CEMEX, S.A.B. de C.V. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; comparative figures are for FY 2016. This is an annual report, not a standalone fourth-quarter report, and the supplied filing text does not provide clear standalone Q4 financial results. Financial amounts below are in millions of Mexican pesos (Ps), unless otherwise noted. The statements are prepared under IFRS as issued by the IASB.
Business context
CEMEX is a global producer and seller of cement, ready-mix concrete, aggregates and related construction materials, operating in more than 50 countries. In 2017 it reported cement sales of 68.5 million tons, ready-mix concrete sales of 51.7 million cubic meters and Operating EBITDA of Ps48,563. Mexico generated 21% of net sales and 58% of operating earnings before other expenses; the United States generated 24% of sales and 14% of operating earnings before other expenses.
Key financial metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | Ps258,131 | Ps249,945 | +3% |
| Gross profit / margin | Ps88,597 / 34.2% | Ps89,512 / 35.8% | Profit -1%; margin -1.6 pts |
| Operating earnings before other expenses, net / margin | Ps32,571 / 12.6% | Ps35,543 / 14.2% | -8%; margin -1.6 pts |
| Operating EBITDA / margin | Ps48,563 / approximately 18.8% | Ps51,534 / approximately 20.6% | -6% |
| Operating earnings | Ps28,756 | Ps33,873 | -15% |
| Earnings before income tax | Ps13,659 | Ps17,563 | -22% |
| Net income from continuing operations | Ps13,139 | Ps14,438 | -9% |
| Consolidated net income | Ps16,638 | Ps15,206 | +9% |
| Controlling interest net income | Ps15,221 | Ps14,033 | +8% |
| Cash flow from continuing operations, after financial expense, perpetual-debenture coupons and cash taxes | Ps30,966 | Ps37,955 | -18% |
| Cash and cash equivalents at year-end | Ps13,741 | Ps11,616 | +18% |
| Total debt plus other financial obligations | Ps226,216 | Ps273,868 | -17% |
| Net working capital | Ps2,902 | Ps7,920 | -63% |
Operating EBITDA and its margin are non-IFRS measures. CEMEX defines Operating EBITDA as operating earnings before other expenses, net, plus depreciation and amortization. Capital expenditures were reported as U.S.$656 million in 2017 versus U.S.$685 million in 2016. The filing uses Ps19.65 per U.S. dollar for convenience translations at year-end; those translations are not assurances of convertibility.
Material changes and drivers
- Consolidated cement volumes were nearly flat, increasing from 68.3 million tons to 68.5 million; ready-mix volumes rose 1%, from 51.4 million to 51.7 million cubic meters.
- Sales increased mainly due to higher local-currency prices in Mexico, the United States and Europe, and higher cement volumes in the United States, Europe and Asia, Middle East and Africa. Mexican net sales rose 9% in pesos, while U.S. net sales fell 2% in dollars.
- Margins weakened as cost of sales rose 6%, faster than sales, with higher energy costs a principal factor. Cost of sales increased from 64.2% to 65.8% of net sales; distribution and logistics costs rose from 10.5% to 11.0% of sales.
- Results varied substantially by market. Operating earnings before other expenses increased in Mexico (12%), but fell in Colombia (55%), the United Kingdom (28%), the Philippines (58%) and Egypt (70%), each measured in local currency. Spain reported an operating loss before other expenses, net, of Ps294 million.
- Financial expense declined 10% to Ps19,301 million, reflecting lower interest rates and reduced debt, partly offset by higher premium payments. Financial income and other items, net, fell to Ps3,616 million from Ps4,489 million; foreign-exchange results shifted from a Ps5,004 million gain to a Ps26 million loss, while a Ps4,164 million gain from associate sales and remeasurement partly offset the change.
- Income-tax expense fell to Ps520 million from Ps3,125 million, including a Ps2,938 million deferred-tax benefit. CEMEX cited revised U.S. taxable-income projections, partly offset by the U.S. tax-rate reduction enacted in December 2017. The effective tax rate was 3.8%, versus 17.8%.
- Consolidated net income growth included discontinued-operations income of Ps3,499 million, up from Ps768 million. Thus, continuing-operations net income declined despite higher total consolidated income.
Debt, liquidity and capital resources
- At year-end, debt plus other financial obligations were Ps226,216 million (U.S.$11,512 million); principal amount before deferred issuance costs was Ps231,621 million. The figures exclude Ps8,784 million (U.S.$447 million) nominal amount of perpetual debentures, classified as equity under IFRS.
- Debt was heavily foreign-currency denominated: approximately 62% in U.S. dollars, 29% in euros, 5% in sterling, 2% in Philippine pesos and 1% in Mexican pesos. Management warns that currency depreciation could raise the peso burden and complicate debt service.
- The 2017 Credit Agreement refinanced the prior credit agreement and extended syndicated bank debt maturities. Outstanding borrowings under it were U.S.$2.5 billion at year-end. Total commitments of approximately U.S.$4.1 billion amortize principally in 2020, 2021 and 2022. A committed revolving facility and undrawn term tranche provided combined availability of U.S.$1.512 billion at December 31, 2017.
- Reported covenant ratios at December 31, 2017 were 3.85x leverage, against a maximum of 5.25x, and 3.46x interest coverage, against a minimum of 2.50x. The filing cautions that covenant definitions differ from similarly titled reported measures and that future limits tighten.
- Current assets were Ps71,365 million versus current liabilities of Ps112,179 million, a current ratio of approximately 0.64x. Current liabilities included Ps16,973 million of short-term debt and Ps19,362 million of other financial obligations. Management stated working capital was sufficient for present requirements and cited operating cash flow, credit facilities and asset-sale proceeds as liquidity sources.
- Cash flow from operations before financial expense, perpetual coupons and taxes was Ps51,389 million, down from Ps61,267 million. After those payments, continuing-operations cash flow was Ps30,966 million. Investing cash flow from continuing operations was positive Ps11,609 million, including Ps23,841 million of net proceeds from disposals; financing activities used Ps42,684 million, principally for debt repayment.
Outlook, commentary and material risks
- Management’s stated priorities are to regain investment-grade status, reduce debt and borrowing costs, improve cash generation, extend maturities, implement pricing initiatives and control costs. It reported achieving its approximately U.S.$150 million annualized cost-savings target for 2017.
- CEMEX estimated 2018 capital expenditures of approximately U.S.$800 million, including U.S.$550 million of base and U.S.$250 million of expansion spending. The 2017 Credit Agreement generally limits annual capital expenditures to U.S.$1 billion, subject to exceptions and separate subsidiary limits.
- No consolidated numerical earnings or sales guidance for 2018 is stated in the supplied filing text. CEMEX noted that construction demand depends on residential, commercial and infrastructure activity, and identified economic, political, trade, weather, energy-cost and foreign-exchange uncertainty across its markets.
- Unusual items included Ps1,920 million of goodwill impairment in Spain, attributed to weak construction outlook, limited infrastructure spending, price uncertainty, competition and imports. Other expenses, net, increased to Ps3,815 million and also included a Colombian antitrust penalty provision; overall impairment losses were Ps2,936 million.
- CEMEX Colombia’s Maceo plant had not commenced commercial operations. Road access, permits, free-trade-zone matters, environmental licensing and contested property rights remained unresolved. The filing describes potential material consequences if the company cannot continue using the site or recover its investment.
- The company disclosed SEC and DOJ investigations relating principally to Colombia and the Maceo project, including a DOJ grand-jury subpoena issued in March 2018. It said it was cooperating and could not predict the scope or outcome. A securities class action was also filed in March 2018; CEMEX denied liability and intended to defend itself.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2017 because of a material weakness in controls over significant unusual transactions, including risks of collusion or management override. The independent auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the IFRS financial statements. Remediation was ongoing, with completion expected during 2018.
- Environmental exposure includes emissions rules and possible future carbon-allowance purchases. CEMEX expected free EU ETS allowances in Phase IV (2021–2030) to be insufficient for its operations. Other significant disclosed contingencies include Colombian tax and water-use matters, Spanish tax proceedings, Egyptian investment litigation and a French quarry dispute.
- CEMEX sold assets for approximately U.S.$2.7 billion during 2016–2017, exceeding its U.S.$2.5 billion asset-sale goal. It declared no cash dividend for 2017; debt agreements restrict dividends and other distributions. Major subsidiary shares securing debt represent substantially all worldwide operations.
Most important facts for investors to verify
- Reconcile the reported 2017 earnings improvement with the decline in continuing-operations income, weaker operating margins and the increased contribution from discontinued operations.
- Review debt maturities, covenant calculations and headroom using the 2017 Credit Agreement’s definitions; confirm subsequent refinancing, repayments and available revolving capacity.
- Assess whether operating cash flow can sustain debt service, capital spending and liquidity needs given the current-liability deficit and lower cash flow after interest and taxes.
- Track Maceo’s permits, site rights, construction status, investment recoverability and any SEC, DOJ or Colombian proceeding developments.
- Monitor progress in remediating the material weakness and whether controls operate effectively for a sufficient period; the auditor’s financial-statement opinion does not remove the disclosed control risk.
- Evaluate the assumptions underlying the Spain goodwill impairment and the concentration of goodwill in the United States, which represented 78% of consolidated goodwill at year-end.
- Confirm the status, potential financial exposure and accounting treatment of major tax, antitrust, environmental and other legal contingencies, including any new claims or enforcement actions.
- Test the sensitivity of debt service, margins and 2018 investment plans to foreign-exchange movements, energy costs, construction demand and the expected need to purchase EU emissions allowances.