFRS 15”)

Under IFRS 15, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, following a five step model: Step 1: Identify the contract(s) with a customer (agreement that creates enforceable rights and obligations); Step 2: Identify the different performance obligations (promises) in the contract and account for those separately; Step 3: Determine the transaction price (amount of consideration an entity expects to be entitled in exchange for transferring promised goods or services); Step 4: Allocate the transaction price to each performance obligation based on the relative stand-alone selling prices of each distinct good or service; and Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation by transferring control of a promised good or service to the customer. A performance obligation may be satisfied at a point in time (typically for the sale of goods) or over time (typically for the sale of services and construction contracts). IFRS 15 also includes disclosure requirements to provide comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 is effective on January 1, 2018 and will supersede all existing guidance on revenue recognition. Beginning January 1, 2018, CEMEX will adopt IFRS 15 using the full retrospective approach, which represents the restatement of the financial statements of prior years.

CEMEX started in 2015 the evaluation of the impacts of IFRS 15 on the accounting and disclosures of its revenues. As of December 31, 2017, CEMEX has analyzed its contracts with customers in all the countries in which it operates in order to review the different performance obligations and other promises (discounts, loyalty programs, rebates, etc.) included in such contracts, among other aspects, aimed to determine the differences in the accounting recognition of revenue with respect to current IFRS and concluded the theoretical assessment. In addition, key personnel were trained in the new standard with the support of external experts and an online training course was implemented. Moreover, CEMEX also concluded the quantification of the adjustments that are necessary to present prior year’s information under IFRS 15 beginning in 2018. The adjustments determined in CEMEX’s revenue recognition will not generate any material impact on CEMEX’s operating results, financial situation and compliance of contractual obligations (financial restrictions).

Among other minor effects, the main changes under IFRS 15 as they apply to CEMEX refer to: a) several reclassifications that are required to comply with IFRS 15 new accounts in the statement of financial position aimed to recognize contract assets (costs to obtain a contract) and contract liabilities (deferred revenue for promises not yet fulfilled); b) rebates and/or discounts offered to customers in a sale transaction that are redeemable by the customer in a subsequent purchase transaction, are considered separate performance obligations, rather than future costs, and a portion of the sale price of such transaction allocated to these promises should be deferred to revenue until the promise is redeemed or expires; and c) awards (points) offer to customers through their purchases under loyalty programs that are later redeemable for goods or services, also represent separate performance obligations, rather than future costs, and a portion of the sale price of such transactions allocated to these points should be deferred to revenue until the points are redeemed or expire. These reclassifications and adjustments are not expected to be material.

Considering the full retrospective adoption of IFRS 15 beginning January 1, 2018, according to the options considered in the standard, there will not be lack of comparability of the financial information prepared in prior years.

 

17

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

IFRS 16, Leases (“IFRS 16”)

IFRS 16 defines leases as any contract or part of a contract that conveys to the lessee the right to use an asset for a period of time in exchange for consideration and the lessee directs the use of the identified asset throughout that period. In summary, IFRS 16 introduces a single lessee accounting model, and requires a lessee to recognize, for all leases with a term of more than 12 months, unless the underlying asset is of low value, assets for the right-of-use the underlying asset against a corresponding financial liability, representing the NPV of estimated lease payments under the contract, with a single income statement model in which a lessee recognizes amortization of the right-of-use asset and interest on the lease liability. A lessee shall present either in the statement of financial position, or disclose in the notes, right-of-use assets separately from other assets, as well as, lease liabilities separately from other liabilities. IFRS 16 is effective beginning January 1, 2019 and will supersede all current standards and interpretations related to lease accounting.

As of December 31, 2017, CEMEX has concluded an assessment of its main outstanding lease contracts and other contracts that may have embedded the use of an asset, in order to inventory the most relevant characteristics of such contracts (types of assets, committed payments, maturity dates, renewal clauses, etc.). During the first quarter of 2018, CEMEX expects to define its future policy under IFRS 16 in connection with the exception for short-term leases and low-value assets, in order to set the basis and be able to quantify the required adjustments for the proper recognition of the assets for the “right-of-use” and the corresponding financial liabilities, aiming to adopt IFRS 16 on January 1, 2019. CEMEX plans preliminarily the adoption of IFRS 16 retrospectively to the extent such adoption is practicable. Based on its preliminary assessment as of the reporting date, CEMEX considers that upon adoption of IFRS 16, most of its outstanding operating leases (note 23.5) would be recognized in the statement of financial position, increasing assets and liabilities, as well as amortization and interest, without any significant initial effect on net assets.

CEMEX does not expect any significant effect on its operation results, financial situation and compliance with contractual obligations (financial restrictions) due to the adoption effects. If retrospective adoption of IFRS 16 beginning January 1, 2019 is applied, according to the options considered in the standard, there would not be lack of comparability of the financial information prepared in prior years.

IFRIC 23, Uncertainty over income tax treatments (“IFRIC 23”)

IFRIC 23 clarifies the accounting for uncertainties in income taxes. Among other aspects, when an entity concludes that it is not probable that a particular tax treatment is accepted, the entity has to use the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The decision should be based on which method provides better predictions of the resolution of the uncertainty. IFRIC 23 is effective beginning January 1, 2019. Considering CEMEX’s current policy for uncertain tax positions (note 2.13) CEMEX does not expect any significant effect from the adoption of IFRIC 23.

 

3)	REVENUES AND CONSTRUCTION CONTRACTS

For the years ended December 31, 2017, 2016 and 2015, net sales, after eliminations between related parties resulting from consolidation, were as follows:

 

		2017				2016				2015
From the sale of goods associated to CEMEX’s main activities 1		$	246,820				239,696				211,258
From the sale of services 2			3,313				3,110				2,811
From the sale of other goods and services 3			7,998				7,139				5,230
		$	258,131				249,945				219,299

 

1	Includes in each period those revenues generated under construction contracts that are presented in the table below.

2	Refers mainly to revenues generated by Neoris N.V. and its subsidiaries, involved in providing information technology solutions and services.

3	Refers mainly to revenues generated by subsidiaries not individually significant operating in different lines of business.

As of December 31, 2017 and 2016, amounts receivable for progress billings to customers of construction contracts and/or advances received by CEMEX from these customers were not significant. For 2017, 2016 and 2015, revenues and costs related to construction contracts in progress were as follows:

 

		Recognized to date 1				2017				2016				2015
Revenue from construction contracts included in consolidated net sales 2		$	5,508				992				1,033				994
Costs incurred in construction contracts included in consolidated cost of sales 3			(4,840	)			(1,205	)			(1,133	)			(919	)
Construction contracts gross operating profit (loss)		$	668				(213	)			(100	)			75

 

1	Revenues and costs recognized from inception of the contracts until December 31, 2017 in connection with those projects still in progress.

2	Revenues from construction contracts during 2017, 2016 and 2015, were mainly obtained in Mexico and Colombia.

3	Refers to actual costs incurred during the periods. The oldest contract in progress as of December 31, 2017 started in 2010.

 

18

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

4)	BUSINESS COMBINATIONS, DISCONTINUED OPERATIONS, SALE OF OTHER DISPOSAL GROUPS AND SELECTED FINANCIAL INFORMATION BY GEOGRAPHIC OPERATING SEGMENT

 

4.1)	BUSINESS COMBINATIONS

On December 5, 2016, through its subsidiary Sierra Trading (“Sierra”), CEMEX presented an offer and take-over bid, which was amended on January 9, 2017 (the “Offer”), to all shareholders of Trinidad Cement Limited (“TCL”), a company publicly listed in Trinidad and Tobago, that was then also listed in Jamaica and Barbados, in which CEMEX already held a 39.5% interest prior to the Offer, to acquire up to 132,616,942 ordinary shares in TCL (equivalent to approximately 30.2% of TCL’s common stock). TCL’s main operations are located in Trinidad and Tobago, Jamaica and Barbados. Pursuant to the Offer, Sierra offered TT$5.07 in cash per TCL share, or its equivalent in US$0.76 except to Shareholders in Barbados (the “Offer Price”). On January 24, 2017, after all terms and conditions were complied with or waived, the Offer was declared unconditional.

In addition, the Offer closed in Jamaica on February 7, 2017. TCL shares deposited in response to the Offer together with Sierra’s existing 39.5% shareholding in TCL represented approximately 69.8% of the outstanding shares of TCL. The total consideration paid by Sierra for the TCL shares under the Offer was US$86 ($1,791). CEMEX started consolidating TCL on February 1, 2017. During 2017, TCL was delisted from the Jamaica and Barbados stock exchanges. CEMEX determined a fair value of TCL’s assets as of February 1, 2017 of US$525 ($10,936), which considers a price of TT$5.07 per share for the percentage acquired in the Amended Offer and TT$4.15 per share, or the market price before the Offer, for the remaining shares, and US$113 ($2,354) of debt assumed, among other effects. The purchase of TCL represented a step acquisition. As a result, the remeasurement of CEMEX’s previous held ownership interest in TCL of 39.5% generated a gain of US$32 ($623) as part of “Financial income and other items, net.” All convenience translations to pesos above consider an exchange rate of 20.83 pesos per dollar as of February 1, 2017.

As of December 31, 2017, after significantly concluding the allocation of TCL’s fair value to the assets acquired and liabilities assumed, the statement of financial position of TCL at the acquisition date of February 1, 2017 was as follows:

 

						As of February 1, 2017
Current assets		US$					84
Property, machinery and equipment							331
Intangible assets and other non-current assets (includes goodwill of US$100)							110
Total assets							525
Current liabilities (includes debt of US$47)							122
Non-current liabilities (includes debt of US$97 and deferred tax liabilities of US$19)							154
Total liabilities							276
Net assets		US$					249
Non-controlling interest net assets							70
Controlling interest net assets		US$					179

In connection with agreements entered into with Holcim Ltd (“Holcim” currently LafargeHolcim Ltd) on October 31, 2014, CEMEX and Holcim agreed a series of related transactions, executed on January 5, 2015, and with retrospective effects as of January 1, 2015, by means of which: a) in the Czech Republic, CEMEX acquired all of Holcim’s assets, including a cement plant, four aggregates quarries and 17 ready-mix plants for €115 (US$139 or $2,049); b) in Germany, CEMEX sold to Holcim its assets in the western region of the country for €171 (US$207 or $3,047); c) in Spain, CEMEX acquired from Holcim one cement plant in the southern part of the country with a production capacity of 850 thousand tons, and one cement mill in the central part of the country with grinding capacity of 900 thousand tons, among other related assets for €88 (US$106 or $1,562); and d) CEMEX agreed a final payment in cash to Holcim of €33 (US$40 or $594). As of January 1, 2015, after concluding the purchase price allocation to the fair values of the assets acquired and liabilities assumed, no goodwill was determined in respect of the Czech Republic, while in Spain, the fair value of the net assets acquired for €106 (US$129 or $1,894) exceeded the purchase price in €19 (US$22 or $328). After the reassessment of fair values, this gain was recognized during 2015 in the income statement.

The purchase price allocation of these acquisitions as of January 1, 2015 was as follows:

 

		Czech Republic				Spain				Total
Current assets		$	231				59				290
Property, machinery and equipment			1,419				2,004				3,423
Other non-current assets			270				—				270
Intangible assets			590				2				592
Fair value of assets acquired			2,510				2,065				4,575
Current liabilities			117				57				174
Non-current liabilities			344				114				458
Fair value of liabilities assumed			461				171				632
Fair value of net assets acquired		$	2,049				1,894				3,943

 

19

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

4.2)	DISCONTINUED OPERATIONS

As mentioned in note 2.1, considering the resolution by the European Commission that ultimately did not allow Duna-Dráva Cement to purchase the CEMEX’s Croatian Operations and the decision of CEMEX to maintain such operations, as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, the Croatian Operations are consolidated line-by-line in the statements of financial position and income statements. The financial statements and footnotes issued in prior periods, in which CEMEX reported the Croatian Operations as “Discontinued Operations” and “Assets held for sale,” have been re-presented in order to reverse such presentation.

As of December 31, 2016, the condensed information of the statement of financial position of the Croatian Operations was as follows:

 

		2016
Current assets		$	573
Property, machinery and equipment, net			3,023
Intangible assets, net and other non-current assets			568
Total assets			4,164
Current liabilities			539
Non-current liabilities			112
Total liabilities			651
Net assets		$	3,513

For the years 2016 and 2015, the condensed information of the income statement of the Croatian Operations was as follows:

 

		2016				2015
Sales		$	1,853				1,892
Cost of sales and operating expenses			(1,629	)			(1,665	)
Other products (expenses), net			(31	)			13
Financial expenses, net and others			(24	)			(35	)
Earnings before income tax			169				205
Income tax			(29	)			(43	)
Net income		$	140				162

On April 17, 2017, one of CEMEX’s subsidiaries in the United States signed a definitive agreement for the sale of its Pacific Northwest Materials Business consisting of aggregate, asphalt and ready mix concrete operations in Oregon and Washington to Cadman Materials, Inc., a subsidiary of HeidelbergCement Group, for US$150. On June 30, 2017, CEMEX announced that after approval from regulators, it has completed the sale of these assets. CEMEX realized a net gain on disposal of these assets of US$22 ($399), which included a proportional allocation of goodwill of US$73 ($64). Considering the disposal of its Pacific Northwest Materials Business, the operations of that business for the six-month period ending June 30, 2017, and for the full years ended December 31, 2016 and 2015, included in CEMEX’s income statements were reclassified to the single line item “Discontinued Operations.”

On November 28, 2016, one of CEMEX’s subsidiaries in the United States signed a definitive agreement to divest its Concrete Reinforced Pipe Manufacturing Business (“Concrete Pipe Business”) in the United States to Quikrete Holdings, Inc. (“Quikrete”) for US$500 plus an additional US$40 contingent consideration based on future performance. On January 31, 2017, CEMEX closed the sale to Quikrete according to the agreed upon price conditions, determined a net gain on disposal of these assets for US$148 ($3,083), including US$260 ($5,369) of goodwill associated to the reporting segment in the United States that was proportionally allocated to these net assets based on their relative fair values Considering the disposal of the entire Concrete Pipe Business, its operations for the one-month period ending January 31, 2017 and full years ended December 31, 2016 and 2015, included in CEMEX’s income statements were reclassified to the single line item “Discontinued Operations.”

On May 26, 2016, CEMEX closed the sale of its operations in Bangladesh and Thailand to Siam City Cement Public Company Ltd. for US$70 ($1,450). The operations in Bangladesh and Thailand for the period from January 1 to May 26, 2016 and the year 2015, included in CEMEX’s income statements were reclassified to the single line item “Discontinued operations” and include in 2016, a gain on sale of US$24 ($424), net of the reclassification of foreign currency translation gains associated with these operations accrued in equity until disposal for US$7 ($122).

With effective date October 31, 2015, after all agreed upon conditions precedent were satisfied, CEMEX completed the process for the sale of its operations in Austria and Hungary that started on August 12, 2015 to the Rohrdorfer Group for €165 (US$179 or $3,090), after final adjustments negotiated for changes in cash and working capital balances as of the transfer date. The combined operations in Austria and Hungary consisted of 29 aggregate quarries and 68 ready-mix plants. The operations in Austria and Hungary for the ten-month period ended October 31, 2015 and the year ended December 31, 2014, included in CEMEX’s statements of operations, were reclassified to the single line item “Discontinued operations,” which includes, in 2015, a gain on sale of US$45 ($741), net of the reclassification of foreign currency translation gains accrued in equity until October 31, 2015 for an amount of US$10 ($215).

 

20

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Discontinued operations - continued

 

The following table presents condensed combined information of the statement of operations of CEMEX’s discontinued operations in the Pacific Northwest Materials Business in the United States for the six-months period ended June 30, 2017 and for the years 2016 and 2015; the Concrete Pipe Business operations in the United States for the one-month period ended January 31, 2017 and for the years 2016 and 2015, the operations in Bangladesh and Thailand for the period from January 1 to May 26, 2016 and for the year 2015, and the operations in Austria and Hungary for the ten-month period ended October 31, 2015:

 

		2017				2016				2015
Sales		$	1,549				8,979				11,888
Cost of sales and operating expenses			(1,531	)			(8,440	)			(11,665	)
Other products (expenses), net			14				(2	)			23
Financial expenses, net and others			(3	)			(57	)			49
Earnings before income tax			29				480				295
Income tax			—				(101	)			6
Net income			29				379				301
Net income of non-controlling interest			—				—				(15	)
Net income of controlling interest		$	29				379				286

Selected condensed combined financial information of the statement of financial position at this date of such operations was as follows:

 

		2016
Current assets		$	1,146
Property, machinery and equipment, net			4,188
Intangible assets, net and other non-current assets			6,835
Total assets			12,169
Current liabilities			(99	)
Non-current liabilities			(336	)
Total liabilities			(435	)
Net assets		$	11,734

 

4.3)	OTHER DISPOSAL GROUPS

On November 18, 2016, a subsidiary of CEMEX in the United States closed the sale to an affiliate of Grupo Cementos de Chihuahua, S.A.B. de C.V. (“GCC”) of certain assets consisting in CEMEX’s cement plant in Odessa, Texas, two cement terminals and the building materials business in El Paso, Texas and Las Cruces, New Mexico, for an amount of US$306 ($6,340). The Odessa plant had an annual production capacity of approximately 537 thousand tons (unaudited). The transfer of control was effective on November 18, 2016. As a result of the sale of these assets, CEMEX recognized in 2016 a gain of US$104 ($2,159) as part of “Other expenses, net” in the income statement, net of an expense for the proportional write off of goodwill associated to CEMEX’s reporting segment in the United States based on their relative fair values for US$161 ($3,340) and the reclassification of proportional foreign currency translation gains associated with these net assets accrued in equity until disposal for US$65 ($1,347).

On September 12, 2016, CEMEX announced that one of its subsidiaries in the United States signed a definitive agreement for the sale of its Fairborn, Ohio cement plant and cement terminal in Columbus, Ohio to Eagle Materials Inc. (“Eagle Materials”) for US$400 ($8,288). Fairborn plant had an annual production capacity of approximately 730 thousand tons (unaudited). On February 10, 2017, CEMEX announced that such subsidiary in the United States closed the divestment of these assets, and recognized in 2017 a gain on disposal for US$188 ($3,694) as part of “Other expenses, net” in the income statement, net of an expense for the proportional write off of goodwill associated to CEMEX’s reporting segment in the United States based on their relative fair values for US$211 ($4,365).

The operations of the net assets sold to GCC and Eagle Materials, mentioned above, did not represent discontinued operations and were consolidated by CEMEX line-by-line in the income statements for all the reported periods. In arriving to this conclusion, CEMEX evaluated: a) the Company’s ongoing cement operations on its CGUs in Texas and the East coast; and b) the relative size of the net assets sold and held for sale in respect to the Company’s remaining overall ongoing cement operations in the United States. Moreover, as a reasonability check, CEMEX measured the materiality of such net assets using a threshold of 5% of consolidated net sales, operating earnings before other expenses, net, net income and total assets. In no case the 5% threshold was reached.

For the years 2017, 2016 and 2015, selected combined statement of operations information of the net assets sold to GCC on November 18, 2016 and those to Eagle Materials was as follows:

 

		2017				2016				2015
Net sales		$	86				3,322				3,538
Operating costs and expenses			(71	)			(2,800	)			(2,795	)
Operating earnings before other expenses, net		$	15				522				743

 

21

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Other disposal groups - continued

 

On December 2, 2016, CEMEX agreed the sale of its assets and activities related to the ready mix concrete pumping business in Mexico to Cementos Españoles de Bombeo, S. de R.L., subsidiary in Mexico of Pumping Team S.L.L. (“Pumping Team”), specialist in the supply of ready mix concrete pumping services based in Spain, for $1,649, which includes the sale of fixed assets upon closing of the transaction for $309 plus administrative and client and market development services, as well as the lease facilities in Mexico that CEMEX will supply to Pumping Team over a period of ten years with the possibility to extend for three additional years, for an aggregate initial amount of $1,340, plus a contingent revenue subject to results for up to $557 linked to annual metrics beginning in the first year and up to the fifth year of the agreement. On April 28, 2017, after receiving the approval by the Mexican authorities, CEMEX concluded the sale.

In addition, as part of related transactions agreed with Holcim Ltd. (note 4.1), effective as of January 1, 2015, CEMEX sold to Holcim its assets in the western region of Germany, consisting of one cement plant, two cement grinding mills, one slag granulator, 22 aggregates quarries and 79 ready-mix plants for €171 (US$207 or $3,047), while CEMEX maintained its operations in the northern, eastern and southern regions of the country.

 

4.4)	SELECTED FINANCIAL INFORMATION BY GEOGRAPHIC OPERATING SEGMENT

Geographic operating segments represent the components of CEMEX that engage in business activities from which CEMEX may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s top management to make decisions about resources to be allocated to the segments and assess their performance, and for which discrete financial information is available. CEMEX operates geographically on a regional basis. Effective January 1, 2016, according to an announcement made by CEMEX’s Chief Executive Officer (“CEO”), the Company’s operations were reorganized into five geographical regions, each under the supervision of a regional president, as follows: 1) Mexico, 2) United States, 3) Europe, 4) South, Central America and the Caribbean, and 5) Asia, Middle East and Africa. Each regional president supervises and is responsible for all the business activities in the countries comprising the region. These activities refer to the production, distribution, marketing and sale of cement, ready-mix concrete, aggregates and other construction materials, the allocation of resources and the review of their performance and operating results. All regional presidents report directly to CEMEX’s CEO. The country manager, who is one level below the regional president in the organizational structure, reports the performance and operating results of its country to the regional president, including all the operating sectors. CEMEX’s top management internally evaluates the results and performance of each country and region for decision-making purposes and allocation of resources, following a vertical integration approach considering: a) that the operating components that comprise the reported segment have similar economic characteristics; b) that the reported segments are used by CEMEX to organize and evaluate its activities in its internal information system; c) the homogeneous nature of the items produced and traded in each operative component, which are all used by the construction industry; d) the vertical integration in the value chain of the products comprising each component; e) the type of clients, which are substantially similar in all components; f) the operative integration among components; and g) that the compensation system for employees of a specific country is based on the consolidated results of the geographic segment and not on the particular results of the components. Consequently, in CEMEX’s daily operations, management allocates economic resources and evaluates operating results on a country basis rather than on an operating component basis.

The financial information by geographic operating segment issued in the financial statements of prior years was restated in order to give effect to: a) the reversal from discontinued operations related to CEMEX’s Croatian Operations for the years 2016 and 2015 (note 4.1), and b) the new geographical operating organization described above for the year 2015. Until December 31, 2015, CEMEX’s operations were organized into six geographical regions: 1) Mexico, 2) United States, 3) Northern Europe, 4) Mediterranean, 5) South, Central America and the Caribbean, and 6) Asia. Under the current operating organization, the geographical operating segments under the former Mediterranean region were incorporated into the current Europe region or the Asia, Middle East and Africa region, as corresponded.

Considering the financial information that is regularly reviewed by CEMEX’s top management, each geographic region and the countries that comprise such regions represent reportable operating segments. However, for disclosure purposes in these notes, considering similar regional and economic characteristics and/or the fact that certain countries do not exceed certain materiality thresholds to be reported separately, such countries have been aggregated and presented as single line items as follows: a) “Rest of Europe” is mainly comprised of CEMEX’s operations in the Czech Republic, Poland, Croatia and Latvia, as well as trading activities in Scandinavia and Finland; b) “Rest of South, Central America and the Caribbean” is mainly comprised of CEMEX’s operations in Puerto Rico, the Dominican Republic, Nicaragua, Jamaica and other countries in the Caribbean, excluding TCL, Guatemala, and small ready-mix concrete operations in Argentina; and c) “Rest of Asia, Middle East and Africa” is mainly comprised of CEMEX’s operations in the United Arab Emirates, Israel and Malaysia. The segment “Others” refers to: 1) cement trade maritime operations, 2) Neoris N.V., CEMEX’s subsidiary involved in the development of information technology solutions, 3) the Parent Company and other corporate entities, and 4) other minor subsidiaries with different lines of business. For the year 2017, for purposes of the geographic operating segments presented in the following tables of this note, CEMEX’s operations acquired in the Caribbean, mainly in Trinidad and Tobago, Jamaica and Barbados as part of the purchase of TCL, are reported in the line item named “Caribbean TCL.”

Considering that is an indicator of CEMEX’s ability to internally fund capital expenditures, as well as a widely accepted financial indicator to measure CEMEX’s ability to service or incur debt (note 16), one relevant indicator used by CEMEX’s management to evaluate the performance of each country is “Operating EBITDA” (operating earnings before other expenses, net, plus depreciation and amortization). This is not an indicator of CEMEX’s financial performance, an alternative to cash flows, a measure of liquidity or comparable to other similarly titled measures of other companies. This indicator, which is presented in the selected financial information by geographic operating segment, is consistent with the information used by CEMEX’s management for decision-making purposes. The accounting policies applied to determine the financial information by geographic operating segment are consistent with those described in note 2.

 

22

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Selected information of the consolidated statements of operations by geographic operating segment for the years ended December 31, 2017, 2016 and 2015 was as follows:

 

2017		Net sales (including related parties)				Less: Related parties				Net sales				Operating EBITDA				Less: depreciation and amortization				Operating earnings before other expenses, net				Other expenses, Net				Financial expense				Other financing items, net
Mexico		$	58,442				(1,075	)			57,367				21,215				2,246				18,969				(687	)			(409	)			(534	)
United States			65,536				—				65,536				10,652				6,200				4,452				3,202				(631	)			(177	)
Europe
United Kingdom			20,179				—				20,179				2,763				997				1,766				450				(77	)			(397	)
France			16,162				—				16,162				855				549				306				(129	)			(61	)			18
Germany			10,056				(1,339	)			8,717				743				509				234				(11	)			(14	)			(63	)
Spain			6,870				(990	)			5,880				344				638				(294	)			(711	)			(34	)			12
Poland			5,552				(74	)			5,478				647				361				286				(140	)			(30	)			(8	)
Rest of Europe			9,439				(864	)			8,575				1,463				688				775				(131	)			(24	)			71
South, Central America and the Caribbean (“SAC”)
Colombia 1			10,685				—				10,685				2,166				507				1,659				(642	)			(129	)			(36	)
Panama 1			5,112				(98	)			5,014				2,007				319				1,688				(20	)			(5	)			7
Costa Rica 1			2,805				(379	)			2,426				1,000				99				901				—				(5	)			29
Caribbean TCL 3			4,332				(49	)			4,283				1,059				610				449				(139	)			(215	)			(25	)
Rest of SAC 1			11,716				(872	)			10,844				2,602				449				2,153				(1,069	)			(23	)			(12	)
Asia, Middle East and Africa (“AMEA”)
Philippines 2			8,296				—				8,296				1,394				528				866				89				(3	)			(24	)
Egypt			3,862				—				3,862				594				299				295				(210	)			(60	)			574
Rest of AMEA			13,516				—				13,516				1,855				363				1,492				(174	)			(28	)			12
Others			22,514				(11,203	)			11,311				(2,796	)			630				(3,426	)			(3,493	)			(17,553	)			4,169
Continuing operations			275,074				(16,943	)			258,131				48,563				15,992				32,571				(3,815	)			(19,301	)			3,616
Discontinued operations			1,550				(1	)			1,549				75				57				18				14				(3	)			—
Total		$	276,624				(16,944	)			259,680				48,638				16,049				32,589				(3,801	)			(19,304	)			3,616
2016		Net sales (including related parties)				Less: Related parties				Net sales				Operating EBITDA				Less: Depreciation and amortization				Operating Earnings before other expenses, net				Other expenses, net				Financial expense				Other financing items, net
Mexico		$	53,579				(848	)			52,731				19,256				2,390				16,866				(608	)			(339	)			2,695
United States			66,554				—				66,554				10,973				6,400				4,573				2,919				(487	)			(212	)
Europe
United Kingdom			21,153				—				21,153				3,606				1,047				2,559				711				(63	)			(393	)
France			14,535				—				14,535				669				484				185				(110	)			(53	)			2
Germany			9,572				(1,385	)			8,187				553				464				89				(64	)			(15	)			(85	)
Spain			6,563				(841	)			5,722				814				663				151				(112	)			(37	)			(9	)
Poland			4,799				(88	)			4,711				579				330				249				6				(11	)			123
Rest of Europe			7,935				(541	)			7,394				1,141				660				481				(103	)			(33	)			77
South, Central America and the Caribbean (“SAC”)
Colombia 1			12,415				(1	)			12,414				3,975				489				3,486				(575	)			46				38
Panama 1			4,906				(124	)			4,782				2,170				340				1,830				(7	)			(27	)			5
Costa Rica 1			2,818				(351	)			2,467				1,127				116				1,011				(23	)			(11	)			27
Rest of SAC 1			11,378				(778	)			10,600				2,875				437				2,438				(1,226	)			(28	)			(182	)
Asia, Middle East and Africa (“AMEA”)
Philippines 2			9,655				—				9,655				2,687				530				2,157				21				(1	)			(24	)
Egypt			6,950				(5	)			6,945				2,454				539				1,915				(213	)			(78	)			(253	)
Rest of AMEA			11,858				(12	)			11,846				1,617				299				1,318				(112	)			(27	)			27
Others			18,846				(8,597	)			10,249				(2,962	)			803				(3,765	)			(2,174	)			(20,323	)			2,653
Continuing operations			263,516				(13,571	)			249,945				51,534				15,991				35,543				(1,670	)			(21,487	)			4,489
Discontinued operations			9,186				(207	)			8,979				1,232				693				539				(2	)			(10	)			(47	)
Total		$	272,702				(13,778	)			258,924				52,766				16,684				36,082				(1,672	)			(21,497	)			4,442

 

23

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Selected information of the income statements by geographic operating segment - continued

 

2015		Net sales (including related parties)				Less: Related parties				Net sales				Operating EBITDA				Less: depreciation and amortization				Operating Earnings before other expenses, net				Other expenses, net				Financial expense				Other financing items, net
Mexico		$	50,260				(5,648	)			44,612				15,362				2,399				12,963				(684	)			(210	)			915
United States			56,846				(18	)			56,828				7,985				5,629				2,356				234				(437	)			(144	)
Europe
United Kingdom			20,227				—				20,227				2,705				1,004				1,701				(147	)			(95	)			(299	)
France			12,064				—				12,064				670				438				232				(8	)			(48	)			(10	)
Germany			8,285				(1,276	)			7,009				542				389				153				49				(14	)			(61	)
Spain			6,151				(755	)			5,396				1,031				604				427				(735	)			(72	)			(2	)
Poland			4,445				(108	)			4,337				598				295				303				18				(54	)			33
Rest of Europe			7,457				(660	)			6,797				1,110				739				371				(187	)			(23	)			(122	)
South, Central America and the Caribbean (“SAC”)
Colombia 1			11,562				(2	)			11,560				4,041				500				3,541				(88	)			(50	)			(570	)
Panama 1			4,599				(68	)			4,531				1,869				298				1,571				(180	)			(13	)			2
Costa Rica 1			2,658				(229	)			2,429				1,096				102				994				(2	)			(9	)			2
Rest of SAC 1			12,177				(1,988	)			10,189				2,295				445				1,850				(87	)			(22	)			(119	)
Asia, Middle East and Africa (“AMEA”)
Philippines 2			8,436				(4	)			8,432				2,206				447				1,759				(12	)			(20	)			19
Egypt			6,923				(5	)			6,918				1,777				536				1,241				(254	)			(115	)			114
Rest of AMEA			9,929				—				9,929				1,250				244				1,006				(53	)			(23	)			(1	)
Others			16,793				(8,752	)			8,041				(3,003	)			589				(3,592	)			(896	)			(18,579	)			(1,090	)
Continuing operations			238,812				(19,513	)			219,299				41,534				14,658				26,876				(3,032	)			(19,784	)			(1,333	)
Discontinued operations			11,944				(56	)			11,888				1,201				978				223				23				(17	)			66
Total		$	250,756				(19,569	)			231,187				42,735				15,636				27,099				(3,009	)			(19,801	)			(1,267	)

 

1

CEMEX Latam Holdings, S.A. (“CLH”), entity incorporated in Spain, trades its ordinary shares in the Colombian Stock Exchange. CLH is the indirect holding company of CEMEX’s operations in Colombia, Panama, Costa Rica, Guatemala, Nicaragua, El Salvador and Brazil. At year end 2017 and 2016, there is a non-controlling interest in CLH of approximately 26.75% and 26.72%, respectively, of its ordinary shares, excluding shares held in CLH’s treasury (note 20.4).

2

CEMEX’s operations in the Philippines are conducted through CEMEX Holdings Philippines, Inc. (“CHP”), subsidiary incorporated in the Philippines which since July 2016 trades its ordinary shares in the Philippines Stock Exchange under the symbol CHP. As of December 31, 2017 and 2016, there is a non-controlling interest in CHP of 45.0% of its ordinary shares (note 20.4).

3

As mentioned in note 4.1, in February 2017, CEMEX’s acquired a controlling interest in TCL, which main operations are located in Trinidad and Tobago (“T&T”), Jamaica and Barbados. TCL shares trade in the T&T stock exchange. As of December 31, 2017, there is a non-controlling interest in TCL of approximately 30.2% of its ordinary shares (note 20.4).

The information of share of profits of equity accounted investees by geographic operating segment for the years ended December 31, 2017, 2016 and 2015 is included in the note 13.1.

 

24

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

As of December 31, 2017 and 2016, selected statement of financial position information by geographic segment was as follows:

 

2017		Equity accounted investees				Other segment assets				Total assets				Total liabilities				Net assets by segment				Additions to fixed assets 1
Mexico		$	241				71,280				71,521				23,574				47,947				2,133
United States			1,573				266,769				268,342				32,366				235,976				3,498
Europe
United Kingdom			107				34,774				34,881				24,160				10,721				1,010
France			1,055				18,481				19,536				7,360				12,176				372
Germany			85				9,010				9,095				6,848				2,247				441
Spain			—				25,731				25,731				3,543				22,188				553
Poland			9				5,477				5,486				3,086				2,400				230
Rest of Europe			158				16,123				16,281				3,627				12,654				321
South, Central America and the Caribbean
Colombia			—				24,406				24,406				11,307				13,099				1,178
Panama			—				7,232				7,232				1,029				6,203				152
Costa Rica			—				1,869				1,869				646				1,223				42
Caribbean TCL			—				11,004				11,004				4,917				6,087				584
Rest of South, Central America and the Caribbean			31				11,298				11,329				4,366				6,963				357
Asia, Middle East and Africa
Philippines			6				11,548				11,554				2,617				8,937				518
Egypt			1				4,602				4,603				1,776				2,827				418
Rest of Asia, Middle East and Africa			—				13,671				13,671				8,027				5,644				449
Others			5,306				24,356				29,662				217,914				(188,252	)			163
Continuing operations			8,572				557,631				566,203				357,163				209,040				12,419
Assets held for sale and related liabilities (note 12.1)			—				1,378				1,378				—				1,378				—
Total		$	8,572				559,009				567,581				357,163				210,418				12,419
2016		Equity accounted investees				Other segment assets				Total assets				Total liabilities				Net assets by segment				Additions to fixed assets 1
Mexico		$	490				70,012				70,502				20,752				49,750				1,651
United States			1,587				287,492				289,079				30,118				258,961				3,760
Europe
United Kingdom			104				32,469				32,573				22,914				9,659				599
France			909				16,855				17,764				6,829				10,935				379
Germany			74				8,396				8,470				6,694				1,776				507
Spain			13				27,251				27,264				3,206				24,058				490
Poland			10				5,036				5,046				2,072				2,974				181
Rest of Europe			270				15,345				15,615				3,221				12,394				258
South, Central America and the Caribbean
Colombia			—				26,532				26,532				11,548				14,984				3,633
Panama			—				7,958				7,958				1,144				6,814				126
Costa Rica			—				1,928				1,928				691				1,237				73
Rest of South, Central America and the Caribbean			28				12,517				12,545				4,133				8,412				441
Asia, Middle East and Africa
Philippines			6				12,308				12,314				2,696				9,618				341
Egypt			1				5,512				5,513				2,907				2,606				381
Rest of Asia, Middle East and Africa			—				12,347				12,347				6,994				5,353				394
Others			6,996				26,253				33,249				276,269				(243,020	)			65
Continuing operations			10,488				568,211				578,699				402,188				176,511				13,279
Assets held for sale and related liabilities (note 12.1)			—				21,029				21,029				815				20,214				—
Total		$	10,488				589,240				599,728				403,003				196,725				13,279

 

1	In 2017 and 2016, the column “Additions to fixed assets” includes capital expenditures of $9,514 and $12,676, respectively (note 14).

Total consolidated liabilities as of December 31, 2017 and 2016 included debt of $193,995 and $236,238, respectively. Of such balances, as of December 31, 2017 and 2016, approximately 80% and 73% was in the Parent Company, less than 1% and 1% was in Spain, 15% and 25% was in finance subsidiaries in the Netherlands, Luxembourg and the United States, and 4% and 2% was in other countries, respectively. The Parent Company and the finance subsidiaries mentioned above are included within the segment “Others.”

 

25

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Net sales by product and geographic segment for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

2017		Cement				Concrete				Aggregates				Others				Eliminations				Net sales
Mexico		$	42,195				14,672				3,416				11,211				(14,127	)			57,367
United States			27,804				35,400				14,436				6,235				(18,339	)			65,536
Europe
United Kingdom			4,879				7,459				7,758				8,067				(7,984	)			20,179
France			—				13,367				6,373				205				(3,783	)			16,162
Germany			3,595				4,668				2,134				2,335				(4,015	)			8,717
Spain			5,499				944				259				676				(1,498	)			5,880
Poland			3,230				2,532				701				226				(1,211	)			5,478
Rest of Europe			6,236				2,715				1,055				462				(1,893	)			8,575
South, Central America and the Caribbean
Colombia			7,043				4,024				1,224				1,960				(3,566	)			10,685
Panama			3,876				1,725				452				180				(1,219	)			5,014
Costa Rica			2,095				386				122				120				(297	)			2,426
Caribbean TCL			4,097				29				19				215				(77	)			4,283
Rest of South, Central America and the Caribbean			11,412				1,308				268				307				(2,451	)			10,844
Asia, Middle East and Africa
Philippines			8,093				67				159				52				(75	)			8,296
Egypt			3,347				479				16				173				(153	)			3,862
Rest of Asia, Middle East and Africa			928				11,078				2,875				2,148				(3,513	)			13,516
Others			—				—				—				22,515				(11,204	)			11,311
Continuing operations			134,329				100,853				41,267				57,087				(75,405	)			258,131
Discontinued operations			—				525				340				687				(3	)			1,549
Total		$	134,329				101,378				41,607				57,774				(75,408	)			259,680
2016		Cement				Concrete				Aggregates				Others				Eliminations				Net sales
Mexico		$	37,647				13,664				3,156				11,773				(13,509	)			52,731
United States			28,585				35,843				14,565				7,107				(19,546	)			66,554
Europe
United Kingdom			5,267				7,830				8,195				7,889				(8,028	)			21,153
France			—				11,883				5,640				278				(3,266	)			14,535
Germany			3,416				4,539				2,112				2,262				(4,142	)			8,187
Spain			5,478				823				196				472				(1,247	)			5,722
Poland			2,811				2,237				579				219				(1,135	)			4,711
Rest of Europe			5,286				2,254				911				338				(1,395	)			7,394
South, Central America and the Caribbean
Colombia			8,814				4,522				1,364				1,761				(4,047	)			12,414
Panama			3,794				1,577				413				139				(1,141	)			4,782
Costa Rica			2,144				390				179				126				(372	)			2,467
Rest of South, Central America and the Caribbean			10,998				1,526				322				298				(2,544	)			10,600
Asia, Middle East and Africa
Philippines			9,405				143				164				70				(127	)			9,655
Egypt			6,076				943				26				217				(317	)			6,945
Rest of Asia, Middle East and Africa			961				9,535				2,519				1,379				(2,548	)			11,846
Others			—				—				—				18,851				(8,602	)			10,249
Continuing operations			130,682				97,709				40,341				53,179				(71,966	)			249,945
Discontinued operations			422				1,366				785				6,665				(259	)			8,979
Total		$	131,104				99,075				41,126				59,844				(72,225	)			258,924

 

26

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Selected information of net sales by sector and geographic operating segment - continued

 

2015		Cement				Concrete				Aggregates				Others				Eliminations				Net sales
Mexico		$	30,384				13,163				2,860				9,956				(11,751	)			44,612
United States			23,358				30,129				11,914				7,994				(16,567	)			56,828
Europe
United Kingdom			4,705				7,729				7,614				7,859				(7,680	)			20,227
France			—				10,026				4,410				224				(2,596	)			12,064
Germany			3,098				3,749				1,790				2,103				(3,731	)			7,009
Spain			5,265				721				150				392				(1,132	)			5,396
Poland			2,630				1,916				489				197				(895	)			4,337
Rest of Europe			5,075				1,945				728				562				(1,513	)			6,797
South, Central America and the Caribbean
Colombia			8,158				4,428				1,329				1,345				(3,700	)			11,560
Panama			3,368				1,424				383				172				(816	)			4,531
Costa Rica			2,092				367				138				109				(277	)			2,429
Rest of South, Central America and the Caribbean			9,633				2,058				376				451				(2,329	)			10,189
Asia, Middle East and Africa
Philippines			8,270				115				96				62				(111	)			8,432
Egypt			6,052				975				36				236				(381	)			6,918
Rest of Asia, Middle East and Africa			880				7,956				1,931				1,115				(1,953	)			9,929
Others			—				—				—				16,811				(8,770	)			8,041
Continuing operations			112,968				86,701				34,244				49,588				(64,202	)			219,299
Discontinued operations			1,046				3,877				1,928				5,474				(437	)			11,888
Total		$	114,014				90,578				36,172				55,062				(64,639	)			231,187

 

5)	OPERATING EXPENSES, DEPRECIATION AND AMORTIZATION

Consolidated operating expenses during 2017, 2016 and 2015 by function are as follows:

 

		2017				2016				2015
Administrative expenses 1		$	21,081				20,750				18,653
Selling expenses			6,450				6,974				5,883
Distribution and logistics expenses			28,495				26,245				23,374
		$	56,026				53,969				47,910

 

1	The Technology and Energy departments in CEMEX undertake all significant R&D activities as part of their daily activities. In 2017, 2016 and 2015, total combined expenses of these departments recognized within administrative expenses were $754 (US$38), $712 (US$38) and $660 (US$41), respectively.

Depreciation and amortization recognized during 2017, 2016 and 2015 are detailed as follows:

 

		2017				2016				2015
Depreciation and amortization expense included in cost of sales		$	14,146				14,180				13,154
Depreciation and amortization expense included in administrative, selling and distribution and logistics expenses			1,846				1,811				1,504
		$	15,992				15,991				14,658

 

6)	OTHER EXPENSES, NET

The detail of the line item “Other expenses, net” in 2017, 2016 and 2015 was as follows:

 

		2017				2016				2015
Impairment losses 1		$	(2,936	)			(2,518	)			(1,517	)
Restructuring costs 2			(843	)			(778	)			(845	)
Charitable contributions			(127	)			(93	)			(60	)
Results from the sale of assets and others, net 3			91				1,719				(610	)
		$	(3,815	)			(1,670	)			(3,032	)

 

1	In 2017, 2016 and 2015, among others, includes impairment losses of fixed assets for approximately $984, $1,899 and $1,145, respectively, as well as impairment losses of goodwill in 2017 for $1,920 (notes 13.2, 14 and 15).

2	In 2017, 2016 and 2015, restructuring costs mainly refer to severance payments.

3	In 2017, includes an expense in Colombian pesos equivalent to approximately $491 (US$25) for a penalty imposed by the Commerce and Industry Superintendence in Colombia in connection with a market investigation (note 24.2).

 

27

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

7)	FINANCIAL INCOME AND OTHER ITEMS, NET

The detail of the line item “Financial income and other items, net” in 2017, 2016 and 2015 was as follows:

 

		2017				2016				2015
Results in the sale of associates and remeasurement of previously held interest before change in control of associates (notes 4.1 and 13.1)		$	4,164				—				—
Financial income			338				402				318
Results from financial instruments, net (notes 13.2 and 16.4)			161				113				(2,729	)
Foreign exchange results			(26	)			5,004				1,970
Effects of NPV on assets and liabilities and others, net			(1,021	)			(1,030	)			(892	)
		$	3,616				4,489				(1,333	)

 

8)	CASH AND CASH EQUIVALENTS

As of December 31, 2017 and 2016, consolidated cash and cash equivalents consisted of:

 

		2017				2016
Cash and bank accounts		$	9,292				9,104
Fixed-income securities and other cash equivalents			4,449				2,512
		$	13,741				11,616

Based on net settlement agreements, the balance of cash and cash equivalents excludes deposits in margin accounts that guarantee several obligations of CEMEX of $ 196 in 2017 and $250 in 2016, which were offset against the corresponding obligations of CEMEX with the counterparties, considering CEMEX’s right, ability and intention to settle the amounts on a net basis.

 

9)	TRADE ACCOUNTS RECEIVABLE, NET

As of December 31, 2017 and 2016, consolidated trade accounts receivable consisted of:

 

		2017				2016
Trade accounts receivable		$	32,623				32,356
Allowances for doubtful accounts			(2,145	)			(2,196	)
		$	30,478				30,160

As of December 31, 2017 and 2016, trade accounts receivable include receivables of $12,713 (US$647) and $13,644 (US$658), respectively, sold under outstanding trade receivables securitization programs and/or factoring programs with recourse, established in Mexico, the United States, France and the United Kingdom, in which CEMEX effectively surrenders control associated with the trade accounts receivable sold and there is no guarantee or obligation to reacquire the assets; nonetheless, in such programs, CEMEX retains certain residual interest in the programs and/or maintains continuing involvement with the accounts receivable. Therefore, the trade accounts receivable sold were not removed from the statement of financial position and the funded amounts to CEMEX of $11,313 (US$576) in 2017 and $11,095 (US$535) in 2016, were recognized within the line item of “Other financial obligations,” the difference in each year against the trade receivables sold was maintained as reserves. Trade accounts receivable qualifying for sale exclude amounts over certain days past due or concentrations over certain limits to any one customer, according to the terms of the programs. The discount granted to the acquirers of the trade accounts receivable is recorded as financial expense and amounted to $308 in 2017, $258 in 2016 and $249 in 2015. CEMEX’s securitization programs are negotiated for periods of one to two years and are usually renewed at their maturity.

Allowances for doubtful accounts were established until December 31, 2017 based on an incurred loss model according to the credit history and risk profile of each customer (note 2.20). Changes in the valuation of this caption allowance for doubtful accounts in 2017, 2016 and 2015, were as follows:

 

		2017				2016				2015
Allowances for doubtful accounts at beginning of period		$	2,196				2,152				1,856
Charged to selling expenses			252				556				434
Additions though business combinations			141				—				—
Deductions			(449	)			(867	)			(276	)
Foreign currency translation effects			5				355				138
Allowances for doubtful accounts at end of period		$	2,145				2,196				2,152

 

28

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

10)	OTHER ACCOUNTS RECEIVABLE

As of December 31, 2017 and 2016, consolidated other accounts receivable consisted of:

 

		2017				2016
Non-trade accounts receivable 1		$	1,918				2,527
Interest and notes receivable 2			1,125				1,286
Current portion of valuation of derivative financial instruments			1,056				236
Loans to employees and others			233				188
Refundable taxes			638				1,001
		$	4,970				5,238

 

1	Non-trade accounts receivable are mainly attributable to the sale of assets.

2

Includes $27 in 2016, representing the short-term portion of a restricted investment related to coupon payments under CEMEX’s perpetual debentures (note 20.4). In addition, in 2016, includes CEMEX Colombia’s beneficial interest in a trust oriented to promote housing projects, which its only asset is land in the municipality of Zipaquira, Colombia and its only liability is a bank credit for $148, guaranteed by CEMEX Colombia, obtained to purchase the land. The estimated fair value of the land as determined by external appraiser significantly exceeds the amount of the loan.

 

11)	INVENTORIES, NET

As of December 31, 2017 and 2016, the consolidated balance of inventories was summarized as follows:

 

		2017				2016
Finished goods		$	5,933				5,865
Work-in-process			3,814				3,378
Raw materials			3,237				3,128
Materials and spare parts			4,996				4,551
Inventory in transit			872				1,176
		$	18,852				18,098

For the years ended December 31, 2017, 2016 and 2015, CEMEX recognized within “Cost of sales” in the income statement, inventory impairment losses of $23, $52 and $49, respectively.

 

12)	ASSETS HELD FOR SALE AND OTHER CURRENT ASSETS

 

12.1)

ASSETS HELD FOR SALE

As of December 31, 2017 and 2016, assets held for sale, which are measured at the lower of their estimated realizable value, less costs to sell, and their carrying amounts, as well as liabilities directly related with such assets are detailed as follows:

 

		2017												2016
		Assets				Liabilities				Net assets				Assets				Liabilities				Net assets
Concrete Pipe Division (note 4.2)		$	—				—			$	—				9,426				642				8,784
Fairborn cement plant (note 4.3)			—				—				—				5,957				164				5,793
Investment in shares of GCC (note 13.1) 1			—				—				—				3,882				—				3,882
Idle assets in Andorra, Spain			580				—				580				560				—				560
Concrete pumping equipment (note 4.3)			—				—				—				213				—				213
Other assets held for sale			798				—				798				991				9				982
		$	1,378				—				1,378			$	21,029				815				20,214

 

1	During 2017, in separate transactions, CEMEX sold the direct investment in 23% of GCC’s common stock it maintained for sale (note 13.1).

 

12.2)

OTHER CURRENT ASSETS

As of December 31, 2017 and 2016, other current assets are mainly comprised of advance payments.

 

29

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

13)	EQUITY ACCOUNTED INVESTEES, OTHER INVESTMENTS AND NON-CURRENT ACCOUNTS RECEIVABLE

 

13.1)

EQUITY ACCOUNTED INVESTEES

As of December 31, 2017 and 2016, the investments in common shares of associates were as follows:

 

		Activity				Country				%				2017				2016
Camcem, S.A. de C.V.			Cement				Mexico				40.1			$	3,618				3,674
Trinidad Cement Limited			Cement				Trinidad and Tobago				39.5				—				1,689
Concrete Supply Co. LLC			Concrete				United States				40.0				1,192				1,234
Akmenes Cementas AB			Cement				Lithuania				37.8				585				586
ABC Capital, S.A. Institución de Banca Múltiple			Financing				Mexico				33.9				228				474
Lehigh White Cement Company			Cement				United States				24.5				375				334
Société Méridionale de Carrières			Aggregates				France				33.3				367				300
Société d’Exploitation de Carrières			Aggregates				France				50.0				318				257
Cemento Interoceánico S.A. (formerly Industrias Básicas, S.A.)			Cement				Panama				25.0				168				155
Other companies			—				—				—				1,721				1,785
														$	8,572				10,488
Out of which:
Book value at acquisition date														$	6,957				8,275
Changes in stockholders’ equity														$	1,615				2,213

During 2016, the Parent Company participated as shareholder in a share restructuring executed by Camcem, S.A. de C.V. (“Camcem”), indirect parent company of Control Administrativo Mexicano, S.A. de C.V. (“Camsa”) and GCC, aimed to simplify its corporate structure, by means of which, Imin de México, S.A. de C.V., intermediate holding company, Camsa and GCC were merged, prevailing GCC as the surviving entity. As a result of the share restructuring, CEMEX’s 10.3% interest in Camcem and 49% interest in Camsa, both before the restructuring, were exchanged on equivalent basis into a 40.1% interest in Camcem and a 23% interest in GCC, which shares of the latest trade in the MSE (note 12.1).

On January 25, 2017, in a public offering to investors in Mexico conducted through the BMV and in a concurrent private placement to eligible investors outside of Mexico, the Parent Company and GCC announced the offering of up to 76,483,332 shares (all the shares of GCC owned by CEMEX) at a price range of between 95.00 to 115.00 pesos per share, which included 9,976,087 shares available to the underwriters of the offerings pursuant to a 30-day option to purchase such shares granted to them by CEMEX. During 2017, after conclusion of the public offering and the private placement, CEMEX sold approximately 13.53% of the common stock of GCC at a price of 95.00 pesos per share receiving $4,094 after deducting commissions and offering expenses, recognizing a gain on sale of $1,859 as part of “Financial income and other items, net” in the income statement.

In addition, on September 28, 2017, CEMEX announced the definitive sale to two financial institutions of the remaining 31,483,332 shares of GCC, which represented approximately 9.47% of the equity capital of GCC. Proceeds from the sale were $3,012 and generated a gain on sale of $1,682 recognized as part of “Financial income and other items, net” in the income statement. CEMEX continues to have an approximate 20% indirect interest in GCC through Camcem.

As mentioned in note 4.1, by means of a public offer and take-over bid through its subsidiary Sierra, and effective as of February 1, 2017, CEMEX acquired a majority ownership interest in TCL’s common stock and assumed control of this entity.

Combined condensed statement of financial position information of CEMEX’s associates as of December 31, 2017 and 2016 is set forth below:

 

		2017				2016
Current assets		$	21,527				21,651
Non-current assets			32,071				41,085
Total assets			53,598				62,736
Current liabilities			10,863				11,612
Non-current liabilities			17,730				22,436
Total liabilities			28,593				34,048
Total net assets		$	25,005				28,688

 

30

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Equity accounted investees - continued

 

Combined selected information of the statements of operations of CEMEX’s associates in 2017, 2016 and 2015 is set forth below:

 

		2017				2016				2015
Sales		$	28,158				29,791				25,484
Operating earnings			4,458				4,730				3,523
Income before income tax			2,451				3,111				3,350
Net income			1,891				1,860				2,403

The share of equity accounted investees by geographic operating segment in the income statements for 2017, 2016 and 2015 is detailed as follows:

 

		2017				2016				2015
Mexico		$	269				452				330
United States			266				253				92
Europe			108				54				339
Corporate and others			(55	)			(71	)			(24	)
		$	588				688				737

 

13.2)

OTHER INVESTMENTS AND NON-CURRENT ACCOUNTS RECEIVABLE

As of December 31, 2017 and 2016, consolidated other investments and non-current accounts receivable were summarized as follows:

 

		2017				2016
Non-current portion of valuation of derivative financial instruments		$	794				1,900
Non-current accounts receivable and other investments 1			4,612				4,572
Investments available-for-sale 2			275				491
Investments held for trading 3			77				157
		$	5,758				7,120

 

1	Includes, among other items: a) advances to suppliers of fixed assets of $43 in 2017 and $52 in 2016. CEMEX recognized impairment losses of non-current accounts receivable in Costa Rica of $21 in 2016, and in Egypt and Colombia of $71 and $22 in 2015, respectively.

2	This line item refers mainly to a strategic investment in CPOs of Axtel, S.A.B. de C.V. (“Axtel”). This investment is recognized as available for sale at fair value and changes in valuation are recorded in other items comprehensive income, net until its disposal.

3	This line item refers to investments in private funds. In 2017 and 2016, no contributions were made to such private funds.

 

14)	PROPERTY, MACHINERY AND EQUIPMENT, NET

As of December 31, 2017 and 2016, consolidated property, machinery and equipment, net and the changes in such line item during 2017, 2016 and 2015, were as follows:

 

		2017
		Land and								Machinery
		mineral								and				Construction
		reserves 1				Building 1				equipment 2				in progress 3				Total
Cost at beginning of period		$	97,218				51,740				229,717				17,247				395,922
Accumulated depreciation and depletion			(16,301	)			(24,224	)			(125,263	)			—				(165,788	)
Net book value at beginning of period			80,917				27,516				104,454				17,247				230,134
Capital expenditures			547				802				8,165				—				9,514
Additions through capital leases			—				—				2,096				—				2,096
Stripping costs			809				—				—				—				809
Total capital expenditures			1,356				802				10,261				—				12,419
Disposals4			(347	)			(223	)			(1,274	)			—				(1,844	)
Reclassifications 5			(784	)			(82	)			(768	)			—				(1,634	)
Business combinations			2,179				749				3,136				428				6,492
Depreciation and depletion for the period			(2,571	)			(1,967	)			(9,417	)			—				(13,955	)
Impairment losses			(202	)			(1	)			(763	)			(18	)			(984	)
Foreign currency translation effects			(1,895	)			908				719				1,800				1,532
Cost at end of period			95,495				53,927				242,636				19,457				411,515
Accumulated depreciation and depletion			(16,842	)			(26,225	)			(136,288	)			—				(179,355	)
Net book value at end of period		$	78,653				27,702				106,348				19,457				232,160

 

31

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Property, machinery and equipment, net - continued

 

 

		2016
		Land and								Machinery
		mineral								and				Construction
		reserves 1				Building 1				equipment 2				in progress 3				Total				2015
Cost at beginning of period		$	86,441				48,563				211,232				13,853				360,089				324,210
Accumulated depreciation and depletion			(12,215	)			(21,228	)			(109,952	)			—				(143,395	)			(118,668	)
Net book value at beginning of period			74,226				27,335				101,280				13,853				216,694				205,542
Capital expenditures			2,149				1,856				8,671				—				12,676				11,454
Additions through capital leases			—				—				7				—				7				63
Capitalization of financial expense			—				—				—				175				175				73
Stripping costs			421				—				—				—				421				723
Total capital expenditures			2,570				1,856				8,678				175				13,279				12,313
Disposals 4			(388	)			(141	)			(1,268	)			(44	)			(1,841	)			(2,247	)
Reclassifications 5			(2,029	)			(703	)			(1,731	)			(86	)			(4,549	)			(3,099	)
Business combinations			—				—				—				—				—				4,004
Depreciation and depletion for the period			(2,426	)			(2,033	)			(9,582	)			—				(14,041	)			(13,086	)
Impairment losses			(671	)			(303	)			(547	)			(378	)			(1,899	)			(1,145	)
Foreign currency translation effects			9,635				1,505				7,624				3,727				22,491				14,412
Cost at end of period			97,218				51,740				229,717				17,247				395,922				360,089
Accumulated depreciation and depletion			(16,301	)			(24,224	)			(125,263	)			—				(165,788	)			(143,395	)
Net book value at end of period		$	80,917				27,516				104,454				17,247				230,134				216,694

 

1	Includes corporate buildings and related land sold to financial institutions in previous years, which were leased back. The aggregate carrying amount of these assets as of December 31, 2017 and 2016 was $1,690 and $1,777, respectively.

2	Includes assets, mainly mobile equipment, acquired through finance leases, which carrying amount as of December 31, 2017 and 2016 was $2,096 and $7, respectively.

3

In July 2014, CEMEX Colombia began the construction of a new cement plant in the municipality of Maceo in the Antioquia department in Colombia with an annual capacity of approximately 1.1 million tons. The first phase included the construction of a cement mill, which began operating in testing phase for some months in 2016 with the supply of clinker from the Caracolito plant in Ibague, and the cement obtained was used in its entirety in the construction of the plant. The next phase, which includes the construction of the kiln, has been completed. In connection with the access road to the plant, the works were suspended meanwhile CEMEX Colombia obtains the permits for its completion. The beginning of commercial operations is subject to the successful conclusion of several ongoing processes related to certain operating permits and other proceedings. As a result of the investigations carried out for the deficiencies found (note 24.1), during the fourth quarter of 2016, CEMEX Colombia reduced construction in progress for $483 (US$23), of which, $295 (US$14) were recognized as impairment losses against “Other expenses, net,” considering that the assets, mainly advances for the purchase of land through a representative, were considered contingent assets based on the low probability for their recoverability due to deficiencies in the legal processes, and $188 (US$9) were decreased against “Other accounts payable” in connection with the cancellation of the portion payable of such assets. CEMEX Colombia determined an initial total budget for the plant of US$340. As of December 31, 2017, the carrying amount of the project, net of adjustments, is for an amount in Colombian pesos equivalent to US$333 ($6,543), considering the exchange rates as of December 31, 2017.

4

In 2017, includes sales of non-strategic fixed assets in Mexico, the United States, and Spain for $343, $223 and $220, respectively. In 2016, includes sales of non-strategic fixed assets in the United States, Mexico, and France for $317, $281 and $165, respectively. In 2015, includes the sales of non-strategic fixed assets in the United Kingdom, the United States and Spain for $584, $451 and $417, respectively.

5

In 2017, refers mainly to those assets of the Pacific Northwest Materials Business in the United States for $1,634 (note 4.2). In 2016, refers mainly to those assets of the Concrete Pipe Business in the United States for $2,747, as well as other disposal groups in the United States reclassified to assets available for sale for $1,386 (notes 4.2, 4.3 and 12.1). In 2015, refers to other disposal groups in the United States reclassified to assets available for sale for $537 (notes 4.3 and 12.1).

As a result of impairment tests conducted on several CGUs considering certain triggering events, mainly: a) the closing and/or reduction of operations of cement and ready-mix concrete plants resulting from adjusting the supply to current demand conditions, such as the situation in Puerto Rico in the last quarter of 2016 due to the adverse outlook and the overall uncertain economic conditions in such country; b) the transferring of installed capacity to more efficient plants, such as the projected closing in the short-term of a cement mill in Colombia; as well as c) the recoverability of certain investments in Colombia as described above, for the years ended December 31, 2017, 2016 and 2015, CEMEX adjusted the related fixed assets to their estimated value in use in those circumstances in which the assets would continue in operation based on estimated cash flows during the remaining useful life, or to their realizable value, in case of permanent shut down, and recognized impairment losses within the line item of “Other expenses, net” (notes 2.10 and 6).

 

32

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Property, machinery and equipment, net - continued

 

During the years ended December 31, 2017, 2016 and 2015 impairment losses of fixed assets by countries are as follows:

 

		2017				2016				2015
Spain		$	452				—				392
Czech Republic			157				—				—
United States			153				277				269
Panama			56				—				118
France			50				—				—
Latvia			46				—				126
Mexico			45				46				46
Puerto Rico			—				1,087				172
Colombia			—				454				—
Other countries			25				35				22
		$	984				1,899				1,145

 

15)	GOODWILL AND INTANGIBLE ASSETS, NET

 

15.1)

BALANCES AND CHANGES DURING THE PERIOD

As of December 31, 2017 and 2016, consolidated goodwill, intangible assets and deferred charges were summarized as follows:

 

		2017												2016
						Accumulated				Carrying								Accumulated				Carrying
		Cost				amortization				Amount				Cost				amortization				Amount
Intangible assets of indefinite useful life:
Goodwill		$	195,474				—				195,474			$	206,319				—				206,319
Intangible assets of definite useful life:
Extraction rights			39,603				(6,480	)			33,123				40,995				(5,948	)			35,047
Industrial property and trademarks			929				(364	)			565				707				(350	)			357
Customer relationships			3,859				(3,852	)			7				4,343				(4,084	)			259
Mining projects			797				(96	)			701				961				(84	)			877
Others intangible assets			14,941				(9,902	)			5,039				13,814				(9,166	)			4,648
		$	255,603				(20,694	)			234,909			$	267,139				(19,632	)			247,507

The amortization of intangible assets of definite useful life was $2,037 in 2017, $1,950 in 2016 and $1,572 in 2015, and was recognized within operating costs and expenses.

Goodwill

Changes in consolidated goodwill in 2017, 2016 and 2015, were as follows:

 

		2017				2016				2015
Balance at beginning of period		$	206,319				184,156				160,544
Business combinations			1,965				—				64
Disposals, net (note 4.3)			—				(3,340	)			(552	)
Reclassification to assets held for sale and other current assets (notes 4.2, 4.3 and 12)			(1,804	)			(9,734	)			—
Impairment losses			(1,920	)			—				—
Foreign currency translation effects			(9,086	)			35,237				24,100
Balance at end of period		$	195,474				206,319				184,156

Intangible assets of definite life

Changes in intangible assets of definite life in 2017, 2016 and 2015, were as follows:

 

		2017
						Industrial
		Extraction				property and				Customer				Mining
		rights				trademarks				relations				projects				Others 1				Total
Balance at beginning of period		$	35,047				357				259				877				4,648				41,188
Additions (disposals), net 1			278				(783	)			—				(148	)			424				(229	)
Business combinations (note 4.1)			—				—				—				4				72				76
Reclassifications (notes 4.1, 4.2 and 12)			—				—				(27	)			—				—				(27	)
Amortization for the period			(716	)			(110	)			(225	)			(12	)			(974	)			(2,037	)
Impairment losses			(38	)			—				—				—				(12	)			(50	)
Foreign currency translation effects			(1,448	)			1,101				—				(20	)			881				514
Balance at the end of period		$	33,123				565				7				701				5,039				39,435

 

33

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Intangible assets of definite life - continued

 

 

		2016
						Industrial
		Extraction				property and				Customer				Mining
		rights				trademarks				relations				projects				Others 1				Total				2015
Balance at beginning of period		$	30,327				622				1,004				805				3,808				36,566				32,940
Business combinations			—				—				—				—				—				—				616
Additions (disposals), net 1			201				(760	)			—				(382	)			343				(598	)			(186	)
Reclassifications (notes 4.1, 4.2 and 12)			—				—				—				—				—				—				1
Amortization for the period			(712	)			(293	)			(658	)			(12	)			(275	)			(1,950	)			(1,572	)
Impairment losses			(6	)			—				—				—				(19	)			(25	)			(10	)
Foreign currency translation effects			5,237				788				(87	)			466				791				7,195				4,777
Balance at the end of period		$	35,047				357				259				877				4,648				41,188				36,566

 

1

As of December 31, 2017 and 2016, “Others” includes the carrying amount of internal-use software of $2,981 and $2,544, respectively. Capitalized direct costs incurred in the development stage of internal-use software, such as professional fees, direct labor and related travel expenses, amounted to $1,422 in 2017, $769 in 2016 and $615 in 2015.

 

15.2)

ANALYSIS OF GOODWILL IMPAIRMENT

As of December 31, 2017 and 2016, goodwill balances allocated by operating segment were as follows:

 

		2017				2016
Mexico		$	7,371				7,529
United States			152,486				162,692
Europe
Spain			10,000				12,316
United Kingdom			6,335				6,371
France			4,796				4,524
Czech Republic			709				583
South, Central America and the Caribbean
Colombia			6,146				6,461
Dominican Republic			279				250
TCL			2,027				—
Rest of South, Central America and the Caribbean 1			985				1,036
Asia, Middle East and Africa
Philippines			1,817				1,911
United Arab Emirates			1,769				1,865
Egypt			232				231
Others
Other reporting segments 2			522				550
		$	195,474				206,319

 

1	This caption refers to the operating segments in the Caribbean, Costa Rica and Panama.

2	This caption is primarily associated with Neoris N.V., CEMEX’s subsidiary involved in the sale of information technology and services.

For purposes of goodwill impairment tests, all cash-generating units within a country are aggregated, as goodwill is allocated at that level. Considering materiality for disclosure purposes, certain balances of goodwill were presented for Rest of South, Central America and the Caribbean, but this does not represent that goodwill was tested at a higher level than for operations in an individual country.

During the last quarter of each year, CEMEX performs its annual goodwill impairment test. Based on these analyses, during 2017, in connection with the Operating Segment in Spain, considering the uncertainty over the improvement indicators affecting the country’s construction industry, and consequently in the expected consumption of cement, ready-mix and aggregates, partially a result of the country’s complex prevailing political environment, which has limited expenditure in infrastructure projects, as well as the uncertainty in the expected price recovery and the effects of increased competition and imports, CEMEX’s management considered a reduction in the horizon of the related cash flows projections from 10 to 5 years and determined that the net book value of such Operating Segment in Spain, exceeded in $1,920 (US$98) the amount of the net present value of projected cash flows. As a result, CEMEX recognized an impairment loss of goodwill for the aforementioned amount as part of “Other expenses, net” in the income statement against the related goodwill balance.

During 2016 and 2015, CEMEX did not determine impairment losses of goodwill.

 

34

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Analysis of goodwill impairment - continued

 

Impairment tests are significantly sensitive to, among other factors, the estimation of future prices of CEMEX’s products, the development of operating expenses, local and international economic trends in the construction industry, the long-term growth expectations in the different markets, as well as the discount rates and the long-term growth rates applied. CEMEX’s cash flow projections to determine the value in use of its CGUs to which goodwill has been allocated consider the use of long-term economic assumptions. CEMEX believes that its discounted cash flow projections and the discount rates used reasonably reflect current economic conditions at the time of the calculations, considering, among other factors that: a) the cost of capital reflects current risks and volatility in the markets; and b) the cost of debt represents the average of industry specific interest rates observed in recent transactions. Other key assumptions used to determine CEMEX’s discounted cash flows are volume and price increases or decreases by main product during the projected periods. Volume increases or decreases generally reflect forecasts issued by trustworthy external sources, occasionally adjusted based on CEMEX’s actual backlog, experience and judgment considering its concentration in certain sectors, while price changes normally reflect the expected inflation in the respective country. Operating costs and expenses during all periods are maintained as a fixed percent of revenues considering historic performance.

CEMEX’s pre-tax discount rates and long-term growth rates used to determine the discounted cash flows in the group of CGUs with the main goodwill balances were as follows:

 

		Discount rates												Growth rates
Groups of CGUs		2017				2016				2015				2017				2016				2015
United States			8.8	%			8.6	%			8.6	%			2.5	%			2.5	%			2.5	%
Spain			9.5	%			9.5	%			9.9	%			1.7	%			1.6	%			1.9	%
Mexico			10.2	%			9.8	%			9.6	%			2.7	%			2.9	%			3.5	%
Colombia			10.5	%			10.0	%			9.8	%			3.7	%			4.0	%			4.0	%
France			9.0	%			9.1	%			9.0	%			1.8	%			1.8	%			1.6	%
United Arab Emirates			10.4	%			10.2	%			10.2	%			3.1	%			3.4	%			3.6	%
United Kingdom			9.0	%			8.8	%			8.8	%			1.7	%			1.9	%			2.3	%
Egypt			11.8	%			11.4	%			12.5	%			6.0	%			6.0	%			4.6	%
Range of rates in other countries			9.1% - 11.7	%			9.1% - 12.8	%			9.0% - 13.8	%			2.3% - 6.8	%			2.2% - 7.0	%			2.4% - 4.3	%

As of December 31, 2017, the discount rates used by CEMEX in its cash flows projections in the countries with the most significant goodwill balances increased slightly as compared to the values determined in 2016. During the year, the funding cost observed in industry slightly decreased from 6.2% in 2016 to 6.1% in 2017 and the risk multiple associated to the Company also decreased from 1.29 in 2016 to 1.26 in 2017. Nonetheless, these decreases were offset by an increase in the risk free rate which change from 2.70% in 2016 to 2.76% in 2017, as well as by overall increases in the sovereign risk rate of the majority of the countries. As of December 31, 2016, the discount rates remained almost flat in most cases as compared to the values determined in 2015. Among other factors, the funding cost observed in industry decreased from 6.9% in 2015 to 6.2% in 2016, and the risk free rate decreased from approximately 3.2% in 2015 to 2.7 % in 2016. Nonetheless, these increases were offset by reductions in 2016 in the country specific sovereign yields in the majority of the countries where CEMEX operates. As of December 31, 2015, the discount rates remained almost flat in most cases as compared to the values determined in previous year. In respect to long-term growth rates, following general practice under IFRS, CEMEX uses country specific rates, which are mainly obtained from the Consensus Economics, a compilation of analysts’ forecast worldwide, or from the International Monetary Fund when the first are not available for a specific country.

In connection with the assumptions included in the table above, CEMEX made sensitivity analyses to changes in assumptions, affecting the value in use of all groups of CGUs with an independent reasonable possible increase of 1% in the pre-tax discount rate, and an independent possible decrease of 1% in the long-term growth rate. In addition, CEMEX performed cross-check analyses for reasonableness of its results using multiples of Operating EBITDA. In order to arrive at these multiples, which represent a reasonableness check of the discounted cash flow models, CEMEX determined a weighted average multiple of Operating EBITDA to enterprise value observed in the industry. The average multiple was then applied to a stabilized amount of Operating EBITDA and the result was compared to the corresponding carrying amount for each group of CGUs to which goodwill has been allocated. CEMEX considered an industry weighted average Operating EBITDA multiple of 9.0 times in 2017, 2016 and 2015. CEMEX’s own Operating EBITDA multiple was 8.5 times in 2017, 8.9 times in 2016 and 8.7 times in 2015. The lowest multiple observed in CEMEX’s benchmark was 6.5 times in 2017, 5.9 times in 2016 and 5.8 times in 2015, and the highest being 18.9 times in 2017, 18.3 times in 2016 and 18.0 times in 2015.

As of December 31, 2017, 2016 and 2015, except for the Operating Segment in Spain described above, in which CEMEX determined an impairment loss of goodwill in 2017, none of the other CEMEX’s sensitivity analyses resulted in a potential impairment risk in CEMEX’s operating segments. CEMEX continually monitors the evolution of the specific CGUs to which goodwill has been allocated that have presented relative goodwill impairment risk in any of the reported periods and, in the event that the relevant economic variables and the related cash flows projections would be negatively affected, it may result in a goodwill impairment loss in the future.

 

35

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Analysis of goodwill impairment - continued

 

As of December 31, 2017 and 2016, goodwill allocated to the United States accounted for approximately 78% and 79%, respectively, of CEMEX’s total amount of consolidated goodwill. In connection with CEMEX’s determination of value in use relative to its groups of CGUs in the United States in the reported periods, CEMEX has considered several factors, such as the historical performance of such operating segment, including the operating results in recent years, the long-term nature of CEMEX’s investment, the signs of recovery in the construction industry over the last years, the significant economic barriers for new potential competitors considering the high investment required, and the lack of susceptibility of the industry to technology improvements or alternate construction products, among other factors. CEMEX has also considered recent developments in its operations in the United States, such as the decrease in ready-mix concrete volumes of approximately 1% in 2017, affected by the hurricanes occurred in Texas and Florida during the year, and the increases of 1% in 2016 and 13% in 2015, and the increases in ready-mix concrete prices of approximately 1% in 2017, 1% in 2016 and 5% in 2015, which are key drivers for cement consumption and CEMEX’s profitability, and which trends are expected to continue over the next few years, as anticipated in CEMEX’s cash flow projections.

 

16)	FINANCIAL INSTRUMENTS

 

16.1)

SHORT-TERM AND LONG-TERM DEBT

As of December 31, 2017 and 2016, CEMEX´s consolidated debt summarized by interest rates and currencies, was as follow:

 

		2017												2016
		Short-term				Long-term				Total				Short-term				Long-term				Total
Floating rate debt		$	7,282				53,389				60,671			$	519				64,550				65,069
Fixed rate debt			9,691				123,633				133,324				703				170,466				171,169
		$	16,973				177,022				193,995			$	1,222				235,016				236,238
Effective rate 1
Floating rate			6.1	%			3.0	%							9.7	%			4.4	%
Fixed rate			4.8	%			5.7	%							4.4	%			6.5	%

 

		2017																2016
Currency		Short-term				Long-term				Total				Effective rate 1				Short-term				Long-term				Total				Effective rate 1
Dollars		$	6,206				107,508				113,714				5.9	%		$	114				179,675				179,789				6.3	%
Euros			9,705				54,906				64,611				3.5	%			50				55,292				55,342				4.3	%
Pounds			—				9,141				9,141				2.6	%			—				—				—				—
Philippine pesos			—				5,408				5,408				4.6	%			—				—				—				—
Pesos			—				—				—				—				648				—				648				4.4	%
Other currencies			1,062				59				1,121				6.2	%			410				49				459				10.2	%
		$	16,973				177,022				193,995							$	1,222				235,016				236,238

 

1	In 2017 and 2016, represents the weighted average interest rate of the related debt agreements.

As of December 31, 2017 and 2016, CEMEX´s consolidated debt summarized by type of instrument, was as follow:

 

2017		Short-term				Long-term				2016		Short-term				Long-term
Bank loans										Bank loans
Loans in foreign countries, 2018 to 2022		$	910				5,439			Loans in foreign countries, 2017 to 2022		$	261				1,090
Syndicated loans, 2018 to 2020			—				50,132			Syndicated loans, 2017 to 2020			36				57,032
			910				55,571						297				58,122
Notes payable										Notes payable
Notes payable in Mexico, 2018			—				—			Notes payable in Mexico, 2017			—				648
Medium-term notes, 2018 to 2026			224				133,949			Medium-term notes, 2017 to 2026			—				173,656
Other notes payable, 2018 to 2025			154				3,187			Other notes payable, 2017 to 2025			173				3,342
			378				137,136						173				177,646
Total bank loans and notes payable			1,288				192,707			Total bank loans and notes payable			470				235,768
Current maturities			15,685				(15,685	)		Current maturities			752				(752	)
		$	16,973				177,022					$	1,222				235,016

As of December 31, 2017 and 2016, discounts, fees and other direct costs incurred in the issuance of CEMEX’s outstanding notes payable and bank loans for US$84 and US$84, respectively, adjust the balance of notes payable and are amortized to financing expense over the maturity of the related debt instruments.

 

36

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Consolidated debt - continued

 

Changes in consolidated debt for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

		2017				2016				2015
Debt at beginning of year		$	236,238				229,343				205,834
Proceeds from new debt instruments			93,620				48,748				52,764
Debt repayments			(128,411	)			(85,798	)			(64,237	)
Foreign currency translation and inflation effects			(7,452	)			43,945				34,982
Debt at end of year		$	193,995				236,238				229,343

As of December 31, 2017 and 2016, as presented in the table above of debt by type of instrument, approximately 29% and 25%, respectively, of CEMEX’s total indebtedness, was represented by bank loans, of which the most significant portion corresponded to those balances under CEMEX’s facilities agreement entered into with 20 financial institutions on July 19, 2017 for an amount in different currencies equivalent to approximately US$4,050 at the origination date (the “2017 Credit Agreement”) which was mainly used to refinance the approximately US$3,680 outstanding under the facilities agreement dated September 29, 2014, as amended several times in 2015 and 2016 (the “2014 Credit Agreement”). In addition, as part of CEMEX’s currency diversification in its debt portfolio described in note 16.5, during 2017, CEMEX replaced debt denominated in dollars for US$280 pursuant to the negotiation of a bank loan denominated in Philippine pesos.

In addition, as of December 31, 2017 and 2016, as presented in the table above of debt by type of instrument, approximately 71% and 75%, respectively, of CEMEX’s total indebtedness, was represented by notes payable, of which, the most significant portion was long-term in both periods. As of December 31, 2017 and 2016, CEMEX’s long-term notes payable are detailed as follows:

 

Description		Date of issuance		Issuer 1, 2		Currency				Principal amount				Rate 1				Maturity Date		Repurchased amount US$				Outstanding amount 3 US$				2017				2016
April 2026 Notes 8		16/Mar/16		CEMEX, S.A.B. de C.V.			Dollar				1,000				7.75	%		16/Apr/26			—				1,000			$	19,568				20,631
July 2025 Notes		02/Apr/03		CEMEX Materials LLC			Dollar				150				7.70	%		21/Jul/25			—				150				3,061				3,249
March 2025 Notes		03/Mar/15		CEMEX, S.A.B. de C.V.			Dollar				750				6.125	%		05/May/25			—				750				14,691				15,488
January 2025 Notes		11/Sep/14		CEMEX, S.A.B. de C.V.			Dollar				1,100				5.70	%		11/Jan/25			(29	)			1,071				20,988				22,124
December 2024 Notes 4		05/Dec/17		CEMEX, S.A.B. de C.V.			Euro				650				2.75	%		05/Dec/24			—				780				15,257				—
June 2024 Notes 8		14/Jun/16		CEMEX Finance LLC			Euro				400				4.625	%		15/Jun/24			—				480				9,390				8,665
April 2024 Notes		01/Apr/14		CEMEX Finance LLC			Dollar				1,000				6.00	%		01/Apr/24			(10	)			990				18,924				19,886
March 2023 Notes		03/Mar/15		CEMEX, S.A.B. de C.V.			Euro				550				4.375	%		05/Mar/23			—				660				12,938				11,948
October 2022 Notes 5, 8		12/Oct/12		CEMEX Finance LLC			Dollar				1,500				9.375	%		12/Oct/22			(1,500	)			—				—				21,738
January 2022 Notes 5		11/Sep/14		CEMEX, S.A.B. de C.V.			Euro				400				4.75	%		11/Jan/22			—				480				9,434				8,696
April 2021 Notes 6		01/Apr/14		CEMEX Finance LLC			Euro				400				5.25	%		01/Apr/21			(447	)			—				—				8,679
January 2021 Notes 7, 8		02/Oct/13		CEMEX, S.A.B. de C.V.			Dollar				1,000				7.25	%		15/Jan/21			(659	)			341				6,606				14,845
December 2019 Notes 5, 7, 8		12/Aug/13		CEMEX, S.A.B. de C.V.			Dollar				1,000				6.50	%		10/Dec/19			(1,000	)			—				—				14,471
October 2018 Variable Notes 8		02/Oct/13		CEMEX, S.A.B. de C.V.			Dollar				500				L+475bps			15/Oct/18			(187	)			313				6,154				6,485
November 2017 Notes		30/Nov/07		CEMEX, S.A.B. de C.V.			Peso				627				4.40	%		17/Nov/17			(37	)			—				—				648
Other notes payable																													125				93
																												$	137,136				177,646

 

1

In all applicable cases the issuer refers to CEMEX España, S.A. acting through its Luxembourg Branch. The letter “L” included above refers to LIBOR, which represents the London Inter-Bank Offered Rate, variable rate used in international markets for debt denominated in U.S. dollars. As of December 31, 2017 and 2016, 3-Month LIBOR rate was 1.6943% and 0.9979%, respectively. The contraction “bps” means basis points. One hundred basis points equal 1%.

2

Unless otherwise indicated, all issuances are fully and unconditionally guaranteed by CEMEX, S.A.B. de C.V., CEMEX México, S.A. de C.V., CEMEX Concretos, S.A. de C.V., Empresas Tolteca de México, S.A. de C.V., New Sunward Holding B.V., CEMEX España, S.A., CEMEX Asia, B.V., CEMEX Corp., CEMEX Egyptian Investments, B.V., CEMEX Finance LLC, CEMEX France Gestion, (S.A.S.), CEMEX Research Group AG and CEMEX UK. CEMEX Egyptian Investments II, B.V. and CEMEX Shipping B.V. originally guaranteed the issuances listed above but were merged into CEMEX España, S.A. on October 3, 2016.

3	Presented net of all outstanding notes repurchased and held by CEMEX’s subsidiaries.

4	On December 5, 2017, CEMEX issued €650 of 2.75% senior secured notes due December 5, 2024 (the “December 2024 Notes”). The proceeds will be used to repay other indebtedness.

5

In connection with tender offers or the execution of call notice, as applicable, on December 10, 2017, CEMEX repurchased the outstanding amount of the December 2019 Notes for an aggregate principal amount of US$611; and on September 25, 2017, CEMEX repurchased US$701 aggregate principal amount of the October 2022 Notes. The notes of the holders that did not tender in the offer for US$343 were redeemed on October 12, 2017. In addition, on November 28, 2017, CEMEX announced its intention to redeem the total outstanding amount of the January 2022 Notes for an aggregate principal amount of €400 (US$480 or $9,432) that would be payable on January 10, 2018 and are presented as current maturities of long-term debt in the statement of financial position as of December 31, 2017 (note 26).

6	On May 31, 2017, by means of a tender offer for the April 2021 Notes, CEMEX redeemed the remaining €400 of aggregate principal amount of such notes.

 

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Consolidated debt - continued

 

7	On February 28, 2017, by means of a tender offer, CEMEX repurchased US$385 aggregate principal amount of the January 2021 Notes and US$90 of the December 2019 Notes.

8

During 2016, by means of tender offers, using available funds from the issuance of the April 2026 Notes, the June 2024 Notes, the sale of assets and cash flows provided by operating activities, CEMEX completed the purchase of US$739 principal amount of the October 2022 Notes, the purchase of US$178 principal amount of the October 2018 Variable Notes, the purchase of US$219 principal amount of the December 2019 Notes, and the purchase of US$242 principal amount of the January 2021 Notes.

During 2017, 2016 and 2015, as a result of the debt transactions incurred including exchange offers and tender offers to replace and/or repurchase existing debt instruments, CEMEX paid combined premiums, fees and issuance costs for US$251 ($4,930), US$196 ($4,061) and US$61 ($1,047), respectively, of which US$212 ($4,160) in 2017, US$151 ($3,129) in 2016 and US$35 ($604) in 2015 are associated with the extinguished portion of the exchanged or repurchased notes and were recognized in the statement of operations in each year within “Financial expense”. In addition, US$39 ($770) in 2017, US$45 ($932) in 2016 and US$26 ($443) in 2015, corresponding to issuance costs of new debt and/or the portion of the combined premiums, fees and issuance costs treated as a refinancing of the old instruments by considering that: a) the relevant economic terms of the old and new notes were not substantially different; and b) the final holders of the new notes were the same of such portion of the old notes; adjusted the carrying amount of the new debt instruments, and are amortized over the remaining term of each instrument. Moreover, proportional fees and issuance costs related to the extinguished debt instruments for US$16 ($310) in 2017, US$37 ($767) in 2016 and US$31 ($541) in 2015 that were pending for amortization were recognized in the statement of operations of each year as part of “Financial expense.”

The maturities of consolidated long-term debt as of December 31, 2017, were as follows:

 

		2017
2019		$	30
2020			10,175
2021			26,948
2022			19,594
2023 and thereafter.			120,275
		$	177,022

As of December 31, 2017, CEMEX had the following lines of credit, the majority of which are uncommitted, at annual interest rates ranging between 1.25% and 6.50%, depending on the negotiated currency:

 

		Lines of credit				Available
Other lines of credit in foreign subsidiaries		$	9,506				7,237
Other lines of credit from banks			9,309				8,169
		$	18,815				15,406

2017 Credit Agreement, 2014 Credit Agreement and Facilities Agreement

As mentioned above, on July 19, 2017, the Parent Company and certain subsidiaries entered into the 2017 Credit Agreement with 20 financial institutions for an amount in different currencies equivalent to US$4,050 at the origination date, which proceeds were used to refinance in full the US$3,680 then outstanding under the 2014 Credit Agreement and other debt repayments, allowing CEMEX to increase the average life of its syndicated bank debt to approximately 4.3 years with a final maturity in July 2022. All tranches under the 2017 Credit Agreement have substantially the same terms, including an applicable margin over the benchmark interest rate of between 125 to 350 basis points, depending on CEMEX’s consolidated debt leverage ratio; and the tranches share the same guarantors and collateral package as the original tranches under the 2014 Credit Agreement and other secured debt obligations of CEMEX. As of December 31, 2017, total commitments under the 2017 Credit Agreement included US$2,746 ($53,959), €741 (US$889 or $17,469), £344 (US$465 or $9,137), out of which about US$1,135 ($22,303) were in a revolving credit facility. All tranches under the 2017 Credit Agreement amortize in five equal semi-annual payments beginning in July 2020, except for the commitments under the revolving credit which have a five-year maturity.

The original proceeds from the 2014 Credit Agreement of US$1,350 were fully used to repay debt under the then existing facilities agreement entered into on September 17, 2012, as amended from time to time (the “Facilities Agreement”). On July 30, 2015, after several repayments under the Facilities Agreement using proceeds from other debt issuances, CEMEX repaid in full the then total amount outstanding of US$1,937 ($33,375) under the Facilities Agreement with additional funds from 21 financial institutions, which joined the 2014 Credit Agreement under new tranches, allowing CEMEX to increase the then average life of its syndicated bank debt to approximately 4 years as of such date. On November 30, 2016, CEMEX prepaid US$373 ($7,729) corresponding to the September 2017 amortization under the 2014 Credit Agreement and agreed with the lenders to exchange current funded commitments for US$664 maturing in 2018 into the revolving facility, maintaining their original amortization schedule and the same terms and conditions.

As of December 31, 2016, total commitments under the 2014 Credit Agreement included US$2,826 ($58,555) and €746 (US$785 or $16,259), out of which about US$1,413 ($29,277) were in a revolving credit facility. Considering all commitments, the amortization profile was of US$783 in 2018, US$883 in 2019 and US$1,096 in 2020.

 

38

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

2017 Credit Agreement, 2014 Credit Agreement and Facilities Agreement - continued

 

All tranches under the 2017 Credit Agreement have substantially the same terms, including an applicable margin over LIBOR or EURIBOR, as applicable, of between 125 to 350 basis points, depending on the leverage ratio (as defined below) of CEMEX, as follows:

 

Consolidated leverage ratio		Applicable margin
> = 5.50x		350 bps
< 5.00x > 4.50x		300 bps
< 4.50x > 4.00x		250 bps
< 4.00x > 3.50x		212.5 bps
< 3.50x > 3.00x		175 bps
< 3.00x > 2.50x		150 bps
< 2.50x		125 bps

The 2017 Credit Agreement also modified the consolidated leverage ratio and consolidated coverage ratio limits as described below in the financial covenants section.

For the years ended December 31, 2017 and 2016, under both the 2017 Credit Agreement and the 2014 Credit Agreement, CEMEX was required to comply with the following thresholds: (a) the aggregate amount allowed for capital expenditures cannot exceed US$1,000 per year excluding certain capital expenditures, and, joint venture investments and acquisitions by CHP and its subsidiaries and CLH and its subsidiaries, which capital expenditures, joint venture investments and acquisitions at any time then incurred are subject to a separate aggregate limit for each of CHP and CLH of US$500 (or its equivalent); and (b) the amounts allowed for permitted acquisitions and investments in joint ventures cannot exceed US$400 per year. Nonetheless, such limitations do not apply if capital expenditures or acquisitions do not exceed free cash flow generation, are funded with equity or asset disposals proceeds.

The debt under the 2017 Credit Agreement and previously under the 2014 Credit Agreement is guaranteed by CEMEX México, S.A. de C.V., CEMEX Concretos, S.A. de C.V., Empresas Tolteca de México, S.A. de C.V., New Sunward Holding B.V., CEMEX España, S.A., CEMEX Asia, B.V., CEMEX Corp., CEMEX Egyptian Investments, B.V., CEMEX Finance LLC, CEMEX France Gestion, (S.A.S.), CEMEX Research Group AG and CEMEX UK. In addition, the debt under such agreements (together with all other senior capital markets debt issued or guaranteed by CEMEX, and certain other precedent facilities) is also secured by a first-priority security interest in: (a) substantially all the shares of CEMEX México, S.A. de C.V., CEMEX Operaciones México, S.A. de C.V, New Sunward Holding B.V., CEMEX Trademarks Holding Ltd. and CEMEX España, S.A. (the “Collateral”); and (b) all proceeds of such Collateral. CEMEX Egyptian Investments II, B.V. and CEMEX Shipping, B.V. originally guaranteed the 2014 Credit Agreement but were merged into CEMEX España, S.A. in October 2016.

In addition to the restrictions mentioned above, and subject in each case to the permitted negotiated amounts and other exceptions, CEMEX is also subject to a number of negative covenants that, among other things, restrict or limit its ability to: (i) create liens; (ii) incur additional debt; (iii) change CEMEX’s business or the business of any obligor or material subsidiary (in each case, as defined in the 2017 Credit Agreement; (iv) enter into mergers; (v) enter into agreements that restrict its subsidiaries’ ability to pay dividends or repay intercompany debt; (vi) acquire assets; (vii) enter into or invest in joint venture agreements; (viii) dispose of certain assets; (ix) grant additional guarantees or indemnities; (x) declare or pay cash dividends or make share redemptions while the Leverage Ratio remains above 4.0 times; and (xi) enter into speculative derivatives transactions. The 2017 Credit Agreement contains a number of affirmative covenants that, among other things, require CEMEX to provide periodic financial information to its lenders. However, a number of those covenants and restrictions will automatically cease to apply or become less restrictive if CEMEX so elects when: (i) CEMEX’s Leverage Ratio (as defined hereinafter) for the two most recently completed quarterly testing periods is less than or equal to 3.75 times; and (ii) no default under the 2017 Credit Agreement is continuing. At that point the Leverage Ratio must not exceed 3.75 times. Restrictions that will cease to apply when CEMEX satisfies such conditions include the capital expenditure limitations mentioned above and several negative covenants, including limitations on CEMEX’s ability to declare or pay cash dividends and distributions to shareholders, limitations on CEMEX’s ability to repay existing financial indebtedness, certain asset sale restrictions, and restrictions on exercising call options in relation to any perpetual bonds CEMEX issues. At such time, several baskets and caps relating to negative covenants will also increase, including permitted financial indebtedness, permitted guarantees and limitations on liens. However, CEMEX cannot assure that it will be able to meet the conditions for these restrictions to cease to apply prior to the final maturity date under the 2017 Credit Agreement.

In addition, the 2017 Credit Agreement, and previously the 2014 Credit Agreement, contains events of default, some of which may occur and are outside of CEMEX’s control such as expropriation, sequestration and availability of foreign exchange. As of December 31, 2017 and 2016, CEMEX was not aware of any event of default. CEMEX cannot assure that in the future it will be able to comply with the restrictive covenants and limitations contained in the 2017 Credit Agreement. CEMEX’s failure to comply with such covenants and limitations could result in an event of default, which could materially and adversely affect CEMEX’s business and financial condition.

 

39

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Financial Covenants

The 2017 Credit Agreement and previously the 2014 Credit Agreement requires CEMEX the compliance with financial ratios, which mainly include: a) the consolidated ratio of debt to Operating EBITDA (the “Leverage Ratio”); and b) the consolidated ratio of Operating EBITDA to interest expense (the “Coverage Ratio”). These financial ratios are calculated according to the formulas established in the debt contracts using the consolidated amounts under IFRS. As of December 31, 2017, CEMEX must comply with a Coverage Ratio and a Leverage Ratio for each period of four consecutive fiscal quarters as follows:

 

Period		Coverage ratio		Period		Leverage ratio
For the period ending on December 31, 2017 up to and including the period ending on March 31, 2020		> = 2.50		For the period ending on December 31, 2017 up to and including the period ending on March 31, 2018		< = 5.25
				For the period ending on June 30, 2018 up to and including the period ending on September 30, 2018		< = 5.00
For the period ending on June 30, 2020 and each subsequent reference period		> = 2.75		For the period ending on December 31, 2018 up to and including the period ending on March 31, 2019		< = 4.75
				For the period ending on June 30, 2019 up to and including the period ending on March 31, 2020		< = 4.50
				For the period ending on June 30, 2020 and each subsequent reference period		< = 4.25

CEMEX’s ability to comply with these ratios may be affected by economic conditions and volatility in foreign exchange rates, as well as by overall conditions in the financial and capital markets. For the compliance periods ended as of December 31, 2017, 2016 and 2015, taking into account the 2017 Credit Agreement and the 2014 Credit Agreement, as applicable, CEMEX was in compliance with the financial covenants imposed by its debt contracts. The main consolidated financial ratios as of December 31, 2017, 2016 and 2015 were as follows:

 

				Consolidated financial ratios
				2017				2016				2015
Leverage ratio 1, 2		Limit			< = 5.25				< = 6.00				< = 6.00
		Calculation			3.85				4.22				5.21
Coverage ratio 3		Limit			> = 2.50				> = 1.85				> = 1.85
		Calculation			3.46				3.18				2.61

 

1

The leverage ratio is calculated in pesos by dividing “Funded debt” by pro forma Operating EBITDA for the last twelve months as of the calculation date. Funded debt equals debt, as reported in the statement of financial position, excluding finance leases, components of liability of convertible subordinated notes, plus perpetual debentures and guarantees, plus or minus the fair value of derivative financial instruments, as applicable, among other adjustments.

2

Pro forma Operating EBITDA represents, all calculated in pesos, Operating EBITDA for the last twelve months as of the calculation date, plus the portion of Operating EBITDA referring to such twelve-month period of any significant acquisition made in the period before its consolidation in CEMEX, minus Operating EBITDA referring to such twelve-month period of any significant disposal that had already been liquidated.

3	The coverage ratio is calculated in pesos using the amounts from the financial statements, by dividing the pro forma Operating EBITDA by the financial expense for the last twelve months as of the calculation date. Financial expense includes interest accrued on the perpetual debentures.

CEMEX will classify all of its outstanding debt as current debt in its statement of financial position if: 1) as of any measurement date CEMEX fails to comply with the aforementioned financial ratios; or 2) the cross default clause that is part of the 2017 Credit Agreement is triggered by the provisions contained therein; 3) as of any date prior to a subsequent measurement date CEMEX expects not to be in compliance with such financial ratios in the absence of: a) amendments and/or waivers covering the next succeeding 12 months; b) high probability that the violation will be cured during any agreed upon remediation period and be sustained for the next succeeding 12 months; and/or c) a signed refinancing agreement to refinance the relevant debt on a long-term basis. Moreover, concurrent with the aforementioned classification of debt in the short-term, the noncompliance of CEMEX with the financial ratios agreed upon pursuant to the 2017 Credit Agreement or, in such event, the absence of a waiver of compliance or a negotiation thereof, after certain procedures upon CEMEX’s lenders’ request, they would call for the acceleration of payments due under the 2017 Credit Agreement. That scenario will have a material adverse effect on CEMEX’s liquidity, capital resources and financial position.

 

40

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

16.2)

OTHER FINANCIAL OBLIGATIONS

As of December 31, 2017 and 2016, other financial obligations in the consolidated statement of financial position are detailed as follows:

 

				2017												2016
				Short-term				Long-term				Total				Short-term				Long-term				Total
I.		Convertible subordinated notes due 2020		$	—				9,985				9,985			$	—				10,417				10,417
II.		Convertible subordinated notes due 2018			7,115				—				7,115				—				13,575				13,575
III.		Mandatorily convertible securities 2019			323				371				694				278				689				967
IV.		Liabilities secured with accounts receivable			11,313				—				11,313				11,095				—				11,095
V.		Finance leases			611				2,503				3,114				285				1,291				1,576
				$	19,362				12,859				32,221			$	11,658				25,972				37,630

Financial instruments convertible into CEMEX’s shares contain components of liability and equity, which are recognized differently depending upon the currency in which the instrument is denominated and the functional currency of the issuer (note 2.6).

 

I.	Optional convertible subordinated notes due 2020

During 2015, the Parent Company issued US$521 aggregate principal amount of 3.72% convertible subordinated notes due in March 2020 (the “2020 Convertible Notes”). The 2020 Convertible Notes were issued: a) US$200 as a result of the exercise in March 13, 2015 of US$200 notional amount of Contingent Convertible Units (“CCUs”) (described below), and b) US$321 as a result of the exchange with certain investors in May 2015, which together with early conversions, resulted in settlement of US$626 aggregate principal amount of 3.25% convertible subordinated notes due in 2016 (the “2016 Convertible Notes”) held by such investors and the issuance and delivery by the Parent Company of an estimated 42 million ADSs, which included a number of additional ADSs issued to the holders as non-cash inducement premiums. The 2020 Convertible Notes, which are subordinated to all of CEMEX’s liabilities and commitments, are convertible into a fixed number of the Parent Company’s ADSs at any time at the holder’s election and are subject to antidilution adjustments. The difference at the exchange date between the fair value of the 2016 Convertible Notes and the 42 million ADSs against the fair value of the 2020 Convertible Notes represented a loss of $365 recognized in 2015 as part of “Financial income and other items, net”. The aggregate fair value of the conversion option as of the issuance dates which amounted to $199 was recognized in other equity reserves. As of December 31, 2017 and 2016, the conversion price per ADS was approximately 11.01 dollars and 11.45 dollars, respectively. After antidilution adjustments, the conversion rate as of December 31, 2017 and 2016 was 90.8592 ADS and 87.3646 ADS per each 1 thousand dollars principal amount of such notes, respectively.

In October 2014, in connection with US$204 remaining principal amount of 4.875% Optional Convertible Subordinated Notes due in March 2015 (the “2015 Convertible Notes”), the Parent Company issued US$200 notional amount of CCUs at an annual rate of 3.0% on the notional amount, by means of which, in exchange for coupon payments, CEMEX secured the refinancing for any of the 2015 Convertible Notes that would mature without conversion up to US$200 of the principal amount. Pursuant to the CCUs, holders invested the US$200 in U.S. treasury bonds, and irrevocably agreed to apply such investment in March 2015, if necessary, to subscribe new convertible notes of the Parent Company for up to US$200. In March 2015, CEMEX exercised the CCUs, issued US$200 principal amount of the 2020 Convertible Notes to the holders of the CCUs and repaid the US$204 remaining principal amount of the 2015 Convertible Notes.

 

II.	Optional convertible subordinated notes due in 2016 and 2018

On March 15, 2011, the Parent Company closed the offering of US$978 principal amount of the 2016 Convertible Notes and US$690 principal amount of 3.75% convertible subordinated notes due in 2018 (the “2018 Convertible Notes”). The notes were subordinated to all of CEMEX’s liabilities and commitments. The notes are convertible into a fixed number of the Parent Company’s ADSs and are subject to antidilution adjustments. After the exchange of notes described in the paragraph above, the US$352 of the 2016 Convertible Notes that remained outstanding, were repaid in cash at their maturity on March 15, 2016. On June 19, 2017, the Parent Company agreed with certain institutional holders the early conversion of US$325 of the 2018 Convertible Notes in exchange for the issuance of approximately 43 million ADSs, which included the number of additional ADSs issued to the holders as non-cash inducement premiums. As a result of the early conversion, the liability component of the converted notes of $5,468 was reclassified from other financial obligations to other equity reserves. In addition, the Parent Company increased common stock for $4 and additional paid-in capital for $7,059 against other equity reserves, and recognized expense for the inducement premiums paid in shares of $769, recognized within “Financial income and others items, net.” in the income statement for 2017. As of December 31, 2017 and 2016, the conversion price per ADS of the notes then outstanding was approximately 8.57 dollars and 8.92 dollars, respectively. After antidilution adjustments, the conversion rate as of December 31, 2017 and 2016 was 116.6193 ADS and 112.1339 ADS, respectively, per each 1 thousand dollars principal amount of such notes. Concurrent with the offering of the 2016 and 2018 Convertible Notes, a portion of the net proceeds from this transaction were used by CEMEX to fund the purchase of capped call options, which when purchased were generally expected to reduce the potential dilution cost to CEMEX upon the potential conversion of such notes (note 16.4).

 

III.	Mandatorily convertible securities due in 2019

In December 2009, the Parent Company exchanged debt into US$315 principal amount of 10% mandatorily convertible securities in pesos with maturity in 2019 (the “2019 Mandatorily Convertible Securities”). Reflecting antidilution adjustments, the notes will be converted at maturity or earlier if the price of the CPO reaches $26.22 into approximately 236 million CPOs at a conversion price of $17.48 per CPO. Holders have an option to voluntarily convert their securities on any interest payment date into CPOs. The conversion option embedded in these securities is treated as a stand-alone derivative liability at fair value through the statement of operations (note 16.4).

 

41

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Other financial obligations - continued

 

IV.	Liabilities secured with accounts receivable

As mentioned in note 9, as of December 31, 2017 and 2016, in connection with trade receivables sold under CEMEX’s outstanding programs, the funded amounts of such receivables sold are recognized in “Other financial obligations” in the statement of financial position.

 

V.	Finance leases

CEMEX has several operating and administrative assets, including buildings and mobile equipment, under finance lease contracts. Future payments associated with these contracts are presented in note 23.5.

 

16.3)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial assets and liabilities

The carrying amounts of cash, trade accounts receivable, other accounts receivable, trade accounts payable, other accounts payable and accrued expenses, as well as short-term debt, approximate their corresponding estimated fair values due to the short-term maturity and revolving nature of these financial assets and liabilities. Cash equivalents and certain long-term investments are recognized at fair value, considering to the extent available, quoted market prices for the same or similar instruments. The estimated fair value of CEMEX´s long-term debt is level 2, and is either based on estimated market prices for such or similar instruments, considering interest rates currently available for CEMEX to negotiate debt with the same maturities, or determined by discounting future cash flows using market-based interest rates currently available to CEMEX. As of December 31, 2017 and 2016, the carrying amounts of financial assets and liabilities and their respective fair values were as follows:

 

		2017								2016
		Carrying amount				Fair value				Carrying amount				Fair value
Financial assets
Derivative instruments (notes 13.2 and 16.4)		$	794				794			$	1,900				1,900
Other investments and non-current accounts receivable (note 13.2)			4,964				4,964				5,220				5,220
		$	5,758				5,758			$	7,120				7,120
Financial liabilities
Long-term debt (note 16.1)		$	177,022				184,220			$	235,016				241,968
Other financial obligations (note 16.2)			12,859				13,381				25,972				27,419
Derivative instruments (notes 16.4 and 17)			402				402				818				818
		$	190,283				198,003			$	261,806				270,205

Fair Value Hierarchy

As of December 31, 2017 and 2016, assets and liabilities carried at fair value in the consolidated statements of financial position are included in the following fair value hierarchy categories:

 

2017		Level 1				Level 2				Level 3				Total
Assets measured at fair value
Derivative instruments (notes 13.2 and 16.4)		$	—				794				—				794
Investments available-for-sale (note 13.2)			275				—				—				275
Investments held for trading (note 13.2)			—				77				—				77
		$	275				871				—				1,146
Liabilities measured at fair value
Derivative instruments (notes 16.4 and 17)		$	—				402				—				402
2016		Level 1				Level 2				Level 3				Total
Assets measured at fair value
Derivative instruments (notes 13.2 and 16.4)		$	—				1,900				—				1,900
Investments available-for-sale (note 13.2)			491				—				—				491
Investments held for trading (note 13.2)			—				157				—				157
		$	491				2,057				—				2,548
Liabilities measured at fair value
Derivative instruments (notes 16.4 and 17)		$	—				818				—				818

 

42

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

16.4)

DERIVATIVE FINANCIAL INSTRUMENTS

During the reported periods, in compliance with the guidelines established by its Risk Management Committee, the restrictions set forth by its debt agreements and its hedging strategy (note 16.5), CEMEX held derivative instruments, with the objectives of, as the case may be of: a) changing the risk profile or fixed the price of fuels and electric energy; b) foreign exchange hedging; c) hedge of forecasted transactions; and d) other corporate purposes. As of December 31, 2017 and 2016, the notional amounts and fair values of CEMEX’s derivative instruments were as follows:

 

		2017								2016
(U.S. dollars millions)		Notional amount				Fair value				Notional amount				Fair value
I.   Net investment hedge		US$	1,160				47				—				—
II. Foreign exchange forwards related to forecasted transactions			381				3				80				—
III.  Equity forwards on third party shares			168				7				—				—
IV.  Interest rate swaps			137				16				147				23
V. Fuels price hedging			72				20				77				15
VI.  2019 Mandatorily Convertible Securities and options on the Parent Company’s own shares			—				(20	)			576				26
		US$	1,918				73				880				64

The fair values determined by CEMEX for its derivative financial instruments are Level 2. There is no direct measure for the risk of CEMEX or its counterparties in connection with the derivative instruments. Therefore, the risk factors applied for CEMEX’s assets and liabilities originated by the valuation of such derivatives were extrapolated from publicly available risk discounts for other public debt instruments of CEMEX and its counterparties.

The caption “Financial income and other items, net” includes gains and losses related to the recognition of changes in fair values of the derivative instruments during the applicable period and that represented net gains of US$9 ($161) in 2017, net gains of US$17 ($317) in 2016 and net losses of US$173 ($2,981) in 2015, respectively.

The estimated fair value of derivative instruments fluctuates over time and is determined by measuring the effect of future relevant economic variables according to the yield curves shown in the market as of the reporting date. These values should be analyzed in relation to the fair values of the underlying transactions and as part of CEMEX’s overall exposure attributable to fluctuations in interest rates and foreign exchange rates. The notional amounts of derivative instruments do not represent amounts of cash exchanged by the parties, and consequently, there is no direct measure of CEMEX’s exposure to the use of these derivatives. The amounts exchanged are determined based on the basis of the notional amounts and other terms included in the derivative instruments.

 

I.	Net investment hedge

During March 2017, CEMEX began the implementation of a long-term US$ / MXP foreign exchange forward program which notional amount is planned to be up to US$1,250, with monthly revolving settlement dates from 1 to 24 months. The average life of these contracts will be approximately one year. As of December 31, 2017, there are forward contract with a notional amount of US$1,160. For accounting purposes under IFRS, CEMEX has designated this program as a hedge of CEMEX’s net investment in Mexican pesos, pursuant to which changes in fair market value of these instruments are recognized as part of other comprehensive income in equity. For the year ended December 31, 2017, these contracts generated gains of US$6 ($110).

 

II.	Foreign exchange forwards related to forecasted transactions

As of December 31, 2017, CEMEX held US$ / Euro foreign exchange forward contracts maturing in January 10, 2018, negotiated to maintain the Euro value of a portion of the 2024 December Notes issued in Euros during December 2017, after converting a portion of these proceeds in U.S. dollar to settle other indebtedness in dollars in December 2017, but as the final use of these proceeds was projected to be the settlement of other indebtedness in Euros during 2018 (note 16.1). In addition, as of December 31, 2016, CEMEX held US$ / MXP foreign exchange forward contracts maturing in February 2017, negotiated to hedge the U.S. dollar value of the proceeds from the expected sale of pumping assets in Mexico (note 4.3). For the years ended December 31, 2017, 2016 and 2015, the results of these instruments related to forecasted transactions, including the effects resulting from positions entered and settled during the year, generated losses of US$17 ($337) in 2017, gains of US$10 ($186) in 2016 and gains of US$26 ($448) in 2015, recognized within “Financial income and other items, net” in the income statement.

 

III.	Equity forwards on third party shares

As of December 31, 2017, in connection with the definitive sale of CEMEX’s remaining GCC shares in September 2017 to two financial institutions which hold all corporate rights and control the aforementioned shares (note 13.1), CEMEX negotiated equity forward contracts to be settled in cash maturing in March 2019 over the price of approximately 31.4 million GCC shares. During 2017, changes in the fair value of these instruments generated losses of US$24 ($463) recognized within “Financial income and other items, net” in the income statement.

 

43

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Derivative financial instruments - continued

 

In October 2015, Axtel, a Mexican telecommunications company traded in the MSE, announced its merger with Alestra, a Mexican entity provider of information technology solutions and member of Alfa Group, which was effective beginning February 15, 2016. In connection with this announcement, considering that upon completion of the merger any shares of Axtel would be exchanged proportionately according to the new ownership interests for shares in the new merged entity that remained public, the business outlook of such new entity and that CEMEX held an existing investment in Axtel prior to the merger, on January 6, 2016, CEMEX settled in cash a forward contract it maintained over the price of 59.5 million CPOs of Axtel maturing in October 2016 and received US$4, net of transaction costs. In a separate transaction, CEMEX purchased in the market 59.5 million CPOs of Axtel and increased its existing investment in Axtel as part of CEMEX’s investments available for sale (note 13.2). Changes in the fair value of this instrument generated losses of US$2 ($30) in 2016 and gains of US$15 ($258) in 2015, recognized in the income statement for each period.

 

IV.	Interest rate swap contracts

As of December 31, 2017 and 2016, CEMEX had an interest rate swap maturing in September 2022 associated with an agreement entered into by CEMEX for the acquisition of electric energy in Mexico, which fair value represented assets of US$16 ($314) and US$23 ($477), respectively. Pursuant to this instrument, during the tenure of the swap and based on its notional amount, CEMEX will receive a fixed rate of 5.4% and will pay LIBOR. Changes in the fair value of this interest rate swap generated losses of US$6 ($114) in 2017, US$6 ($112) in 2016 and US$4 ($69) in 2015, recognized in the income statement for each period.

 

V.	Fuel price hedging

As of December 31, 2017 and 2016, CEMEX maintained forward contracts negotiated to hedge the price of diesel fuel in several countries for aggregate notional amounts of US$46 ($904) and US$44 ($912), respectively, with an estimated aggregate fair value representing assets of US$10 ($197) in 2017 and assets of US$7 ($145) in 2016. By means of these contracts, for own consumption only, CEMEX fixed the price of diesel over certain volume representing a portion of the estimated consumption of such fuel in several operations. These contracts have been designated as cash flow hedges of diesel fuel consumption, and as such, changes in fair value are recognized temporarily through other comprehensive income and are recycled to operating expenses as the related diesel volumes are consumed. For the years 2017, 2016 and 2015, changes in fair value of these contracts recognized in other comprehensive income represented gains of US$3 ($57), gains of US$7 ($145) and losses of US$3 ($52), respectively.

In addition, as of December 31, 2017 and 2016, CEMEX held forward contracts negotiated to hedge the price of coal, as solid fuel, for an aggregate notional amount of US$26 ($511) and US$33 ($684), respectively and an estimated fair value representing assets of US$10 ($197) in 2017 and assets of US$8 ($166) in 2016. By means of these contracts, for own consumption only, CEMEX fixed the price of coal over certain volume representing a portion of the estimated coal consumption in CEMEX’s applicable operations. These contracts have been designated as cash flow hedges of coal consumption, and as such, changes in fair value are recognized temporarily through other comprehensive income and are recycled to operating expenses as the related coal volumes are consumed. For the years 2017 and 2016, changes in fair value of these contracts recognized in other comprehensive income represented gains of US$1 ($19) and gains of US$8 ($166), respectively.

 

VI.	2019 Mandatorily Convertible Securities and options on the Parent Company’s own shares

In connection with the 2019 Mandatorily Convertible Securities (note 16.2); considering that the securities are denominated in pesos and the functional currency of the Parent Company’s division that issued the securities is the dollar (note 2.4), CEMEX separated the conversion option embedded in such instruments and recognized it at fair value through the income statement, which as of December 31, 2017 and 2016, resulted in a liability of US$20 ($393) and US$40 ($829), respectively. Changes in fair value generated a gain of US$19 ($359) in 2017, a loss of US$29 ($545) in 2016 and a gain of US$18 ($310) in 2015.

In addition, on March 15, 2011, the Parent Company entered into a capped calls, considering antidilution adjustments, over 194 million CEMEX’s ADSs (114 million ADSs maturing in March 2016 in connection with the 2016 Convertible Notes and 80 million ADSs maturing in March 2018 in connection with the 2018 Convertible Notes) in order to effectively increase the conversion price of the ADSs under such notes, by means of which, at maturity of the notes, originally CEMEX would receive in cash the excess between the market price and the strike price of approximately 8.57 dollars per ADS, with a maximum appreciation per ADS of approximately 3.96 dollars for the 2016 Convertible Notes and 5.27 dollars for the 2018 Convertible Notes. CEMEX paid aggregate premiums of US$222. During 2015, CEMEX amended a portion of the capped calls relating to the 2016 Convertible Notes and, as a result, CEMEX received US$44 in cash, equivalent to the unwind of 44.2% of the total notional amount of such capped calls. On March 15, 2016, the remaining options for the 55.8% of the 2016 Convertible Notes expired out of the money. During August 2016, CEMEX amended 58.3% of the total notional amount of the capped calls relating to the 2018 Convertible Notes to lower the exercise price in exchange for reducing the number of underlying options, as a result, CEMEX retained capped calls relating to the 2018 Convertible Notes over 71 million ADSs. As of December 31, 2016, the fair value of the existing options represented an asset of US$66 ($1,368). Changes in the fair value of these instruments generated gains of US$37 ($725) in 2017, gains of US$44 ($818) in 2016 and losses of US$228 ($3,928) in 2015, recognized within “Financial income and other items, net” in the income statement. During 2017, CEMEX unwound all its capped calls relating to the 2018 Convertible Notes and, as a result, CEMEX received US$103 in cash. As of December 31, 2017, all outstanding capped calls based on the price of the Parent Company´s own ADSs have been early settled.

 

44

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

16.5)

RISK MANAGEMENT

Enterprise risks may arise from any of the following situations: i) the potential change in the value of assets owned or reasonably anticipated to be owned, ii) the potential change in value of liabilities incurred or reasonably anticipated to be incurred, iii) the potential change in value of services provided, purchase or reasonably anticipated to be provided or purchased in the ordinary course of business, iv) the potential change in the value of assets, services, inputs, product or commodities owned, produced, manufactured, processed, merchandised, leased or sell or reasonably anticipated to be owned, produced, manufactured, processed, merchandising, leasing or selling in the ordinary course of business, or v) any potential change in the value arising from interest rate or foreign exchange rate exposures arising from current or anticipated assets or liabilities.

In the ordinary course of business, CEMEX is exposed to commodities risk, including the exposure from inputs such as fuel, coal, petcoke, fly-ash, gypsum and other industrial materials which are commonly used by CEMEX in the production process, and expose CEMEX to variations in prices of the underlying commodities. To manage this and other risks, such as credit risk, interest rate risk, foreign exchange risk, equity risk and liquidity risk, considering the guidelines set forth by the Board of Directors, which represent CEMEX’s risk management framework and that are supervised by several Committees, CEMEX’s management establishes specific policies that determine strategies oriented to obtain natural hedges to the extent possible, such as avoiding customer concentration on a determined market or aligning the currencies portfolio in which CEMEX incurred its debt, with those in which CEMEX generates its cash flows.

As of December 31, 2017 and 2016, these strategies are sometimes complemented with the use of derivative financial instruments as mentioned in note 16.4, such as the commodity forward contracts on diesel fuel and coal negotiated to fix the price of these underlying commodities.

The main risks categories are commented below:

Credit risk

Credit risk is the risk of financial loss faced by CEMEX if a customer or counterpart of a financial instrument does not meet its contractual obligations and originates mainly from trade accounts receivable. As of December 31, 2017 and 2016, the maximum exposure to credit risk is represented by the balance of financial assets. Management has developed policies for the authorization of credit to customers. The accounting exposure to credit risk is monitored constantly according to the behavior of payment of the debtors. Credit is assigned on a customer-by-customer basis and is subject to assessments which consider the customers’ payment capacity, as well as past behavior regarding due dates, balances past due and delinquent accounts. In cases deemed necessary, CEMEX’s management requires guarantees from its customers and financial counterparties with regard to financial assets.

The Company’s management has established a policy of low risk which analyzes the creditworthiness of each new client individually before offering the general conditions of payment terms and delivery. The review includes external ratings, when references are available, and in some cases bank references. Threshold of purchase limits are established for each client, which represent the maximum purchase amounts that require different levels of approval. Customers that do not meet the levels of solvency requirements imposed by CEMEX can only carry out transactions by paying cash in advance. As of December 31, 2017, considering CEMEX’s best estimate of potential incurred losses based on an analysis of age and considering recovery efforts, the allowance for doubtful accounts was $2,145.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates, which only affects CEMEX’s results if the fixed-rate long-term debt is measured at fair value. All of CEMEX’s fixed-rate long-term debt is carried at amortized cost and therefore is not subject to interest rate risk. CEMEX’s accounting exposure to the risk of changes in market interest rates relates primarily to its long-term debt obligations with floating interest rates, which, if such rates were to increase, may adversely affect its financing cost and the results for the period.

Nonetheless, it is not economically efficient to concentrate in fixed rates in a high point when the interest rates market expects a downward trend, this is, there is an opportunity cost for remaining long periods paying a determined fixed interest rate when the market rates have decreased and the entity may obtain improved interest rate conditions in a new loan or debt issuance. CEMEX manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to reduce its interest costs. In addition, when the interest rate of a debt instrument has turned relatively high as compared to current market rates, CEMEX intents to renegotiate the conditions or repurchase the debt, to the extent the net present value of the expected future benefits from the interest rate reduction would exceed the incentives that would have to be paid in such renegotiation or repurchase of debt.

As of December 31, 2017 and 2016, approximately 31% and 28%, respectively, of CEMEX’s long-term debt was denominated in floating rates at a weighted average interest rate of LIBOR plus 268 basis points in 2017 and 306 basis points in 2016. As of December 31, 2017 and 2016, if interest rates at that date had been 0.5% higher, with all other variables held constant, CEMEX’s net income for 2017 and 2016 would have reduced by US$18 ($353) and US$18 ($373), respectively, as a result of higher interest expense on variable rate denominated debt. This analysis does not include the effect of interest rate swaps held by CEMEX during 2017 and 2016.

 

45

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Foreign currency risk

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. CEMEX’s exposure to the risk of changes in foreign exchange rates relates primarily to its operating activities. Due to its geographic diversification, CEMEX’s revenues and costs are generated and settled in various countries and in different currencies. For the year ended December 31, 2017, approximately 21% of CEMEX’s net sales, before eliminations resulting from consolidation, were generated in Mexico, 24% in the United States, 7% in the United Kingdom, 6% in France, 4% in Germany, 2% in Spain, 2% in Poland, 3% in the Rest of Europe region, 4% in Colombia, 2% in Panama, 1% in Costa Rica, 2% Caribbean TCL, 4% in the Rest of South, Central America and the Caribbean region, 3% in Philippines, 1% in Egypt, 5% in the Rest of Asia, Middle East and Africa and 9% in CEMEX’s other operations.

Foreign exchange gains and losses occur by monetary assets or liabilities in a currency different from its functional currency, and are recorded in the consolidated statements of operations, except for exchange fluctuations associated with foreign currency indebtedness directly related to the acquisition of foreign entities and exchange fluctuations related parties’ long-term balances denominated in foreign currency which are not expected to be settled in the foreseeable future, which are reported in the statement of other comprehensive income. As of December 31, 2017 and 2016, excluding from the sensitivity analysis the impact of translating the net assets of foreign operations into CEMEX’s reporting currency, considering a hypothetic 10% strengthening of the dollar against the Mexican peso, with all other variables held constant, CEMEX’s net income for 2017 and 2016 would have decreased by US$119 ($2,343) and US$136 ($2,829), respectively, as a result of higher foreign exchange losses on CEMEX’s dollar-denominated net monetary liabilities held in consolidated entities with other functional currencies. Conversely, a hypothetic 10% weakening of the U.S. dollar against the Mexican peso would have the opposite effect.

As of December 31, 2017, approximately 59% of CEMEX’s financial debt was Dollar-denominated, 33% was Euro-denominated, 5% was Pound-denominated, 3% was Philippine peso-denominated and immaterial amounts were denominated in other currencies; therefore, CEMEX had a foreign currency exposure arising mainly from the Dollar-denominated and Euro-denominated financial debt versus the several currencies in which CEMEX’s revenues are settled in most countries in which it operates. The amounts of Pound-denominated financial debt and Philippine peso-denominated financial debt outstanding as of December 31, 2017, are closely related to the amount of revenues generated in such currencies and/or, in the case of the Euro-denominated financial debt, the amount of CEMEX’s net assets denominated in such currencies; therefore, CEMEX considers that the foreign currency risk related to these amounts of debt is low. Nonetheless, CEMEX cannot guarantee that it will generate sufficient revenues in Dollars, Euros, Pounds and Philippine pesos from its operations to service these obligations. As of December 31, 2017 and 2016, CEMEX had not implemented any derivative financing hedging strategy to address this foreign currency risk. Nonetheless, CEMEX may enter into derivative financing hedging strategies in the future if either of its debt portfolio currency mix, interest rate mix, market conditions and/or expectations changes.

As of December 31, 2017 and 2016, CEMEX’s consolidated net monetary assets (liabilities) by currency are as follows:

 

		2017
		Mexico				United States				Europe				South, Central America and the Caribbean				Asia, Middle East and Africa				Others 1				Total
Monetary assets		$	11,798				9,453				14,182				7,347				9,780				5,163				57,723
Monetary liabilities			17,505				32,158				45,675				12,016				11,522				221,579				340,455
Net monetary assets (liabilities) 2		$	(5,707	)			(22,705	)			(31,493	)			(4,669	)			(1,742	)			(216,416	)			(282,732	)
Out of which:
Dollars		$	(1,097	)			(22,710	)			39				(126	)			221				(133,530	)			(157,203	)
Pesos			(4,610	)			4				24				—				—				(7,745	)			(12,327	)
Euros			—				—				(10,155	)			2				—				(58,452	)			(68,605	)
Pounds			—				—				(19,358	)			—				—				(9,119	)			(28,477	)
Other currencies			—				1				(2,043	)			(4,545	)			(1,963	)			(7,570	)			(16,120	)
		$	(5,707	)			(22,705	)			(31,493	)			(4,669	)			(1,742	)			(216,416	)			(282,732	)
		2016
		Mexico				United States				Europe				South, Central America and the Caribbean				Asia, Middle East and Africa				Others 1				Total
Monetary assets		$	10,261				26,685				12,724				6,132				13,101				11,836				80,739
Monetary liabilities			10,564				33,145				42,336				9,130				11,305				277,117				383,597
Net monetary assets (liabilities) 2		$	(303	)			(6,460	)			(29,612	)			(2,998	)			1,796				(265,281	)			(302,858	)
Out of which:
Dollars		$	(483	)			(6,463	)			38				35				364				(214,751	)			(221,260	)
Pesos			180				3				—				—				—				(3,395	)			(3,212	)
Euros			—				—				(9,465	)			—				—				(48,470	)			(57,935	)
Pounds			—				—				(14,408	)			—				—				—				(14,408	)
Other currencies			—				—				(5,777	)			(3,033	)			1,432				1,335				(6,043	)
		$	(303	)			(6,460	)			(29,612	)			(2,998	)			1,796				(265,281	)			(302,858	)

 

1	Includes the Parent Company, CEMEX’s financing subsidiaries, as well as Neoris N.V., among other entities.

2	Includes assets held for sale and liabilities directly related with these assets considering that such items will be realized in the short-term.

 

46

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Foreign currency risk - continued

 

In addition, considering that the Parent Company’s functional currency for all assets, liabilities and transactions associated with its financial and holding company activities is the dollar (note 2.4), there is foreign currency risk associated with the translation of subsidiaries’ net assets denominated in different currencies (peso, euro, pound) into dollars. When the dollar appreciates, the value of CEMEX’s net assets denominated in other currencies decreases in terms of dollars, generating negative foreign currency translation and reducing stockholders’ equity. Conversely, when the dollar depreciates, the value of CEMEX’s net assets denominated in other currencies would increase in terms of dollars generating the opposite effect. As mentioned in note 16.4, CEMEX has implemented a long-term program for up to US$1,250 to hedge foreign currency translation in connection with its net assets denominated in pesos.

Equity risk

Equity risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in the market price of CEMEX’s and/or third party’s shares. As described in note 16.4, considering specific objectives, CEMEX has entered into equity forward contracts on third-party shares, as well as capped calls based on the price of CEMEX’s own ADSs. Under these equity derivative instruments, there is a direct relationship from the change in the fair value of the derivative with the change in price of the underlying share. All changes in fair value of such derivative instruments are recognized in the income statement as part of “Financial income and other items, net.” Until December 31, 2016, a significant decrease in the market price of CEMEX’s ADSs would negatively affect CEMEX’s liquidity and financial position. During 2017, all outstanding capped calls based on the price of CEMEX´s own ADSs were early settled.

As of December 31, 2017, the potential change in the fair value of CEMEX’s forward contracts in GCC shares that would result from a hypothetical, instantaneous decrease of 10% in the market price of GCC shares in dollars, with all other variables held constant, CEMEX’s net income for 2017 would have reduced in US$14 ($283), as a result of additional negative changes in fair value associated with these forward contracts. A 10% hypothetical increase in the price of GCC shares in 2017 would have generated approximately the opposite effect, respectively.

In addition, even though the changes in fair value of CEMEX’s embedded conversion option in the Mandatorily Convertible Notes 2019 denominated in a currency other than the functional issuer’s currency affect the income statement, they do not imply any risk or variability in cash flows, considering that through their exercise, CEMEX will settle a fixed amount of debt with a fixed amount of shares. As of December 31, 2017 and 2016, the potential change in the fair value of the embedded conversion options in the Mandatorily Convertible Notes 2019 that would result from a hypothetical, instantaneous increase of 10% in the market price of CEMEX’s CPOs, with all other variables held constant, would have decreased CEMEX’s net income for US$9 ($180) in 2017 and decreased for US$8 ($162) in 2016; as a result of additional negative changes in fair value associated with this option. A 10% hypothetical decrease in the CEMEX CPO price would generate approximately the opposite effect.

Liquidity risk

Liquidity risk is the risk that CEMEX will not have sufficient funds available to meet its obligations. In addition to cash flows provided by its operating activities, in order to meet CEMEX’s overall liquidity needs for operations, servicing debt and funding capital expenditures and acquisitions, CEMEX relies on cost-cutting and operating improvements to optimize capacity utilization and maximize profitability, as well as borrowing under credit facilities, proceeds of debt and equity offerings, and proceeds from asset sales. CEMEX is exposed to risks from changes in foreign currency exchange rates, prices and currency controls, interest rates, inflation, governmental spending, social instability and other political, economic and/or social developments in the countries in which it operates, any one of which may materially affect CEMEX’s results and reduce cash from operations. The maturities of CEMEX’s contractual obligations are included in note 23.5.

As of December 31, 2017, current liabilities, which included $36,335 of current maturities of debt and other financial obligations, exceed current assets in $40,814. For the year ended December 31, 2017, CEMEX generated net cash flows provided by operating activities from continuing operations for $30,966, after payments of interest and income taxes. The Company’s management considers that CEMEX will generate sufficient cash flows from operations. In addition, CEMEX has committed available lines of credit under its 2017 Credit Agreement, which includes the revolving credit facility and an undrawn tranche for a combined amount of $29,711 (US$1,512), as well as CEMEX’s proven capacity to continually refinance and replace its short-term obligations, will enable CEMEX to meet any liquidity risk in the short term.

As of December 31, 2017 and 2016, the potential requirement for additional margin calls under our different commitments is not significant.

 

47

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

17)	OTHER CURRENT AND NON-CURRENT LIABILITIES

As of December 31, 2017 and 2016, consolidated other current liabilities were as follows:

 

		2017				2016
Provisions 1		$	12,667				11,716
Interest payable			2,496				3,425
Advances from customers			3,886				3,413
Other accounts payable and accrued expenses 2			5,238				3,976
		$	24,287				22,530

 

1	Current provisions primarily consist of accrued employee benefits, insurance payments, accruals for legal assessments and others. These amounts are revolving in nature and are expected to be settled and replaced by similar amounts within the next 12 months.

2	In 2017, includes an account payable in Colombian pesos equivalent to $491 (US$25) to be settled on January 5, 2018 related to a penalty imposed by the Commerce and Industry Superintendence in Colombia in connection with a market investigation (note 24.2).

As of December 31, 2017 and 2016, consolidated other non-current liabilities were as follows:

 

		2017				2016
Asset retirement obligations 1		$	7,906				8,237
Accruals for legal assessments and other responsibilities 2			1,599				1,514
Non-current liabilities for valuation of derivative instruments			402				818
Environmental liabilities 3			991				1,172
Other non-current liabilities and provisions 4			4,751				5,305
		$	15,649				17,046

 

1	Provisions for asset retirement include future estimated costs for demolition, cleaning and reforestation of production sites at the end of their operation, which are initially recognized against the related assets and are depreciated over their estimated useful life.

2	Provisions for legal claims and other responsibilities include items related to tax contingencies.

3	Environmental liabilities include future estimated costs arising from legal or constructive obligations, related to cleaning, reforestation and other remedial actions to remediate damage caused to the environment. The expected average period to settle these obligations is greater than 15 years.

4

As of December 31, 2017 and 2016, includes $1,498 and $2,300, respectively, of the non-current portion of taxes payable recognized in connection with the termination of the tax consolidation regime in Mexico as described in note 19.4. As of December 31, 2017 and 2016, $958 and $936, respectively, were included within current taxes payable.

Changes in consolidated other current and non-current liabilities for the years ended December 31, 2017 and 2016, were as follows:

 

		2017
		Asset retirement obligations				Environmental liabilities				Accruals for legal proceedings				Valuation of derivative instruments				Other liabilities and provisions				Total				2016
Balance at beginning of period		$	8,237				1,172				1,514				823				17,016				28,762				25,611
Business combinations			—				—				—				—				345				345				—
Additions or increase in estimates			573				21				701				214				39,545				41,054				67,684
Releases or decrease in estimates			(527	)			(54	)			(289	)			(306	)			(40,524	)			(41,700	)			(61,362	)
Reclassifications			—				(182	)			530				—				(1,462	)			(1,114	)			(741	)
Accretion expense			(191	)			—				—				—				(830	)			(1,021	)			(1,042	)
Foreign currency translation			(186	)			34				(857	)			(310	)			3,309				1,990				(1,388	)
Balance at end of period		$	7,906				991				1,599				421				17,399				28,316				28,762
Out of which:
Current provisions		$	—				—				—				19				12,648				12,667				11,716

 

48

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

18)	PENSIONS AND POST-EMPLOYMENT BENEFITS

Defined contribution pension plans

The consolidated costs of defined contribution plans for the years ended December 31, 2017, 2016 and 2015 were $922, $865 and $706, respectively. CEMEX contributes periodically the amounts offered by the pension plan to the employee’s individual accounts, not retaining any remaining liability as of the financial statements´ date.

Defined benefit pension plans

Most CEMEX’s defined benefit plans have been closed to new participants for several years. Actuarial results related to pension and other post retirement benefits are recognized in the results and/or in “Other comprehensive income” for the period in which they are generated, as correspond. For the years ended December 31, 2017, 2016 and 2015, the effects of pension plans and other post-employment benefits are summarized as follows:

 

		Pensions												Other benefits												Total
Net period cost (income):		2017				2016				2015				2017				2016				2015				2017				2016				2015
Recorded in operating costs and expenses
Service cost		$	221				151				128				33				25				30				254				176				158
Past service cost			(55	)			8				12				—				—				(20	)			(55	)			8				(8	)
Loss for settlements and curtailments			—				—				—				—				—				(13	)			—				—				(13	)
			166				159				140				33				25				(3	)			199				184				137
Recorded in other financial expenses
Net interest cost			693				711				596				74				57				56				767				768				652
Recorded in other comprehensive income
Actuarial (gains) losses for the period			20				3,985				872				(23	)			34				(124	)			(3	)			4,019				748
		$	879				4,855				1,608				84				116				(71	)			963				4,971				1,537

The reconciliations of the actuarial benefits obligations, pension plan assets, and liabilities recognized in the statement of financial position as of December 31, 2017 and 2016 are presented as follows:

 

		Pensions								Other benefits								Total
		2017				2016				2017				2016				2017				2016
Change in benefits obligation:
Projected benefit obligation at beginning of the period		$	51,055				42,740				1,164				1,100				52,219				43,840
Service cost			221				151				33				25				254				176
Interest cost			1,625				1,685				76				59				1,701				1,744
Actuarial (gains) losses			727				6,263				(24	)			35				703				6,298
Additions through business combinations			2,801				—				271				—				3,072				—
Settlements and curtailments			—				—				—				(19	)			—				(19	)
Plan amendments			15				8				—				—				15				8
Benefits paid			(2,920	)			(2,379	)			(81	)			(74	)			(3,001	)			(2,453	)
Foreign currency translation			1,386				2,587				(3	)			38				1,383				2,625
Projected benefit obligation at end of the period			54,910				51,055				1,436				1,164				56,346				52,219
Change in plan assets:
Fair value of plan assets at beginning of the period			28,828				25,547				26				24				28,854				25,571
Return on plan assets			932				974				2				2				934				976
Actuarial (gains) losses for the period			707				2,278				(1	)			1				706				2,279
Employer contributions			1,494				1,289				81				93				1,575				1,382
Additions through business combinations			2,841				—				—				—				2,841				—
Reduction for disposal of assets			(4	)			—				—				—				(4	)			—
Settlements and curtailments			—				—				—				(19	)			—				(19	)
Benefits paid			(2,920	)			(2,379	)			(81	)			(74	)			(3,001	)			(2,453	)
Foreign currency translation			787				1,119				1				(1	)			788				1,118
Fair value of plan assets at end of the period			32,665				28,828				28				26				32,693				28,854
Amounts recognized in the statements of financial position:
Net projected liability recognized in the statement of financial position		$	22,245				22,227				1,408				1,138				23,653				23,365

 

49

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Pensions and post-employment employee benefits - continued

 

For the years 2017, 2016 and 2015, actuarial (gains) losses for the period were generated by the following main factors as follows:

 

		2017				2016				2015
Actuarial (gains) losses due to experience		$	121				(511	)			(105	)
Actuarial (gains) losses due to demographic assumptions			(46	)			(231	)			(153	)
Actuarial (gains) losses due financial assumptions			(78	)			4,761				1,006
		$	(3	)			4,019				748

In 2017, net actuarial gains due to financial assumptions were mainly driven by an increase in the discount rates applicable to the benefits’ obligations in Germany and Mexico and by actual returns higher than estimated in the United States, partially offset by a decrease in the discount rate in the United Kingdom. Net actuarial losses due to financial assumptions during 2016 were mainly generated by a significant reduction compared to 2015 in the discount rates applicable to the benefit obligations in the United Kingdom, Germany and other European countries, considering macroeconomic and political uncertainty, partially offset by an increase in the discount rate in Mexico. These actuarial losses originated by the reduction in the discount rates in 2016 were also partially offset by actual returns higher than estimated in some of the plan assets related to CEMEX’s defined benefit plans. During 2015, discounts rates increased slightly or remained flat as compared to 2014, but the resulting actuarial gains were offset and reversed by actuarial losses generated by actual returns lower than estimated in certain of CEMEX’s plan assets.

As of December 31, 2017 and 2016, plan assets were measured at their estimated fair value and, based on the hierarchy of fair values, are detailed as follows:

 

		2017																2016
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Cash		$	579				—				111				690			$	1,075				1,024				—				2,099
Investments in corporate bonds			144				6,067				1				6,212				1,050				2,617				—				3,667
Investments in government bonds			1,701				9,407				—				11,108				209				10,081				—				10,290
Total fixed-income securities			2,424				15,474				112				18,010				2,334				13,722				—				16,056
Investment in marketable securities			6,212				1,735				—				7,947				2,001				5,956				—				7,957
Other investments and private funds			991				3,279				2,466				6,736				770				3,478				593				4,841
Total variable-income securities			7,203				5,014				2,466				14,683				2,771				9,434				593				12,798
Total plan assets		$	9,627				20,488				2,578				32,693			$	5,105				23,156				593				28,854

As of December 31, 2017, estimated payments for pensions and other post-employment benefits over the next 10 years were as follows:

 

		2017
2018		$	3,071
2019			2,952
2020			3,085
2021			3,080
2022			3,121
2023 - 2027			15,868

The most significant assumptions used in the determination of the benefit obligation were as follows:

 

		2017																2016
		Mexico				United States				United Kingdom				Range of rates in other countries				Mexico				United States				United Kingdom				Rates ranges in other countries
Discount rates			9.3	%			3.9	%			2.4	%			1.3% – 6.3	%			9.0	%			4.2	%			2.6	%			1.1% – 7.0	%
Rate of return on plan assets			9.3	%			3.9	%			2.4	%			1.3% – 6.3	%			9.0	%			4.2	%			2.6	%			1.1% – 7.0	%
Rate of salary increases			4.0	%			—				3.2	%			1.5% – 6.0	%			4.0	%			—				3.3	%			1.5% – 6.0	%

 

50

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Pensions and post-employment employee benefits - continued

 

As of December 31, 2017 and 2016, the aggregate projected benefit obligation (“PBO”) for pension plans and other post-employment benefits and the plan assets by country were as follows:

 

		2017												2016
		PBO				Assets				Deficit				PBO				Assets				Deficit
Mexico		$	3,213				840				2,373			$	3,247				824				2,423
United States			6,378				4,031				2,347				7,110				4,192				2,918
United Kingdom			35,602				23,145				12,457				33,925				22,154				11,771
Germany			4,362				213				4,149				4,429				227				4,202
Other countries			6,791				4,464				2,327				3,508				1,457				2,051
		$	56,346				32,693				23,653			$	52,219				28,854				23,365

Applicable regulation in the United Kingdom requires entities to maintain plan assets at a level similar to that of the obligations. In November 2012, in order to better manage CEMEX’s obligations under its defined benefit pension schemes and future cash funding requirements thereof, CEMEX implemented an asset backed pension funding arrangement in its operations in the United Kingdom by means of which CEMEX transferred certain operating assets to a non-transferable limited partnership, owned, controlled and consolidated by CEMEX UK with a total value of US$553 and entered into lease agreements for the use of such assets with the limited partnership, in which the pension schemes hold a limited interest. On an ongoing basis CEMEX UK will make annual rental payments of US$20, increasing at annual rate of 5%, which will generate profits in the limited partnership that are then distributed to the pension schemes. As previously mentioned, the purpose of the structure, in addition to provide the pension schemes with secured assets producing an annual return over a period of 25 years, improves the security for the trustees of the pension schemes, and reduces the level of cash funding that CEMEX UK will have to make in future periods. In 2037, on expiry of the lease arrangements, the limited partnership will be terminated and under the terms of the agreement, the remaining assets will be distributed to CEMEX UK. Any future profit distribution from the limited partnership to the pension fund will be considered as an employer contribution to plan assets in the period in which they occur.

In some countries, CEMEX has established health care benefits for retired personnel limited to a certain number of years after retirement. As of December 31, 2017 and 2016, the projected benefits obligation related to these benefits was $1,080 and $837, respectively. The medical inflation rates used to determine the projected benefits obligation of these benefits in 2017 and 2016 for Mexico were 7.0% and 7.0%, respectively, for Puerto Rico 6.9% and 4.3%, respectively, and for the United Kingdom were 6.7% and 6.8%, respectively. In connection with TCL’s consolidation (note 4.1), CEMEX integrated TCL’s health care benefits to its operations. For 2017, the medical inflation rate used to determine the projected benefits obligation was 5.0%.

Significant events related to employees’ pension benefits and other post-employment benefits during the reported periods

During 2017, CEMEX in Spain removed certain increases in pensions benefits which resulted in an adjustment to past service cost generating gains of $99 (US$5) in 2017, recognized in the income statement for the year. In addition, due to the acquisition of TCL’s (note 4.1), CEMEX integrated its pensions plans, which were fully funded, as well as TCL’s health care benefits which represented an increase in the net projected liability of $271 (US$14).

During 2015, CEMEX in the United States terminated the retiree medical coverage for certain participants not yet retired. In addition, during 2014, CEMEX in the United States terminated the retiree medical and life insurance coverage for most new retirees, and changed the existing retirees program effective January 1, 2015, where participants will cease their current plans and instead receive a Health Reimbursement Account (HRA) contribution, if they become eligible. These curtailment events resulted in an adjustment to past service cost which generated gains of $13 (US$1) in 2015, recognized immediately through the benefit cost of the respective period.

Sensitivity analysis of pension and other post-employment benefits

For the year ended December 31, 2017, CEMEX performed sensitivity analyses on the most significant assumptions that affect the PBO, considering reasonable independent changes of plus or minus 50 basis points in each of these assumptions. The increase (decrease) that would have resulted in the PBO of pensions and other post-employment benefits as of December 31, 2017 are shown below:

 

		Pensions								Other benefits								Total
Assumptions:		+50 bps				-50 bps				+50 bps				-50 bps				+50 bps				-50 bps
Discount Rate Sensitivity		$	(4,028	)			4,426				(72	)			83				(4,100	)			4,509
Salary Increase Rate Sensitivity			154				(138	)			34				(29	)			189				(166	)
Pension Increase Rate Sensitivity			2,341				(2,209	)			—				—				2,341				(2,209	)

 

51

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

19)	INCOME TAXES

 

19.1)

INCOME TAXES FOR THE PERIOD

The amounts of income tax revenue (expense) in the statements of operations for 2017, 2016 and 2015 are summarized as follows:

 

		2017				2016				2015
Current income taxes		$	(3,458	)			(3,456	)			6,121
Deferred income taxes			2,938				331				(8,489	)
		$	(520	)			(3,125	)			(2,368	)

 

19.2)

DEFERRED INCOME TAXES

As of December 31, 2017 and 2016, the main temporary differences that generated the consolidated deferred income tax assets and liabilities are presented below:

 

		2017				2016
Deferred tax assets:
Tax loss carryforwards and other tax credits		$	15,900				17,514
Accounts payable and accrued expenses			7,083				9,262
Intangible assets and deferred charges, net			4,175				6,358
Others			—				411
Total deferred tax assets, net			27,158				33,545
Deferred tax liabilities:
Property, machinery and equipment			(27,268	)			(35,095	)
Investments and other assets			(874	)			(2,012	)
Total deferred tax liabilities, net			(28,142	)			(37,107	)
Net deferred tax liabilities		$	(984	)			(3,562	)
Out of which:
Net deferred tax (liability) asset in Mexican entities		$	(3,644	)			(2,509	)
Net deferred tax (liability) asset in Foreign entities		$	2,660				(1,053	)

The breakdown of changes in consolidated deferred income taxes during 2017, 2016 and 2015 were as follows:

 

		2017				2016				2015
Deferred income tax (charged) credited to the income statement 1		$	2,938				331				(8,489	)
Deferred income tax (charged) credited to stockholders’ equity			200				514				1,089
Reclassification to other captions in the statement of financial position and in the income statement 2			(560	)			531				(5,467	)
Change in deferred income tax during the period		$	2,578				1,376				(12,867	)

 

1	In 2017, includes a net income tax revenue related to the recognition of deferred income tax assets in CEMEX’s operations in the United States (note 19.4).

2	In 2017, 2016 and 2015, includes the effects of discontinued operations (note 4.2) and in 2015 the effects of the termination of tax consolidation regime in Mexico.

Current and/or deferred income tax relative to items of other comprehensive income during 2017, 2016 and 2015 were as follows:

 

		2017				2016				2015
Tax effects relative to foreign exchange fluctuations from debt (note 20.2)		$	—				(410	)			(272	)
Tax effects relative to foreign exchange fluctuations from intercompany balances (note 20.2)			32				(12	)			(181	)
Tax effects relative to actuarial (gains) and losses (note 20.2)			(1	)			788				183
Foreign currency translation and other effects			201				(274	)			906
		$	232				92				636

 

52

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Deferred income taxes - continued

 

For the recognition of deferred tax assets, CEMEX analyzes the aggregate amount of self-determined tax loss carryforwards included in its income tax returns in each country where CEMEX believes, based on available evidence, that the tax authorities would not reject such tax loss carryforwards; and the likelihood of the recoverability of such tax loss carryforwards prior to their expiration through an analysis of estimated future taxable income. If CEMEX believes that it is probable that the tax authorities would reject a self-determined deferred tax asset, it would decrease such asset. Likewise, if CEMEX believes that it would not be able to use a tax loss carryforward before its expiration or any other tax asset, CEMEX would not recognize such asset. Both situations would result in additional income tax expense for the period in which such determination is made. In order to determine whether it is probable that deferred tax assets will ultimately be realized, CEMEX takes into consideration all available positive and negative evidence, including factors such as market conditions, industry analysis, expansion plans, projected taxable income, carryforward periods, current tax structure, potential changes or adjustments in tax structure, tax planning strategies and future reversals of existing temporary differences. In addition, every reporting period, CEMEX analyzes its actual results versus its estimates, and adjusts, as necessary, its tax asset valuations. If actual results vary from CEMEX’s estimates, the deferred tax asset may be affected and necessary adjustments will be made based on relevant information, any adjustments recorded will affect CEMEX’s statements of operations in such period.

As of December 31, 2017, consolidated tax loss and tax credits carryforwards expire as follows:

 

		Amount of carryforwards				Amount of unrecognized carryforwards				Amount of recognized carryforwards
2018		$	1,099				415				684
2019			5,989				5,149				840
2020			8,929				8,115				814
2021			4,407				2,908				1,499
2022 and thereafter			288,466				230,425				58,041
		$	308,890				247,012				61,878

As of December 31, 2017, in connection with CEMEX’s deferred tax loss carryforwards presented in the table above, in order to realize the benefits associated with such deferred tax assets that have not been reserved, before their expiration, CEMEX would need to generate $61,878 in consolidated pre-tax income in future periods. Based on the same forecasts of future cash flows and operating results used by CEMEX’s management to allocate resources and evaluate performance in the countries in which CEMEX operates, which include expected growth in revenues and reductions in interest expense in several countries due to a reduction in intra-group debt balances, along with the implementation of feasible tax strategies, CEMEX believes that it will recover the balance of its tax loss carryforwards that have not been reserved before their expiration. In addition, CEMEX concluded that, the deferred tax liabilities that were considered in the analysis of recoverability of its deferred tax assets will reverse in the same period and tax jurisdiction of the related recognized deferred tax assets. Moreover, a certain amount of CEMEX’s deferred tax assets refer to operating segments and tax jurisdictions in which CEMEX is currently generating taxable income or in which, according to CEMEX’s management cash flow projections, will generate taxable income in the relevant periods before the expiration of the deferred tax assets.

CEMEX does not recognize a deferred income tax liability related to its investments in subsidiaries considering that CEMEX controls the reversal of the temporary differences arising from these investments and management is satisfied that such temporary differences will not reverse in the foreseeable future.

 

19.3)

RECONCILIATION OF EFFECTIVE INCOME TAX RATE

For the years ended December 31, 2017, 2016 and 2015, the effective consolidated income tax rates were as follows:

 

		2017				2016				2015
Income before income tax		$	13,659				17,563				3,464
Income tax expense			(520	)			(3,125	)			(2,368	)
Effective consolidated income tax rate 1			(3.8	)%			(17.8	)%			(68.4	)%

 

1	The average effective tax rate equals the net amount of income tax revenue or expense divided by income or loss before income taxes, as these line items are reported in the income statement.

 

53

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Effective tax rate - continued

 

Differences between the financial reporting and the corresponding tax basis of assets and liabilities and the different income tax rates and laws applicable to CEMEX, among other factors, give rise to permanent differences between the statutory tax rate applicable in Mexico, and the effective tax rate presented in the consolidated statements of operations, which in 2017, 2016 and 2015 were as follows:

 

		2017								2016								2015
		%				$				%				$				%				$
Mexican statutory tax rate			(30.0	)			(4,098	)			(30.0	)			(5,269	)			(30.0	)			(1,039	)
Non-taxable dividend income			0.1				14				0.2				32				37.0				1,280
Difference between accounting and tax expenses, net			(20.9	)			(2,855	)			82.6				14,507				(84.3	)			(2,919	)
Termination of the income tax consolidation regime in Mexico			—				—				—				—				32.8				1,136
Unrecognized effects during the year related to applicable tax consolidation regimes			0.9				123				(3.6	)			(632	)			8.5				293
Non-taxable sale of marketable securities and fixed assets			15.0				2,049				3.7				650				36.5				1,263
Difference between book and tax inflation			(31.2	)			(4,261	)			(11.0	)			(1,932	)			(26.6	)			(922	)
Differences in the income tax rates in the countries where CEMEX operates 1			21.9				2,991				11.0				1,932				48.9				1,693
Changes in deferred tax assets 2			39.8				5,433				(70.1	)			(12,320	)			(100.3	)			(3,473	)
Changes in provisions for uncertain tax positions			(0.4	)			(55	)			0.7				123				7.9				272
Others			1.0				139				(1.3	)			(216	)			1.2				48
Effective consolidated tax rate			(3.8	)			(520	)			(17.8	)			(3,125	)			(68.4	)			(2,368	)

 

1	Refers mainly to the effects of the differences between the statutory income tax rate in Mexico of 30% against the applicable income tax rates of each country where CEMEX operates. In 2017, includes the effect related to the change in statutory tax rate in the United States (note 19.4).

2	Refers to the effects in the effective income tax rate associated with changes during the period in the amount of deferred income tax assets related to CEMEX’s tax loss carryforwards.

The following table compares variations between the line item “Changes in deferred tax assets” as presented in the table above against the changes in deferred tax assets in the statement of financial position for the years ended December 31, 2017 and 2016:

 

		2017								2016
		Changes in the statement of financial position				Amounts in reconciliation				Changes in the statement of financial position				Amounts in reconciliation
Tax loss carryforwards generated and not recognized during the year		$	—				6,092				—				(9,108	)
Derecognition related to tax loss carryforwards recognized in prior years			(5,221	)			(5,221	)			(4,843	)			(4,843	)
Recognition related to unrecognized tax loss carryforwards			9,694				9,694				1,631				1,631
Foreign currency translation and other effects			(6,087	)			(5,132	)			4,068				—
Changes in deferred tax assets		$	(1,614	)			5,433				856				(12,320	)

 

19.4)

UNCERTAIN TAX POSITIONS AND SIGNIFICANT TAX PROCEEDINGS

As of December 31, 2017 and 2016, as part of short-term and long-term provisions and other liabilities (note 17), CEMEX has recognized provisions related to unrecognized tax benefits in connection with uncertain tax positions taken, in which it is deemed probable that the tax authority would differ from the position adopted by CEMEX. As of December 31, 2017, the tax returns submitted by some subsidiaries of CEMEX located in several countries are under review by the respective tax authorities in the ordinary course of business. CEMEX cannot anticipate if such reviews will result in new tax assessments, which would, should any arise, be appropriately disclosed and/or recognized in the financial statements.

A summary of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015, excluding interest and penalties, is as follows:

 

		2017				2016				2015
Balance of tax positions at beginning of the period		$	1,132				1,190				1,396
Additions for tax positions of prior periods			663				200				134
Additions for tax positions of current period			16				90				71
Reductions for tax positions related to prior periods and other items			(32	)			(131	)			(95	)
Settlements and reclassifications			(119	)			(163	)			(204	)
Expiration of the statute of limitations			(138	)			(126	)			(231	)
Foreign currency translation effects			49				72				119
Balance of tax positions at end of the period		$	1,571				1,132				1,190

 

54

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Uncertain tax positions and significant tax proceedings - continued

 

During 2017, considering recoverability analyses and cash flow projections, CEMEX recognized deferred income tax assets related to its operations in the United States for US$700 considering the then applicable income tax rate of 35%. However, regarding the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017, the U.S. statutory federal tax rate was reduced from 35% to 21%. For this reason, CEMEX reduced its net deferred tax assets by US$124. The reduction in the U.S. statutory federal tax rate is expected to positively impact CEMEX’s future after-tax earnings in the United States. Nonetheless, the ultimate impact is subject to the effect of other complex provisions in the Act, including the Base Erosion and Anti-Abuse Tax (“BEAT”), which CEMEX is currently reviewing, and it is possible that any impact of BEAT could reduce the benefit of the change in such statutory federal tax rate. Due to the uncertain practical and technical application of many of these provisions, it is currently not possible to reliably estimate whether BEAT will apply and if so, how it would impact CEMEX, but as additional guidance from the U.S. tax authorities is received, CEMEX will recognize the effects of such clarifications into its financial statements.

Tax examinations can involve complex issues, and the resolution of issues may span multiple years, particularly if subject to negotiation or litigation. Although CEMEX believes its estimates of the total unrecognized tax benefits are reasonable, uncertainties regarding the final determination of income tax audit settlements and any related litigation could affect the amount of total unrecognized tax benefits in future periods. It is difficult to estimate the timing and range of possible changes related to the uncertain tax positions, as finalizing audits with the income tax authorities may involve formal administrative and legal proceedings. Accordingly, it is not possible to reasonably estimate the expected changes to the total unrecognized tax benefits over the next 12 months, although any settlements or statute of limitations expirations may result in a significant increase or decrease in the total unrecognized tax benefits, including those positions related to tax examinations being currently conducted.

As of December 31, 2017, the Company’s most significant tax proceedings are as follows:

 

•

As part of an audit process, the tax authorities in Spain have challenged part of the tax loss carryforwards reported by CEMEX España covering the tax years from and including 2006 to 2009. During 2014, the tax authorities in Spain notified CEMEX España of fines in the aggregate amount of US$547 ($10,755). CEMEX España filed appeals against such resolution. On September 20, 2017, CEMEX España was notified about an adverse resolution to such appeals. CEMEX España challenged this decision and applied for the suspension of the payment before the National Court (Audiencia Nacional) until the recourses are finally resolved. As of December 31, 2017, CEMEX does not consider probable an adverse resolution in this proceeding and no accruals have been created in connection with this proceeding. Nonetheless, is difficult to assess with certainty the likelihood of an adverse result, and the appeals that CEMEX España has filed could take an extended amount of time to be resolved, but if adversely resolved, it could have a material adverse impact on CEMEX’s results of operations, liquidity or financial position.

 

•

In December 2013, the Mexican Congress approved amendments to the income tax law effective January 1, 2014, which eliminated the tax consolidation regime. A period of up to 10 years was established for the settlement of any liability for income taxes related to the tax consolidation regime accrued until December 31, 2013, amount which considering the rules issued for the disconnection of the tax consolidation regime amounted to $24,804. In October 2015, a new tax reform approved by the Mexican Congress (the “new tax reform”) granted entities the option to settle a portion of the liability for the exit of the tax consolidation regime using available tax loss carryforwards of the previously consolidated entities, considering a discount factor, and a tax credit to offset certain items of the aforementioned liability. Consequently, as a result of payments made during 2014 and 2015, the liability was further reduced to $16,244, which after the application of the tax credit and tax loss carryforwards (as provided by the new tax reform) which had a book value for CEMEX before discount of $11,136, as of December 31, 2015, the Parent Company’s liability was reduced to $3,971. As of December 31, 2017 and 2016, considering payments made during these years net of inflation adjustments, CEMEX reduced the balance payable to $2,456 and $3,236, respectively.

 

•

In April 2011, the Colombian Tax Authority (“Dirección de Impuestos”) notified CEMEX Colombia of a special proceeding rejecting certain deductions taken by CEMEX Colombia in its 2009 tax return considering they are not linked to direct revenues recorded in the same fiscal year, and assessed an increase in taxes to be paid by CEMEX Colombia in an amount in Colombian pesos equivalent to US$30 ($593) and imposed a penalty in an amount in Colombian pesos equivalent to US$48 ($948), both as of December 31, 2017. After several appeals of CEMEX Colombia to the Colombian Tax Authority’s special proceeding in the applicable courts in which CEMEX Colombia obtained negative resolutions in each case over the years, in July 2014, CEMEX Colombia filed an appeal against this resolution before the Colombian State Council (Consejo de Estado). As of December 31, 2017, at this stage of the proceeding, CEMEX does not consider probable an adverse resolution in this proceeding, nonetheless, is difficult to assess with certainty the likelihood of an adverse result; but if adversely resolved, this proceeding could have a material adverse impact on CEMEX’s results of operations, liquidity or financial position.

 

20)	STOCKHOLDERS’ EQUITY

As of December 31,2017 and 2016, stockholders’ equity excludes investments in CPOs of the Parent Company held by subsidiaries of $301 (20,541,277 CPOs) and $327 (19,751,229 CPOs), respectively, which were eliminated within “Other equity reserves.”

 

20.1)

COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

As of December 31, 2017 and 2016, the breakdown of common stock and additional paid-in capital was as follows:

 

		2017				2016
Common stock		$	4,171				4,162
Additional paid-in capital			140,483				123,174
		$	144,654				127,336

 

55

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Common stock and additional paid-in capital - continued

 

As of December 31, 2017 and 2016 the common stock of CEMEX, S.A.B. de C.V. was presented as follows:

 

		2017								2016
Shares 1		Series A 2				Series B 2				Series A 2				Series B 2
Subscribed and paid shares			30,214,469,912				15,107,234,956				28,121,583,148				14,060,791,574
Unissued shares authorized for executives’ stock compensation programs			531,739,616				265,869,808				638,468,154				319,234,077
Shares that guarantee the issuance of convertible securities 3			4,529,605,020				2,264,802,510				5,218,899,920				2,609,449,960
			35,275,814,548				17,637,907,274				33,978,951,222				16,989,475,611

 

1	As of December 31, 2017 and 2016, 13,068,000,000 shares correspond to the fixed portion, and 39,845,721,822 shares in 2017 and 37,900,426,833 shares in 2016, correspond to the variable portion.

2	Series “A” or Mexican shares must represent at least 64% of CEMEX’s capital stock; meanwhile, Series “B” or free subscription shares must represent at most 36% of CEMEX’s capital stock.

3	Shares that guarantee the conversion of both the outstanding voluntary and mandatorily convertible securities and new securities issues (note 16.2).

On March 30, 2017, stockholders at the annual ordinary shareholders’ meeting approved resolutions to: (i) increase the variable common stock through the capitalization of retained earnings by issuing up to 1,687 million shares (562 million CPOs), which shares were issued, representing an increase in common stock of $5, considering a nominal value of $0.00833 per CPO, and additional paid-in capital of $9,459; (ii) increase the variable common stock by issuing up to 258 million shares (86 million CPOs), which will be kept in the Parent Company’s treasury to be used to preserve the anti-dilutive rights of note holders pursuant CEMEX’s convertible securities (note 16.2).

On March 31, 2016, stockholders at the annual ordinary shareholders’ meeting approved resolutions to: (i) increase the variable common stock through the capitalization of retained earnings by issuing up to 1,616 million shares (539 million CPOs), which shares were issued, representing an increase in common stock of $4, considering a nominal value of $0.00833 per CPO, and additional paid-in capital of $6,966; (ii) increase the variable common stock by issuing up to 297 million shares (99 million CPOs), which will be kept in the Parent Company’s treasury to be used to preserve the anti-dilutive rights of note holders pursuant CEMEX’s convertible securities (note 16.2).

On March 26, 2015, stockholders at the annual ordinary shareholders’ meeting approved resolutions to: (i) increase the variable common stock through the capitalization of retained earnings by issuing up to 1,500 million shares (500 million CPOs), which shares were issued, representing an increase in common stock of $4, considering a nominal value of $0.00833 per CPO, and additional paid-in capital of $7,613; (ii) increase the variable common stock by issuing up to 297 million shares (99 million CPOs), which will be kept in the Parent Company’s treasury to be used to preserve the anti-dilutive rights of note holders pursuant CEMEX’s convertible securities (note 16.2).

In connection with the long-term executive share-based compensation program (note 21) in 2017, 2016 and 2015, CEMEX issued approximately 53.2 million CPOs, 53.9 million CPOs and 49.2 million CPOs, respectively, generating an additional paid-in capital of $817 in 2017, $742 in 2016 and $655 in 2015 associated with the fair value of the compensation received by executives.

 

20.2)

OTHER EQUITY RESERVES

As of December 31, 2017 and 2016 other equity reserves are summarized as follows:

 

		2017				2016
Cumulative translation effect, net of effects from perpetual debentures and deferred income taxes recognized directly in equity (notes 19.2 and 20.4)		$	21,288				31,293
Cumulative actuarial losses			(10,931	)			(10,934	)
Effects associated with CEMEX´s convertible securities 1			3,427				4,761
Treasury shares held by subsidiaries			(301	)			(327	)
		$	13,483				24,793

 

1

Represents the equity component upon the issuance of CEMEX’s convertible securities described in note 16.2, as well as the effects associated with such securities in connection with the change in the Parent Company’s functional currency (note 2.4). Upon conversion of these securities, the balances have been correspondingly reclassified to common stock and/or additional paid-in capital (note 16.1).

For the years ended December 31, 2017, 2016 and 2015, the translation effects of foreign subsidiaries included in the statements of comprehensive income were as follows:

 

		2017				2016				2015
Foreign currency translation result 1		$	(3,116	)			20,648				12,869
Foreign exchange fluctuations from debt 2			(4,160	)			1,367				908
Foreign exchange fluctuations from intercompany balances 3			(2,243	)			(10,385	)			(5,801	)
		$	(9,519	)			11,630				7,976

 

56

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Other equity reserves - continued

 

1	These effects refer to the result from the translation of the financial statements of foreign subsidiaries and include the changes in fair value of foreign exchange forward contracts designated as hedge of a net investment (note 16.4).

2	Generated by foreign exchange fluctuations over a notional amount of debt in CEMEX, S.A.B. de C.V., associated with the acquisition of foreign subsidiaries and designated as a hedge of the net investment in foreign subsidiaries (note 2.4).

3

Refers to foreign exchange fluctuations arising from balances with related parties in foreign currencies that are of a long-term investment nature considering that their liquidation is not anticipated in the foreseeable future and foreign exchange fluctuations over a notional amount of debt of a subsidiary of CEMEX España identified and designated as a hedge of the net investment in foreign subsidiaries.

 

20.3)

RETAINED EARNINGS

The Parent Company’s net income for the year is subject to a 5% allocation toward a legal reserve until such reserve equals one fifth of the common stock. As of December 31, 2017, the legal reserve amounted to $1,804.

 

20.4)

NON-CONTROLLING INTEREST AND PERPETUAL DEBENTURES

Non-controlling interest

Non-controlling interest represents the share of non-controlling stockholders in the equity and results of consolidated subsidiaries. As of December 31, 2017 and 2016, non-controlling interest in equity amounted to $23,298 and $19,876, respectively. In addition, in 2017, 2016 and 2015, non-controlling interests in consolidated net income were $1,417, $1,173 and $923, respectively. These non-controlling interests arise mainly from the following CEMEX’s subsidiaries:

 

•

In February 2017, as described in note 4.1, CEMEX acquired a controlling interest in TCL, which shares trade in the Trinidad and Tobago Stock Exchange. As of December 31, 2017, there is a non-controlling interest in TCL of approximately 30.2% of its common shares (see note 4.4 for certain relevant condensed financial information).

 

•

In July 2016, CHP, an indirect wholly-owned subsidiary of CEMEX España, S.A., closed its initial offering of 2,337,927,954 new common shares, or 45% of CHP’s common shares, at a price of 10.75 Philippine Pesos per common share. The net proceeds from the offering of US$507 (considering an exchange rate of 46.932 Philippines pesos per U.S. dollar on June 30, 2016), after deducting commissions and other offering expenses, were used by CEMEX for general corporate purposes, including the repayment of existing debt. CHP’s assets consist primarily of CEMEX’s cement manufacturing assets in the Philippines. As of December 31, 2017 and 2016, there is a non-controlling interest in CHP of approximately 45% of its common shares in both years (see note 4.4 for certain relevant condensed financial information).

 

•

In November 2012, pursuant to a public offering in Colombia and an international private placement, CLH, a direct subsidiary of CEMEX España, S.A., concluded its initial offering of common shares. CLH’s assets include substantially all of CEMEX’s assets in Colombia, Panama, Costa Rica, Brazil, Guatemala and El Salvador. As of December 31, 2017 and 2016, there is a non-controlling interest in CLH of approximately 26.75% and 26.72%, respectively, of CLH’s outstanding common shares, excluding shares held in treasury (see note 4.4 for certain relevant condensed financial information).

Perpetual debentures

As of December 31, 2017 and 2016, the balances of the non-controlling interest included US$440 ($7,581) and US$438 ($9,075), respectively, representing the notional amount of perpetual debentures, which exclude any perpetual debentures held by subsidiaries.

Interest expense on the perpetual debentures, was included within “Other equity reserves” and amounted to $482 in 2017, $507 in 2016 and $432 in 2015, excluding in all the periods the amount of interest accrued by perpetual debentures held by subsidiaries.

CEMEX’s perpetual debentures have no fixed maturity date and there are no contractual obligations for CEMEX to exchange any series of its outstanding perpetual debentures for financial assets or financial liabilities. As a result, these debentures, issued entirely by Special Purpose Vehicles (“SPVs”), qualify as equity instruments and are classified within non-controlling interest, as they were issued by consolidated entities. In addition, subject to certain conditions, CEMEX has the unilateral right to defer indefinitely the payment of interest due on the debentures. The classification of the debentures as equity instruments was made under applicable IFRS. The different SPVs were established solely for purposes of issuing the perpetual debentures and were included in CEMEX’s consolidated financial statements.

As of December 31, 2017 and 2016, the detail of CEMEX’s perpetual debentures, excluding the perpetual debentures held by subsidiaries, was as follows:

 

2017

2016

Repurchase option

Interest rate

Issuer

Issuance date

Nominal amount

Nominal amount

C10-EUR Capital (SPV) Ltd

May 2007

€

64

€

64

Tenth anniversary

EURIBOR+4.79%

C8 Capital (SPV) Ltd

February 2007

US$

135

US$

135

Eighth anniversary

LIBOR+4.40%

C5 Capital (SPV) Ltd 1

December 2006

US$

61

US$

61

Fifth anniversary

LIBOR+4.277%

C10 Capital (SPV) Ltd

December 2006

US$

175

US$

175

Tenth anniversary

LIBOR+4.71%

 

1	Under the 2017 Credit Agreement, and previously under the 2014 Credit Agreement, CEMEX is not permitted to call these debentures.

 

57

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

21)	EXECUTIVE SHARE-BASED COMPENSATION

CEMEX has long-term restricted share-based compensation programs providing for the grant of the Parent Company’s CPOs to a group of eligible executives, pursuant to which, new CPOs are issued under each annual program over a service period of four years (the “ordinary program”). The Parent Company’s CPOs of the annual grant (25% of each annual ordinary program) are placed at the beginning of the service period in the executives’ accounts to comply with a one year restriction on sale. Under the ordinary programs, the Parent Company issued new shares for approximately 53.2 million CPOs in 2017, 53.9 million CPOs in 2016 and 49.2 million CPOs in 2015 that were subscribed and pending for payment in the Parent Company’s treasury. As of December 31, 2017, there are approximately 79 million CPOs associated with these annual programs that are potentially expected to be issued in the following years as the executives render services.

Moreover, beginning in 2017, with the approval of the Parent Company’s Board of Directors, for a group of key executives, the conditions of the program were modified for new awards by reducing the service period from four to three years and implementing three-annual internal and external performance metrics, which depending in their weighted achievement, may result in a final payment in the Parent Company’s CPOs at the end of the third year between 0% and 200% of the target for each annual program (the “key executives program”). During 2017, no CPOs of the Parent Company were issued under the key executives program.

Beginning January 1, 2013, those eligible executives belonging to the operations of CLH and subsidiaries ceased to receive Parent Company’s CPOs and instead started receiving shares of CLH, sharing significantly the same conditions of CEMEX’s plan also over a service period of four years. During 2017, 2016 and 2015, CLH physically delivered 172,981 shares, 271,461 shares and 242,618 shares, respectively, corresponding to the vested portion of prior years’ grants, which were subscribed and held in CLH’s treasury. As of December 31, 2017, there are 798,552 shares of CLH associated with these annual programs that are expected to be delivered in the following years as the executives render services.

The combined compensation expense related to the programs described above as determined considering the fair value of the awards at the date of grant in 2017, 2016 and 2015, was recognized in the operating results against other equity reserves and amounted to $817, $742 and $655, respectively. The weighted average price per CPO granted during the period was approximately 14.28 pesos in 2017, 13.79 pesos in 2016 and 13.34 pesos in 2015. Moreover, the weighted average price per CLH share granted during the period was 13,077 Colombian pesos in 2017, 13,423 Colombian pesos in 2016 and 14,291 Colombian pesos in 2015. As of December 31, 2017 and 2016, there were no options or commitments to make payments in cash to the executives based on changes in the market price of the Parent Company’s CPO or CLH’s shares.

 

22)	EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income attributable to ordinary equity holders of the Parent Company (the numerator) by the weighted average number of shares outstanding (the denominator) during the period. Shares that would be issued depending only by the passage of time should be included in the determination of the basic weighted average number of shares outstanding. Diluted earnings per share should reflect in both, the numerator and denominator, the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions, to the extent that such assumption would led to a reduction in basic earnings per share or an increase in basic loss per share, otherwise, the effects of potential shares are not considered because they generate antidilution.

The amounts considered for calculations of earnings per share in 2017, 2016 and 2015 were as follows:

 

		2017				2016				2015
Denominator (thousands of shares)
Weighted average number of shares outstanding 1			43,107,457				42,211,409				41,491,672
Capitalization of retained earnings 2			1,687,295				1,687,295				1,687,295
Effect of dilutive instruments – mandatorily convertible securities (note 16.2) 3			708,153				708,153				708,153
Weighted average number of shares – basic			45,502,905				44,606,857				43,887,120
Effect of dilutive instruments – share-based compensation (note 21) 3			237,102				226,972				171,747
Effect of potentially dilutive instruments – optionally convertible securities (note 16.2) 3			2,698,600				3,834,458				5,065,605
Weighted average number of shares – diluted			48,438,607				48,668,287				49,124,472
Numerator
Net income from continuing operations		$	13,139				14,438				1,096
Less: non-controlling interest net income			1,417				1,173				923
Controlling interest net income from continuing operations			11,722				13,265				173
Plus: after tax interest expense on mandatorily convertible securities			91				119				144
Controlling interest net income from continuing operations – for basic earnings per share calculations			11,813				13,384				317
Plus: after tax interest expense on optionally convertible securities			903				1,079				1,288
Controlling interest net income from continuing operations – for diluted earnings per share calculations		$	12,716				14,463				1,605
Net income from discontinued operations		$	3,499				768				1,028

 

58

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Earnings per share - continued

 

		2017				2016				2015
Basic earnings per share
Controlling interest basic earnings per share		$	0.34				0.32				0.03
Controlling interest basic earnings per share from continuing operations			0.26				0.30				0.01
Controlling interest basic earnings per share from discontinued operations			0.08				0.02				0.02
Controlling interest diluted earnings per share 4
Controlling interest diluted earnings per share		$	0.34				0.32				0.03
Controlling interest diluted earnings per share from continuing operations			0.26				0.30				0.01
Controlling interest diluted earnings per share from discontinued operations			0.08				0.02				0.02

 

1	The weighted average number of shares outstanding in 2016 and 2015 reflects the shares issued as a result of the capitalization of retained earnings declared on March 2016 and March 2015, as applicable (note 20.1).

2	According to resolution of the Parent Company’s stockholders’ meeting on March 30, 2017.

3

The number of CPOs to be issued under the executive share-based compensation programs, as well as the total amount of CPOs committed for issuance in the future under the mandatorily and optionally convertible securities, are computed from the beginning of the reporting period. The number of shares resulting from the executives’ stock option programs is determined under the inverse treasury method.

4	For 2017, 2016 and 2015, the effects on the denominator and numerator of potential dilutive shares generate antidilution; therefore, there is no change between the reported basic earnings per share and diluted earnings per share.

 

23)	COMMITMENTS

 

23.1)

GUARANTEES

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V., had guaranteed loans of certain subsidiaries for US$1,506 ($29,601) and US$2,887 ($59,819), respectively.

 

23.2)

PLEDGED ASSETS

CEMEX transferred to a guarantee trust the shares of its main subsidiaries, including, among others, CEMEX México, S.A. de C.V., New Sunward Holding B.V. and CEMEX España, S.A., and entered into pledge agreements in order to secure payment obligations under the 2017 Credit Agreement (formerly under the 2014 Credit Agreement and the Facilities Agreement) and other debt instruments entered into prior to the date of these agreements (note 16.1).

As of December 31, 2017 and 2016, there are no liabilities secured by property, machinery and equipment.

 

23.3)

OTHER COMMITMENTS

As of December 31, 2017 and 2016, CEMEX was party of other commitments for several purposes, including the purchase of fuel and energy, which estimated future cash flows over their maturity are presented in note 23.5. A description of the most significant contracts is as follows:

 

•

In connection with the beginning of full commercial operations of the Ventika S.A.P.I. de C.V. and the Ventika II S.A.P.I. de C.V. wind farms (jointly “Ventikas”) located in the Mexican state of Nuevo Leon with a combined generation capacity of 252 Megawatts (“MW”), CEMEX agreed to acquire a portion of the energy generated by Ventikas for its overall electricity needs in Mexico for a period of 20 years, which began in April 2016. As of December 31, 2017, the estimated annual cost of this agreement is US$27 (unaudited) assuming that CEMEX receives all its energy allocation. Nonetheless, energy supply from wind source is variable in nature and final amounts will be determined considering the final MW effectively received at the agreed prices per unit.

 

•

On July 30, 2012, CEMEX signed a 10-year strategic agreement with International Business Machines Corporation (“IBM”) pursuant to which IBM provides, among others, data processing services (back office) in finance, accounting and human resources; as well as Information Technology (“IT”) infrastructure services, support and maintenance of IT applications in the countries in which CEMEX operates.

 

•

Beginning in February 2010, for its overall electricity needs in Mexico CEMEX agreed with EURUS the purchase a portion of the electric energy generated for a period of no less than 20 years. EURUS is a wind farm with an installed capacity of 250 MW operated by ACCIONA in the Mexican state of Oaxaca. As of December 31, 2017, the estimated annual cost of this agreement is US$71 (unaudited) assuming that CEMEX receives all its energy allocation. Nonetheless, energy supply from wind source is variable in nature and final amounts will be determined considering the final MWh effectively received at the agreed prices per unit.

 

•

CEMEX maintains a commitment initiated in April 2004 to purchase the energy generated by Termoeléctrica del Golfo (“TEG”) until 2027 for its overall electricity needs in Mexico. As of December 31, 2017, the estimated annual cost of this agreement is US$110 (unaudited) assuming that CEMEX receives all its energy allocation. Nonetheless, final amounts will be determined considering the final MWg effectively received at the agreed prices per unit.

 

59

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Other commitments - continued

 

•

In regards with the above, CEMEX also committed to supply TEG and another third-party electrical energy generating plant adjacent to TEG all fuel necessary for their operations until the year 2027, equivalent to approximately 1.2 million tons of petroleum coke per year. CEMEX covers its commitments under this agreement acquiring the aforementioned volume of fuel from sources in the international markets and Mexico.

 

•

CEMEX Ostzement GmbH (“COZ”), CEMEX’s subsidiary in Germany, held a long-term energy supply contract until 2023 with STEAG - Industriekraftwerk Rüdersdorf GmbH (“SIKW”) in connection with the overall electricity needs of CEMEX’s Rüdersdorf plant. Based on the contract, each year COZ has the option to fix in advance the volume of energy in terms of MW that it will acquire from VEN SIKW, with the option to adjust the purchase amount one time on a monthly and quarterly basis. The estimated annual cost of this agreement is approximately US$12 (unaudited) assuming that CEMEX receives all its energy allocation.

 

23.4)

COMMITMENTS FROM EMPLOYEE BENEFITS

In some countries, CEMEX has self-insured health care benefits plans for its active employees, which are managed on cost plus fee arrangements with major insurance companies or provided through health maintenance organizations. As of December 31, 2017, in certain plans, CEMEX has established stop-loss limits for continued medical assistance derived from a specific cause (e.g., an automobile accident, illness, etc.) ranging from 23 thousand dollars to 400 thousand dollars. In other plans, CEMEX has established stop-loss limits per employee regardless of the number of events ranging from 100 thousand dollars to 2.5 million dollars. The contingency for CEMEX if all employees qualifying for health care benefits required medical services simultaneously is significantly. However, this scenario is remote. The amount expensed through self-insured health care benefits was US$64 ($1,258) in 2017, US$69 ($1,430) in 2016 and US$69 ($1,189) in 2015.

 

23.5)

CONTRACTUAL OBLIGATIONS

As of December 31, 2017 and 2016, CEMEX had the following contractual obligations:

 

(U.S. dollars millions)		2017																				2016
		Less than 1 year				1-3 years				3-5 years				More than 5 years				Total				Total
Obligations
Long-term debt		US$	798				519				2,411				6,164				9,892				11,379
Finance lease obligations 1			36				87				52				—				175				107
Convertible notes 2			379				527				—				—				906				1,205
Total debt and other financial obligations 3			1,213				1,133				2,463				6,164				10,973				12,691
Operating leases 4			109				181				136				68				494				515
Interest payments on debt 5			448				968				809				848				3,073				3,996
Pension plans and other benefits 6			156				307				316				808				1,587				1,414
Purchases of raw materials, fuel and energy 7			649				810				866				2,001				4,326				4,440
Total contractual obligations		US$	2,575				3,399				4,590				9,889				20,453				23,056
		$	50,599				66,790				90,193				194,319				401,901				477,720

1	Represent nominal cash flows. As of December 31, 2017, the NPV of future payments under such leases was US$158 ($3,105), of which, US$79 ($1,552) refers to payments from 1 to 3 years and US$48 ($943) refer to payments from 3 to 5 years.

2	Refers to the components of liability of the convertible notes described in note 16.2 and assumes repayment at maturity and no conversion of the notes.

3	The schedule of debt payments, which includes current maturities, does not consider the effect of any refinancing of debt that may occur during the following years. In the past, CEMEX has replaced its long-term obligations for others of a similar nature.

4

The amounts represent nominal cash flows. CEMEX has operating leases, primarily for operating facilities, cement storage and distribution facilities and certain transportation and other equipment, under which annual rental payments are required plus the payment of certain operating expenses. Rental expense was US$115 ($2,252) in 2017, US$121 ($2,507) in 2016 and US$114 ($1,967) in 2015.

5	Estimated cash flows on floating rate denominated debt were determined using the floating interest rates in effect as of December 31, 2017 and 2016.

6	Represents estimated annual payments under these benefits for the next 10 years (note 18), including the estimate of new retirees during such future years.

7

Future payments for the purchase of raw materials are presented on the basis of contractual nominal cash flows. Future nominal payments for energy were estimated for all contractual commitments on the basis of an aggregate average expected consumption per year using the future prices of energy established in the contracts for each period. Future payments also include CEMEX’s commitments for the purchase of fuel.

 

60

---

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

24)	LEGAL PROCEEDINGS

 

24.1)

PROVISIONS RESULTING FROM LEGAL PROCEEDINGS

CEMEX is involved in various significant legal proceedings, the resolutions of which are deemed probable and imply cash outflows or the delivery of other resources owned by CEMEX. As a result, certain provisions or losses have been recognized in the financial statements, representing the best estimate of the amounts payable or the amount of impaired assets. Therefore, CEMEX believes that it will not make significant expenditure or incur significant losses in excess of the amounts recorded. As of December 31, 2017, the details of the most significant events giving effect to provisions or losses are as follows:

 

•

Regarding the Maceo project in Colombia (note 14), in August 2012, CEMEX Colombia signed a memorandum of understanding (“MOU”) with the representative of CI Calizas y Minerales S.A. (“CI Calizas”), which objective was the acquisition and transfer of assets comprising land, the mining concession and the environmental permit, the common shares of the entity Zona Franca Especial Cementera del Magdalena Medio S.A.S. (“Zomam”) (holder of the free trade zone concession), as well as the rights to build the new cement plant. After signing the MOU, a former shareholder of CI Calizas, who presumptively transferred its shares of CI Calizas two years before the signing of the MOU, was linked to a process of expiration of property initiated by Colombia’s Attorney General (the “Attorney General”). Amongst other measures, the Attorney General ordered the seizure and consequent suspension of the right to dispose the assets subject to the MOU. CEMEX Colombia acquired the shares of Zomam before the beginning of such process; nonetheless, the Attorney General decided to also include them in the action of expiration of property. To protect its interests and defend its rights as a third party acting in good faith and free of guilt, CEMEX Colombia joined the expiration of property process fully cooperating with the Attorney General.

In July 2013, CEMEX Colombia signed with the provisional depository of the assets, designed by the Drugs National Department (Dirección Nacional de Estupefacientes, then depository of the affected assets), which functions after its liquidation were assumed by the Administrator of Special Assets (Sociedad de Activos Especiales S.A.S. or the “SAE”), a lease contract for a period of five years, which can be early terminated by the SAE, by means of which CEMEX Colombia was duly authorized to continue with the necessary works for the construction and operation of the plant (the “Lease Contract”). Likewise, the provisional depository granted a mandate to CEMEX Colombia for the same purpose. CEMEX considers that during the course of the different legal processes, the Lease Contract enables it to use and enjoy the land in order to operate the plant. Therefore, CEMEX Colombia plans to negotiate an extension to the Lease Contract before its maturity in July 2018, as well as an agreement that would allow CEMEX Colombia to operate the plant while the expiration of property process is exhausted.

In May 2016, the Attorney General resolved to deny the inadmissibility request to the action for expiration of property previously filed by CEMEX Colombia, considering that it should broaden the collection of evidential elements and its analysis in order to take a resolution according to law. As of December 31, 2017, given the nature of the process and the several procedural stages, it is estimated that it may take between five and ten years for the issuance of a final resolution in respect to the aforementioned process, which is in its investigation stage awaiting for the defendants’ legal counsel (guardians ad litem) designated by the Attorney General to assume functions in order to open the evidentiary stage.

Moreover, in connection with Maceo’s project, CEMEX Colombia also engaged the same representative of CI Calizas to also represent in the name and on behalf of CEMEX Colombia in the acquisition of land adjacent to the plant, signing a new memorandum of understanding with this representative (the “Land MOU”). During 2016, CEMEX received reports through its anonymous reporting line, related to possible deficiencies in the purchase process of land were the cement plant is located. At this respect, CEMEX initiated an investigation and internal audit in accordance with its corporate governance policies and its code of ethics, confirming the irregularities in such process described below. As a result, on September 23, 2016, CLH and CEMEX Colombia decided to terminate the employment relationship with the Vice President of Planning of CLH and CEMEX Colombia, with the Legal Counsel of CLH and CEMEX Colombia; and accepted the resignation of the Chief Executive Officer of CLH and President of CEMEX Colombia to facilitate investigations. In order to strengthen the levels of leadership, management and best practices of corporate governance, in October 2016, the Board of Directors of CLH decided to separate the roles of Chairman of the Board of Directors, Chief Executive Officer of CLH and President of CEMEX Colombia, and immediately made the respective appointments. Moreover, pursuant to a requirement of CEMEX, S.A.B. de C.V.’s Audit Committee and of CLH’s Audit Commission, an audit firm, experts in forensic audits, was engaged in order to perform an independent investigation of the Maceo project. Additionally, CEMEX Colombia and CLH engaged an external firm to assist CLH and CEMEX Colombia on the necessary collaboration with the Attorney General and management also engaged a team of external lawyers for its own legal advice.

The internal audit initiated in 2016 found that CEMEX Colombia made cash advances and paid interest to this representative for amounts in Colombian pesos equivalent to US$13.4 and US$1.2, respectively, in both cases considering the Colombian peso to U.S. dollar exchange rate as of December 31, 2016. These payments were deposited in the representative’s personal bank account as advance payments under the MOU and the Land MOU. CEMEX Colombia paid interest according to the representative’s instructions. Pursuant to the expiration of property process of the assets subject to the MOU and the failures to legally formalize the purchases under the Land MOU, as of the reporting date, CEMEX Colombia is not the legitimate owner of the aforementioned assets. Considering that payments made by CEMEX Colombia under the MOU and the Land MOU were made in violation of CEMEX’s and CLH’s internal policies; both CLH and CEMEX Colombia reported these facts to the Attorney General, providing the findings obtained during the investigations and internal audits, and also filed a claim in the civil courts aiming that all property rights related to the additional land, some of which were assigned to the representative, would be effectively transferred to CEMEX.

 

61

---

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Provisions resulting from legal proceedings - continued

 

Based on the investigation and internal audit related to Maceo’s project mentioned above, and considering the findings and the legal opinions available, in December 2016, CEMEX determined: a) low probability of recovering resources delivered under the different memorandums of understanding for an amount in Colombian pesos equivalent to US$14.3 ($295) recognized as part of investments in progress, were reduced to zero recognizing an impairment loss for such amount against “Other expenses, net;” b) certain purchases of equipment installed in the plant were considered exempt for VAT purposes under the benefits of the free trade zone, however, as those assets were actually installed outside of the free trade zone’s area, they lack of such benefits, therefore, CEMEX increased investments in progress against VAT accounts payable for US$9.2 ($191); and c) the cancellation of the balance payable to CI Calizas under the MOU in connection with the acquisition of the assets for US$9.1 ($188) against a reduction in investments in progress. All these amounts considering the Colombian peso to U.S. dollar exchange rate as of December 31, 2016. During 2017, no additional significant adjustments or losses have been determined in relation to this project. CEMEX Colombia determined an initial total budget for the Maceo plant of US$340. As of December 31, 2017, the carrying amount of the project, net of adjustments, is for an amount in Colombian pesos equivalent to $6,543 (US$333), considering the exchange rates as of December 31, 2017.

In relation to the aforementioned irregularities detected, there is an ongoing criminal investigation by the Attorney General. As of December 31, 2017, the investigation by the Attorney General is finalizing its initial stage (inquiry) and a hearing to present charges was set for January 15, 2018, which would initiate the second stage of the proceeding (investigation). CEMEX is neither able to predict the actions that the General Attorney could implement, nor the possibility and degree in which any of these possible actions, including the termination of employment of the aforementioned executives, could have a material adverse effect on CEMEX’s results of operation, liquidity or financial position. Under the presumption that CEMEX Colombia conducted itself in good faith, and considering that the rest of its investments made in the development of Maceo’s project were made with the consent of the SAE and CI Calizas, such investments are protected by Colombian law, under which, if a person builds on the property of a third party, with full knowledge of such third party, this third party may: a) take ownership of the plant, provided a corresponding indemnity to CEMEX Colombia, or otherwise, b) oblige CEMEX Colombia to purchase the land. Consequently, CEMEX considers that will be able to retain ownership of the plant and other refurbishments made. Nonetheless, had this not be the case, CEMEX Colombia would take all necessary actions to safeguard the project in Maceo. At this respect, there is the possibility that CEMEX considers remote, in which, in the event that the expiration of property over the assets subject to the MOU is ordered in favor of the State, the SAE may decide not to sell the assets to CEMEX Colombia, or, the SAE may elect to maintain ownership of the assets and not extend the Lease Contract. In both cases, under Colombian law, CEMEX Colombia would be entitled to an indemnity for the amount of its incurred investments. However, an adverse resolution at this respect could have a material adverse effect on the Company’s results of operations, liquidity or financial condition.

In October 2016, considering information that also emerged from the audits, CEMEX decided to postpone the start-up of the Maceo plant and the construction of the access road until the following issues would be resolved: (i) there are pending permits required to finalize the access road to the Maceo plant, critical infrastructure to assure safety and capacity to transport products from the plant; (ii) CEMEX Colombia has requested an expansion to the free trade zone to cover the totality of the cement plant in order to access the tax benefits originally projected for the plant, for which is critical that the request for partial adjustment to the District of Integrated Management (“DIM”) would be finalized in July 2018, in order to allow CEMEX Colombia continue with the expansion process of the free trade zone; (iii) it is necessary to modify the environmental license to expand its production to 950 thousand tons of clinker per year as initially planned; as well as to reduce the size of the zoning area in order to avoid any overlap with the DIM; (iv) a subsidiary of CEMEX Colombia holds the environmental permit for project Maceo, however, the transfer of the mining concession was revoked by the Antioquia Mining Government Ministry in December 2013 and reassigned to CI Calizas. As a result, the environmental permit and the mining concession are in custody of different entities, contrary to standard situation; and (v) the mining permit of the plant partially overlaps with the DIM. In connection with these issues, on December 13, 2016, Corantioquia, the regional environmental agency, communicated its negative resolution to CEMEX Colombia’s request to increase the mining concession for up to 950 thousand tons per year, resolution that was appealed by CEMEX Colombia, whom continues working to address these issues as soon as possible, including the zoning and reconciliation of the Maceo project with the DIM, as well as analyzing alternatives for partial extraction of the DIM aiming to evidence the feasibility of achieving the expansion of the proposed activity in the project. Once these alternatives are implemented, CEMEX Colombia would reconsider submitting a new request for modification of the environmental license to expand its production to the initially envisaged 950 thousand tons. Meanwhile, CEMEX Colombia will limit its activities to those authorized under the currently effective environmental license and mining title.

 

•

On December 11, 2017, in the context of a market investigation opened in 2013 against five cement companies and 14 executives of those companies, including two former executives of CEMEX Colombia for purported practices that limited free competition, and after several processes over the years, the Colombian Superintendence of Industry and Commerce (Superintendencia de Industria y Comercio or the “SIC”) imposed a final fine to CEMEX Colombia for an amount equivalent to US$25 ($491) to be paid no later than January 5, 2018, considering CEMEX Colombia’s defense strategy. As a result, as of December 31, 2017, CEMEX Colombia recognized a provision for the full amount against “Other expenses, net.” CEMEX Colombia will not appeal the resolution of the SIC and instead intends directly to file an annulment and reestablishment of right claim before the Administrative Court within the four months after the resolution. Once filed, this claim could take a considerable amount of time in being resolved. As of December 31, 2017, CEMEX is not able to assess the likelihood for the recovery of the fine imposed by the SIC or the timeframe for the defense process.

 

62

---

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Provisions resulting from legal proceedings - continued

 

•

In January 2007, the Polish Competition and Consumers Protection Office (the “Protection Office”) initiated an antitrust proceeding against all cement producers in the country, including CEMEX Polska Sp. Z.o.o.(“CEMEX Polska”) and another subsidiary in Poland, arguing that there was an agreement between all cement producers in Poland regarding prices, market quotas and other sales conditions; and that the producers exchanged information, all of which limited competition in the Polish cement market. In December 2009, the Protection Office issued a resolution imposing fines on a number of Polish cement producers, including CEMEX Polska for the period of 1998 to 2006. The fine imposed on CEMEX Polska, after an appeal before the Polish Court of Competition and Consumer Protection in Warsaw amounts to the equivalent of US$27 ($531). In 2014, CEMEX Polska filed an appeal against the fine and the case has been since in the Appeals Court in Warsaw (the “Appeals Court”). The above mentioned penalty is not enforceable until the Appeals Court issues its final judgment and if the penalty is maintained in the final resolution, then it will be payable within 14 calendar days of the announcement. As of December 31, 2017, CEMEX had accrued a provision for the full amount of the fine mentioned above representing the best estimate in connection with this resolution. CEMEX Polska estimates that the final judgment will be issued during 2018.

 

•

As of December 31, 2017, CEMEX had accrued environmental remediation liabilities in the United Kingdom pertaining to closed and current landfill sites for the confinement of waste, representing the NPV of such obligations for an amount in Sterling Pounds equivalent to US$178 ($3,493). Expenditure was assessed and quantified over the period in which the sites have the potential to cause environmental harm, which was accepted by the regulator as being up to 60 years from the date of closure. The assessed expenditure included the costs of monitoring the sites and the installation, repair and renewal of environmental infrastructure.

 

•

As of December 31, 2017, CEMEX had accrued environmental remediation liabilities in the United States for an amount of US$30 ($586), related to: a) the disposal of various materials in accordance with past industry practice, which might currently be categorized as hazardous substances or wastes, and b) the cleanup of sites used or operated by CEMEX, including discontinued operations, regarding the disposal of hazardous substances or waste, either individually or jointly with other parties. Most of the proceedings are in the preliminary stages, and a final resolution might take several years. Based on the information developed to date, CEMEX’s does not believe that it will be required to spend significant sums on these matters in excess of the amounts previously recorded. The ultimate cost that may be incurred to resolve these environmental issues cannot be assured until all environmental studies, investigations, remediation work and negotiations with, or litigation against, potential sources of recovery have been completed.

 

24.2)

OTHER CONTINGENCIES FROM LEGAL PROCEEDINGS

CEMEX is involved in various legal proceedings, which have not required the recognition of accruals, considering that the probability of loss is less than probable or remote. In certain cases, a negative resolution may represent the revocation of an operating license, in which case, CEMEX may experience a decrease in future revenues, an increase in operating costs or a loss. Nonetheless, until all stages in the procedures are exhausted in each proceeding, CEMEX cannot assure the achievement of a final favorable resolution. As of December 31, 2017, the most significant events with a quantification of the potential loss, when it is determinable and would not impair the outcome of the relevant proceeding, were as follows:

 

•

In December 2016, CEMEX, S.A.B. de C.V. received subpoenas from the United States Securities and Exchange Commission (“SEC”) seeking information that may allow determining whether there are violations of the U.S. Foreign Corrupt Practices Act in connection with the Maceo project. These subpoenas do not mean that the SEC has concluded that CEMEX violated the law. The payments made by CEMEX Colombia in connection with Maceo’s project under the MOU and the MOU with the Representative described above, were made to non-governmental individuals in breach of CEMEX and CLH established protocols. CEMEX has been cooperating with the SEC and the Attorney General and intends to continue cooperating fully with the SEC and the Attorney General. It is possible that the United States Department of Justice or investigatory entities in other jurisdictions may also open investigations into this matter. To the extent they do so, CEMEX intends to cooperate fully with those inquiries, as well. As of December 31, 2017, CEMEX is neither able to predict the duration, scope, or outcome of the SEC investigation or any other investigation that may arise, nor has elements to determine the probability that the SEC’s investigation results may or may not have a material adverse impact on its consolidated results of operations, liquidity or financial position.

 

•

In September 2016, CEMEX España Operaciones, S.L.U. (“CEMEX España Operaciones”), a subsidiary of CEMEX in Spain, in the context of a market investigation initiated in 2014 for alleged anticompetitive practices in 2009 for the cement market and the years 2008, 2009, 2012, 2013 and 2014 for the ready-mix market, was notified of a resolution by the National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia or the “CNMC”) requiring the payment of a fine for €6 (US$7 or $138). CEMEX España Operaciones appealed the fine and requested the suspension of payment before the National Court (Audiencia Nacional), which granted the requested suspension; subject to issuance of a bank guarantee for the principal amount of the sanction. The CNMC was notified. As of December 31, 2017, CEMEX do not expect that an adverse resolution to this matter would have a material adverse impact on our results of operations, liquidity and financial condition.

 

63

---

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Other contingencies from legal proceedings - continued

 

 

•

In February 2014, the Egyptian Tax Authority requested Assiut Cement Company (“ACC”), a subsidiary of CEMEX in Egypt, the payment of a development levy on clay applied to the Egyptian cement industry in amounts equivalent as of December 31, 2017 of US$18 ($357) for the period from May 5, 2008 to November 30, 2011. In March 2014, ACC appealed the levy and obtained a favorable resolution by the Ministerial Committee for Resolution of Investment Disputes, which instructed the Egyptian Tax Authority to cease claiming ACC the aforementioned payment of the levy on clay. It was further decided that the levy on clay should not be imposed on imported clinker. Nonetheless, in May 2016, the Egyptian tax authority challenged ACC´s right to cancel the levy on clay before the North Cairo Court, which referred the cases to Cairo’s Administrative Judiciary Court. As of December 31, 2017, a session has been scheduled for February 5, 2018 in order to review the two referred cases. At this stage, as of December 31, 2017, CEMEX does not expect a material adverse impact due to this matter in its results of operations, liquidity or financial position.

 

•

In September 2012, in connection with a lawsuit submitted to a first instance court in Assiut, Egypt in 2011, the first instance court of Assiut issued a resolution in order to nullify the Share Purchase Agreement (the “SPA”) pursuant to which CEMEX acquired in 1999 a controlling interest in Assiut Cement Company (“ACC”). In addition, during 2011 and 2012, lawsuits seeking, among other things, the annulment of the SPA were filed by different plaintiffs, including 25 former employees of ACC, before Cairo’s State Council. After several appeals, hearings and resolutions over the years, as of December 31, 2017, in connection with the first lawsuit of 2011, was referred by the Assiut’s Administrative Judiciary Court to the Commissioners’ Division to render the corresponding opinion; whereas in respect to the second lawsuits, the cases are held in Cairo’s 7th Circuit State Council Administrative Judiciary Court awaiting also for the High Constitutional Court to pronounce itself in regards to the challenges against the constitutionality of Law 32/2014 filed by the plaintiffs, which protects CEMEX’s investments in Egypt. These matters are complex and take several years to be resolved. As of December 31, 2017, CEMEX is not able to assess the likelihood of an adverse resolution regarding these lawsuits nor is able to assess if the Constitutional Court will dismiss Law 32/2014, but, regarding the lawsuits, if adversely resolved, CEMEX does not believe the resolutions in the first instance would have an immediate material adverse impact on CEMEX’s operations, liquidity and financial condition. However, if CEMEX exhausts all legal recourses available, a final adverse resolution of these lawsuits, or if the Constitutional Court dismisses Law 32/2014, this could adversely impact the ongoing matters regarding the SPA, which could have a material adverse impact on CEMEX’s operations, liquidity and financial condition.

 

•

In 2012, in connection with a contract entered into in 1990 (the “Quarry Contract”) by CEMEX Granulats Rhône Méditerranée (“CEMEX GRM”), one of CEMEX’s subsidiaries in France, with SCI La Quinoniere (“SCI”) pursuant to which CEMEX GRM has drilling rights in order to extract reserves and do quarry remediation at a quarry in the Rhone region of France, SCI filed a claim against CEMEX GRM for breach of the Quarry Contract, requesting the rescission of such contract and damages plus interest for an amount in euros equivalent to US$66 ($1,297), arguing that CEMEX GRM partially filled the quarry allegedly in breach of the terms of the Quarry Contract. After many hearings, resolutions and appeals over the years, as of December 31, 2017, the case is held in the appeals court in Lyon, France, where a judgment is expected by mid 2018. As of December 31, 2017, CEMEX considers that an adverse resolution on this matter would not have a material adverse impact on CEMEX’s results of operations, liquidity and financial condition.

 

•

In June 2012, one of CEMEX’s subsidiaries in Israel and three other companies were notified about a class action suits filed by a homeowner who built his house with concrete supplied by the defendants in October 2010. The class action argues that the concrete supplied to him did not meet with the Israeli ready-mix strength standard requirements and that as a result CEMEX acted unlawfully toward all of its customers who received concrete that did not comply with such standard requirements, causing financial and non-financial damages to those customers, including the plaintiff. CEMEX presumes that the class action would represent the claim of all the clients who purchased the alleged non-conforming concrete from its subsidiary in Israel during the past 7 years, the limitation period according to applicable laws in Israel. The damages that could be sought are equivalent to US$80 ($1,564). After several hearings to present evidence from all parties over the years and the resolution of the court to join together all claims against all four companies in order to simplify and shorten court proceedings, as of December 31, 2017, the proceedings are finalizing the evidentiary stage, and CEMEX’s subsidiary in Israel is not able to assess the likelihood of the class action application being approved or, if approved, of an adverse result, such as an award for damages in the full amount that could be sought, but if adversely resolved CEMEX considers that an adverse resolution on this matter would not have a material adverse impact on its results of operations, liquidity or financial condition.

 

•

In June 2010, the District of Bogota’s Environmental Secretary (the “Environmental Secretary”), ordered the suspension of CEMEX Colombia’s mining activities at El Tunjuelo quarry, located in Bogota, sealed off the mine to machinery and prohibited the removal of aggregates inventory, as well as those of other aggregates producers in the same area. The Environmental Secretary alleged that during the past 60 years, CEMEX Colombia and the other companies have illegally changed the course of the Tunjuelo River, have used the percolating waters without permission and have improperly used the edge of the river for mining activities. CEMEX Colombia responded to the injunction by requesting that it be revoked based on the fact that the mining activities at El Tunjuelo quarry are supported by the authorizations required by the applicable environmental laws and that all the environmental impact statements submitted by CEMEX Colombia have been reviewed and permanently authorized by the Ministry of Environment and Sustainable Development. Although there is not an official quantification of the possible fine, the Environmental Secretary has publicly declared that the fine could be up to the equivalent of US$100 ($1,976). As of December 31, 2017, CEMEX is not able to assess the likelihood of an adverse result or potential damages which could be borne by CEMEX Colombia. An adverse resolution on this case could have a material adverse impact on CEMEX’s results of operations, liquidity or financial condition.

 

64

---

CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Other contingencies from legal proceedings - continued

 

In connection with the legal proceedings presented in notes 24.1 and 24.2, the exchange rates as of December 31, 2017 used by CEMEX to convert the amounts in local currency to their equivalents in dollars were the official closing exchange rates of 3.47 Polish zloty per dollar, 0.83 Euro per dollar, 0.74 British pound sterling per dollar, 2,984.0 Colombian pesos per dollar and 3.47 Israelite shekel per dollar.

In addition to the legal proceedings described above in notes 24.1 and 24.2, as of December 31, 2017, CEMEX is involved in various legal proceedings of minor impact that have arisen in the ordinary course of business. These proceedings involve: 1) product warranty claims; 2) claims for environmental damages; 3) indemnification claims relating to acquisitions or divestitures; 4) claims to revoke permits and/or concessions; and 5) other diverse civil actions. CEMEX considers that in those instances in which obligations have been incurred, CEMEX has accrued adequate provisions to cover the related risks. CEMEX believes these matters will be resolved without any significant effect on its business, financial position or results of operations. In addition, in relation to certain ongoing legal proceedings, CEMEX is sometimes able to make and disclose reasonable estimates of the expected loss or range of possible loss, as well as disclose any provision accrued for such loss, but for a limited number of ongoing legal proceedings, CEMEX may not be able to make a reasonable estimate of the expected loss or range of possible loss or may be able to do so but believes that disclosure of such information on a case-by-case basis would seriously prejudice CEMEX’s position in the ongoing legal proceedings or in any related settlement discussions. Accordingly, in these cases, CEMEX has disclosed qualitative information with respect to the nature and characteristics of the contingency, but has not disclosed the estimate of the range of potential loss.

 

25)	RELATED PARTIES

All significant balances and transactions between the entities that constitute the CEMEX group have been eliminated in the preparation of the consolidated financial statements. These balances with related parties resulted primarily from: (i) the sale and purchase of goods between group entities; (ii) the sale and/or acquisition of subsidiaries’ shares within the CEMEX group; (iii) the invoicing of administrative services, rentals, trademarks and commercial name rights, royalties and other services rendered between group entities; and (iv) loans between related parties. Transactions between group entities are conducted on arm’s length terms based on market prices and conditions. When market prices and/or market conditions are not readily available, CEMEX conducts transfer pricing studies in the countries in which it operates to assure compliance with regulations applicable to transactions between related parties.

The definition of related parties includes entities or individuals outside the CEMEX group, which, pursuant to their relationship with CEMEX, may take advantage of being in a privileged situation. Likewise, this applies to cases in which CEMEX may take advantage of such relationships and obtain benefits in its financial position or operating results. CEMEX’s transactions with related parties are executed under market conditions.

For the years ended December 31, 2017, 2016 and 2015, in ordinary course of business, CEMEX has entered into transactions with related parties for the sale of products, purchase of services or the lease of assets, all of which are not significant for CEMEX and the related party, are incurred for non-significant amounts and are executed under market terms and conditions following the same commercial principles and authorizations applied to other third parties. These identified transactions are approved annually by the Parent Company’s Board of Directors. None of these transactions are material to be disclosed separately.

In addition, for the years ended December 31, 2017, 2016 and 2015, the aggregate amount of compensation of CEMEX board of directors, including alternate directors, and top management executives, was US$47 ($887), US$43 ($802) and US$36 ($579), respectively. Of these amounts, US$35 ($661) in 2017, US$32 ($595) in 2016, US$25 ($402) in 2015, was paid as base compensation plus performance bonuses, including pension and post-employment benefits. In addition, US$12 ($227) in 2017, US$11 ($207) in 2016 and US$11 ($177) in 2015 of the aggregate amount in each year, corresponded to allocations of CPOs under CEMEX’s executive share-based compensation programs.

 

26)	SUBSEQUENT EVENTS

On January 5, 2018, in connection with the fine associated with the market investigation imposed by the SIC in Colombia for US$25 ($491), CEMEX Colombia made the payment of such fine, CEMEX Colombia will not appeal the resolution of the SIC and instead intends directly to file an annulment and reestablishment of right claim before the Administrative Court within the four months after the resolution. Once filed, this claim could take a considerable amount of time in being resolved. As of December 31, 2017, CEMEX is not able to assess the likelihood for the recovery of the fine imposed by the SIC or the timeframe for the defense process.

On January 10, 2018, in connection with the tender offer of the January 2022 Notes, the Parent Company incurred a payment of €419, which included, the principal amount oustanding of the notes of €400 plus the premium offer and the accrued interest at the date of redemption (note 16.1).

On January 31, 2018, CEMEX España was notified, based on a resolution dated January 18, 2018, that the National Court (Audiencia Nacional) accepted the request for suspension of payment of the fine submitted by CEMEX España, in connection with the tax proceeding in Spain related to the review of tax loss carryforwards reported between 2006 and 2009 (note 19.4), subject to the presentation of a satisfactory guarantee in the amount of the proposed fine plus interest before March 31, 2018. CEMEX España expects to successfully complete an acceptable form and amount of the required guarantee before the stipulated due date.

 

65

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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

27)	MAIN SUBSIDIARIES

The main subsidiaries as of December 31, 2017 and 2016 were as follows:

 

				% Interest
Subsidiary		Country		2017				2016
CEMEX México, S. A. de C.V. 1		Mexico			100.0				100.0
CEMEX España, S.A. 2		Spain			99.9				99.9
CEMEX, Inc.		United States of America			100.0				100.0
CEMEX Latam Holdings, S.A. 3		Spain			73.2				73.3
CEMEX (Costa Rica), S.A.		Costa Rica			99.1				99.1
CEMEX Nicaragua, S.A.		Nicaragua			100.0				100.0
Assiut Cement Company		Egypt			95.8				95.8
CEMEX Colombia S.A. 4		Colombia			99.9				99.9
Cemento Bayano, S.A. 5		Panama			100.0				100.0
CEMEX Dominicana, S.A.		Dominican Republic			100.0				100.0
Trinidad Cement Limited		Trinidad and Tobago			69.8				—
CEMEX de Puerto Rico Inc.		Puerto Rico			100.0				100.0
CEMEX France Gestion (S.A.S.)		France			100.0				100.0
CEMEX Holdings Philippines ,Inc. 6		Philippines			55.0				55.0
Solid Cement Corporation 6		Philippines			100.0				100.0
APO Cement Corporation 6		Philippines			100.0				100.0
CEMEX Holdings (Malaysia) Sdn Bhd		Malaysia			100.0				100.0
CEMEX U.K.		United Kingdom			100.0				100.0
CEMEX Deutschland, AG.		Germany			100.0				100.0
CEMEX Czech Republic, s.r.o.		Czech Republic			100.0				100.0
CEMEX Polska sp. Z.o.o.		Poland			100.0				100.0
CEMEX Holdings (Israel) Ltd.		Israel			100.0				100.0
CEMEX SIA		Latvia			100.0				100.0
CEMEX Topmix LLC, CEMEX Supermix LLC and CEMEX Falcon LLC 7		United Arab Emirates			100.0				100.0
Neoris N.V. 8		The Netherlands			99.8				99.8
CEMEX International Trading, LLC 9		United States of America			100.0				100.0
Transenergy, Inc. 10		United States of America			100.0				100.0

 

1	CEMEX México, S.A. de C.V. is the indirect holding company of CEMEX España, S.A. and subsidiaries.

2	CEMEX España, S.A is the indirect holding company of most of CEMEX’s international operations.

3

The interest reported excludes own shares held at CLH’s treasury. CLH, entity incorporated in Spain, trades its ordinary shares in the Colombian Stock Exchange under the symbol CLH, is the indirect holding company of CEMEX’s operations in Colombia, Panama, Costa Rica, Guatemala, Nicaragua, El Salvador and Brazil (note 20.4).

4	Represents our 99.7% and 98.9% interest in ordinary and preferred shares, respectively.

5	Includes a 0.515% interest held on Cemento Bayano’s treasury.

6	Represents CHP direct and indirect interest. CEMEX’s operations in the Philippines are conducted through CHP, subsidiary incorporated in the Philippines which since July 2016 trades its ordinary shares in the Philippines Stock Exchange under the symbol CHP (note 20.4).

7	CEMEX owns a 49% equity interest in each of these entities and holds the remaining 51% of the economic benefits, through agreements with other shareholders.

8	Neoris N.V. is the holding company of the entities involved in the sale of information technology solutions and services.

9	CEMEX International Trading, LLC is involved in the international trading of CEMEX’s products.

10	Formerly named Gulf Coast Portland Cement Co., it is engaged in the procurement and trading of fuels, such as coal and petroleum coke, used in certain operations of CEMEX’s.

 

66

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				KPMG Cardenas Dosal Blvd. Diaz Ordaz 140 Pte. Piso 8 Col. Santa Maria 64650 Monterrey, N.L. Telefono: + 01 (81) 81 22 18 18 Fax: + 01 (81) 83 33 05 32 kpmg.com.mx

Independent auditors’ report

To the Board of Directors and Stockholders

CEMEX, S.A.B. de C.V.

Opinion

We have audited the consolidated financial statements of CEMEX, S.A.B. de C.V. and subsidiaries (“the Group”), which comprise the consolidated statements of financial position as at December 31, 2017 and 2016, the consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the years ended December 31, 2017, 2016 and 2015, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2017 and 2016, and of its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2017, 2016 and 2015 in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Mexico and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

KPMG Cardenas Dosal, S.C. la firma Mexicana afiliada a KPMG International Cooperative (“KPMG Internacional”), una entidad Suiza.				Aguascalientes, Ags. Cancun, Q. Roo. Ciudad Juarez, Chih. Culiacan, Sin. Chihuahua, Chih. Guadalajara, Jal. Hermosillo, Son. Merida, Yuc. Mexicali, B.C.		Mexico, D.F. Monterrey, N.L. Puebla, Pue. Queretaro, Qro. Reynosa, Tamps. Saltillo, Coah. San Luis Potosi, S.L.P. Tijuana, B.C.

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Evaluation of goodwill impairment
See Note 15.2 to the consolidated financial statements
The key audit matter				How the matter was addressed in our audit
The Group’s balance sheet includes a significant amount of goodwill arising mainly from historic acquisitions which requires conducting an annual evaluation of its recoverability.   We consider this a key audit matter because of the materiality of the goodwill balance and because it involves complex and subjective judgments by the Group regarding long-term sales growth rates, costs and projected operating margins in the different countries where the Group operates, discount rates used to discount future cash flows, as well as comparisons to publicly-available information such as multiples of EBITDA in recent market transactions.				Our audit procedures included considering the consistency and appropriateness of the allocation of goodwill to groups of CGUs, as well as testing the Group’s methodology and assumptions used in preparing discounted cash flow models through the involvement of our valuation specialists.   We compared the Group’s assumptions to data obtained from external sources in relation to key inputs such as discount rates and projected economic growth and compared the latter with reference to historical forecasting accuracy, considering the potential risk of management bias.   We compared the sum of the discounted cash flows to the Group’s market capitalization to assess the reasonableness of those cash flows. In addition we performed sensitivity analysis using multiples of EBITDA.   We challenged the overall results of the calculations and performed our own sensitivity analysis, including a reasonably probable reduction in assumed growth rates and cash flows.   We also assessed whether the group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions such as discount rates and growth rates reflected the risks inherent in the valuation of goodwill.

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Recoverability of deferred tax assets related to tax loss carry forwards and other tax credits
See Note 19.2 and 19.4 to the consolidated financial statements
The key audit matter				How the matter was addressed in our audit
The group has significant deferred tax assets in respect of tax losses and other tax credits (mainly in the United States, Mexico and Spain).   There is inherent uncertainty involved in forecasting future taxable profits, which determines the extent to which deferred tax assets are or are not recognized.   The periods over which the deferred tax assets are expected to be recovered can be extensive.   Additionally in December 2017, the new tax legislation was enacted in the United States. To assess the potential implications of this new law, management analysed the tax modifications and the impacts of the related amounts in the consolidated financial statements   As a result of the above, we consider this to be a key audit matter.				Our audit procedures included considering historical levels of taxable profits and comparing the assumptions used in respect of future taxable profit forecasts to those used in the Group’s long-term forecasts, such as the forecasts prepared in relation to goodwill impairment evaluations.   Our tax specialists assisted in evaluating the reasonableness of key tax assumptions, timing of reversal of temporary differences and expiration of tax loss carry forwards and other tax credits, as well as the reasonableness of any tax strategies proposed by the Group based on our knowledge of the tax, legal and operating environments in which the Group operates.   We also assessed the adequacy of the Group’s disclosures setting out the basis of the deferred tax asset balances and the level of estimation involved.   Regarding the US tax reform, our tax specialists in the US assisted in evaluating the tax implications, the reasonableness of estimates and calculations determined by management.

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Tax and legal contingencies
See Notes 19.4 and 24 to the consolidated financial statements
The key audit matter				How the matter was addressed in our audit
The Group is involved in certain significant tax and legal proceedings.   Compliance with tax regulations is a complex matter within the Group because of the different tax laws in the jurisdictions where the Group operates, the application of which requires the use of significant expertise and judgment, making this area a key audit matter. Also, because of the diversity of the Group’s operations, exposure to legal claims is a risk that requires management’s attention.   Resolution of tax and legal proceedings may span multiple years, and may involve negotiation or litigation and therefore, making judgments of potential outcomes is a complex issue in the Group.   Management applies judgment in estimating the likelihood of the future outcome in each case and records a provision for uncertain tax positions or settlement of legal claims where applicable. We focused on this area due to the inherent complexity and judgment in estimating the amount of provision required.				Our audit procedures included the assessment of the adequacy of the level of provision established, or lack thereof, in relation to significant uncertain tax positions and legal contingencies, primarily in respect of cases in Spain, France, Egypt, and Colombia.   We discussed the status of each significant case with management, including in-house counsel, and critically assessed their responses. We read the latest correspondence between the Group and the various tax authorities or plaintiffs and attorneys where applicable. We also obtained written responses from the Group’s legal advisors where those have been appointed, containing their views on material exposures and any related litigation.   In relation to tax matters, we also met with the Group’s tax officers to assess their judgments on significant cases, their views and strategies, as well as the related technical grounds to their position based on applicable tax laws by involving our tax specialists.   We assessed whether the Group’s disclosures about legal and tax contingencies provided sufficient information to readers of the financial statements in light of the significance of these cases.

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Other Information

Management is responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended December 31, 2017, to be filed with the National Banking and Securities Commission (Mexico) (Comision Nacional Bancaria y de Valores) and the Mexican Stock Exchange (Bolsa Mexicana de Valores) (“the Annual Report”) but does not include the consolidated financial statements and our auditors’ report thereon. The Annual Report is expected to be made available to us after the date of this auditors’ report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

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As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

•

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

•

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

 

•

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

•

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.

 

•

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

•

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

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From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

KPMG Cardenas Dosal, S.C.

Monterrey, N.L.

February 1, 2018

Exhibit 2

CEMEX, S.A.B. DE C.V.

Financial Statements

December 31, 2017, 2016 and 2015

(With Independent Auditor’s Report Thereon)

 

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INDEX TO THE PARENT COMPANY-ONLY FINANCIAL STATEMENTS

 

CEMEX, S.A.B. de C.V. (Parent Company-only):
Income Statements for the years ended December 31, 2017, 2016 and 2015			1
Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015			2
Statements of Financial Position as of December 31, 2017 and 2016			3
Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015			4
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015			5
Notes to the Financial Statements			6
Independent Auditors’ Report - KPMG Cárdenas Dosal, S.C.			34

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CEMEX, S.A.B. DE C.V. (PARENT COMPANY-ONLY)

Income Statements

(Millions of Mexican pesos)

 

						Years ended December 31,
		Notes				2017				2016				2015
Net sales			1, 2.13			$	57,810				52,493				44,771
Revenues from Parent Company-only activities			3				736				807				733
							58,546				53,300				45,504
Cost of sales			2.14				(25,287	)			(23,073	)			(20,577	)
Operating expenses			2.14, 4				(19,305	)			(17,959	)			(17,179	)
Operating earnings before other income (expenses), net							13,954				12,268				7,748
Other income (expenses), net			5				(1,391	)			530				(66	)
Operating earnings							12,563				12,798				7,682
Financial expense			16				(15,126	)			(15,430	)			(12,720	)
Financial income and other items, net			6				3,772				801				(2,377	)
Foreign exchange results							(4,593	)			5,833				3,301
Share of profit of equity accounted investees			12				17,867				13,430				349
Net income (loss) before income tax							14,483				17,432				(3,765	)
Income tax			18.1				738				(3,399	)			4,966
NET INCOME						$	15,221				14,033				1,201

The accompanying notes are part of these Parent Company-only financial statements.

 

1

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CEMEX, S.A.B. DE C.V. (PARENT COMPANY-ONLY)

Statements of Comprehensive Income

(Millions of Mexican pesos)

 

						Years ended December 31,
		Notes				2017				2016				2015
NET INCOME						$	15,221				14,033				1,201
Items that will not be reclassified subsequently to the income statement
Currency translation effects			2.3				(9,263	)			10,263				6,124
Derivative financial instruments designated as net investment hedge			16.4				110				—				—
Income tax recognized directly in other comprehensive income			18.2				(33	)			—				—
Total items of other comprehensive income for the period							(9,186	)			10,263				6,124
TOTAL COMPREHENSIVE INCOME						$	6,035				24,296				7,325

The accompanying notes are part of these Parent Company-only financial statements.

 

2

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CEMEX, S.A.B. DE C.V. (PARENT COMPANY-ONLY)

Statements of Financial Position

(Millions of Mexican pesos)

 

						December 31,
		Notes				2017				2016
ASSETS
CURRENT ASSETS
Cash and cash equivalents			7			$	667				352
Trade accounts receivables, net			8				3,993				3,729
Other accounts receivable			9				1,342				947
Inventories			10				3,488				3,738
Accounts receivable from related parties			17.1				1,200				2,027
Other current assets			11				68				3,942
Total current assets							10,758				14,735
NON-CURRENT ASSETS
Equity accounted investees			12				414,953				419,180
Other investments and non-current accounts receivable			13				2,077				3,075
Property, machinery and equipment, net			14				3,523				3,473
Deferred income tax assets			18.2				828				—
Total non-current assets							421,381				425,728
TOTAL ASSETS						$	432,139				440,463
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term debt			16.1			$	15,844				728
Other financial obligations			16.2				9,110				811
Trade payables							7,437				5,641
Accounts payable to related parties			17.1				60,141				58,740
Other current liabilities			15				6,018				6,042
Total current liabilities							98,550				71,962
NON-CURRENT LIABILITIES
Long-term debt			16.1				140,208				171,936
Other financial obligations			16.2				10,515				24,681
Long-term accounts payable to related parties			17.1				373				802
Deferred income tax liabilities			18.2				—				172
Tax payable and other long-term liabilities			18.1				2,954				3,135
Total non-current liabilities							154,050				200,726
TOTAL LIABILITIES							252,600				272,688
STOCKHOLDERS’ EQUITY
Common stock and additional paid-in capital			19.1				144,654				127,336
Other equity reserves							13,483				24,794
Retained earnings			19.2				6,181				1,612
Net income							15,221				14,033
TOTAL STOCKHOLDERS’ EQUITY							179,539				167,775
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY						$	432,139				440,463

The accompanying notes are part of these Parent Company-only financial statements.

 

3

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CEMEX, S.A.B. DE C.V. (PARENT COMPANY-ONLY)

Statements of Cash Flows

(Millions of Mexican pesos)

 

						Years ended December 31,
		Notes				2017				2016				2015
OPERATING ACTIVITIES
Net income						$	15,221				14,033				1,201
Non-cash items:
Depreciation of property, machinery and equipment			14				269				491				559
Share of profit of equity accounted investees			12				(17,867	)			(13,430	)			(349	)
Financial items, net							15,947				8,796				11,796
Income taxes			18.1				(738	)			3,399				(4,966	)
Results from the sale of assets			5				(41	)			(319	)			11
Changes in working capital							7,521				61,765				(9,080	)
Net cash flow provided by (used in) operating activities before financial expense and income taxes							20,312				74,735				(828	)
Financial expense paid							(12,287	)			(12,802	)			(10,669	)
Income taxes paid			18.1				(636	)			(929	)			(3,818	)
Net cash flows provided by (used in) operating activities							7,389				61,004				(15,315	)
INVESTING ACTIVITIES
Equity accounted investees			12				(375	)			(36,964	)			57
Disposal of investments in associates			12				7,106				—				—
Financial instruments							(942	)			435				(1,672	)
Property, plant and equipment			14				(216	)			—				—
Net cash flows (used in) provided by investing activities							5,573				(36,529	)			(1,615	)
FINANCING ACTIVITIES
Long-term related parties, net			17.1				(429	)			867				421
Derivative financial instruments			16.4				1,489				180				1,108
Issuance (payment) of debt, net			16				(12,180	)			(22,707	)			16,334
Securitization of trade accounts receivable			16.2				1,100				(745	)			317
Other financial expenses paid in cash			16				(2,627	)			(2,026	)			(1,113	)
Net cash flows (used in) provided by financing activities							(12,647	)			(24,431	)			17,067
Increase in cash and cash equivalents							315				44				137
Cash and cash equivalents at beginning of period							352				308				171
CASH AND CASH EQUIVALENTS AT END OF PERIOD			7			$	667				352				308
Changes in working capital:
Trade accounts receivables, net			8			$	(264)				(257	)			(1,673	)
Other accounts receivable			9				(395	)			142				594
Inventories			10				250				(897	)			(392	)
Short-term related parties, net			17.1				6,158				59,185				(5,948	)
Trade payables							1,796				2,068				764
Other current liabilities			15				(24	)			1,524				(2,425	)
Changes in working capital, excluding income taxes						$	7,521				61,765				(9,080	)

The accompanying notes are part of these Parent Company-only financial statements.

 

4

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CEMEX, S.A.B. DE C.V. (PARENT COMPANY-ONLY)

Statements of Changes in Stockholders’ Equity

(Millions of Mexican pesos)

 

		Note		Common stock				Additional paid-in capital				Other equity reserves				Retained earnings				Total stockholders’ equity
Balance as of December 31, 2014				$	4,151				101,216				10,738				14,998				131,103
Comprehensive income, net					—				—				6,124				1,201				7,325
Capitalization of retained earnings		19.1			4				7,613				—				(7,617	)			—
Effects of early conversion and issuance of convertible subordinated notes		16.2			3				5,982				(934	)			—				5,051
Share-based compensation		19.1			—				655				(655	)			—				—
Balance as of December 31, 2015				$	4,158				115,466				15,273				8,582				143,479
Comprehensive income, net					—				—				10,263				14,033				24,296
Capitalization of retained earnings		19.1			4				6,966				—				(6,970	)			—
Share-based compensation		19.1			—				742				(742	)			—				—
Balance as of December 31, 2016				$	4,162				123,174				24,794				15,645				167,775
Comprehensive income, net					—				—				(9,186	)			15,221				6,035
Capitalization of retained earnings		19.1			5				9,459				—				(9,464	)			—
Effects of early conversion of convertible subordinated notes		16.2			4				7,059				(1,334	)			—				5,729
Share-based compensation		19.1			—				791				(791	)			—				—
Balance as of December 31, 2017				$	4,171				140,483				13,483				21,402				179,539

The accompanying notes are part of these Parent Company-only financial statements.

 

5

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

1)	DESCRIPTION OF BUSINESS

CEMEX, S.A.B. de C.V. founded in 1906, is a public stock corporation with variable capital (S.A.B. de C.V.) organized under the laws of the United Mexican States, or Mexico. CEMEX, S.A.B. de C.V. is a holding company (parent) of entities whose main activities are oriented to the construction industry, through the production, marketing, distribution and sale of cement, ready-mix concrete, aggregates and other construction materials. In addition, in order to facilitate the acquisition of financing and run its operations in Mexico more efficiently; CEMEX, S.A.B. de C.V. carries out all businesses and operational activities of the cement, ready-mix concrete and aggregates sectors in Mexico.

The shares of CEMEX, S.A.B. de C.V. are listed on the Mexican Stock Exchange (“MSE”) as Ordinary Participation Certificates (“CPOs”) under the symbol “CEMEXCPO”. Each CPO represents two series “A” shares and one series “B” share of common stock of CEMEX, S.A.B. de C.V. In addition, CEMEX, S.A.B. de C.V.’s shares are listed on the New York Stock Exchange (“NYSE”) as American Depositary Shares (“ADSs”) under the symbol “CX.” Each ADS represents ten CPOs.

The terms “CEMEX, S.A.B. de C.V.” or the “Parent Company-only”, used in these accompanying notes to the Parent Company-only financial statements refers to CEMEX, S.A.B. de C.V. without its consolidated subsidiaries. The term “CEMEX” refers to CEMEX, S.A.B. de C.V. together with its consolidated subsidiaries. The issuance of these separate financial statements was authorized by the Board of Directors of CEMEX, S.A.B. de C.V. on February 1, 2018. These financial statements will be submitted for authorization to the General Ordinary Shareholders’ Meeting of CEMEX, S.A.B. de C.V. on April 5, 2018.

 

2)	SIGNIFICANT ACCOUNTING POLICIES

 

2.1)	BASIS OF PRESENTATION AND DISCLOSURE

CEMEX, S.A.B. de C.V.’s financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Presentation currency and definition of terms

The presentation currency of these financial statements is the Mexican peso. When reference is made to “Pesos” or “$” it means Mexican pesos. The amounts in the financial statements and the accompanying notes are stated in millions, except when references are made to prices per share. When reference is made to “US$” or “Dollars”, it means dollars of the United States of America (“United States”). When reference is made to “€” or “euros,” it means the currency in circulation in a significant number of European Union (“EU”) countries. When reference is made to “£” or “pounds”, it means British pounds sterling. When it is deemed relevant, certain amounts in foreign currency presented in the notes to the financial statements include between parentheses a convenience translation into dollars and/or into pesos, as applicable. Previously reported convenience translations of prior years are not restated unless the transaction is still outstanding, in which case those are restated using the closing exchange rates as of the reporting date. These translations should not be construed as representations that the amounts in pesos or dollars, as applicable, actually represent those peso or dollar amounts or could be converted into pesos or dollars at the rate indicated. As of December 31, 2017 and 2016, translations of pesos into dollars and dollars into pesos, were determined for statements of financial position amounts using the closing exchange rates of $19.65 and $20.72 pesos per dollar, respectively, and for income statements amounts, using the average exchange rates of $18.88, $18.72 and $15.98 pesos per dollar for 2017, 2016 and 2015, respectively. When the amounts between parentheses are the peso and the dollar, the amounts were determined by translating the Euro amount into Dollars using the closing exchange rates at year-end and then translating the Dollars into Pesos as previously described.

Income Statements

CEMEX, S.A.B. de C.V. includes the line item titled “Operating earnings before other income (expenses), net” considering that it is a relevant measure for CEMEX, S.A.B. de C.V.’s management. Under IFRS, the inclusion of certain subtotals such as “Operating earnings before other income (expenses), net” and the display of the income statement vary significantly by industry and company according to specific needs.

The line item “Other income (expense), net” consists primarily of revenues and expenses not directly related to CEMEX, S.A.B. de C.V.’s main activities, or which are of an unusual and/or non-recurring nature, including impairment losses of long-lived assets and results on disposal of assets, among others (note 5).

Statements of cash flows

The statements of cash flows exclude the following transactions that did not represent sources or uses of cash:

 

•

In 2017, 2016 and 2015, the increases in common stock and additional paid-in capital associated with: (i) the capitalization of retained earnings for $9,464, $6,970 and $7,617, respectively; and (ii) CPOs issued as part of the executive share-based compensation programs for $791, $742 and $655, respectively (note 19.1);

 

•

In 2017, 2016 and 2015, the changes in property, plant and equipment for $248, $231 and $1,499, respectively, associated with the negotiation of finance leases (note 14 and 17.2);

 

 

6

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Statements of cash flows - Continued

 

•

In 2017, the decrease in debt for $5,468, the net decrease in other equity reserves for $1,334, the increase in common stock for $4 and the increase in additional paid-in capital for $7,059, in connection with the early conversion of part of the 2018 optional convertible subordinated notes, which involved, the early conversion of optional convertible subordinated notes due in 2018. In addition, in 2015, the decrease in debt for $4,517, the net decrease in other equity reserves for $934, the increase in common stock for $3 and the increase in additional paid-in capital for $5,982, in connection with the issuance of optional convertible subordinated notes due in 2020, which involved, the exchange and early conversion of optional convertible subordinated notes due in 2016. These transactions involved the issuance of approximately 43 million ADSs in 2017 and 42 million ADSs in 2015 (note 16.2);

 

•

In 2015, the decrease in other current and non-current liabilities and in deferred tax assets in connection with changes in the tax legislation in Mexico effective as of December 31, 2015 (notes 18.3); and

 

•

In 2015, the increase in equity accounted investees through the capitalization of a loan for $11,330 (note 12).

 

2.2)	USE OF ESTIMATES AND CRITICAL ASSUMPTIONS

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. These assumptions are reviewed on an ongoing basis using available information. Actual results could differ from these estimates. The items subject to significant estimates and assumptions by management include impairment tests of long-lived assets and the equity accounted investees, recognition of deferred income tax assets, as well as the measurement of financial instruments at fair value. Significant judgment by management is required to appropriately assess the amounts of these concepts.

 

2.3)	FOREIGN CURRENCY TRANSACTIONS

Transactions denominated in foreign currencies are recorded in the functional currency at the exchange rates prevailing on the dates of their execution. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the statements of financial position date, and the resulting foreign exchange fluctuations are recognized in earnings, except for exchange fluctuations arising from: 1) foreign currency indebtedness associated to the acquisition of foreign entities; and 2) fluctuations associated with related parties’ balances denominated in foreign currency, which settlement is neither planned nor likely to occur in the foreseeable future and as a result, such balances are of a permanent investment nature. These fluctuations are recorded against “Other equity reserves”, as part of the foreign currency translation adjustment (note 2.12) until the disposal of the foreign net investment, at which time, the accumulated amount is recycled through the Income Statements as part of the gain or loss on disposal.

The financial statements of foreign subsidiaries, as determined using their respective functional currency, are translated to pesos at the closing exchange rate for statements of financial position accounts and at the closing exchange rates of each month within the period for income statements accounts. The functional currency is that in which each entity primarily generates and expends cash. The corresponding translation effect is included within “Other equity reserves” and is presented in the statement of other comprehensive income for the period as part of the foreign currency translation adjustment (note 2.12) until the disposal of the net investment in the foreign subsidiary.

Considering its integrated activities, for purposes of functional currency, the Parent Company-only is considered to have two divisions, one related with its financial and Parent Company-only activities, in which the functional currency is the dollar for all assets, liabilities and transactions associated with these activities, and another division related with the Parent Company-only’s operating activities in Mexico, in which the functional currency is the peso for all assets, liabilities and transactions associated with these activities. The most significant closing exchange rates and the approximate average exchange rates for statements of financial position accounts and income statements accounts, respectively, as of December, 31 2017, 2016 and 2015, were as follows:

 

		2017								2016								2015
Currency		Closing				Average				Closing				Average				Closing				Average
Dollar			19.6500				18.8800				20.7200				18.7200				17.2300				15.9800
Euros			23.5866				21.4122				21.7945				20.6564				18.7181				17.6041
British Pound Sterling			26.5361				24.4977				25.5361				25.0731				25.4130				24.3638

The peso to U.S. dollar exchange rate used by CEMEX, S.A.B. de C.V. is an average of free market rates available to settle its foreign currency transactions. No significant differences exist, in any case, between the foreign exchange rates used by CEMEX, S.A.B. de C.V. and those exchange rates published by the Mexican Central Bank.

 

2.4)	CASH AND CASH EQUIVALENTS (note 7)

The balance in this caption is comprised of available amounts of cash and cash equivalents, mainly represented by highly-liquid short-term investments, which are easily convertible into known amounts of cash, and which are not subject to significant risks of changes in their values, including overnight investments, which yield fixed returns and have maturities of less than three months from the investment date. These fixed- income investments are recorded at cost plus accrued interest. Accrued interest is included in the income statement as part of “Financial income and other items, net.”

 

7

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Cash and cash equivalents - Continued

 

The amount of cash and cash equivalents in the statements of financial position includes restricted cash and investments, comprised of deposits in margin accounts that guarantee certain of CEMEX, S.A.B. de C.V.’s obligations, to the extent that the restriction will be lifted in less than three months from the statements of financial position reporting date. When the restriction period is greater than three months, such restricted cash and investments are not considered cash equivalents and are included within short-term or long-term other accounts receivable as appropriate. When contracts contain provisions for net settlement, these restricted amounts of cash and cash equivalents are offset against the liabilities that CEMEX, S.A.B. de C.V. has with its counterparts.

 

2.5)	FINANCIAL INSTRUMENTS

Beginning January 1, 2018, IFRS 9, Financial Instruments: classification and measurement is effective, see note 2.17. Until December 31, 2017, CEMEX’s policy for the recognition of financial instruments is set forth below:

Trade accounts receivable and other current accounts receivable (notes 8 and 9)

Instruments under these captions are classified as “loans and receivables” and are recorded at their amortized cost, representing the net present value (“NPV”) of the consideration receivable or payable as of the transaction date. Due to their short-term nature, CEMEX, S.A.B. de C.V. initially recognizes these receivables at the original invoiced amount less an estimate of doubtful accounts. Allowances for doubtful accounts were recognized based on incurred loss estimates against administrative and selling expenses.

Trade accounts receivables sold under securitization programs, in which certain residual interest in the trade receivables sold in case of recovery failure and continued involvement in such assets is maintained, do not qualify for derecognition and are maintained on the statement of financial position (note 8).

Other investments and non-current accounts receivable (note 13)

As part also of “loans and receivables,” non-current accounts receivable and investments classified as held to maturity are initially recognized at their amortized cost. Subsequent changes in NPV are recognized in the income statement as part of “Financial income and other items, net”.

Investments in financial instruments held for trading, as well as those investments available for sale, are recognized at their estimated fair value, in the first case through the income statement as part of “Financial income and other items, net” and in the second case, changes in valuation are recognized as part of comprehensive income for the period within other equity reserves until their time of disposition, when all valuation effects accrued in equity are reclassified to “Financial income and other items, net,” in the income statement. These investments are tested for impairment upon the occurrence of a significant adverse change or at least once a year during the last quarter.

Debt and other financial obligations (notes 16.1 and 16.2)

Bank loans and notes payable are recognized at their amortized cost. Interest accrued on financial instruments is recognized within other current liabilities against financial expense. During the reported periods, CEMEX, S.A.B. de C.V did not have financial liabilities voluntarily recognized at fair value or associated to fair value hedge strategies with derivative financial instruments. Direct costs incurred in debt issuances or borrowings, as well as debt refinancing or non-substantial modifications to debt agreements that did not represent an extinguishment of debt, by considering that the holders and the relevant economic terms of the new instrument are not substantially different to the replaced instrument, adjust the carrying amount of related debt are amortized as interest expense as part of the effective interest rate of each transaction over its maturity. These costs include commissions and professional fees. Costs incurred in the extinguishment of debt, as well as debt refinancing or modifications to debt agreements when the new instrument is substantially different to the old instrument according to a qualitative and quantitative analysis, are recognized in the income statement as incurred.

Finance leases are recognized as financing liabilities against a corresponding fixed asset for the lesser of the market value of the leased asset and the NPV of future minimum lease payments, using the contract’s implicit interest rate to the extent available, or the incremental borrowing cost. The main factors that determine a finance lease are: a) ownership title of the asset is transferred to CEMEX, S.A.B. de C.V. at the expiration of the contract; b) CEMEX, S.A.B. de C.V. has a bargain purchase option to acquire the asset at the end of the lease term; c) the lease term covers most of the useful life of the asset; and/or d) the NPV of minimum payments represents substantially all the fair value of the related asset at the beginning of the lease.

Financial instruments with components of both liabilities and equity (note 16.2)

The financial instrument that contains components of both liability and equity, such as notes convertible into a fixed number of the issuer’s shares and denominated its same functional currency, each component is recognized separately in the statement of financial position according to the specific characteristics of each transaction. In the case of instruments mandatorily convertible into shares of the issuer, the liability component represents the NPV of interest payments on the principal amount using a market interest rate, without assuming any early conversion, and is recognized within “Other financial obligations,” whereas the equity component represents the difference between the principal amount and the liability component, and is recognized within “Other equity reserves” net of commissions. In the case of instruments that are optionally convertible into a fixed number of shares, the liability component represents the difference between the principal amount and the fair value of the conversion option premium, which reflects the equity component (note 2.12). When the transaction is denominated in a currency different than the functional currency of the issuer, the conversion option is accounted for as a derivative financial instrument at fair value in the income statements

 

8

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Derivative financial instruments (note 16.4)

CEMEX, S.A.B. de C.V. recognizes all derivative instruments as assets or liabilities in the statement of financial position at their estimated fair values, and the changes in such fair values are recognized in the income statement within “Financial income and other items, net” for the period in which they occur, except for the effective portion of changes in fair value of derivative instruments associated with cash flow hedges, in which case, such changes in fair value are recognized in stockholders’ equity, and are reclassified to earnings as the interest expense of the related debt is accrued, in the case of interest rate swaps, or when the underlying products are consumed in the case of contracts on the price of raw materials and commodities. Likewise, in hedges of the net investment in foreign subsidiaries, changes in fair value are recognized in stockholders’ equity as part of the foreign currency translation result (note 2.3), which reversal to earnings would take place upon disposal of the foreign investment. During the reported periods, CEMEX, S.A.B. de C.V. did not have derivatives designated as fair value hedges. Derivative instruments are negotiated with institutions with significant financial capacity; therefore, CEMEX, S.A.B. de C.V. believes the risk of non-performance of the obligations agreed to by such counterparties to be minimal.

CEMEX, S.A.B. de C.V. reviews its contracts to identify the existence of embedded derivatives. Identified embedded derivatives are analyzed to determine if they need to be separated from the host contract and recognized in the statements of financial position as assets or liabilities, applying the same valuation rules used for other derivative financial instruments.

Put options granted for the purchase of non-controlling interests and associates

Represent agreements by means of which a non-controlling interest has the right to sell, at a future date using a predefined price formula or at fair market value, its shares in a subsidiary of CEMEX, S.A.B. de C.V. When the obligation should be settled in cash or through the delivery of other financial asset, CEMEX, S.A.B. de C.V. recognizes a liability for the NPV of the redemption amount as of the reporting date against the controlling interest within stockholders’ equity. A liability is not recognized under these agreements when the redemption amount is determined at fair market value at the exercise date and CEMEX, S.A.B. de C.V. has the election to settle using its own shares.

In respect of a put option granted for the purchase of an associate, CEMEX, S.A.B. de C.V. would recognize a liability against a loss in the income statements whenever the estimated purchase price exceeds the fair value of the net assets to be acquired by CEMEX, S.A.B. de C.V., had the counterparty exercised its right to sell. As of December 31, 2017 and 2016, there were no written put options.

Fair value measurements (note 16.3)

Under IFRS, fair value represents an “Exit Value” which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, considering the counterparty’s credit risk in the valuation. The concept of Exit Value is premised on the existence of a market and market participants for the specific asset or liability. When there is no market and/or market participants willing to make a market, IFRS establishes a fair value hierarchy that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

•

Level 1.- represent quoted prices (unadjusted) in active markets for identical assets or liabilities that CEMEX, S.A.B. de C.V. has the ability to access at the measurement date. A quote price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available.

 

•

Level 2.- are inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly, and are used mainly to determine the fair value of securities, investments or loans that are not actively traded. Level 2 inputs included equity prices, certain interest rates and yield curves, implied volatility and credit spreads, among others, as well as inputs extrapolated from other observable inputs. In the absence of Level 1 inputs CEMEX, S.A.B. de C.V. determined fair values by iteration of the applicable Level 2 inputs, the number of securities and/or the other relevant terms of the contract, as applicable.

 

•

Level 3.- inputs are unobservable inputs for the asset or liability. CEMEX, S.A.B. de C.V. used unobservable inputs to determine fair values, to the extent there are no Level 1 or Level 2 inputs, in valuation models such as Black-Scholes, binomial, discounted cash flows or multiples of Operative EBITDA, including risk assumptions consistent with what market participants would use to arrive at fair value.

 

2.6)	INVENTORIES (note 10)

Inventories are valued using the lower of cost or net realizable value. The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. CEMEX, S.A.B. de C.V. analyzes its inventory balances to determine if, as a result of internal events, such as physical damage, or external events, such as technological changes or market conditions, certain portions of such balances have become obsolete or impaired. When an impairment situation arises, the inventory balance is adjusted to its net realizable value, whereas, if an obsolescence situation occurs, the inventory obsolescence reserve is increased. In both cases, these adjustments are recognized against the results of the period. Advances to suppliers of inventory are presented as part of other current assets.

 

2.7)	EQUITY ACCOUNTED INVESTEES (note 12)

Investments in controlled entities and associates, which are not classified as held for sale, are measured using the equity method.

 

9

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

2.8)	PROPERTY, MACHINERY AND EQUIPMENT (note 14)

Property, machinery and equipment are recognized at acquisition or construction cost, as applicable, less accumulated depreciation and accumulated impairment losses. Depreciation of property, machinery and equipment is recognized as part of operating costs and expenses (note 4) and is calculated using the straight-line method over the estimated useful lives of the assets. As of December 31, 2017, the average useful lives by category of fixed assets were as follows:

 

		Years
Administrative and industrial buildings			68
Machinery and equipment in plant			25
Ready-mix trucks and motor vehicles			10

Costs incurred in respect of operating fixed assets that result in future economic benefits, such as an extension in their useful lives, an increase in their production capacity or in safety, as well as those costs incurred to mitigate or prevent environmental damage, are capitalized as part of the carrying amount of the related assets. The capitalized costs are depreciated over the remaining useful lives of such fixed assets. Periodic maintenance on fixed assets is expensed as incurred. Advances to suppliers of fixed assets are presented as part of other long-term accounts receivable. The useful lives and residual values of property, machinery and equipment are reviewed at each reporting date and adjusted if appropriate.

 

2.9)	IMPAIRMENT OF LONG LIVED ASSETS (notes 12 and 14)

Property, machinery and equipment and other investments

These assets are tested for impairment upon the occurrence of factors such as the occurrence of a significant adverse event, changes in CEMEX, S.A.B. de C.V.’s operating environment or in technology, as well as expectations of lower operating results, in order to determine whether their carrying amounts may not be recovered. An impairment loss is recorded in the income statement for the period within “Other income (expenses), net,” for the excess of the asset’s carrying amount over its recoverable amount, corresponding to the higher of the fair value less costs to sell the asset, and the asset’s value in use, the latter represented by the NPV of estimated cash flows related to the use and eventual disposal of the asset. The main assumptions utilized to develop estimates of NPV are a discount rate that reflects the risk of the cash flows associated with the assets and the estimations of generation of future income. Those assumptions are evaluated for reasonableness by comparing such discount rates to available market information and by comparing to third-party expectations of industry growth, such as governmental agencies or industry chambers.

When impairment indicators exist, for each long-lived asset, CEMEX, S.A.B. de C.V. determines its projected revenue streams over the estimated useful life of the long lived asset. In order to obtain discounted cash flows attributable to each long-lived asset, such revenues are adjusted for operating expenses, changes in working capital and other expenditures, as applicable, and discounted to NPV using the risk adjusted discount rate of return. The most significant economic assumptions are: a) the useful life of the asset; b) the risk adjusted discount rate of return; c) royalty rates; and d) growth rates. Assumptions used for these cash flows are consistent with internal forecasts and industry practices. The fair values of these assets are very sensitive to changes in such significant assumptions. Certain key assumptions are more subjective than others. CEMEX, S.A.B. de C.V. validates its assumptions through benchmarking with industry practices and the corroboration of third party valuation advisors. Significant judgment by management is required to appropriately assess the fair values and values in use of the related assets, as well as to determine the appropriate valuation method and select the significant economic assumptions.

Equity accounted investees

Equity accounted investees are tested for impairment when required due to significant adverse changes, by determining the recoverable amount of such investment, which consists of the higher of the investment in subsidiaries and associates’ fair value, less cost to sell and value in use, represented by the discounted amount of estimated future cash flows to be generated to which those net assets relate. CEMEX, S.A.B. de C.V. determines initially its discounted cash flows over periods of 5 to 10 years, depending on the economic cycle. If the value in use of the equity accounted investees is lower than its corresponding carrying amount, the Parent Company determines the fair value of its investment using methodologies generally accepted in the market to determine the value of entities, such as multiples of Operating EBITDA and by reference to other market transactions. An impairment loss is recognized within “Other income (expenses), net”, if the recoverable amount is lower than the net book value of the investment.

 

2.10)

PROVISIONS (note 15)

CEMEX, S.A.B. de C.V. recognizes provisions when it has a legal or constructive obligation resulting from past events, whose resolution would imply cash outflows or the delivery of other resources owned by the Parent Company-only. As of December 31, 2017 and 2016 some significant proceedings that gave rise to a portion of the carrying amount of the Parent Company’s other current and non-current liabilities and provisions are detailed in note 15.

Considering guidance under IFRS, CEMEX, S.A.B. de C.V. recognizes provisions for levies imposed by governments until the obligating event or the activity that triggers the payment of the levy has occurred, as defined in the legislation.

 

10

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Contingencies and commitments (note 20)

Obligations or losses related to contingencies are recognized as liabilities in the statement of financial position only when present obligations exist resulting from past events that are expected to result in an outflow of resources and the amount can be measured reliably. Otherwise, a qualitative disclosure is included in the notes to the financial statements. The effects of long-term commitments established with third parties, such as supply contracts with suppliers or customers, are recognized in the financial statements on an incurred or accrued basis, after taking into consideration the substance of the agreements. CEMEX, S.A.B. de C.V. does not recognize contingent revenues, income or assets, unless the realization is virtually certain.

 

2.11)

INCOME TAXES (note 18)

The effects reflected in the income statement for income taxes include the amounts incurred during the period and the amounts of deferred income taxes, determined according to the income tax law applicable to each subsidiary. Deferred income taxes is the result of applying the enacted statutory income tax rate to the total temporary differences resulting from comparing the book and taxable values of assets and liabilities, considering tax assets such as loss carryforwards and other recoverable taxes, to the extent that it is probable that future taxable profits will be available against which they can be utilized. The measurement of deferred income taxes at the reporting period reflects the tax consequences that follow the manner in which CEMEX, S.A.B. de C.V. expects to recover or settle the carrying amount of its assets and liabilities. Deferred income tax assets and liabilities relating to different tax jurisdictions are not offset. According to IFRS, all items charged or credited directly in stockholders’ equity or as part of other comprehensive income or loss for the period are recognized net of their current and deferred income tax effects. The effect of a change in enacted statutory tax rates is recognized in the period in which the change is officially enacted.

Deferred tax assets are reviewed at each reporting date and are reduced when it is not deemed probable that the related tax benefit will be realized, considering the aggregate amount of self-determined tax loss carryforwards that CEMEX, S.A.B. de C.V. believes will not be rejected by the tax authorities based on available evidence and the likelihood of recovering them prior to their expiration through an analysis of estimated future taxable income. If it is probable that the tax authorities would reject a self-determined deferred tax asset, CEMEX would decrease such asset. When it is considered that a deferred tax asset will not be recovered before its expiration, CEMEX, S.A.B. de C.V. would not recognize such deferred tax asset. Both situations would result in additional income tax expense for the period in which such determination is made. In order to determine whether it is probable that deferred tax assets will ultimately be recovered, CEMEX, S.A.B. de C.V. takes into consideration all available positive and negative evidence, including factors such as market conditions, industry analysis, expansion plans, projected taxable income, carryforward periods, current tax structure, potential changes or adjustments in tax structure, tax planning strategies, future reversals of existing temporary differences, etc. Likewise, CEMEX, S.A.B. de C.V. analyzes its actual results versus the Company’s estimates, and adjusts, as necessary, its tax asset valuations. If actual results vary from CEMEX, S.A.B. de C.V.’s estimates, the deferred tax asset and/or valuations may be affected and necessary adjustments will be made based on relevant information in CEMEX, S.A.B. de C.V.’s income statement for such period.

The income tax effects from an uncertain tax position are recognized when is probable that the position will be sustained based on its technical merits and assuming that the tax authorities will examine each position and have full knowledge of all relevant information, and they are measured using a cumulative probability model. Each position has been considered on its own, regardless of its relation to any other broader tax settlement. The high probability threshold represents a positive assertion by management that CEMEX, S.A.B. de C.V. is entitled to the economic benefits of a tax position. If a tax position is considered not probable of being sustained, no benefits of the position are recognized. Interest and penalties related to unrecognized tax benefits are recorded as part of the income tax in the income statements.

The effective income tax rate is determined dividing the line item “Income Tax” by the line item “Earnings before income (loss) tax.” This effective tax rate is further reconciled to CEMEX, S.A.B. de C.V.’s statutory tax rate applicable in Mexico (note 18). A significant effect in CEMEX, S.A.B. de C.V.’s effective tax rate and consequently in the aforementioned reconciliation of CEMEX, S.A.B. de C.V.’s effective tax rate, relates to the difference between the statutory income tax rate in Mexico of 30% against the effective tax rates.

CEMEX, S.A.B. de C.V.’s current and deferred income tax amounts included in the income statement for the period are highly variable, and are subject, among other factors, to taxable income. Such amounts of taxable income depend on factors such as sale volumes and prices, costs and expenses, exchange rates fluctuations and interest on debt, among others, as well as to the estimated tax assets at the end of the period due to the expected future generation of taxable gains.

 

2.12)

STOCKHOLDERS’ EQUITY

Common stock and additional paid-in capital (note 19.1)

These items represent the value of stockholders’ contributions, and include increases related to the capitalization of retained earnings and the recognition of executive compensation programs in CEMEX, S.A.B. de C.V.’s CPOs as well as decreases associated with the restitution of retained earnings.

Other equity reserves

Groups the cumulative effects of items and transactions that are, temporarily or permanently, recognized directly to stockholders’ equity, and includes the comprehensive income, which reflects certain changes in stockholders’ equity that do not result from investments by owners and distributions to owners. The most significant items within “Other equity reserves” during the reported periods are as follows:

Items of “Other equity reserves” included within other comprehensive income:

 

•

Changes in fair value of available-for-sale investments until their disposal (note 2.5); and

 

•

Current and deferred income taxes during the period arising from items whose effects are directly recognized in stockholders’ equity.

 

11

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Items of “Other equity reserves” not included in comprehensive income:

 

•

The effective portion of the valuation and liquidation effects from derivative instruments under cash flow and net investment hedging relationships, which are recorded in stockholders’ equity (note 2.5);

 

•

The equity component of securities which are mandatorily or optionally convertible into shares of the Parent Company-only (note 16.2). Upon conversion, this amount will be reclassified to common stock and additional paid-in capital; and

 

•

The items recognized by the subsidiaries in “other equity reserves”, which are recognized through the equity method.

Retained earnings (note 19.2)

Retained earnings represent the cumulative net results of prior years, net of: a) dividends declared; b) capitalization of retained earnings; and c) restitution of retained earnings when applicable.

 

2.13)

REVENUE RECOGNITION (note 3)

Beginning January 1, 2018, IFRS 15, Revenue from contracts with customers is effective, see note 2.17. Until December 31, 2017, CEMEX, S.A.B. de C.V.’s policy for revenue recognition is set forth below:

CEMEX, S.A.B. de C.V. net sales, as well as the revenues from Parent Company-only activities, represent the value, before tax on sales, of revenues originated by products and services sold by CEMEX, S.A.B. de C.V. as a result of their ordinary activities and are quantified at the fair value of the consideration received or receivable, decreased by any trade discounts or volume rebates granted to customers.

Revenue from the sale of goods and services is recognized when goods are delivered or services are rendered to customers, there is no condition or uncertainty implying a reversal thereof, and they have assumed the risk of loss. Revenue from trading activities, in which CEMEX, S.A.B. de C.V. acquires finished goods from a third party and subsequently sells the goods to another third-party, are recognized on a gross basis, considering that CEMEX, S.A.B. de C.V. assumes the total risk on the goods purchased, not acting as agent or broker.

 

2.14)

COST OF SALES AND OPERATING EXPENSES (note 4)

Cost of sales represents the production cost of inventories at the moment of sale. Such cost of sales includes depreciation, amortization and depletion of assets involved in production, expenses related to storage in production plants and freight expenses of raw material in plants and delivery expenses of CEMEX, S.A.B. de C.V.’s ready-mix concrete business.

Administrative expenses represent the expenses associated with services and equipment, including depreciation and amortization, related to managerial activities and back office for CEMEX, S.A.B. de C.V.’s management.

Sales expenses represent the expenses associated with services and equipment, including depreciation and amortization, involved specifically in sales activities.

Distribution and logistics expenses refer to expenses of storage at points of sales, including depreciation and amortization, as well as freight expenses of finished products between plants and points of sale and freight expenses between points of sales and the customers’ facilities.

 

2.15)

EXECUTIVE SHARE-BASED COMPENSATION

Share-based payments to executives are defined as equity instruments when services received from employees are settled by delivering shares of CEMEX, S.A.B. de C.V.; or as liability instruments when CEMEX, S.A.B. de C.V. commits to make cash payments to the executives on the exercise date of the awards based on changes in CEMEX, S.A.B. de C.V.’s and/or subsidiary’s own stock (intrinsic value). The cost of equity instruments represents their estimated fair value at the date of grant and is recognized in the income statement during the period in which the exercise rights of the employees become vested. In respect of liability instruments, these instruments are valued at their estimated fair value at each reporting date, recognizing the changes in fair value through the operating results. CEMEX, S.A.B. de C.V. determines the estimated fair value at the date of grant of stock compensation programs with performance conditions using Monte Carlo simulations.

 

2.16)

CONCENTRATION OF BUSINESS AND CREDIT

CEMEX, S.A.B. de C.V. sells its products primarily to distributors in the construction industry, with no specific geographic concentration. As of and for the years ended December 31, 2017, 2016 and 2015, no single customer individually accounted for a significant amount of the reported amounts of sales or in the balances of trade accounts receivables. In addition, there is no significant concentration of a specific supplier relating to the purchase of raw materials.

 

2.17)

NEWLY ISSUED IFRS NOT YET ADOPTED

There are a number of IFRS issued as of the date of issuance of these financial statements but which have not yet been adopted, which are listed below.

IFRS 9, Financial Instruments: classification and measurement (“IFRS 9”)

IFRS 9 sets forth the guidance relating to the classification and measurement of financial assets and liabilities, the accounting for expected credit losses of financial assets and commitments to extend credits, as well as the requirements for hedge accounting; and will replace IAS 39, Financial instruments: recognition and measurement (“IAS 39”). IFRS 9 is effective beginning January 1, 2018. Among other aspects, IFRS 9 changes the classification categories for financial assets under IAS 39 of: 1) held to maturity; 2) loans and receivables; 3) fair value through the income statement; and 4) available for sale; and replaces them with categories that reflect the measurement method the contractual cash flow characteristics and the entity’s business model for managing the financial asset: 1) amortized cost, that will significantly comprise IAS39 held to maturity and loans and receivables categories; 2) fair value through other comprehensive income, similar to IAS 39 held to maturity category; and 3) fair value through the income statement with the same IAS 39 definitions. The adoption of such classification categories under IFRS 9 will not have any significant effect on CEMEX, S.A.B. de C.V.’s operating results, financial situation and compliance of contractual obligations (financial restrictions).

 

12

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

IFRS 9, Financial Instruments: classification and measurement - Continued

 

In addition, under the new impairment model based on expected credit losses, impairment losses for the entire lifetime of financial assets, including trade accounts receivable, are recognized on initial recognition, and at each subsequent reporting period, even in the absence of a credit event or if the loss has not yet been incurred, considering for their measurement past events and current conditions, as well as reasonable and supportable forecasts affecting collectability. Changes in the allowance for doubtful accounts under the new expected credit loss model upon adoption of IFRS 9 on January 1, 2018 will be recognized through equity.

In this regard, CEMEX, S.A.B. de C.V. developed an expected credit loss model applicable to its trade accounts receivable that considers the historical performance, as well as the credit risk and expected developments for each group of customers, ready for the prospective adoption of IFRS 9 on January 1, 2018. The preliminary effects for adoption of IFRS 9 on January 1, 2018 related to the new expected credit loss model which do represent any significant impact on CEMEX, S.A.B. de C.V.’s operating results, financial situation and compliance of contractual obligations (financial restrictions), represent an estimated increase in the allowance for doubtful accounts as of December 31, 2017 of $110 that will be recognized against equity.

In connection with hedge accounting under IFRS 9, among other changes, there is a relief for entities in performing: a) the retrospective effectiveness test at origination of the hedging relationship; and b) the requirement to maintain a prospective effectiveness ratio between 0.8 and 1.25 at each reporting date for purposes of sustaining the hedging designation, both requirements of IAS 39. Under IFRS 9, a hedging relationship can be established to the extent the entity considers, based on the analysis of the overall characteristics of the hedging and hedged items, that the hedge will be highly effective in the future and the hedge relationship at inception is aligned with the entity’s reported risk management strategy. Nonetheless, IFRS 9 maintains the same hedging accounting categories of cash flow hedge, fair value hedge and hedge of a net investment established in IAS 39, as well as the requirement of recognizing the ineffective portion of a cash flow hedge immediately in the income statement. CEMEX, S.A.B. de C.V. does not expect any significant effect upon the adoption of the new hedge accounting rules under IFRS 9 beginning January 1, 2018.

Considering the prospective adoption of IFRS 9 as of January 1, 2018, according to the options provided in the standard, there may be lack of comparability beginning January 1, 2018, with the information of impairment of financial assets disclosed in prior years, however, the effects are not significant.

IFRS 15, Revenues from contracts with customers (“IFRS 15”)

Under IFRS 15, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, following a five step model: Step 1: Identify the contract(s) with a customer (agreement that creates enforceable rights and obligations); Step 2: Identify the different performance obligations (promises) in the contract and account for those separately; Step 3: Determine the transaction price (amount of consideration an entity expects to be entitled in exchange for transferring promised goods or services); Step 4: Allocate the transaction price to each performance obligation based on the relative stand-alone selling prices of each distinct good or service; and Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation by transferring control of a promised good or service to the customer. A performance obligation may be satisfied at a point in time (typically for the sale of goods) or over time (typically for the sale of services and construction contracts). IFRS 15 also includes disclosure requirements to provide comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 is effective on January 1, 2018 and will supersede all existing guidance on revenue recognition. Beginning January 1, 2018, CEMEX, S.A.B. de C.V. will adopt IFRS 15 using the full retrospective approach, which represents the restatement of the financial statements of prior years.

CEMEX, S.A.B. de C.V. started in 2015 the evaluation of the impacts of IFRS 15 on the accounting and disclosures of its revenues. As of December 31, 2017, CEMEX, S.A.B. de C.V. has analyzed its contracts with customers in all the countries in which it operates in order to review the different performance obligations and other promises (discounts, loyalty programs, rebates, etc.) included in such contracts, among other aspects, aimed to determine the differences in the accounting recognition of revenue with respect to current IFRS and concluded the theoretical assessment. In addition, key personnel were trained in the new standard with the support of external experts and an online training course was implemented. Moreover, CEMEX, S.A.B. de C.V. also concluded the quantification of the adjustments that are necessary to present prior year’s information under IFRS 15 beginning in 2018 and has implemented the necessary changes in business processes to generate information under IFRS 15 beginning in 2018. The adjustments determined in CEMEX, S.A.B. de C.V.’s revenue recognition will not generate any significant impact on CEMEX, S.A.B. de C.V.’s operating results, financial situation and compliance of contractual obligations (financial restrictions).

Among other minor effects, the main changes under IFRS 15 as they apply to CEMEX, S.A.B. de C.V. refer to: a) several reclassifications that are required to comply with IFRS 15 new accounts in the statement of financial position aimed to recognize contract assets (costs to obtain a contracts) and contract liabilities (deferred revenue for promises not yet fulfilled); b) rebates and/or discounts offered to customers in a sale transaction that are redeemable by the customer in a subsequent purchase transaction, are considered separate performance obligations, rather than future costs, and a portion of the sale price of such transaction allocated to these promises should be deferred to revenue until the promise is redeemed or expires; and c) awards (points) offer to customers through their purchases under loyalty programs that are later redeemable for goods or services, also represent separate performance obligations, rather than future costs, and a portion of the sale price of such transactions allocated to these points should be deferred to revenue until the points are redeemed or expire. These reclassifications and adjustments are not expected to be material.

Considering the full retrospective adoption of IFRS 15 beginning January 1, 2018, according to the options considered in the standard, there will not be lack of comparability of the financial information prepared in prior years.

 

13

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

IFRS 16, Leases (“IFRS 16”)

IFRS 16 defines leases as any contract or part of a contract that conveys to the lessee the right to use an asset for a period of time in exchange for consideration and the lessee directs the use of the identified asset throughout that period. In summary, IFRS 16 introduces a single lessee accounting model, and requires a lessee to recognize, for all leases with a term of more than 12 months, unless the underlying asset is of low value, assets for the right-of-use the underlying asset against a corresponding financial liability, representing the NPV of estimated lease payments under the contract, with a single income statement model in which a lessee recognizes amortization of the right-of-use asset and interest on the lease liability. A lessee shall present either in the balance sheet, or disclose in the notes, right-of-use assets separately from other assets, as well as, lease liabilities separately from other liabilities. IFRS 16 is effective beginning January 1, 2019 and will supersede all current standards and interpretations related to lease accounting.

As of December 31, 2017, CEMEX, S.A.B. de C.V. has concluded an assessment of its main outstanding lease contracts and other contracts that may have embedded the use of an asset, in order to inventory the most relevant characteristics of such contracts (types of assets, committed payments, maturity dates, renewal clauses, etc.). During the first quarter of 2018, CEMEX, S.A.B. de C.V. expects to define its future policy under IFRS 16 in connection with the exception for short-term leases and low-value assets, in order to set the basis and be able to quantify the required adjustments for the proper recognition of the assets for the “right-of-use” and the corresponding financial liabilities, aiming to adopt IFRS 16 on January 1, 2019. CEMEX, S.A.B. de C.V. plans preliminarily the adoption IFRS 16 retrospectively to the extent such adoption is practicable. Based on its preliminary assessment as of the reporting date, CEMEX, S.A.B. de C.V. considers that upon adoption of IFRS 16, most of its outstanding operating leases (notes 17.2 and 20.4) would be recognized in the statement of financial position, increasing assets and liabilities, as well as amortization and interest, without any significant initial effect on net assets.

CEMEX, S.A.B. de C.V. does not expect any significant effect on its operation results, financial situation and compliance with contractual obligations (financial restrictions) due to the adoption effects. If retrospective adoption of IFRS 16 beginning January 1, 2019 is applied, according to the options considered in the standard, there would not be lack of comparability of the financial information prepared in prior years.

IFRIC 23, Uncertainty over-income tax treatments (“IFRIC 23”)

IFRIC 23 clarifies the accounting for uncertainties in income taxes. Among other aspects, when an entity concludes that it is not probable that a particular tax treatment is accepted, the entity has to use the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The decision should be based on which method provides better predictions of the resolution of the uncertainty. IFRIC 23 is effective beginning January 1, 2019. Considering CEMEX, S.A.B. de C.V.’s current policy for uncertain tax positions (note 2.13) CEMEX, S.A.B. de C.V. does not expect any significant effect from the adoption of IFRIC 23.

 

3)	REVENUES FROM PARENT COMPANY-ONLY ACTIVITIES

Revenues from Parent Company-only activities as of December 31, 2017, 2016 and 2015, consisted of the following:

 

		2017				2016				2015
Rental income		$	65				63				54
License fees			671				744				679
		$	736				807				733

 

4)	OPERATING EXPENSES, DEPRECIATION AND AMORTIZATION

CEMEX, S.A.B. de C.V.’s operating expenses during 2017, 2016 and 2015 by function are as follows:

 

		2017				2016				2015
Administrative expenses		$	10,933				10,046				10,633
Selling expenses			845				952				674
Distribution and logistics expenses			7,527				6,961				5,872
		$	19,305				17,959				17,179

Depreciation and amortization recognized during 2017, 2016 and 2015 are detailed as follows:

 

		2017				2016				2015
Depreciation and amortization expense included in cost of sales		$	231				423				481
Depreciation and amortization expense included in operating expenses			38				68				78
		$	269				491				559

 

14

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

 

5)	OTHER INCOME (EXPENSES), NET

The detail of the line item “Other income (expenses), net” in 2017, 2016 and 2015 was as follows:

 

		2017				2016				2015
Results from the sale of assets, net		$	41				319				(11	)
Miscellaneous fees			(730	)			—				—
Others			(702	)			211				(55	)
		$	(1,391	)			530				(66	)

For the year ended December 31, 2017, the miscellaneous fees are related to the resources paid in relation to the assets sale in some of our subsidiaries. Moreover, for the year 2016, the Results from the sale of assets, net, include a gain of the divestment of equity interest in associates from $293 (US$14) (note 12).

 

6)	FINANCIAL INCOME AND OTHER ITEMS, NET

For the years ended December 31, 2017, 2016 and 2015, the detail of “Financial income and other items, net” is as follows:

 

		2017				2016				2015
Financial income		$	58				453				608
Results from financial instruments, net (note 13 and 16.4)			3,714				348				(2,985	)
		$	3,772				801				(2,377	)

For the period ended as of December 31, 2017, the caption Result from financial instruments, net, includes the gain on the sale of GCC shares, for an aggregate amount of $ 3,541 (note 12).

 

7)	CASH AND CASH EQUIVALENTS

As of December 31, 2017 and 2016, cash and cash equivalents include cash and bank accounts of $667 and $352, respectively.

 

8)	TRADE ACCOUNTS RECEIVABLES, NET

As of December 31, 2017 and 2016, trade accounts receivable, net consisted of:

 

		2017				2016
Trade accounts receivable		$	4,249				3,948
Allowances for doubtful accounts			(256	)			(219	)
		$	3,993				3,729

As of December 31, 2017 and 2016, trade accounts receivable include receivables of $2,234 (US$114) and $2,074 (US$100), respectively, sold under outstanding trade receivables securitization programs and/or factoring programs with recourse, established in Mexico, in which CEMEX, S.A.B. de C.V. effectively surrenders control associated with the trade accounts receivable sold and there is no guarantee or obligation to reacquire the assets; nonetheless, in such programs, CEMEX, S.A.B. de C.V. retains certain residual interest in the programs and/or maintains continuing involvement with the accounts receivable. Therefore, the trade accounts receivable sold were not removed from the statement of financial position and the funded amounts to CEMEX, S.A.B. de C.V. of $1,634 (US$83) in 2017 and $533 (US$26) in 2016, were recognized within the line item of “Other financial obligations,” the difference in each year against the trade receivables sold was maintained as reserves. Trade accounts receivable qualifying for sale exclude amounts over certain days past due or concentrations over certain limits to any one customer, according to the terms of the programs. The discount granted to the acquirers of the trade accounts receivable is recorded as financial expense and amounted to $93 (US$5) in 2017, $70 (US$3) in 2016 and $78 (US$5) in 2015. CEMEX, S.A.B. de C.V.’s securitization programs are negotiated for periods of one to two years and are usually renewed at their maturity.

Allowances for doubtful accounts were established until December 31, 2017 based on an incurred loss model according to the credit history and risk profile of each customer (note 2.17). For the years ended as of December 31, 2017, 2016 and 2015, the expense related with the allowances of accounts were $37, $142 and $53, respectively, which were recognized as part of the operating expense.

 

9)	OTHER ACCOUNTS RECEIVABLE

As of December 31, 2017 and 2016, other accounts receivable include the following:

 

		2017				2016
Other refundable taxes		$	57				577
Derivative financial instruments (note 16.4)			1,056				233
Non- trade accounts receivable			229				137
		$	1,342				947

 

15

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

10)	INVENTORIES

As of December 31, 2017 and 2016, the balance of inventories was summarized as follows:

 

		2017				2016
Finished goods		$	689				788
Work-in-process			656				538
Raw materials			528				486
Materials and spare parts			1,244				1,220
Inventory in transit			371				706
		$	3,488				3,738

For the years ended December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. recognized in the income statement, inventory obsolescence of $77 and $6, respectively.

 

11)	OTHER CURRENT ASSETS

As of December 31, 2017 and 2016, other current assets consisted of:

 

		2017				2016
Advance payments		$	46				60
Assets held for sale (note 12)			22				3,882
		$	68				3,942

 

12)	EQUITY ACCOUNTED INVESTEES

As of December 31, 2017 and 2016 equity accounted investees, include the following:

 

		Activity				Country				%				2017				2016
CEMEX México, S.A. de C.V.			Cement				Mexico				100.0			$	301,366				322,426
CEMEX Trademarks Holding Ltd			Holding				Switzerland				49.2				55,129				44,625
CEMEX Operaciones México, S.A. de C.V.			Holding				Mexico				21.3				46,861				37,456
CEMEX Central, S.A. de C.V.			Administrative Services				Mexico				100.0				7,357				10,293
Camcem, S.A. de C.V.			Cement				Mexico				40.1				3,618				3,770
Other companies			—				—				—				622				610
														$	414,953				419,180
Out of which:
Book value														$	533,163				561,747
Changes in stockholders’ equity														$	(118,210	)			(142,567	)

During 2017 and 2016, CEMEX, S.A.B. de C.V. made stockholders’ equity contributions to subsidiaries of $418 and $37,039, respectively. In connection with such contributions in 2017 and 2016, CEMEX, S.A.B. de C.V. made a contribution to CEMEX, Inc and CEMEX Research Group AG, respectively, subsidiaries of CEMEX Mexico, S.A. de C.V. for $407 and $36,228, respectively. For 2016, CEMEX, S.A.B. de C.V. increased its investment in shares of CEMEX Trademarks Holding Ltd in approximately 0.5% through a contribution of $811. In addition, during 2016, CEMEX, S.A.B. de C.V. sold its interest in Ventikas to Infraestructura Energética Nova S.A.B. de C.V., current owner of 100% of Ventikas, for US$15 ($311). CEMEX, S.A.B. de C.V. will remain as the manager of the Ventikas facilities in exchange of a management fee.

During 2016, CEMEX, S.A.B. de C.V. participated as shareholder in a share restructuring executed by Camcem, S.A. de C.V. (“Camcem”), indirect Parent Company of Control Administrativo Mexicano, S.A. de C.V. (“Camsa”) and GCC, aimed to simplify its corporate structure, by means of which, Imin de México, S.A. de C.V., intermediate holding company, Camsa and GCC were merged, prevailing GCC as the surviving entity. As a result of the share restructuring, CEMEX, S.A.B. de C.V.´s 10.3% interest in Camcem and 49% interest in Camsa, both before the restructuring, were exchanged and transformed on equivalent basis into a 40.1% interest in Camcem and 23% interest in GCC, which shares trade in the MSE.

On January 25, 2017, in a public offering to investors in Mexico conducted through the BMV and in a concurrent private placement to eligible investors outside of Mexico, the Parent Company and GCC announced the offering of up to 76,483,332 shares (all the shares of GCC owned by CEMEX, S.A.B. de C.V.) at a price range of between 95.00 to 115.00 pesos per share, which included 9,976,087 shares available to the underwriters of the offerings pursuant to a 30-day option to purchase such shares granted to them by CEMEX, S.A.B. de C.V.. During 2017, after conclusion of the public offering and the private placement, CEMEX, S.A.B. de C.V. sold the 13.53% of the common stock of GCC at a price of 95.00 pesos per share receiving $4,094 after deducting commissions and offering expenses, recognizing a gain on sale of $1,859 as part of “Financial income and other items, net” in the income statement.

In addition, on September 28, 2017, CEMEX, S.A.B. de C.V. announced the definitive sale to two financial institutions of the remaining 31,483,332 shares of GCC, which represented approximately 9.47% of the equity capital of GCC. Proceeds from the sale were $3,012 and generated a gain on sale of $1,682 recognized as part of “Financial income and other items, net” in the income statement. CEMEX, S.A.B. de C.V. continues to have an approximate 20% indirect interest in GCC through Camcem. In addition, CEMEX, S.A.B. de C.V. entered into equity forward contracts on GCC´s stock price, with net cash settlement (note 16.4).

 

16

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Equity accounted investees - continued

 

The combined condensed financial information presented below, refers only to Camcem and other minor associates in which CEMEX, S.A.B. de C.V. possess significant influence. Combined condensed statement of financial position information of CEMEX, S.A.B. de C.V.’s associates as of December 31, 2017 and 2016 is set forth below:

 

		2017				2016
Current assets		$	9,773				8,418
Non-current assets			26,986				29,178
Total assets			36,759				37,596
Current liabilities			3,413				2,809
Non-current liabilities			15,670				16,853
Total liabilities			19,083				19,662
Total net assets		$	17,676				17,934

Combined selected information of the income statement of CEMEX, S.A.B. de C.V.’s associates in 2017, 2016 and 2015 is set forth below:

 

		2017				2016				2015
Sales		$	16,243				12,931				12,081
Operating earnings			2,828				2,311				1,653
Income before income tax			1,107				1,577				1,643
Net income			659				604				682

 

13)	OTHER INVESTMENTS AND NON-CURRENT ACCOUNTS RECEIVABLE

As of December 31, 2017 and 2016, other investments and non-current accounts receivable include the following:

 

		2017				2016
Investments available-for-sale		$	1,192				1,073
Non-current portion of valuation of derivative financial instruments (note 16.4)			794				1,900
Other non-current investments			91				102
		$	2,077				3,075

 

14)	PROPERTY, MACHINERY AND EQUIPMENT, NET

As of December 31, 2017 and 2016, property, machinery and equipment, net include the following:

 

		2017				2016
Lands		$	2,876				2,837
Buildings			649				640
Machinery and equipment			1,140				1,026
Investments in progress			210				54
Accumulated depreciation			(1,352	)			(1,084	)
		$	3,523				3,473

 

17

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Property, machinery and equipment, net - continued

 

Changes in property, machinery and equipment, net for the year ended December 31, 2017 and 2016, were as follows:

 

		2017
										Machinery and				Investments in
		Land				Building				equipment				progress				Total
Cost at beginning of period		$	2,837				640				1,026				54				4,557
Accumulated depreciation			—				(399	)			(685	)			—				(1,084	)
Net book value at beginning of period			2,837				241				341				54				3,473
Capital expenditures			—				—				308				216				524
Disposals			—				—				(209	)			(60	)			(269	)
Depreciation for the period			—				(5	)			(264	)			—				(269	)
Foreign currency translation effects			39				9				16				—				64
Cost at end of period			2,876				649				1,140				210				4,875
Accumulated depreciation			—				(404	)			(948	)			—				(1,352	)
Net book value at end of period		$	2,876				245				192				210				3,523
		2016
										Machinery and				Investments in
		Land				Building				equipment				progress				Total
Cost at beginning of period		$	2,518				559				1,483				35				4,595
Accumulated depreciation			—				(394	)			(552	)			—				(946	)
Net book value at beginning of period			2,518				165				931				35				3,649
Capital expenditures			—				—				35				54				89
Disposals			(13	)			—				(265	)			(35	)			(313	)
Depreciation for the period			—				(5	)			(486	)			—				(491	)
Foreign currency translation effects			332				81				126				—				539
Cost at end of period			2,837				640				1,026				54				4,557
Accumulated depreciation			—				(399	)			(685	)			—				(1,084	)
Net book value at end of period		$	2,837				241				341				54				3,473

 

15)	OTHER CURRENT LIABILITIES

As of December 31, 2017 and 2016, other current liabilities are shown below:

 

		2017				2016
Interest payable		$	2,031				2,379
Advances from customers			1,901				1,778
Taxes payable			1,315				1,147
Accounts payable and accrued expenses			771				738
		$	6,018				6,042

As of December 31, 2017 and 2016, the caption accounts payable and accrued expenses, includes $432 (US$22) and $359 (US$17) from provisions related to insurances and fees, respectively.

 

18

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

16)	FINANCIAL INSTRUMENTS

 

16.1)

SHORT-TERM AND LONG-TERM DEBT

CEMEX, S.A.B. de C.V.’s debt summarized as of December 31, 2017 and 2016, by interest rates and currencies was as follows:

 

		2017												2016
		Short-term				Long-term				Total				Short-term				Long-term				Total
Floating rate debt		$	6,186				50,090				56,276			$	80				63,394				63,474
Fixed rate debt			9,658				90,118				99,776				648				108,542				109,190
		$	15,844				140,208				156,052			$	728				171,936				172,664
Effective rate 1
Floating rate			6.1	%			2.9	%							4.9	%			4.0	%
Fixed rate			4.8	%			5.6	%							4.4	%			6.3	%

 

		2017																2016
														Effective																Effective
Currency		Short-term				Long-term				Total				rate 1				Short-term				Long-term				Total				rate 1
Dollars		$	6,186				85,554				91,740				5.8	%		$	80				135,118				135,198				5.8	%
Pesos			—				—				—				—				648				—				648				4.4	%
Euros			9,658				45,536				55,194				3.3	%			—				36,818				36,818				4.0	%
Pounds			—				9,118				9,118				2.6	%			—				—				—				—
		$	15,844				140,208				156,052							$	728				171,936				172,664

 

1	Represents the weighted average effective interest rate.

 

2017		Short-term				Long-term				2016		Short-term				Long-term
Bank loans										Bank loans
Loans in foreign countries, 2018 to 2022		$	—				32			Loans in foreign countries, 2017 to 2018.		$	—				114
Syndicated loans, 2018 to 2020			—				50,090			Syndicated loans, 2017 to 2019			—				56,875
			—				50,122						—				56,989
Notes payable										Notes payable
Notes payable in Mexico, 2018			—				—			Notes payable in Mexico, 2017			—				648
Medium-term notes, 2018 to 2026			224				105,706			Medium-term notes, 2017 to 2025			—				115,027
			224				105,706						—				115,675
Total bank loans and notes payable			224				155,828			Total bank loans and notes payable			—				172,664
Current maturities			15,620				(15,620	)		Current maturities			728				(728	)
		$	15,844				140,208					$	728				171,936

As of December 31, 2017 and 2016, discounts, fees and other direct costs incurred in the issuance of CEMEX, S.A.B. de C.V.’s outstanding notes payable for US$54 ($1,055) and US$33 ($684), respectively, adjusted the balance of notes payable and are amortized to financing expense over the maturity of the related debt instruments.

Changes in debt for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

		2017				2016				2015
Debt at beginning of year		$	172,664				163,237				122,973
Proceeds from new debt instruments			82,070				41,999				51,928
Debt repayments			(94,250	)			(64,706	)			(35,594	)
Foreign currency translation effects			(4,432	)			32,134				23,930
Debt at end of year		$	156,052				172,664				163,237

As of December 31, 2017 and 2016, as presented in the table above of debt by type of instrument, approximately 32% and 33%, respectively, of CEMEX, S.A.B. de C.V.’s total indebtedness, was represented by bank loans, of which the most significant portion corresponded to those balances under CEMEX, S.A.B. de C.V.’s financing agreement entered into with 20 financial institutions on July 19, 2017 for an amount in different currencies equivalent to US$4,050 at the origination date (the “2017 Credit Agreement”) which was mainly used to refinance the US$3,680 outstanding under the facilities agreement dated September 29, 2014, as amended several times in 2016 and 2017 (the “2014 Credit Agreement”).

In addition, as of December 31, 2017 and 2016, as presented in the table above of debt by type of instrument, approximately 68% and 67%, respectively, of CEMEX, S.A.B. de C.V.’s total indebtedness, was represented by notes payable, of which, the most significant portion was long- term in both periods.

 

19

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Short-term and long-term debt - continued    

 

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V.’s long-term notes payable are detailed as follows:

 

																														Balances as of December 31,
		Date of								Principal								Maturity				Repurchased				Outstanding
Description2		issuance				Currency				amount				Rate 1				date				amount US$ 3				amount US$				2017				2016
April 2026 Notes 7			16/Mar/16				Dollar				1,000				7.75	%			16/Apr/26				—				1,000			$	19,567				20,630
March 2025 Notes			03/Mar/15				Dollar				750				6.125	%			05/May/25				—				750				14,691				15,488
January 2025 Notes			11/Sep/14				Dollar				1,100				5.70	%			11/Jan/25				(29	)			1,071				20,988				22,123
December 2024 Notes 4			05/Dec/17				Euro				650				2.75	%			05/Dec/24				—				780				15,257				—
March 2023 Notes			03/Mar/15				Euro				550				4.375	%			05/Mar/23				—				660				12,938				11,948
January 2022 Notes 5			11/Sep/14				Euro				400				4.75	%			11/Jan/22				—				480				9,434				8,696
January 2021 Notes 6,7			02/Oct/13				Dollar				1,000				7.25	%			15/Jan/21				(659	)			341				6,677				15,019
December 2019 Notes 5,6,7			12/Aug/13				Dollar				1,000				6.50	%			10/Dec/19				(1,000	)			—				—				14,638
October 2018 Variable Notes 7			02/Oct/13				Dollar				500				L+475bps				15/Oct/18				(187	)			313				6,154				6,485
November 2017 Notes			30/Nov/07				Peso				627				4.40	%			17/Nov/17				(37	)			—				—				648
																														$	105,706				115,675

 

1

The letter “L” included above refers to LIBOR, which represents the London Inter-Bank Offered Rate, variable rate used in international markets for debt denominated in U.S. dollars. As of December 31, 2017 and 2016, the 3-Month LIBOR rate was 1.6943% and 0.9979%, respectively. The contraction “bps” means basis points. One hundred basis points equal 1%.

2

Unless otherwise indicated, all issuances are fully and unconditionally guaranteed by CEMEX, S.A.B. de C.V., CEMEX México, S.A. de C.V., CEMEX Concretos S.A. de C.V., Empresas Tolteca de México, S.A. de C.V., New Sunward Holding B.V., CEMEX España, S.A., CEMEX Asia, B.V., CEMEX Corp., CEMEX Egyptian Investments, B.V., CEMEX Egyptian Investments II, B.V., CEMEX Finance LLC, CEMEX France Gestion, (S.A.S.), CEMEX Research Group AG, CEMEX Shipping B.V. and CEMEX UK.

3	Presented net of all outstanding notes repurchased and held by CEMEX, S.A.B. de C.V.’s subsidiaries.

4	On December 5, 2017, CEMEX, S.A.B. de C.V. issued €650 of 2.75% senior secured notes due December 5, 2024 (the “December 2024 Notes”). The proceeds will be used to repay other indebtedness.

5

In connection with tender offers or the execution of call notice, as applicable, on December 10, 2017, CEMEX repurchased the outstanding amount of the December 2019 Notes for an aggregate principal amount of US$611. In addition, on November 28, 2017, CEMEX announced its intention to redeem the total outstanding amount of the January 2022 Notes for an aggregate principal amount of €400 (US$480 or $9,432), that would be payable on January 10, 2018 and are presented as current maturities of long-term debt in the statement of financial position as of December 31, 2017 (note 22).

6	On February 28, 2017, by means of a tender offer, CEMEX, S.A.B. de C.V. repurchased US$385 aggregate principal amount of the January 2021 Notes and US$90 of the December 2019 Notes.

7

On May 9, 2016, using available funds from the issuance of the April 2026 Notes, the sale of assets and cash flows provided by operating activities, and by means of tender offers, CEMEX, S.A.B. de C.V. purchased US$187 principal amount of the October 2018 Variable Notes, and the purchase of US$219 principal amount of the December 2019 Notes. Moreover, on October 28, 2016, CEMEX, S.A.B. de C.V. repurchased US$242 principal amount of the January 2021 Notes.

During 2017, 2016 and 2015, as a result of the debt transactions incurred, including exchange offers and tender offers to replace and/or repurchase existing debt instruments, some of which are mentioned above and the Credit Agreement 2017, CEMEX, S.A.B. de C.V. paid combined premiums, fees and issuance costs for US$181 ($3,550), US$111 ($2,300) and US$51 ($877), respectively, of which US$142 ($2,786) in 2017, US$76 ($1,575) in 2016 and US$25 ($435) in 2015, are associated with the extinguished portion of the exchanged or repurchased debt and were recognized in the income statement in each year within “Financial expense”. In addition, US$39 ($770) in 2017, US$35 ($752) in 2016 and US$26 ($443) in 2015, corresponding to issuance costs of new debt and/or the portion of the combined premiums, fees and issuance costs treated as a refinancing of the old instruments by considering that: a) the relevant economic terms of the old and new notes were not substantially different; and b) the final holders of the new notes were the same of such portion of the old notes; adjusted the carrying amount of the new debt instruments, and are amortized over the remaining term of each instrument. Moreover, proportional fees and issuance costs related to the extinguished debt instruments for US$10 ($196) in 2017, US$30 ($622) in 2016 and US$20 ($320) in 2015 that were pending for amortization were recognized in the income statement of each year as part of “Financial expense”.

Long-term debt maturities as of December 31, 2017, are as follows:

 

		2017
2020		$	10,168
2021			27,013
2022			19,586
2023 and thereafter			83,441
		$	140,208

2017 Credit Agreement, 2014 Credit Agreement and Facilities Agreement

As mentioned above, on July 19, 2017, CEMEX, S.A.B. de C.V. and certain subsidiaries entered into the 2017 Credit Agreement with 20 financial institutions for an amount in different currencies equivalent to US$4,050 at the origination date, which proceeds were used to refinance in full the US$3,680 then outstanding under the 2014 Credit Agreement and other debt repayments, allowing CEMEX, S.A.B. de C.V. to increase the average life of its syndicated bank debt to approximately 4.3 years with a final maturity in July 2022. All tranches under the 2017 Credit Agreement have substantially the same terms, including an applicable margin over the benchmark interest rate of between 125 to 350 basis points, depending on CEMEX’s consolidated debt leverage ratio; and the tranches share the same guarantors and collateral package as the original tranches under the 2014 Credit Agreement and other secured debt obligations of CEMEX, S.A.B. de C.V. As of December 31, 2017, total commitments under the 2017 Credit Agreement included US$2,746 ($53,959), €741 (US$889 or $17,469) and £344 (US$465 or $9,137), out of which about US$1,135 ($22,303) were in a revolving credit facility. All tranches under the 2017 Credit Agreement amortize in five equal semi-annual payments beginning in July 2020, except for the commitments under the revolving credit which have a five-year maturity.

 

20

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

2017 Credit Agreement, 2014 Credit Agreement and Facilities Agreement - continued

 

The original proceeds from the 2014 Credit Agreement of US$1,350 were fully used to repay debt under the then existing facilities agreement, entered into on September 17, 2012, as amended from time to time (the “Facilities Agreement”). On July 30, 2015, after several repayments under the Facilities Agreement using proceeds from other debt issuances, CEMEX, S.A.B. de C.V. repaid in full the then total amount outstanding of US$1,937 ($33,375) under the Facilities Agreement with additional funds from 21 financial institutions, which joined the 2014 Credit Agreement under new tranches, allowing CEMEX, S.A.B. de C.V. to increase the then average life of its syndicated bank debt to approximately 4 years as of such date. On November 30, 2016, CEMEX, S.A.B. de C.V. prepaid US$373 ($7,729) corresponding to the September 2017 amortization under the 2014 Credit Agreement and agreed with the lenders to exchange current funded commitments for US$664 maturing in 2018 into the revolving facility, maintaining their original amortization schedule and the same terms and conditions. As of December 31, 2016, total commitments under the 2014 Credit Agreement included US$2,826 ($58,555) and €746 (US$785 or $16,259), out of which about US$1,413 ($29,277) were in a revolving credit facility. Considering all commitments, the amortization profile, was of US$783 in 2018; US$883 in 2019; and US$1,096 in 2020.

All tranches under the 2017 Credit Agreement have substantially the same terms, including an applicable margin over LIBOR or EURIBOR, as applicable, of between 125 to 350 basis points, depending on the leverage ratio (as defined below) of CEMEX, S.A.B. de C.V. as follows:

 

Consolidated leverage ratio		Applicable margin
> = 5.50x		350 bps
< 5.00x > 4.50x		300 bps
< 4.50x > 4.00x		250 bps
< 4.00x > 3.50x		212.5 bps
< 3.50x > 3.00x		175 bps
< 3.00x > 2.50x		150 bps
< 2.50x		125 bps

The 2017 Credit Agreement also modified the consolidated leverage ratio and consolidated coverage ratio limits as described below in the financial covenants section. For the years ended December 31, 2017 and 2016, under both the 2017 Credit Agreement and the 2014 Credit Agreement, CEMEX, S.A.B. de C.V. was required to comply with the following thresholds: (a) the aggregate amount allowed for capital expenditures cannot exceed US$1,000 per year excluding certain capital expenditures, and, joint venture investments and acquisitions by CEMEX Latam Holdings, S.A. (“CEMEX Latam” or “CLH”), indirect holding company of CEMEX’s operations in Colombia, Panama, Costa Rica, Guatemala, El Salvador and Brazil which shares trade in the Colombian stock exchange, and its subsidiaries, which capital expenditures, joint venture investments and acquisitions at any time then incurred are subject to a separate aggregate limit of US$500 (or its equivalent); and (b) the amounts allowed for permitted acquisitions and investments in joint ventures cannot exceed US$400 per year. Nonetheless, such limitations do not apply if capital expenditures or acquisitions are funded with equity, do not exceed free cash flow generation, or asset disposals proceeds.

The debt under the 2017 Credit Agreement and previously under the 2014 Credit Agreement, is guaranteed by CEMEX México, S.A. de C.V., CEMEX Concretos, S.A. de C.V., Empresas Tolteca de México, S.A. de C.V., New Sunward Holding B.V., CEMEX España, S.A., CEMEX Asia, B.V., CEMEX Corp., CEMEX Egyptian Investments, B.V., CEMEX Egyptian Investments II, B.V., CEMEX Finance LLC., CEMEX France Gestion, (S.A.S.), CEMEX Research Group AG, CEMEX Shipping B.V. and CEMEX UK. In addition, the debt under such agreements (together with all other senior capital markets debt issued or guaranteed by CEMEX, S.A.B. de C.V., and certain other precedent facilities) is also secured by a first-priority security interest in: (a) substantially all the shares of CEMEX México, S.A. de C.V.; CEMEX Operaciones México, S.A. de C.V; New Sunward Holding B.V.; CEMEX Trademarks Holding Ltd. and CEMEX España (the “Collateral”), and (b) all proceeds of such Collateral. CEMEX Egyptian Investments II, B.V. and CEMEX Shipping, B.V. originally guaranteed the 2014 Credit Agreement but were merged into CEMEX España, S.A. in October, 2016.

In addition to the restrictions mentioned above, and subject in each case to the permitted negotiated amounts and other exceptions, CEMEX, S.A.B. de C.V. is also subject to a number of negative covenants that, among other things, restrict or limit its ability to: (i) create liens; (ii) incur additional debt; (iii) change CEMEX, S.A.B. de C.V.’s business or the business of any obligor or material subsidiary (in each case, as defined in the 2017 Credit Agreement and the Facilities Agreement); (iv) enter into mergers; (v) enter into agreements that restrict its subsidiaries’ ability to pay dividends or repay intercompany debt; (vi) acquire assets; (vii) enter into or invest in joint venture agreements; (viii) dispose of certain assets; (ix) grant additional guarantees or indemnities; (x) declare or pay cash dividends or make share redemptions while the Leverage Ratio remains above 4.0 times; and; (xi) enter into speculative derivatives transactions

The 2017 Credit Agreement also contains a number of affirmative covenants that, among other things, require CEMEX, S.A.B. de C.V. to provide periodic financial information to its lenders. However, a number of those covenants and restrictions will automatically cease to apply or become less restrictive if CEMEX, S.A.B. de C.V. so elects when: (i) CEMEX, S.A.B. de C.V.’s Leverage Ratio (as defined hereinafter) for the two most recently completed quarterly testing periods is less than or equal to 3.75 times; and (ii) no default under the 2017 Credit Agreement is continuing. At that point the Leverage Ratio must not exceed 3.75 times. Restrictions that will cease to apply when CEMEX, S.A.B. de C.V. satisfies such conditions include the capital expenditure limitations mentioned above and several negative covenants, including limitations on CEMEX, S.A.B. de C.V.’s ability to declare or pay cash dividends and distributions to shareholders, limitations on CEMEX, S.A.B. de C.V.’s ability to repay existing financial indebtedness, certain asset sale restrictions, and restrictions on exercising call options in relation to any perpetual bonds CEMEX, S.A.B. de C.V. At such time, several baskets and caps relating to negative covenants will also increase, including permitted financial indebtedness, permitted guarantees and limitations on liens. However, CEMEX, S.A.B. de C.V. cannot assure that it will be able to meet the conditions for these restrictions to cease to apply prior to the final maturity date under the Credit Agreement 2017.

 

21

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Credit Agreement, Facilities Agreement and Financing Agreement - continued

 

In addition, the 2017 Credit Agreement, and previously the 2014 Credit Agreement, contains events of default, some of which may occur and are outside of CEMEX, S.A.B. de C.V.’s control such as expropriation, sequestration and availability of foreign exchange. As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. was not aware of any event of default. CEMEX, S.A.B. de C.V. cannot assure that in the future it will be able to comply with the restrictive covenants and limitations contained in the Credit Agreement. CEMEX, S.A.B. de C.V.’s failure to comply with such covenants and limitations could result in an event of default, which could materially and adversely affect CEMEX, S.A.B. de C.V.’s business and financial condition.

Financial Covenants

The 2017 Credit Agreement and previously the 2014 Credit Facilities Agreement requires CEMEX, S.A.B. de C.V. the compliance with financial ratios, which mainly include: a) the consolidated ratio of debt to Operating EBITDA (the “Leverage Ratio”); and b) the consolidated ratio of Operating EBITDA to interest expense (the “Coverage Ratio”). These financial ratios are calculated according to the formulas established in the debt contracts using the consolidated amounts under IFRS.

As of December 31, 2017, CEMEX, S.A.B. de C.V. must comply with a Coverage Ratio and a Leverage Ratio for each period of four consecutive fiscal quarters as follows:

 

Period		Coverage Ratio		Period		Leverage Ratio
For the period ending on December 31, 2017 up to and including the period ending on March 31, 2020		> = 2.50		For the period ending on December 31, 2017 up to and including the period ending on March 31, 2018		< = 5.25
				For the period ending on June 30, 2018 up to and including the period ending on September 30, 2018		< = 5.00
For the period ending on June 30, 2020 and each subsequent reference period		> = 2.75		For the period ending on December 31, 2018 up to and including the period ending on March 31, 2019		< = 4.75
				For the period ending on June 30, 2019 up to and including the period ending on March 31, 2020		< = 4.50
				For the period ending on June 30, 2020 and each subsequent reference period		< = 4.25

CEMEX, S.A.B. de C.V.’s ability to comply with these ratios may be affected by economic conditions and volatility in foreign exchange rates, as well as by overall conditions in the financial and capital markets. For the compliance periods ended as of December 31, 2017, 2016 and 2015, considering the 2017 Credit Agreement and the 2014 Credit Agreement, as applicable, CEMEX, S.A.B. de C.V. was in compliance with the financial covenants imposed by its debt contracts.

The main consolidated financial ratios as of December 31, 2017, 2016 and 2015 were as follows:

 

				Financial ratios
				2017				2016				2015
Leverage ratio 1, 2		Limit			< = 5.25				< = 6.00				< = 6.00
		Calculation			3.85				4.23				5.21
Coverage ratio 3		Limit			> = 2.50				> = 1.85				> = 1.85
		Calculation			3.46				3.18				2.61

 

1

The leverage ratio is calculated in pesos by dividing “Funded debt” by pro forma Operating EBITDA for the last twelve months as of the calculation date. Funded debt equals debt, as reported in the statement of financial position, excluding finance leases, plus perpetual debentures and guarantees, plus or minus the fair value of derivative financial instruments, as applicable, among other adjustments.

2

Pro forma Operating EBITDA represents, all calculated in pesos, Operating EBITDA for the last twelve months as of the calculation date, plus the portion of Operating EBITDA referring to such twelve-month period of any significant acquisition made in the period before its consolidation in CEMEX, minus Operating EBITDA referring to such twelve-month period of any significant disposal that had already been liquidated .

3	The coverage ratio is calculated in pesos using the amounts from the financial statements, by dividing the pro forma Operating EBITDA by the financial expense for the last twelve months as of the calculation date. Financial expense includes interest accrued on the perpetual debentures .

CEMEX, S.A.B. de C.V. will classify all of its outstanding debt as current debt in its statement of financial position if: 1) as of any measurement date CEMEX, S.A.B. de C.V. fails to comply with the aforementioned financial ratios; or 2) the cross default clause that is part of the 2017 Credit Agreement is triggered by the provisions contained therein; 3) as of any date prior to a subsequent measurement date CEMEX, S.A.B. de C.V. expects not to be in compliance with such financial ratios, in the absence of: a) amendments and/or waivers covering the next succeeding 12 months; b) high probability that the violation will be cured during any agreed upon remediation period and be sustained for the next succeeding 12 months; and/or c) a signed refinancing agreement to refinance the relevant debt on a long-term basis. Moreover, concurrent with the aforementioned classification of debt in the short-term, the noncompliance of CEMEX, S.A.B. de C.V. with the financial ratios agreed upon pursuant to the Credit Agreement or, in such event, the absence of a waiver of compliance or a negotiation thereof, after certain procedures upon CEMEX, S.A.B. de C.V.’s lenders’ request, they would call for the acceleration of payments due under the 2017 Credit Agreement. That scenario will have a material adverse effect on CEMEX, S.A.B. de C.V.’s liquidity, capital resources and financial position.

 

22

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

16.2)

OTHER FINANCIAL OBLIGATIONS

Other financial obligations in the statement of financial position of CEMEX, S.A.B. de C.V. as of December 31, 2017 and 2016, are as follows:

 

		2017												2016
		Short-term				Long-term				Total				Short-term				Long-term				Total
I.   Convertible subordinated notes due 2020		$	—				9,985				9,985			$	—				10,417				10,417
II. Convertible subordinated notes due 2018			7,115				—				7,115				—				13,575				13,575
III.  Mandatorily convertible securities due in 2019			323				371				694				278				689				967
IV.  Liabilities secured with accounts receivable			1,634				—				1,634				533				—				533
V. Finance leases			38				159				197				—				—				—
		$	9,110				10,515				19,625			$	811				24,681				25,492

Financial instruments convertible into CEMEX, S.A.B. de C.V.’s shares contain components of liability and equity, which are recognized differently depending upon the currency in which the instrument is denominated and the functional currency of the issuer (note 2.5).

 

I.	Optional convertible subordinated notes due 2020

During 2015, CEMEX, S.A.B. de C.V. issued US$521 aggregate principal amount of 3.72% convertible subordinated notes due in March 2020 (the “2020 Convertible Notes”). The 2020 Convertible Notes were issued: a) US$200 as a result of the exercise in March 13, 2015 of US$200 notional amount of Contingent Convertible Units (“CCUs”) (described below), and b) US$321 as a result of the exchange with certain investors in May 2015, which together with early conversions, resulted in settlement of US$626 aggregate principal amount of 3.25% convertible subordinated notes due in 2016 (the “2016 Convertible Notes”) held by such investors and the issuance and delivery by CEMEX, S.A.B. de C.V. of an estimated 42 million ADSs, which included a number of additional ADSs issued to the holders as non-cash inducement premiums. The 2020 Convertible Notes, which are subordinated to all of CEMEX, S.A.B. de C.V.’s liabilities and commitments, are convertible into a fixed number of CEMEX, S.A.B. de C.V.’s ADSs at any time at the holder’s election and are subject to antidilution adjustments. The difference at the exchange date between the fair value of the 2016 Convertible Notes and the 42 million ADSs against the fair value of the 2020 Convertible Notes, represented a loss of $365 recognized in 2015 as part of “Financial income and other items, net.”. The aggregate fair value of the conversion option as of the issuance dates which amounted to $199 was recognized in other equity reserves. As of December 31, 2017 and 2016, the conversion price per ADS was approximately 11.01 dollars and 11.45 dollars, respectively. After antidilution adjustments, the conversion rate as of December 31, 2017 and 2016 was 90.8592 ADS and 87.3646 ADS per each 1 thousand dollars principal amount of such notes, respectively.

In October 2014, in connection with US$204 remaining principal amount of 4.875% Optional Convertible Subordinated Notes due in March 2015 (the “2015 Convertible Notes”), the Parent Company issued US$200 notional amount of CCUs at an annual rate of 3.0% on the notional amount, by means of which, in exchange for coupon payments, CEMEX, S.A.B. de C.V. secured the refinancing for any of the 2015 Convertible Notes that would mature without conversion up to US$200 of the principal amount. Pursuant to the CCUs, holders invested the US$200 in U.S. treasury bonds, and irrevocably agreed to apply such investment in March 2015, if necessary, to subscribe new convertible notes of the Parent Company for up to US$200. In March 2015, CEMEX, S.A.B. de C.V. exercised the CCUs, issued US$200 principal amount of the 2020 Convertible Notes to the holders of the CCUs and repaid the US$204 remaining principal amount of the 2015 Convertible Notes.

 

II.	Optional convertible subordinated notes due in 2016 and 2018

On March 15, 2011, CEMEX, S.A.B. de C.V. closed the offering of US$978 principal amount of the 2016 Convertible Notes and US$690 principal amount of 3.75% convertible subordinated notes due in 2018 (the “2018 Convertible Notes”). The notes were subordinated to all of CEMEX, S.A.B. de C.V.’s liabilities and commitments. The notes are convertible into a fixed number of CEMEX, S.A.B. de C.V.’s ADSs and are subject to antidilution adjustments. After the exchange of notes described in the paragraph above, the US$352 of the 2016 Convertible Notes that remained outstanding, were repaid in cash at their maturity on March 15, 2016. On June 19, 2017, CEMEX, S.A.B. de C.V. agreed with certain institutional holders the early conversion of US$325 of the 2018 Convertible Notes in exchange for the issuance of approximately 43 million ADSs, which included the number of additional ADSs issued to the holders as non-cash inducement premiums. As a result of the early conversion, the liability component of the converted notes of $5,468 was reclassified from other financial obligations to other equity reserves. In addition, CEMEX, S.A.B. de C.V. increased common stock for $4 and additional paid-in capital for $7,059 against other equity reserves, and recognized expense for the inducement premiums paid in shares of $769, recognized within “Financial income and other items, net.” in the income statement for 2017.

As of December 31, 2017 and 2016, the conversion price per ADS of the notes then outstanding was approximately 8.57 dollars and 8.92 dollars, respectively. After antidilution adjustments, the conversion rate as of December 31, 2017 and 2016 was 116.6193 ADS and 112.1339 ADS, respectively, per each 1 thousand dollars principal amount of such notes. Concurrent with the offering of the 2016 and 2018 Convertible Notes, a portion of the net proceeds from this transaction were used by CEMEX, S.A.B. de C.V. to fund the purchase of capped call options, which when purchased were generally expected to reduce the potential dilution cost to CEMEX, S.A.B. de C.V. upon the potential conversion of such notes (note 16.4).

 

23

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

III.	Mandatorily convertible securities due in 2019

In December 2009, CEMEX, S.A.B. de C.V. exchanged debt into US$315 ($6,527) principal amount of 10% mandatorily convertible securities in pesos with maturity in 2019 (the “2019 Mandatorily Convertible Securities”). Reflecting antidilution adjustments, the notes will be converted at maturity or earlier if the price of the CPO reaches $26.22 into approximately 236 million CPOs at a conversion price of $17.48 per CPO. Holders have an option to voluntarily convert their securities on any interest payment date into CPOs. The conversion option embedded in these securities is treated as a stand-alone derivative liability at fair value through the income statements (note 16.4).

 

IV.	Liabilities secured with accounts receivable

As mentioned in note 8, as of December 31, 2017 and 2016, in connection with trade receivables sold under CEMEX, S.A.B. de C.V.’s outstanding programs, funded amounts such trade accounts receivables sold are recognized in “Other financial obligations” in the statement of financial position.

 

V.	Finance leases

CEMEX, S.A.B. de C.V. has several operating and administrative assets under finance lease contracts. Future payments associated with these contracts are presented in notes 17.2 and 20.4.

 

16.3)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial assets and liabilities

The carrying amounts of cash, trade accounts receivables, other accounts receivable, short-term intercompany balances, trade payable, other current liabilities, as well as short-term debt, approximate their corresponding estimated fair values due to the short-term maturity and revolving nature of these financial assets and liabilities. Cash equivalents and certain long-term investments are recognized at fair value, considering to the extent available, quoted market prices for the same or similar instruments. The estimated fair value of long-term debt is either based on estimated market prices for such or similar instruments, considering interest rates currently available for CEMEX, S.A.B. de C.V. to negotiate debt with the same maturities, or determined by discounting future cash flows using market-based interest rates currently available to CEMEX, S.A.B. de C.V. As of December 31, 2017 and 2016, the carrying amounts of long-term financial assets and liabilities and their respective fair values were as follows:

 

		2017								2016
		Carrying amount				Fair value				Carrying amount				Fair value
Financial assets
Investments available-for-sale (note 13)		$	1,192				1,192			$	1,073				1,073
Non-current portion of valuation of derivative financial instruments (note 13)			794				794				1,900				1,900
		$	1,986				1,986			$	2,973				2,973
Financial liabilities
Long-term debt (note 16.1)		$	140,208				145,557			$	171,936				175,941
Other financial obligations (note 16.2)			10,515				11,037				24,681				27,419
Derivative financial instruments (note 16.4)			402				402				1,326				1,326
Long-term accounts payable with related parties (note 17.1)			373				368				802				925
		$	151,498				157,364			$	198,745				205,611

Fair Value Hierarchy

The fair values determined by CEMEX, S.A.B. de C.V. as of December 31, 2017 and 2016, for its financial assets and liabilities are determined by Level 2.

 

16.4)

DERIVATIVE FINANCIAL INSTRUMENTS

During the reported periods, in compliance with the guidelines established by its Risk Management Committee, the restrictions set forth by its debt agreements and its hedging strategy (note 16.5), CEMEX, S.A.B. de C.V. held derivative instruments, with the objectives of, as the case may be of: a) changing the risk profile or fixed the price of fuels and electric energy; b) foreign exchange hedging; c) hedge of forecasted transactions; and d) other corporate purposes. As of December 31, 2017 and 2016, the notional amounts and fair values of CEMEX, S.A.B. de C.V.’s derivative instruments were as follows:

 

								2017												2016
(Millions of U.S. dollars)								Notional amount				Fair value								Notional amount				Fair value
I.		Net investment hedge			US			$	1,160				47				US			$	—				—
II.		Foreign exchange forwards related to forecasted transactions							381				3								80				—
III.		Equity forwards on third party shares							168				7								—				—
IV.		Interest rate swaps							137				16								147				23
V.		Fuel price hedging							72				20								77				15
VI.		2019 Mandatorily Convertible Securities and options on own shares							—				(20	)							576				26
					US			$	1,918				73				US			$	880				64

 

24

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Derivative financial instruments - continued

 

The fair values determined by CEMEX, S.A.B. de C.V. for its derivative financial instruments are Level 2. There is no direct measure for the risk of CEMEX, S.A.B. de C.V. or its counterparts in connection with the derivative instruments. Therefore, the risk factors applied for CEMEX, S.A.B. de C.V. assets and liabilities originated by the valuation of such derivatives were extrapolated from publicly available risk discounts for other public debt instruments of CEMEX, S.A.B. de C.V. and its counterparts.

The caption “Financial income and other items, net” included gains and losses related to the recognition of changes in fair values of the derivative instruments during the period and represented net gains of $161 (US$9) in 2017, gains of $317 (US$17) in 2016 and losses of $2,981 (US$173) in 2015.

The estimated fair value of derivative instruments fluctuates over time and is determined by measuring the effect of future relevant economic variables according to the yield curves shown in the market as of the reporting date. These values should be analyzed in relation to the fair values of the underlying transactions and as part of CEMEX, S.A.B. de C.V.’s overall exposure attributable to fluctuations in interest rates and foreign exchange rates. The notional amounts of derivative instruments do not represent amounts exchanged by the parties, and consequently, there is no direct measure of CEMEX, S.A.B. de C.V.’s exposures to the use of these derivatives. The amounts exchanged are determined based on the notional amounts and other terms included in the derivative instruments.

 

I.	Net investment hedge

During March 2017, CEMEX, S.A.B. de C.V. begun the implementation of a long-term US$/$ foreign exchange forward program which notional amount is planned to be up to US$1,250, with monthly revolving settlement dates from 1 to 24 months. The average life of these contracts will be approximately one year. As of December 31, 2017, there are forward contract with a notional amount of US$1,160. For accounting purposes under IFRS, CEMEX, S.A.B. de C.V. has designated this program as hedge of CEMEX, S.A.B. de C.V.‘s net investment in Mexican pesos, pursuant to which changes in fair market value of these instruments are recognized as part of other comprehensive income in equity. For the year ended December 31, 2017, these contracts generated gains for US$6 ($110).

 

II.	Foreign exchange forwards related to forecasted transactions

As of December 31, 2017, CEMEX, S.A.B. de C.V. held US$ / Euro foreign exchange forward contracts maturing in January 10, 2018, negotiated to maintain the Euro value of a portion of the 2024 December Notes issued in Euros during December 2017, after converting a portion of these proceeds in U.S. dollar to settle other indebtedness in dollars in December 2017, but as the final use of these proceeds was projected to be the settle of other indebtedness in Euros during 2018 (note 16.1). In addition, as of December 31, 2016, CEMEX, S.A.B. de C.V. held US$/$ foreign exchange forward contracts maturing in February 2017, negotiated to hedge the U.S. dollar value of the proceeds from the expected sale of pumping assets in Mexico (note 11). For the years ended December 31, 2017, 2016 and 2015, the results of these instruments related to forecasted transactions, including the effects resulting from positions entered and settled during the year, generated losses of US$17 ($337) in 2017, gains of US$10 ($186) in 2016 and gains of US$26 ($448) in 2015, recognized within “Financial income and other items, net” in the income statement.

 

III.	Equity forwards on third party shares

As of December 31, 2017, in connection with the definitive sale of CEMEX, S.A.B. de C.V.’s remaining GCC shares in September 2017 to two financial institutions which hold all corporate rights and control the aforementioned shares (note 12), CEMEX, S.A.B. de C.V. negotiated equity forward contracts to be settled in cash maturing in March 2019 over the price of approximately 31.4 million GCC shares. During 2017, changes in the fair value of these instruments generated losses of US$24 ($463) recognized within “Financial income and other items, net” in the income statement.

In October 2015, Axtel, a Mexican telecommunications company traded in the MSE, announced its merger with Alestra, a Mexican entity provider of information technology solutions and member of Alfa Group, which was effective beginning February 15, 2016. In connection with this announcement, considering that upon completion of the merger any shares of Axtel would be exchanged proportionately according to the new ownership interests for shares in the new merged entity that remained public, the business outlook of such new entity and that CEMEX, S.A.B. de C.V. held an existing investment in Axtel prior to the merger, on January 6, 2016, CEMEX, S.A.B. de C.V. settled in cash a forward contract it maintained over the price of 59.5 million CPOs of Axtel maturing in October 2016 and received US$4, net of transaction costs. In a separate transaction, CEMEX, S.A.B. de C.V. purchased in the market 59.5 million CPOs of Axtel and increased its existing investment in Axtel as part of CEMEX, S.A.B. de C.V.’s investments available for sale (note 13). Changes in the fair value of this instrument generated losses of US$2 ($30) in 2016 and gains of US$15 ($258) in 2015, recognized in the income statement for each period.

 

IV.	Interest rate swap contracts

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. had an interest rate swap maturing in September 2022 associated with an agreement entered into by CEMEX, S.A.B. de C.V. for the acquisition of electric energy in Mexico, which fair value represented assets of US$16 ($314) and US$23 ($477), respectively. Pursuant to this instrument, during the tenure of the swap and based on its notional amount, CEMEX, S.A.B. de C.V. will receive a fixed rate of 5.4% and will pay LIBOR. Changes in the fair value of this interest rate swap generated losses of US$6 ($114) in 2017, US$6 ($112) in 2016 and US$4 ($69) in 2015, recognized in the income statement for each period.

 

 

25

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

V.	Fuel price hedging

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. maintained forward contracts negotiated to hedge the price of diesel fuel in several countries for aggregate notional amounts of US$46 ($904) and US$44 ($912), respectively, with an estimated aggregate fair value representing assets of US$10 ($197) in 2017 and assets of US$7 ($145) in 2016. By means of these contracts, for consumption of some of its subsidiaries only, CEMEX, S.A.B. de C.V. fixed the price of diesel over certain volume representing a portion of the estimated consumption of such fuel in several operations. These contracts have been designated as cash flow hedges of diesel fuel consumption, and as such, changes in fair value are recognized temporarily through other comprehensive income and are recycled to operating expenses as the related diesel volumes are consumed. For the years 2017, 2016 and 2015, changes in fair value of these contracts recognized in other comprehensive income represented gains of US$3 ($57), gains of US$7 ($145) and losses of US$3 ($52), respectively.

In addition, as of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. held forward contracts negotiated to hedge the price of coal, as solid fuel, for an aggregate notional amount of US$26 ($511) and US$33 ($684), respectively and an estimated fair value representing assets of US$10 ($197) in 2017 and assets of US$8 ($166) in 2016. By means of these contracts, for own consumption only, CEMEX, S.A.B. de C.V. fixed the price of coal over certain volume representing a portion of the estimated coal consumption in CEMEX, S.A.B. de C.V.’s applicable operations. These contracts have been designated as cash flow hedges of coal consumption, and as such, changes in fair value are recognized temporarily through other comprehensive income and are recycled to operating expenses as the related coal volumes are consumed. For the years 2017 and 2016, changes in fair value of these contracts recognized in other comprehensive income represented gains of US$1 ($19) and gains of US$8 ($166), respectively.

 

VI.	2019 Mandatorily Convertible Securities and options on own shares

In connection with the 2019 Mandatorily Convertible Securities (note 16.2); considering that the securities are denominated in pesos and the functional currency of the Parent Company’s division that issued the securities is the dollar (note 2.3), CEMEX, S.A.B. de C.V. separated the conversion option embedded in such instruments and recognized it at fair value through the income statement, which as of December 31, 2017 and 2016, resulted in a liability of US$20 ($393) and US$40 ($829), respectively. Changes in fair value generated a gain of US$19 ($359) in 2017, a loss of US$29 ($545) in 2016 and a gain of US$18 ($310) in 2015.

In addition, on March 15, 2011, CEMEX, S.A.B. de C.V. entered into a capped calls, considering antidilution adjustments, over 194 million CEMEX, S.A.B. de C.V.’s ADSs (114 million ADSs maturing in March 2016 in connection with the 2016 Convertible Notes and 80 million ADSs maturing in March 2018 in connection with the 2018 Convertible Notes) in order to effectively increase the conversion price of the ADSs under such notes, by means of which, at maturity of the notes, originally CEMEX, S.A.B. de C.V. would receive in cash the excess between the market price and the strike price of approximately 8.57 dollars per ADS, with a maximum appreciation per ADS of approximately 3.96 dollars for the 2016 Convertible Notes and 5.27 dollars for the 2018 Convertible Notes. CEMEX, S.A.B. de C.V. paid aggregate premiums of US$222. During 2015, CEMEX, S.A.B. de C.V. amended a portion of the capped calls relating to the 2016 Convertible Notes and, as a result, CEMEX, S.A.B. de C.V. received US$44 in cash, equivalent to the unwind of 44.2% of the total notional amount of such capped call. On March 15, 2016, the remaining options for the 55.8% of the 2016 Convertible Notes expired out of the money. During August 2016, CEMEX, S.A.B. de C.V. amended 58.3% of the total notional amount of the capped calls relating to the 2018 Convertible Notes to lower the exercise price in exchange for reducing the number of underlying options, as a result, CEMEX, S.A.B. de C.V. retained capped calls relating to the 2018 Convertible Notes over 71 million ADSs. As of December 31, 2016, the fair value of the existing options represented an asset of US$66 ($1,368). Changes in the fair value of these instruments generated gains of US$37 ($725) in 2017, gains of US$44 ($818) in 2016 and losses of US$228 ($3,928) in 2015, recognized within “Financial income and other items, net” in the income statement During 2017, CEMEX, S.A.B. de C.V. unwound all its capped calls relating to the 2018 Convertible Notes and, as a result, CEMEX, S.A.B. de C.V. received US$103 in cash. As of December 31, 2017, all outstanding capped calls based on the price of CEMEX, S.A.B. de C.V. ADSs have been early settled.

 

16.5)

RISK MANAGEMENT

Enterprise risks may arise from any of the following situations: i) the potential change in the value of assets owned or reasonably anticipated to be owned, ii) the potential change in value of liabilities incurred or reasonably anticipated to be incurred, iii) the potential change in value of services provided, purchase or reasonably anticipated to be provided or purchased in the ordinary course of business, iv) the potential change in the value of assets, services, inputs, product or commodities owned, produced, manufactured, processed, merchandised, leased or sell or reasonably anticipated to be owned, produced, manufactured, processed, merchandising, leasing or selling in the ordinary course of business, or v) any potential change in the value arising from interest rate or foreign exchange rate exposures arising from current or anticipated assets or liabilities.

In the ordinary course of business, CEMEX, S.A.B. de C.V. is exposed to commodities risk, including the exposure from inputs such as fuel, coal, petroleum coke, fly-ash, gypsum and other industrial materials which are commonly used by CEMEX, S.A.B. de C.V. in the production process, and expose CEMEX, S.A.B. de C.V. to variations in prices of the underlying commodities. To manage this and other risks, such as credit risk, interest rate risk, foreign exchange risk, equity risk and liquidity risk, considering the guidelines set forth by the Board of Directors, which represent CEMEX, S.A.B. de C.V.’s risk management framework and that are supervised by several Committees, CEMEX, S.A.B. de C.V.’s management establishes specific policies that determine strategies oriented to obtain natural hedges to the extent possible, such as avoiding customer concentration on a determined market or aligning the currencies portfolio in which CEMEX, S.A.B. de C.V. incurred its debt, with those in which CEMEX, S.A.B. de C.V. generates its cash flows. As of December 31, 2017 and 2016, these strategies are sometimes complemented with the use of derivative financial instruments as mentioned in note 16.4, such as the commodity forward contracts on diesel fuel and coal negotiated to fix the price of these underlying commodities. The main risks categories are commented in this note.

 

26

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates which only affect CEMEX, S.A.B. de C.V.’s results if the fixed rate long-term debt is measured a fair value. All of our fixed-rate long-term debt is carried at amortized cost and therefore is not subject to interest rate risk. CEMEX, S.A.B. de C.V.’s accounting exposure to the risk of changes in market interest rates relates primarily to its long-term debt obligations with floating interest rates., which, if such rates were to increase, may adversely affect its financing cost and the results for the period.

Nonetheless, it is not economically efficient to concentrate in fixed rates in a high point when the interest rates market expects a downward trend, this is, there is an opportunity cost for remaining long periods paying a determined fixed interest rate when the market rates have decreased and the entity may obtain improved interest rate conditions in a new loan or debt issuance. CEMEX, S.A.B. de C.V. manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to reduce its interest costs. In addition, when the interest rate of a debt instrument has turned relatively high as compared to current market rates, CEMEX intents to renegotiate the conditions or repurchase the debt, to the extent the net present value of the expected future benefits from the interest rate reduction would exceed the incentives that would have to be paid in such renegotiation or repurchase of debt.

As of December 31, 2017 and 2016, approximately 32% and 37% of the long-term debt of CEMEX, S.A.B. de C.V. bears floating rates at a weighted average interest rate of LIBOR plus 270 and 306 basis points, respectively. As of December 31, 2017 and 2016, if interest rates at that date had been 0.5% higher, with all other variables held constant, the net income of CEMEX, S.A.B. de C.V. for 2017 and for 2016 would have decreased by US$14 ($274) and US$18 ($373), as a result of higher interest expense on variable rate denominated debt. This analysis does not include the interest rate swaps held in 2017 and 2016.

Foreign currency risk

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. CEMEX, S.A.B. de C.V.’s exposure to the risk of changes in foreign exchange rates relates primarily to its financing activities. As of December 31, 2017, approximately 59% of the financial debt was Dollar-denominated, approximately 35% was Euro-denominated, and approximately 6% was Pound-denominated; therefore, CEMEX, S.A.B. de C.V. had a foreign currency exposure arising from the Dollar- denominated financial debt, the Euro-denominated financial debt and the Pound-denominated financial debt, versus the currency in which CEMEX, S.A.B. de C.V.’s revenues are settled. CEMEX, S.A.B. de C.V. cannot guarantee that it will generate sufficient revenues in Dollars, Euro and Pounds from its operations to service these obligations. As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. had not implemented any derivative financial instrument hedging strategy to address this risk. Nonetheless, CEMEX, S.A.B. de C.V. may enter into derivative financing hedging strategies in the future if either of its debt portfolio currency mix, interest rate mix, market conditions and/or expectations changes.

Monetary position by currency

As of December 31, 2017 and 2016, the net monetary assets (liabilities) by currency are as follows:

 

		2017				2016
Short-term:
Monetary assets		$	7,575				10,948
Monetary liabilities			(98,558	)			(71,954	)
Net monetary liabilities			(90,983	)			(61,006	)
Long-term:
Monetary assets			1,986				43,087
Monetary liabilities			(154,347	)			(200,735	)
Net monetary liabilities		$	(152,361	)			(157,648	)
Out of which:
Dollars			(145,760	)			(119,596	)
Pesos			(32,584	)			(61,736	)
Euros			(55,879	)			(37,322	)
Pounds			(9,121	)			—
		$	(243,344	)			(218,654	)

Credit risk

Credit risk is the risk of financial loss faced by CEMEX, S.A.B. de C.V. if a customer or counterpart of a financial instrument does not meet its contractual obligations and originates mainly from trade accounts receivables. As of December 31, 2017 and 2016, the maximum exposure to credit risk is represented by the balance of financial assets. Management has developed policies for the authorization of credit to customers. The accounting exposure to credit risk is monitored constantly according to the behavior of payment of the debtors. Credit is assigned on a customer-to -customer basis and is subject to assessments which consider the customers’ payment capacity, as well as past behavior regarding due dates, balances past due and delinquent accounts. In cases deemed necessary, CEMEX, S.A.B. de C.V.’s management requires guarantees from its customers and financial counterparties with regard to financial assets.

 

27

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Credit risk - Continued

 

CEMEX, S.A.B. de C.V.’s management has established a policy of low risk which analyzes the creditworthiness of each new client individually before offering the general conditions of payment terms and delivery. The review includes external ratings, when references are available, and in some cases bank references. Threshold of purchase limits are established for each client, which represent the maximum purchase amounts that require different levels of approval. Customers that do not meet the levels of solvency requirements imposed by can only carry out transactions by paying cash in advance. As of December 31, 2017, considering the Company’s best estimate of potential incurred losses based on an analysis of age and considering recovery efforts, the allowance for doubtful accounts was $256 (US$13).

The aging of trade accounts receivable as of December 31, 2017 are as follows:

 

		2017
Neither past due, nor impaired portfolio		$	3,515
Past due less than 90 days portfolio			253
Past due more than 90 days portfolio			481
		$	4,249

Liquidity risk

Liquidity risk is the risk that CEMEX, S.A.B. de C.V. will not have sufficient funds available to meet its obligations. In addition to cash flows provided by its operating activities, in order to meet CEMEX, S.A.B. de C.V.’s overall liquidity needs for operations, servicing debt and funding capital expenditures and acquisitions, CEMEX, S.A.B. de C.V. relies on cost-cutting and operating improvements to optimize capacity utilization and maximize profitability, as well as borrowing under credit facilities, proceeds of debt and equity offerings, and proceeds from asset sales. CEMEX, S.A.B. de C.V. is exposed to risks from changes in foreign currency exchange rates, prices and currency controls, interest rates, inflation, governmental spending, social instability and other political, economic and/or social developments in the countries in which it operates, any one of which may materially affect CEMEX, S.A.B. de C.V.’s results and reduce cash from operations. The maturities of CEMEX, S.A.B. de C.V.’s contractual obligations are included in note 20. As of December 31, 2017 and 2016, the potential requirement for additional margin calls under our different commitments is not significant.

As of December 31, 2017, current liabilities, which included $24,954 of current maturities of debt and other financial obligations, exceed current assets in $87,792. For the year ended December 31, 2017, CEMEX, S.A.B. de C.V. generated net cash flows provided by operating activities for $7,389. The Company’s management considers that CEMEX, S.A.B. de C.V. will generate sufficient cash flows from operations. In addition, CEMEX, S.A.B. de C.V. has committed available lines of credit under its 2017 Credit Agreement, which includes the revolving credit facility and an undrawn tranche for a combined amount of $29,711 (US$1,512), as well as CEMEX, S.A.B. de C.V.’s proven capacity to continually refinance and replace its short-term obligations, will enable CEMEX to meet any liquidity risk in the short-term.

In connection with the current liabilities with related parties for $58,740, mainly from New Sunward Holdings. B.V. and CEMEX México, S.A. of C.V. (note 17), CEMEX, S.A.B. of C.V. has proven successful in refinancing such liabilities.

Equity risk

Equity risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in the market price of CEMEX, S.A.B. de C.V.’s and/or third party’s shares. As described in note 16.4, considering specific objectives, CEMEX, S.A.B. de C.V. has entered into equity forward contracts on third-party shares, as well as capped calls based on the price of CEMEX, S.A.B. de C.V.’s own ADSs. Under these equity derivative instruments, there is a direct relationship in the change in the fair value of the derivative with the change in price of the underlying share. All changes in fair value of such derivative instruments are recognized in the income statement as part of “Financial income and other items, net” Until December 31, 2016, a significant decrease in the market price of CEMEX, S.A.B. de C.V.’s ADSs would negatively affect CEMEX, S.A.B. de C.V.’s liquidity and financial position. During 2017, all outstanding capped calls based on the price of CEMEX´s own ADSs were early settled.

As of December 31, 2017, the potential change in the fair value of CEMEX, S.A.B. de C.V.’s forward contracts in GCC shares that would result from a hypothetical, instantaneous decrease of 10% in the market price of GCC shares in dollars, with all other variables held constant, CEMEX, S.A.B. de C.V.’s net income for 2017 would have reduced in US$14 ($283), as a result of additional negative changes in fair value associated with these contracts. A 10% hypothetical increase in the price of GCC shares in 2017 would have generated approximately the opposite effect, respectively.

In addition, even though the changes in fair value of CEMEX, S.A.B. de C.V.’s embedded conversion option in the Mandatorily Convertible Notes 2019 denominated in a currency other than the functional issuer’s currency affect the income statement, they do not imply any risk or variability in cash flows, considering that through their exercise, CEMEX, S.A.B. de C.V. will settle a fixed amount of debt with a fixed number of shares. As of December 31, 2017 and 2016, the potential change in the fair value of the embedded conversion options in the Mandatorily Convertible Notes 2019 that would result from a hypothetical, instantaneous increase of 10% in the market price of CEMEX, S.A.B. de C.V.’s CPOs, with all other variables held constant, would have decreased CEMEX, S.A.B. de C.V.’s net income for US$9 ($180) in 2017 and decreased US$8 ($162) in 2016; as a result of additional negative changes in fair value associated with this option. A 10% hypothetical decrease in the CEMEX, S.A.B. de C.V. CPO price would generate approximately the opposite effect.

 

28

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

17)	BALANCES AND TRANSACTIONS WITH RELATED PARTIES

 

17.1)

ACCOUNTS RECEIVABLE AND PAYABLE WITH RELATED PARTIES

Balances and operations between CEMEX, S.A.B. de C.V. and the subsidiaries and associates companies result mainly from: (i) businesses and operational activities in Mexico; (ii) the acquisition or sale of shares of subsidiaries within the group; (iii) billing of administrative services, rents, rights to use brands and commercial names, royalties and other services rendered between affiliated companies; and (iv) loans between subsidiaries and associates companies. The transactions between subsidiaries and associates companies are conducted at arm’s length. When market prices and/or market conditions are not readily available, CEMEX, S.A.B. de C.V. conducts transfer pricing studies to assure compliance with regulations applicable to transactions between related parties.

For the transactions mentioned above, as of December 31, 2017 and 2016, the main accounts receivable and payable with related parties, are the following:

 

		Assets								Liabilities
2017		Short-term				Long-term				Short-term				Long-term
New Sunward Holdings. B.V.		$	—				—				35,783				—
CEMEX Operaciones México, S.A. de C.V.			—				—				628				—
CEMEX Concretos, S.A. de C.V.			456				—				—				49
CEMEX México, S.A. de C.V.			—				—				20,128				—
CEMEX Central, S.A. de C.V.			—				—				2,259				—
Transenergy, Inc.			—				—				942				—
TEG Energía, S.A. de C.V.			—				—				—				324
Proveedora Mexicana de Materiales, S.A. de C.V.			207				—				—				—
Others			537				—				401				—
		$	1,200				—				60,141				373

 

		Assets								Liabilities
2016		Short-term				Long-term				Short-term				Long-term
New Sunward Holdings. B.V.		$	—				—				39,817				—
CEMEX Operaciones México, S.A. de C.V.			938				—				—				—
CEMEX Concretos, S.A. de C.V.			728				—				—				264
CEMEX México, S.A. de C.V.			—				—				17,342				—
CEMEX Central, S.A. de C.V.			—				—				535				—
Transenergy, Inc.			—				—				529				72
TEG Energía, S.A. de C.V.			—				—				—				466
Proveedora Mexicana de Materiales, S.A. de C.V.			202				—				—				—
Others			159				—				517				—
		$	2,027				—				58,740				802

 

17.2)

MAIN OPERATIONS WITH RELATED PARTIES

The main operations of CEMEX, S.A.B. de C.V. with related parties for the years ended December 31, 2017, 2016 and 2015, are as follows:

 

		2017				2016				2015
Revenues:
Net sales		$	4,704				5,013				4,861
Rental income (note 3)			65				63				54
License fees (note 3)			671				744				679
Cost of sales and operating expenses:
Raw material and other production cost			5,831				5,507				5,568
Management service expenses			4,758				4,159				4,412
Rental expense			3,630				3,540				3,274
Financing cost (income):
Financial expenses			2,429				1,208				492
Other financial (income) expense, net			37				(409	)			(537	)

During 2015, in connection with all businesses and operational activities of the cement and aggregates sectors in Mexico, CEMEX, S.A.B. de C.V. agreed a contract of operating leases with its subsidiaries CEMEX México, S.A. de C.V. and CEMEX Agregados, S.A. de C.V., primarily for operating facilities, cement storage and distribution facilities, under which annual rental payments are required plus the payment of certain operating expenses related to leased assets. In addition, with the in integration of some activities of the ready-mix concrete, CEMEX, S.A.B. de C.V. agreed a contract of finance leases with its subsidiary CEMEX Concretos, S.A. de C.V., primarily for the ready-mix trucks.

 

29

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

Main operations with related parties - continued

 

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. had the following contractual obligations with related parties are as follows:

 

(Millions of U.S. dollars)						2017																								2016
						Less than				1-3				3-5				More than
Obligations						1 year				Years				Years				5 Years				Total								Total
Finance leases with related parties			US			$	9				3				—				—				12				US			$	32
Operating leases with related parties							170				511				341				—				1,022								1,145
Total leases with related parties			US			$	179				514				341				—				1,034				US			$	1,177
						$	3,517				10,100				6,701				—				20,318							$	24,387

In connection with the transfer of CEMEX, S.A.B. de C.V. assets and activities related to the ready-mix concrete pumping in Mexico to Cementos Españoles de Bombeo, S. de R.L., during 2016 (note 11), CEMEX, S.A.B. de C.V. derecognized the related finance leases of such assets for US$9 ($186).

In addition, for the years ended December 31, 2017, 2016 and 2015, in the ordinary course of business, CEMEX, .S.A.B. de C.V. has entered into transactions with related parties (outside CEMEX´s group) for the sale of products, purchase of services or the lease of assets, all of which are not significant for CEMEX, S.A.B. de C.V. and the related party, are incurred for non-significant amounts and are executed under market terms and conditions following the same commercial principles and authorizations applied to other third parties. These identified transactions are approved annually by the CEMEX, S.A.B. de C.V.’s Board of Directors. None of these transactions are material to be disclosed separately.

 

18)	INCOME TAXES

 

18.1)

INCOME TAXES FOR THE PERIOD

The amounts of income tax revenue (expense) in the income statements for 2017, 2016 and 2015 are summarized as follows:

 

		2017				2016				2015
Current income tax		$	(295	)			(90	)			9,447
Deferred income tax			1,033				(3,309	)			(4,481	)
		$	738				(3,399	)			4,966

As of December 31, 2017, tax loss and tax credits carryforwards and reserved carryforwards expire as follows:

 

						Amount of
		Amount of				reserved
		carryforward				carryforwards
2024		$	17,135				17,135
2025 and thereafter			56,938				56,938
		$	74,073				74,073

In December 2013, the Mexican Congress approved amendments to the income tax law effective January 1, 2014, which eliminated the tax consolidation regime. A period of up to 10 years was established for the settlement of any liability for income taxes related to the tax consolidation regime accrued until December 31, 2013, amount which considering the rules issued for the disconnection of the tax consolidation regime amounted to $24,804. In October 2015, a new tax reform approved by the Mexican Congress (the “new tax reform”) granted entities the option to settle a portion of the liability for the exit of the tax consolidation regime using available tax loss carryforwards of the previously consolidated entities, considering a discount factor, and a tax credit to offset certain items of the aforementioned liability.

Consequently, as a result of payments made during 2014 and 2015, the liability was further reduced to $16,244, which after the application of tax credits and assets for tax loss carryforwards (as provided by the new tax reform) which had a book value for CEMEX, S.A.B. de C.V. before discount of $11,136, as of December 31, 2015, CEMEX, S.A.B. de C.V.’s liability was reduced to $3,971. As of December 31, 2017 and 2016, considering payments made during these years net of inflation adjustments, CEMEX, S.A.B. de C.V. reduced the balance payable to $2,456 and $3,236, respectively.

 

30

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

 

18.2)

DEFERRED INCOME TAXES

The effect of deferred income taxes for the period represents the difference between the income tax balances at the beginning and end of the period. As of December 31, 2017 and 2016 the temporary differences that generated the deferred income tax assets and liabilities of CEMEX, S.A.B. de C.V. are presented below:

 

		2017				2016
Deferred tax assets:
Allowances for doubtful accounts		$	77				66
Provisions			170				144
Advances from customers			872				533
Accounts payable to related parties			108				251
Derivative financial instruments			120				1,033
Total deferred tax assets			1,347				2,027
Deferred tax liabilities:
Land and buildings			(488	)			(644	)
Derivative financial instruments			(130	)			(549	)
Convertible securities			95				(31	)
Equity accounted investees			—				(1,004	)
Advance payments			4				29
Total deferred tax liabilities			(519	)			(2,199	)
Net deferred tax assets (liabilities)		$	828				(172	)

CEMEX, S.A.B. de C.V. does not recognize a deferred tax liability for the undistributed earnings generated by its subsidiaries, considering that such undistributed earnings are expected to be reinvested and not generating taxable income in the foreseeable future. In addition, for the year ended December 31, 2017, CEMEX, S.A.B. de C.V. recognized an income tax expense of $33 within other comprehensive income in stockholders’ equity related with the net investment hedge (note 16.4).

 

18.3)

RECONCILIATION OF EFFECTIVE INCOME TAX RATE

For the years ended December 31, 2017, 2016 and 2015, the effective income tax rates were as follows:

 

		2017				2016				2015
Net income (loss) before income tax		$	14,483				17,432				(3,765	)
Income tax			738				(3,399	)			4,966
Effective income tax rate 1			(5.1	)%			19.5	%			131.9	%

 

1	The average effective tax rate equals the net amount of income tax revenue or expense divided by income or loss before income taxes, as these line items are reported in the income statement.

The effects of inflation are recognized differently for tax purposes and for book purposes. This situation, as in the differences between book and tax bases, give rise to permanent differences between the approximate tax rate and the effective rate shown in the income statement of CEMEX, S.A.B. de C.V.

As of December 31, 2017, 2016 and 2015, these differences are as follows:

 

		2017								2016								2015
		%				(Expense) benefit $				%				(Expense) benefit $				%				(Expense) benefit $
Tax law income tax rate			30.0				(4,345	)			30.0				(5,230	)			30.0				1,129
Results on tax benefits for the year			—				—				—				—				30.2				1,136
Inflation adjustments			32.8				(4,755	)			12.5				(2,178	)			(28.0	)			(1,056	)
Non-deductible and other items			(67.9	)			9,838				(23.0	)			4,009				99.7				3,757
Effective tax rate and benefit (expense)			(5.1	)			738				19.5				(3,399	)			131.9				4,966

The Results on tax benefits for the year, includes changes during the period related to deferred tax assets originated by tax loss carryforwards.

 

19)	STOCKHOLDERS’ EQUITY

As of December 31, 2017 and 2016, there were 20,541,277 CPOs and 19,751,229 CPOs, respectively, held by subsidiaries.

 

31

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

19.1)

COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

As of December 31, 2017 and 2016, common stock and additional paid-in capital was as follows:

 

		2017				2016
Common stock		$	4,171				4,162
Additional paid-in capital			140,483				123,174
		$	144,654				127,336

As of December 31, 2017 and 2016, the common stock of CEMEX, S.A.B. de C.V. was represented as follows:

 

		2017								2016
Shares 1		Series A 2				Series B 2				Series A 2				Series B 2
Subscribed and paid shares			30,214,469,912				15,107,234,956				28,121,583,148				14,060,791,574
Unissued shares authorized for executives’ stock compensation programs			531,739,616				265,869,808				638,468,154				319,234,077
Shares that guarantee the issuance of convertible securities 3			4,529,605,020				2,264,802,510				5,218,899,920				2,609,449,960
			35,275,814,548				17,637,907,274				33,978,951,222				16,989,475,611

 

1	As of December 31, 2017 and 2016, 13,068,000,000 shares correspond to the fixed portion, and 39,845,721,822 shares in 2017 and 37,900,426,833 shares in 2016 correspond to the variable portion.

2	Series “A” or Mexican shares may represent at least 64% of common stock, meanwhile, Series “B” or free subscription shares must represent at most 36% of CEMEX, S.A.B. de C.V.’s capital stock.

3	Shares that guarantee the conversion of both the outstanding and mandatorily convertible securities and new securities issues (note 16.2).

On March 30, 2017, stockholders at the annual ordinary shareholders’ meeting approved resolutions to: (i) increase the variable common stock through the capitalization of retained earnings by issuing up to 1,687 million shares (562 million CPOs), which shares were issued, representing an increase in common stock of $5, considering a nominal value of $0.00833 per CPO and an additional paid-in capital of $9,459; and (ii) increase the variable common stock by issuing up to 258 million shares (86 million CPOs), which will be kept in CEMEX, S.A.B. de C.V.’s treasury to be used to preserve the anti-dilutive rights of note holders pursuant CEMEX, S.A.B. de C.V.’s convertible securities (note 16.2).

On March 31, 2016, stockholders at the annual ordinary shareholders’ meeting approved resolutions to: (i) increase the variable common stock through the capitalization of retained earnings by issuing up to 1,616 million shares (539 million CPOs), which shares were issued, representing an increase in common stock of $4, considering a nominal value of $0.00833 per CPO and an additional paid-in capital of $6,966; and (ii) increase the variable common stock by issuing up to 297 million shares (99 million CPOs), which will be kept in CEMEX, S.A.B. de C.V.’s treasury to be used to preserve the anti-dilutive rights of note holders pursuant CEMEX, S.A.B. de C.V.’s convertible securities (note 16.2).

On March 26, 2015, stockholders at the annual ordinary shareholders’ meeting approved resolutions to: (i) increase the variable common stock through the capitalization of retained earnings by issuing up to 1,500 million shares (500 million CPOs), which shares were issued, representing an increase in common stock of $4, considering a nominal value of $0.00833 per CPO and an additional paid-in capital of $7,613; and (ii) increase the variable common stock by issuing up to 297 million shares (99 million CPOs), which will be kept in CEMEX, S.A.B. de C.V.’s treasury to be used to preserve the anti-dilutive rights of note holders pursuant CEMEX, S.A.B. de C.V.’s convertible securities (note 16.2).

In addition, in connection with the long-term executive share-based compensation program in 2017, 2016 and 2015, CEMEX, S.A.B. de C.V. issued approximately 53.2 million, 53.9 million and 49.2 million CPOs, respectively, generating an additional paid-in capital of $791 in 2017, $742 in 2016 and $655 in 2015, associated with the fair value of the compensation received by executives.

 

19.2)

RETAINED EARNINGS

CEMEX, S.A.B. de C.V.’s net income for the year is subject to a 5% allocation toward a legal reserve until such reserve equals one fifth of the equity represented by the common stock. As of December 31, 2017, 2016 and 2015, the legal reserve amounted to $1,804.

 

20)	CONTINGENCIES AND COMMITMENTS

 

20.1)

GUARANTEES

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. had guaranteed loans to certain subsidiaries of US$1,506 ($29,601) and US$2,887 ($59,819), respectively.

 

20.2)

PLEDGED ASSET

CEMEX, S.A.B. de C.V. transferred to a guarantee trust the shares of its main subsidiaries, including CEMEX México, S.A. de C.V. and CEMEX España, S.A., and entered into pledge agreements in order to secure payment obligations under the Credit Agreement (formerly under the Facilities Agreement) and other debt instruments entered into prior to the date of these agreements (note 16.1).

As of December 31, 2017 and 2016, there are no liabilities secured by property, machinery and equipment.

 

32

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CEMEX, S.A.B. DE C.V.

Notes to the Parent Company-Only Financial Statements

As of December 31, 2017, 2016 and 2015

(Millions of Mexican pesos)

 

20.3)

OTHER COMMITMENTS

Assets held for sale are measured at the lower of their estimated realizable value, less costs to sell, and their carrying amounts, as well as liabilities directly related with such assets. On December 2, 2016, CEMEX, S.A.B. de C.V. agreed the sale of its assets and activities related to the ready mix concrete pumping in Mexico to Cementos Españoles de Bombeo, S. de R.L., subsidiary in Mexico of Pumping Team S.L.L. (“Pumping Team”), specialist in the supply of ready mix concrete pumping services based in Spain, for $1,649, which includes the sale of fixed assets upon closing of the transaction for $309 plus administrative and client and market development services, as well as the lease of facilities in Mexico that CEMEX, S.A.B. de C.V. will supply to Pumping Team over a period of ten years with the possibility to extend for three additional years, for an aggregate initial amount of $1,340, plus a contingent revenue subject to results for up to $557 linked to annual metrics beginning in the first year and up to the fifth year of the agreement. On April 28, 2017, after receiving the approval by the Mexican authorities, CEMEX, S.A.B. de C.V. concluded the definite sale.

 

20.4)

CONTRACTUAL OBLIGATIONS

As of December 31, 2017 and 2016, CEMEX, S.A.B. de C.V. had the following contractual obligations are as follows:

 

(Millions of U.S. dollars)						2017																								2016
Obligations						Less than 1 year				1-3 Years				3-5 Years				More than 5 Years				Total								Total
Long-term debt1			US			$	795				517				2,411				4,261				7,984				US			$	8,333
Convertible notes2							379				527				—				—				906								1,230
Finance leases obligations3							2				8				—				—				10								—
Total debt and other financial obligations							1,176				1,052				2,411				4,261				8,900								9,563
Interest payments on debt4							345				763				603				676				2,387								2,612
Operating leases							5				9				9				4				27								—
Total contractual obligations			US			$	1,526				1,824				3,023				4,941				11,314				US			$	12,175
						$	29,986				35,842				59,401				97,090				222,319							$	252,266

 

1	The schedule of debt payments, which includes current maturities, does not consider the effect of any refinancing of debt that may occur during the following years. In the past, CEMEX, S.A.B. de C.V. has replaced its long-term obligations for others of a similar nature.

2	Refers to the convertible notes described in note 16.2 and assumes repayment at maturity and no conversion of the notes.

3	Represent nominal cash flows.

4	For the determination of the future estimated interest payments on floating rate denominated debt, CEMEX, S.A.B. de C.V. used the floating interest rates in effect as of December 31, 2017 and 2016.

 

21)	CONTINGENCIES

In December 2016, CEMEX, S.A.B. de C.V. received subpoenas from the United States Securities and Exchange Commission (“SEC”) seeking information that may allow determining whether there are violations of the U.S. Foreign Corrupt Practices Act in connection with Maceo’s project, an investment project made by one of CEMEX, S.A.B. de C.V.’s subsidiaries located in Colombia. These subpoenas do not mean that the SEC has concluded that CEMEX, S.A.B. de C.V. has broken the law. CEMEX, S.A.B. de C.V.’s internal audits and investigations question certain payments made in connection with Maceo’s project. These payments, which amount to US$16 ($326), were made to non-governmental individual in connection with the purchase of the factory land, adjacent land, mining rights and the benefits of the free trade zone of Maceo’s project, were made in breach of CEMEX, S.A.B. de C.V. established protocols. CEMEX, S.A.B. de C.V. has been cooperating with the SEC and intends to continue cooperating fully with the SEC. It is possible that the United States Department of Justice or investigatory entities in other jurisdictions may also open investigations into this matter. To the extent they do so, CEMEX, S.A.B. de C.V. intends to cooperate fully with those inquiries, as well. As of December 31, 2017, CEMEX, S.A.B. de C.V. is neither able to predict the duration, scope, or outcome of the SEC investigation or any other investigation that may arise, nor has elements to determine the probability that the SEC’s investigation results may or may not have a material adverse impact on its results of operations, liquidity or financial position.

In addition, CEMEX, S.A.B. de C.V. is involved in various legal proceedings of minor impact that have arisen in the ordinary course of business. These proceedings involve: 1) product warranty claims; 2) claims for environmental damages; 3) indemnification claims relating to acquisitions or divestitures; 4) claims to revoke permits and/or concessions; and 5) other diverse civil actions. CEMEX, S.A.B. de C.V. considers that in those instances in which obligations have been incurred, CEMEX, S.A.B. de C.V. has accrued adequate provisions to cover the related risks. CEMEX, S.A.B. de C.V. believes these matters will be resolved without any significant effect on its business, financial position or results of operations. In addition, in relation to certain ongoing legal proceedings, CEMEX, S.A.B. de C.V. is sometimes able to make and disclose reasonable estimates of the expected loss or range of possible loss, as well as disclose any provision accrued for such loss, but for a limited number of ongoing legal proceedings, CEMEX, S.A.B. de C.V. may not be able to make a reasonable estimate of the expected loss or range of possible loss or may be able to do so but believes that disclosure of such information on a case-by-case basis would seriously prejudice CEMEX, S.A.B. de C.V.’s position in the ongoing legal proceedings or in any related settlement discussions. Accordingly, in these cases, CEMEX, S.A.B. de C.V. has disclosed qualitative information with respect to the nature and characteristics of the contingency, but has not disclosed the estimate of the range of potential loss.

 

22)	SUBSEQUENT EVENTS

On January 10, 2010, in connection with the tender offer of the January 2022 Notes, CEMEX, S.A.B. de C.V. incurred a payment of €419, which included, the principal amount outstanding of the notes of €400 plus the premium offer and the accrued interest at the date of redemption (note 16.1)

 

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				KPMG Cárdenas Dosal, S.C. Manuel Avila Camacho 176 P1, Reforma Social, Miguel Hidalgo, C.P. 11650, Ciudad de Mexico. Telefono: +01 (55) 5246 8300 kpmg.com.mx

Independent auditors’ report

To the Board of Directors and Stockholders

CEMEX, S.A.B. de C.V.

Opinion

We have audited the separate financial statements of CEMEX, S.A.B. de C.V. (“the Company”), which comprise the separate statements of financial position as at December 31, 2017 and 2016, the separate statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the years ended December 31, 2017, 2016 and 2015, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying separate financial statements present fairly, in all material respects, the unconsolidated financial position of the Company as at December 31, 2017 and 2016, and its unconsolidated financial performance and its unconsolidated cash flows for the years ended December 31, 2017, 2016 and 2015 in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Mexico and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

“D.R.” © KPMG Cardenas Dosal, S.C., la firma mexicana miembro de la red de firmas miembro de KPMG afilidas a KPMG International Cooperative (“KPMG International”), una entided suiza. Impreso en Mexico. Todos los derechos reservados.		Aguascalientes, Ags.		Guadalajara, Jal.		Puebla, Pue.
		Cancun, Q, Roo.		Hermosillo, Son.		Queretaro, Qro
		Ciudad de Mexico.		Leon, Gto.		Reynosa, Tamps
		Ciuded Juarez , Chih.		Merida, Yuc.		Saltillo, Coah.
		Culiacan, Sin.		Mexicali, B.C.		San Luis Potosi, S.L.P.
		Chihuahua, Chih.		Monterray, N.L.		Tijuana, B.C.

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Measurement of Investments in subsidiaries
See Note 12 to the financial statements
The key audit matter				How the matter was addressed in our audit
The Company’s investments in subsidiaries represent approximately 96% of the Company’s unconsolidated assets and is therefore the most significant component of the Company’s balance sheet.   Management’s evaluation of potential triggering events over impairment of its investments requires the exercise of critical judgment, making this a key audit matter.				We also audit the consolidated financial statements of the Company and issued our audit opinion thereon on this same date. When performing the audit of the consolidated financial statements we assessed the Company’s goodwill impairment analysis over the most significant subsidiaries. We used such analysis to consider, whether management’s conclusions with respect to potential impairment triggering events was appropriate, considering the amount of investments in subsidiaries from a separate financial statement perspective.

 

Recoverability of deferred tax assets related to tax loss carry forwards
See Note 18.2 to the financial statements
The key audit matter				How the matter was addressed in our audit
The Company has significant unrecognized deferred tax assets in respect of tax losses. There is inherent uncertainty involved in forecasting future taxable profits, which determines the extent to which deferred tax assets are or are not recognized. The periods over which the deferred tax assets are expected to be recovered can be extensive.   As a result, we consider this to be a key audit matter.   The Company’s separate financial position shows a significant concentration in liabilities denominated in U.S. dollars which, for Mexican tax reporting purposes, results in significant foreign exchange fluctuations which are deductible/taxable in the year in which they accrue as a result of changes in the exchange rate of the Mexican peso to the U.S. dollar. The current uncertainty on said exchange rate increases the amount of judgment needed to conclude on the projections of future taxable income.				Our procedures included considering historical levels of taxable profits and comparing the assumptions used in respect of future taxable profit forecasts to those used in the Company’s long-term forecasts, such as the forecasts prepared in relation to goodwill impairment evaluations used in preparation of the consolidated financial statements.   Our tax specialists assisted in evaluating the reasonableness of key tax assumptions, timing of reversal of temporary differences and expiration of tax loss carry forwards based on our knowledge of applicable tax regulations.   For our analysis of recoverability of deferred tax assets related to tax losses, we evaluated management’s scenarios of the possible changes in exchange rates of the Mexican peso to the U.S. dollar in order to conclude whether it was reasonable or not to recognize such tax losses. Nonetheless, there is significant uncertainty with respect to future exchange gains or losses that may affect the use of such tax losses and may therefore affect the carrying amount of the related deferred tax assets.   We also assessed the adequacy of the Company’s disclosures setting out the basis of the deferred tax asset balances and the level of estimation involved.

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Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

•

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

•

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

•

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

•

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

•

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

•

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

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We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

KPMG Cardenas Dosal, S.C.

Monterrey, N.L.

February 1, 2018