UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F/A
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REGISTRATION STATEMENT PERSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
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OR
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2007
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TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
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SHELL COMPANY REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
COMMISSION FILE NUMBER: 1-10905
Vitro, S.A.B. de C.V.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
Ave. Ricardo Margáin Zozaya 400, Col. Valle del Campestre,
San Pedro Garza García, Nuevo León, 66265 México
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Shares of Series “A” common stock, no par value
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New York Stock Exchange*
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Ordinary Participation Certificate, each representing
one share of Series “A” common stock
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New York Stock Exchange*
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American Depositary Shares, evidenced by American
Depositary Receipts, each representing three
Ordinary Participation Certificates
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New York Stock Exchange
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Not for trading, but only in connection with the registration of American Depositary Shares,
pursuant to the requirements of the Securities and Exchange Commission.
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
11.75% Senior Notes due 2013
8.625% Senior Notes due 2012
9.125% Senior Notes due 2017
The number of outstanding shares of each of the issuer’s classes of capital stock
as of December 31, 2007:
358,504,974 shares of Series “A” common stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act
Yes
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No
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If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Yes
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No
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
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U.S. GAAP
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International Financial Reporting Standards as issued by
the International
Accounting Standards Board
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Other
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If “Other” has been checked in response to the previous question, indicate by check mark which
financial statement item the Registrant has elected to follow:
Item 17
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Item 18
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If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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TABLE OF CONTENTS
20-F/A 2007
EXPLANATORY NOTE
This Annual Report on Form 20-F/A is being filed as an amendment to our Annual Report on
Form 20-F for the fiscal year ended December 31, 2007.
This amendment includes additional information within Item 3. Key Information — Risk Factors,
Item 5. Operating and Financial Review and Prospects — Operating Results, and Item 11. Quantitative
and Qualitative Disclosures About Market Risk.
As we have publicly disclosed, due to the extraordinary financial events, in late 2008 we
determined to close substantially all of our outstanding derivative financial instruments. After
such unwindings, we were sued in the U.S. by most of the counterparties to these instruments. We
have formally filed an answer to the complaints, and as part of the answer asserted affirmative
defenses including, among others, challenging the validity of the derivative agreements. We will
continue evaluating, assisted by our external advisors and counsel, the enforceability, amounts
claimed and legality of the derivative financial instruments. Therefore, the amounts claimed by the
Counterparties in no manner or under no concept should be considered as an express or implied
acknowledgement of the same by us, and neither should be considered as a renunciation of us to any
right, which we have purposely and expressly reserved and continues to do so, including the right
to adjust or eliminate, depending on the circumstances, in such case, those amounts.
Nothing set forth in this amendment shall be construed in a manner that is contradictory with
the initial pleadings, responses and affirmative defenses raised by us and the other defendants in
such judicial proceedings or any other. All of our rights thereto are hereby expressly reserved.
1
Item 3. Key Information
RISK FACTORS
You should carefully consider the following risk factors, as well as all of the other
information presented in this annual report, including our consolidated financial statements and
the notes thereto. In general, investing in the securities of issuers in emerging market countries
such as Mexico involves certain risks not typically associated with investing in securities of U.S.
companies.
The risks and uncertainties described below are not the only risks and uncertainties affecting
us. Additional risks and uncertainties that we do not know about or that we currently think are
immaterial also may impair our business operations or our ability to make payments under our
existing indebtedness.
For purposes of this section, when we state that a risk, uncertainty or problem may, could or
would have an “adverse effect” on us, we mean that the risk, uncertainty or problem may, could or
would have an adverse effect on our business, financial condition, liquidity, results of operations
or prospects, except as otherwise indicated or as the context may otherwise require.
RISK FACTORS RELATING TO US
We have high interest payment requirements.
On February 1, 2007, we completed a major refinancing program by virtue of which we refinanced
substantially all of our indebtedness under improved terms and conditions. See “Item 3. Key
Information— Recent Developments—New Perspectives” and “Item 5. Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Financing Transactions.” Although the refinancing program
reduced our interest expense and extended our debt maturities, we continue to have high interest
payment requirements. As of December 31, 2007, our total consolidated indebtedness was Ps. 14,918
million ($1,373 million) and our consolidated off-balance sheet financings, related to our
receivable securitization and sale of receivable transactions, were Ps. 1,509 million ($139
million). Our interest expense on debt for the year ended December 31, 2007 was Ps. 1,696 million
($156 million), while our operating income was Ps. 2,704 million ($249 million). After the
refinancing program, our average interest rate was reduced.
Our ability to make scheduled interest payments when due depends on, and is subject to,
several factors, including our financial and operating performance, which is subject to prevailing
economic conditions and financial, business and other factors.
The amount of our interest payment requirements could adversely affect our business in a
number of ways, including but not limited to, the following:
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we may have less cash available to expand and improve our business, since we
are required to dedicate a significant portion of our cash flow from operations to the
payment of interest on our debt;
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our ability to obtain additional debt financing may be limited and the terms on
which such financing is obtained may be negatively affected; and
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our ability to compete effectively against better-capitalized competitors and
to withstand downturns in our business may be affected since a significant portion of
our cash flow from operations is required to be dedicated to making interest payments.
As a result, we may lose market share and experience lower sales, which, in turn, could
result in a material adverse effect on our financial condition, results of operations
and liquidity.
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Our indentures contain certain restrictive covenants.
Our current indentures that govern the terms of our indebtedness contain certain restrictive
covenants that are customary for similar indebtedness. Such covenants include restrictions on our
ability to (i) incur additional indebtedness unless, at the time of incurrence, we satisfy certain
conditions, (ii) pay dividends above a certain permitted amount or make other restricted payments,
(iii) grant certain liens on our assets, (iv) make certain investments, and (v) take part in
certain merger, consolidation, and asset sale transactions.
As of December 31, 2007, under the covenants of our current indentures, we are prohibited from
incurring additional debt (other than certain permitted exceptions) and from making certain
investments (other than certain permitted investments).
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The restrictions in our indentures could limit our flexibility to adjust to changes in our
business and the industries in which we operate and/or limit our ability to fund future operations,
acquisitions or meet extraordinary capital needs.
Additionally, under our current indentures governing our Senior Notes, if an event of default
results in any indebtedness (as defined in the indentures) having a principal amount of $25 million or more in the aggregate being due and payable prior to its stated maturity or failure to
make a principal payment when due and such defaulted payment is not made, waived or extended within
the applicable grace period, the noteholders have the right to accelerate the Senior Notes.
We have to pay interest and principal on our dollar-denominated debt with revenues generated in
pesos or other currencies, as we do not generate sufficient revenue in dollars from our operations.
As of March 31, 2008, 96% of our outstanding debt was denominated in dollars. This debt must
be serviced by funds generated from sales by our subsidiaries. We do not generate sufficient
revenues in dollars from our operations to service our entire dollar denominated debt.
Consequently, we have to use revenues generated in pesos or other currencies to service our dollar
denominated debt. A devaluation of the peso against the dollar could adversely affect our ability
to service our debt.
As of March 31, 2008, we have entered into swap arrangements under which all interest
payments, until 2012, on $500 million principal amount of our outstanding debt were swapped from a
fixed dollar rate to a variable peso rate and interest payments on another $500 million principal
amount of our outstanding debt were swapped from a fixed dollar rate to a fixed peso rate. We
define our strategy and objectives in the ordinary course of business and to fulfill such
objectives we limit our exposure to increases in foreign currency exchange rates by entering into
derivative financial instruments (“DFI”) suggested by our counterparties and jointly structured
with them. This strategy is designed to meet our objectives with the risk that a decrease in the
foreign currency exchange rate could have an adverse effect on the fair value of the derivative
instruments, resulting in losses that would be reflected within comprehensive financing result in
the income statement.
We cannot assure that in the future these instruments will be available on favorable terms to
us, if at all, to fully hedge our exposure. See “Item 11. Quantitative and Qualitative Disclosures
About Market Risk.”
We have experienced rising operating costs in our businesses.
Some of the components of our cost of goods sold are subject to market price variations. For
instance, our total energy cost represented 15% of our consolidated cost of goods sold in 2007.
Such cost is directly linked to the price of natural gas which has experienced significant
increases in recent years due to, among other things, the effects of hurricanes in the production
area of the Gulf of Mexico. NYMEX natural gas prices have increased from an average price of $3.22
per million British Thermal Units (“MMBTU”), during 2003 to an average price of $7.12 per MMBTU
during 2007, representing an increase of 120%. Since the price of natural gas in Mexico is tied to
the price of natural gas in Southern Texas, which in turn is fully exposed to market factors such
as demand in the United States or the amount of available natural gas reserves, we are exposed to
such price variations. Other potential sources of significant variations in our costs are packaging
and freight costs.
Our cost of goods sold is sensitive to the price of natural gas. Every dollar fluctuation per
MMBTU has had an annual impact of approximately $20 million on our cost of goods sold based on our
average historical consumption of approximately 1.7 million MMBTUs per month. The closing price of
natural gas on the New York Mercantile Exchange (“NYMEX”) as of June 23, 2008 was $13.20 per MMBTU.
We have not been able to raise the prices of our products to fully reflect the increases in our
operating costs and therefore our results of operations could be adversely affected by continued
high prices of natural gas.
Additionally, if the price of natural gas increases, we cannot assure you we would be able to
raise the prices of our products to fully reflect the increases in our operating costs and
therefore our results of operations could be adversely affected by continued high prices of natural
gas.
We define our strategy and objectives in the ordinary course of business and to fulfill such
objectives we limit our exposure to increases in natural gas prices by entering into DFIs suggested
by our counterparties and jointly structured with them. Although a decrease in the price of natural
gas could have a positive impact in our cost of goods sold, this strategy is designed to meet our
objectives with the risk that a decrease in natural gas prices could have an adverse effect on the
fair value of the derivative instruments,
resulting in losses that would be reflected within comprehensive financing result in the
income statement. We cannot assure you that these instruments will be available on favorable terms
to us, if at all, to fully hedge our exposure to such variations. See “Item 11. Quantitative and
Qualitative Disclosures About Market Risk.”
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A material decline in natural gas prices would have the beneficial impact of substantially
reducing our cost of goods sold. However, the benefits to our cost of sales would be realized over
a period of time, whereas the effect for the DFIs is recorded immediately in our financial result
by means of the mark to market valuations.
Our limited thresholds for derivative transactions could be insufficient to cover significant
negative fair values.
Under the International Swap Dealers Association (“ISDA”) agreements entered into with our
derivative counterparties, we have been granted certain limited tresholds which could be
insufficient to cover significant negative fair values which could lead to margin calls that may
affect our liquidity.
We continue to experience competition from our global competitors and vertically integrated
customers.
Historically, aggressive investment by our global competitors such as Compagnie de Saint
Gobain (“Saint Gobain”) and Guardian Industries Corporation (“Guardian”), and vertically integrated
customers with glass manufacturing facilities in Mexico, coupled with the increased imports of
low-cost competitive products into several of our important markets, has resulted in an increase in
capacity that has brought significant pricing pressure on our products, particularly in our Flat
Glass construction market where the industry is faced with over-capacity. Similarly, our
competitors may make new investments in Mexico in the glass containers market. Loss of existing or
future market share to competitors or customers in any of our business units may adversely affect
our performance and, to the extent that one or more of our competitors becomes more successful than
us with respect to any key competitive factor, our results of operations, financial position and
liquidity may be adversely affected.
Difficult market conditions in the automotive industry may affect our operating margins and results
of operations.
The North American automotive industry continues to face difficult market conditions. North
American automobile manufacturers have experienced slower demand and increased pricing pressures on
their products. These difficult market conditions in the automotive industry may continue to lead
to additional pricing pressure on our products and may lead to loss of sales volume, either of
which may have an adverse effect on us. In addition, the automotive industry has experienced
pressures due to increased oil prices which could decrease of our original equipment manufacturers
(“OEMs”) business sales, as the U.S. demand in the automobile sector has declined.
Certain of our flat glass products sold to OEMs in the automotive industry are sold under
global purchase agreements, which are entered into after completion of a bidding process. Such
automotive OEMs have significant buying power which, coupled with substantial competition, puts
pressure on prices and margins relating to products supplied under the global purchase agreements.
As a result, even if we were awarded the right to sell to an automotive OEM under a global purchase
agreement, we may sell at operating margins that are lower than margins generally achievable from
sales to other flat glass customers. The automotive OEM business line represented 8% of our
consolidated net sales for the year ended December 31, 2006 and 9% for the year ended December 31,
2007.
We have customers that are significant to us and the loss of all or a portion of their business
would have an adverse effect on us.
Because of the relative importance of our largest customers, our business is exposed to a
certain degree of risk related to customer concentration. Although no single customer accounted for
more than 8% of our consolidated net sales in 2007, we have customers that are significant to our
business units. Our three largest customers, who serve different markets, accounted for an
aggregate of 14% of our consolidated net sales in 2007. Given that our profitability depends on our
maintenance of a high capacity utilization rate, the loss of all or a portion of the sales volume
from a significant customer would have an adverse effect on us. Among our most significant
customers are automotive OEMs and beer and soft-drink
bottlers. One of our main customers has vertically integrated operations and therefore, a
capacity increase in its glass production could adversely affect our results of operations.
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Downturns in the economies in which we operate may negatively affect the demand for our products
and our results of operations.
Demand for our flat glass and glass containers products is affected by general economic
conditions in the markets in which we operate, principally Mexico, the United States and Europe. As
a result, demand for our products and, consequently, our results of operations have been and may be
negatively affected by the downturn in the economies in which we operate.
A downturn in the Mexican economy, from which we derived 43% and 44% of our consolidated net
sales for the year ended December 31, 2006 and 2007, respectively, would reduce the demand for our
products and negatively impact our results of operations. Similarly, a prolonged economic downturn
in the United States, from which we derived 43% and 37% of our consolidated net sales in 2006 and
2007, respectively, would have an adverse impact on the export and foreign subsidiary sales of our
Flat Glass and Glass Containers business units. Furthermore, in recent years, economic conditions
in Mexico have become increasingly correlated to economic conditions in the United States.
Therefore, adverse economic conditions in the United States could have a significant adverse effect
on the Mexican economy. Also, in the past, economic crises in Asia, Russia, Brazil, Argentina and
other countries have adversely affected the Mexican economy and therefore our results of
operations.
Economic downturns in Mexico and the United States may also subject us to increased foreign
currency exchange rate and interest rate risks and impair our results of operations and our ability
to raise capital or service our debt.
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Inflation fluctuations may have an adverse effect on our total comprehensive financing result.
Our total comprehensive financing results includes net interest expense, the net effect of
inflation on our monetary assets and liabilities (which, as discussed below, applies only for
inflationary environments beginning on January 1, 2008 according to the new Mexican FRS B-10,
“Effects of Inflation”), the net effect of changes in nominal foreign currency exchange rates on
monetary assets and liabilities denominated in foreign currencies and gains or losses related to
some of our derivative transactions.
Inflation has historically affected our total comprehensive financing result. During periods
of inflation, the principal amount of our monetary debt will generally be reduced in real terms by
the rate of inflation. The amount of such reduction will result in a gain from monetary position.
This gain is offset by the reduction in real terms in the value of the monetary assets we held
during such period. Historically, our monetary liabilities have exceeded our monetary assets and,
thus, we have tended to experience monetary gains during periods of inflation. Declining levels of
inflation in recent years have resulted in lower monetary gains.
The new Mexican FRS B-10, which became effective for fiscal years beginning on January 1,
2008, provides that, in non-inflationary environments (when cumulative inflation of the three
preceding years is less than 26%), no inflationary effects should be recognized in a company’s
financial statements. Given the cumulative inflation in Mexico for the three years ended December
31, 2007, the Mexican economic environment will not qualify as inflationary in 2008, thereby
eliminating inflationary accounting in our consolidated financial statements. See “Item 5.
Operating and Financial Review and Prospects—Operating Results—Trend Information—Inflation and
Foreign Currency Exchange Rate Fluctuations” and “—New Accounting Pronouncements”.
Foreign currency exchange rate fluctuations may have an adverse effect on our total comprehensive
financial result.
Our total comprehensive financing result is impacted by changes in the nominal value of the
peso relative to the U.S. dollar. Foreign currency exchange gains or losses included in our total
financing cost result primarily from the impact of nominal changes in the U.S. dollar-peso exchange
rate on our Mexican subsidiaries’ U.S. dollar-denominated monetary liabilities (such as U.S.
dollar-denominated debt and accounts payable arising from imports of raw materials and equipment)
and assets (such as U.S. dollar-denominated cash, cash equivalents and accounts receivable).
Because our U.S. dollar-denominated monetary liabilities have historically been significantly in
excess of our U.S. dollar-denominated monetary assets, the nominal devaluation or appreciation of
the peso relative to the U.S. dollar has historically resulted in foreign currency exchange losses
and gains, respectively. Accordingly, in 2003, 2006 and 2007, the nominal devaluation of the peso
relative to the U.S. dollar during the year resulted in foreign currency exchange losses. The
nominal appreciation of the peso relative to the U.S. dollar resulted in a foreign currency
exchange gain in 2004 and 2005. In May 2004, with the unwinding of certain currency exchange swaps
we recorded a net exchange loss.
As of March 31, 2008, we have entered into swap arrangements under which all interest
payments, until 2012, on $500 million principal amount of our outstanding debt were swapped from a
fixed dollar rate to a variable peso rate and interest payments on another $500 million principal
amount of our outstanding debt were swapped from a fixed dollar rate to a fixed peso rate. We
define our strategy and objectives in the ordinary course of business and to fulfill such
objectives we limit our exposure to increases in foreign currency exchange rates by entering into
DFIs suggested by our counterparties and jointly structured with them. This strategy is designed to
meet our objectives with the risk that a decrease in the foreign currency exchange rate could have
an adverse effect on the fair value of the derivative instruments, resulting in losses that would
be reflected within comprehensive financing result in the income statement.
We cannot assure you that these instruments or other currency swap and option agreements will
be available at favorable terms to us, if at all, to fully hedge our exposure. See “Item 11.
Quantitative and Qualitative Disclosures About Market Risk.”
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Changes in the value of the peso to the U.S. dollar and the Euro may have an adverse effect on us.
Changes in the value of the peso to the U.S. dollar have an effect on our results of
operations. In general, as described more fully in the following paragraphs, a real devaluation of
the peso will likely result
in an increase of our operating margins and a real appreciation of the peso will likely result
in a decrease in our operating margins, in each case, when measured in pesos. This is so because
the aggregate amount of our consolidated net sales denominated in or linked to U.S. dollars exceeds
the aggregate amount of our costs of goods sold and our general, administrative and selling
expenses denominated in or linked to U.S. dollars.
A substantial portion of the sales generated by our Mexican and U.S. subsidiaries are either
denominated in or linked to the value of the U.S. dollar. The prices of a significant number of the
products we sell in Mexico, in particular those of flat glass for automotive uses, capital goods
and packaging products are linked to the U.S. dollar. In addition, substantially all of our export
sales are invoiced in U.S. dollars and subsequently translated into pesos using the exchange rate
in effect at the time of the transaction.
Further, a strong peso relative to the U.S. dollar makes the Mexican market more attractive
for importers and competitors that might not otherwise sell in the Mexican market. A strong peso
relative to the U.S. dollar also makes those of our products whose prices are denominated in or are
linked to the value of the U.S. dollar less competitive or profitable. When the peso appreciates in
real terms, with respect to such products, we must either increase our prices in U.S. dollars,
which make our products less price-competitive, or bear reduced operating margins when measured in
pesos. Given the competitive nature of the industries in which we operate, in the past we have had
to reduce our operating margins for such products in response to appreciation of the peso relative
to the U.S. dollar.
The sales generated by our Spanish subsidiary in our European operations are either
denominated in or linked to the value of the Euro, while its cost of goods sold is denominated in
or linked to U.S. dollars. Changes in the value of the U.S. dollar to the Euro may have an adverse
effect on us in a similar fashion to those described with respect to the value of the peso above.
We may be adversely affected by increases in interest rates.
Interest rate risk exists primarily with respect to our floating-rate peso and
dollar-denominated debt, which generally bear interest based on the Mexican equilibrium interbank
interest rate, which we refer to as the “TIIE,” or the London interbank offered rate, which we
refer to as “LIBOR”. If the TIIE or LIBOR rates increase significantly, our ability to service our
debt will be adversely affected.
As of December 31, 2007, our floating-rate peso and dollar-denominated debt amounted to Ps. 366
million and $34 million. As of March 31, 2008, we entered into swap arrangements under which all
interest payments, until 2012, on $500 million principal amount of our outstanding debt were
swapped from a fixed dollar rate to a variable peso rate. We define our strategy and objectives in
the ordinary course of business and to fulfill such objectives we limit our exposure to increases
in interest rates by entering into DFIs suggested by our counterparties and jointly structured with
them. This strategy is designed to meet our objectives with the risk that a decrease in interest
rates could have an adverse effect on the fair value of the derivative instruments, resulting in
losses that would be reflected within comprehensive financing result in the income statement.
We cannot assure you that these instruments will continue to be favorable to us or if other
instruments will be available at favorable terms to us, if at all, to fully hedge our exposure. See
“Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
The costs of complying with environmental protection and health and safety laws, and any
liabilities arising thereunder, may increase and adversely affect our business, results of
operations, cash flows or financial condition.
We are subject to various environmental protection, health and safety laws and regulations
governing, among other things, the generation, storage, handling, use, remediation, disposal and
transportation of hazardous materials, the emission and discharge of hazardous materials into the
ground, air or water, and the health and safety of our employees.
We are also required to obtain permits from governmental authorities for certain operations.
We cannot assure you that we have been or will be at all times in complete compliance with such
laws, regulations and permits. If we violate or fail to comply with these laws, regulations or
permits, we could be fined or otherwise sanctioned by regulators. We could also be held liable for
any and all consequences arising out of human exposure to hazardous substances or other
environmental damage.
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Since 1998, we have been participating in a voluntary audit program at our Mexican facilities.
As a result of audits by and implementation of certain measures suggested by the
Procuraduría
Federal de Protección al Ambiente
(“PROFEPA”), action plans are entered into, and costs are
incurred, to make environmental investments and improvements required for PROFEPA Clean Industry
certification.
Environmental laws are complex, change frequently and have tended to become more stringent
over time. While we have budgeted for future capital and operating expenditures to maintain
compliance with environmental laws, we cannot assure you that environmental laws will not change or
become more stringent in the future. Therefore, we cannot assure you that our costs of complying
with current and future environmental, health and safety laws, and our liabilities arising from
past or future releases of, or exposure to, hazardous substances will not adversely affect our
business, results of operations, cash flow or financial condition. See “Item 4. Information on the
Company—Business—Environmental Matters.”
Substitution trends in the glass container industry may continue to adversely affect our business.
Glass containers have been, and continue to be, subject to competition from alternate forms of
packaging, including plastic containers, aluminum cans and laminated paper containers. In mature
glass containers markets, such as in the United States, demand for glass containers began a
sustained long-term decline in the 1970s (although such decline has substantially diminished in
recent years). In connection with such decline, the glass containers industry experienced a
reduction in capacity and consolidation among glass container producers. The remaining glass
containers producers in mature markets have faced, and may continue to face, pricing pressures as a
result of competition from other forms of packaging. Mexico is becoming a mature market, with
increased competition from alternate forms of packaging, particularly plastic, aluminum cans and
laminated paper containers. Such products have adversely affected, and may continue to adversely
affect, our prices and operating margins, principally with respect to glass containers for the
beer, soft drinks and food industries. Our Glass Containers business unit represented 51% of our
consolidated net sales in 2007.
If we fail to maintain an effective system of internal control over financial reporting, we may not
be able to accurately report our financial results or prevent fraud.
We are focused on improving and maintaining an effective internal control structure. During
2005, 2006 and 2007 we implemented new controls and procedures related to the preparation, review
and presentation of our financial information. These measures include the following modifications
to our internal controls:
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reinforcement of personnel knowledge base regarding technical accounting
matters;
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hiring a professional service firm to assist our accounting staff with the
implementation of superior processes and new internal controls; and
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Genesis Project implementation, including the ERP conversion, across Vitro’s
global operating model. See “Item 3. Key Information—Recent Developments—Genesis
Project” and “Item 15. Controls and Procedures”.
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There can be no assurance that the implementation of our new internal controls, including the ERP,
will be completed without unforeseen challenges or significant additional expenditures. In
addition, any unremediated internal control deficiencies may reduce our ability to provide accurate
financial information to our investors.
8
We have a disagreement with our partner in our Flat Glass business unit about the merger of Vitro
Plan into Viméxico, which may affect the value of the guaranty of the 2012 Senior Notes, 2017
Senior Notes, and 2013 Senior Notes by our Flat Glass business unit.
On December 11, 2006 the shareholders of Vitro Plan concluded the extraordinary meeting upon a
second call to approve the merger of Vitro Plan into Viméxico. Viméxico, a subsidiary of Vitro,
held a $135 million loan receivable from Vitro Plan. At the meeting, resolutions were adopted
approving (a) the merger of Vitro Plan into Viméxico based on financial information as of October
31, 2006, with Viméxico as the surviving entity, and (b) the cancellation upon delivery of existing
Vitro Plan stock certificates in exchange for Viméxico stock certificates, using a ratio of
7.19319816 shares of Viméxico common stock per share of Vitro Plan common stock.
Prior to the merger, Vitro Plan was a direct 65%-owned subsidiary of Vitro, and the company
through which Vitro conducted its Flat Glass business. As a result of the merger, Viméxico is a
direct 91.8%-owned subsidiary of Vitro. Prior to the merger, Pilkington Plc, which we refer to as
“Pilkington”, owned a 35% equity interest in Vitro Plan and, as a result of the merger, owns an
8.2% equity interest in Viméxico. Pilkington voted against the adoption of the shareholder
resolutions approving the merger. Under the merger, the outstanding $135 million intercompany
indebtedness owed by Vitro Plan was cancelled, reducing the debt of Viméxico, as the surviving
party to the merger to a level that could more readily be supported by its cash flow from
operations.
On January 16, 2007, Pilkington commenced litigation, challenging and opposing, among other
claims, the resolutions adopted at the December 11, 2006 extraordinary meeting approving the
merger. On February 28, 2008, the court denied all of Pilkington’s claims and declared the merger
valid. Pilkington has filed an appeal of this decision which on June 26, 2008 was resolved by the
Appeals Court confirming the denial of all claims by Pilkington and ratifying in all aspects the
decision issued by the lower court, including, as a consequence, the validity of the Merger and the
obligation to pay litigation costs and attorney’s fees. However, Pilkington still has one last
opportunity to challenge such rulings through an “Amparo” procedure (which is a constitutional
challenge held before a federal court).
Additionally, on December 6, 2007, Pilkington commenced another litigation, alleging, among
other claims, that the December 11, 2006 extraordinary meeting was invalid and, therefore, the
resolutions adopted at such meeting and the merger agreement are invalid. This litigation is at an
early stage and we do not expect any decision by the courts during 2008.
In the event these proceedings ultimately result in the merger being declared not effective,
the guarantee by Viméxico of the 2012 Senior Notes, the 2017 Senior Notes and the 2013 Senior
Notes, could not include any of the assets owned by Vitro Plan. It is also possible that such
determination could include a determination that the guarantees provided by the subsidiaries of
Vitro Plan are also ineffective. Vitro believes, based on the advice of Rivera, Gaxiola y
Asociados, S.C., our Mexican special litigation counsel, that the merger of Vitro Plan into
Viméxico complied with all applicable legal requirements, specifically the by-laws of Vitro Plan
and the Mexican General Law of Mercantile Corporations and, as a result, that the risk that the
merger between Vitro Plan and Viméxico is reversed, nullified, voided or set aside is minimal. Even
if the shareholder resolutions approving the merger were to be set aside and the guarantee by Vitro
Plan determined to be ineffective, such Mexican special litigation counsel has advised us that it
believes that it is likely that substantially all of the guarantees of the 2012 Senior Notes, the
2017 Senior Notes and the 2013 Senior Notes granted by the subsidiaries of Vitro Plan would
nonetheless remain in effect.
If any of the guarantees referred to above were to be determined to be ineffective or avoided,
the 2012 Senior Notes, the 2017 Senior Notes, and the 2013 Senior Notes would be effectively junior
to all liabilities of Vitro Plan and any of its subsidiaries whose guarantee was thereby avoided.
9
RISK FACTORS RELATING TO ECONOMIES IN WHICH WE PARTICIPATE
Economic developments in Mexico and the United States affect our business.
The year 2007 was characterized by a slowdown in global economic activity compared to 2006.
After three years of solid and generalized growth, the world economy decelerated. Global GDP grew
3.3% in 2007, below the 3.9% growth rate in 2006, according to International Monetary Fund
research. The main cause of this economic slowdown is attributed to the United States economy, due
to the growth decline from 3.3% in 2006 to 2.2% in 2007. This deceleration is expected to continue
in 2008 in the United States mainly due to the weakening of the real estate sector.
The real estate and construction market in the United States is now being seriously affected
by the sub-prime mortgage crisis, which is also affecting the economy overall. The growth in
housing sales and construction financed by credit played a large role in the economy’s expansion by
lifting other sectors of the economy. Losses on subprime mortgages have negatively affected not
only the housing and construction markets but other sectors and the availability of credit
generally. Increased foreclosures could generate increased inventory on the housing market which
could affect our residential and commercial construction sales. See “Item 5. Operating and
Financial Review and Prospects—Operating Results—Trend Information.”
In Mexico, GDP growth reached 3.3%, below the 4.7% growth rate in 2006. For 2008 additional
economic uncertainties are anticipated due to, among other factors, the economic deceleration in
the United States.
Over the past few years, Mexico’s rate of inflation has remained low, amounting to 4.1% in
2006 and 3.8% in 2007.
The majority of our manufacturing facilities are located in Mexico. For each of the years
ended December 31, 2005, 2006 and 2007, 41%, 43% and 44%, respectively, of our consolidated net
sales resulted from sales to parties located within Mexico. In the past, inflation has led to high
interest rates on peso-denominated obligations and devaluations of the peso.
While helping the country to maintain low levels of inflation and a manageable deficit, the
Mexican government’s continued fiscal and monetary policy has not provided the flexibility
necessary to support Mexico’s economic improvement. As a result, new investment and growth in
aggregate purchasing power have been marginal. Several factors could affect the growth of Mexico’s
economy and its industrial sector. These factors include the extent of the U.S. economic growth and
the participation of Mexico’s industrial sector in such growth; the Mexican government’s approval
and implementation of fiscal and other structural reforms such as the evolution of energy prices,
particularly natural gas; and the current political environment.
Future economic development in or affecting Mexico or the United States could adversely affect
us and our ability to obtain financing.
Developments in other countries may adversely affect our business or the market price of our
securities.
The market price of securities of Mexican companies is, to varying degrees, affected by
economic and market conditions in other countries. Although economic conditions in such countries
may differ significantly from economic conditions in Mexico, investors’ reactions to developments
in such countries may have an adverse effect on the market price of securities of Mexican
companies, including ours.
If foreign currency exchange controls and restrictions are imposed, we may not be able to service
our debt in U.S. dollars, which exposes investors to foreign currency exchange risk.
In the past, the Mexican economy has experienced balance of payments deficits, shortages in
foreign currency reserves and other problems that have affected the availability of foreign
currencies in Mexico. The Mexican government does not currently restrict or regulate the ability of
persons or entities to convert pesos into U.S. dollars. However, it has done so in the past and
could do so again in the future. We cannot assure you that the Mexican government will not
institute a restrictive currency exchange control policy in
the future. Any such restrictive foreign currency exchange control policy could prevent or
restrict access to U.S. dollars and limit our ability to service our U.S. dollar-denominated debt.
10
Political events in Mexico could affect Mexican economic policy and adversely affect us.
The Mexican government has exercised, and continues to exercise, significant influence over
the Mexican economy. Mexican governmental actions concerning the economy could have a significant
impact on Mexican private sector entities in general, as well as on market conditions and prices
and returns on Mexican securities, including our securities.
The current legislature and Mr. Felipe Calderon Hinojosa, President of Mexico, may bring
significant changes in laws, public policies and/or regulations that could adversely affect
Mexico’s political and economic situation, which could adversely affect our business. Social and
political instability in Mexico or other adverse social or political developments in or affecting
Mexico could adversely affect us and our ability to obtain financing. It is also possible that
political uncertainty may adversely affect Mexican financial markets.
Mr. Calderon recently presented to the Mexican Congress an energy reform proposal. This energy
reform proposal intends to provide PEMEX sufficient administrative and financial autonomy, through
several mechanisms, in order to strengthen its financial position and preserve PEMEX’s future
operations.
We cannot provide any assurance that future political developments in Mexico, over which we
have no control, will not have an unfavorable impact on Mexican private sector entities in general,
as well as on market conditions and prices and returns on Mexican securities, including our
securities.
Social Instability in Mexico could affect Mexican economic policy and adversely affect us
In 2007, some incidents occurred at certain PEMEX gas pipelines located in Salamanca,
Guanajuato and other counties in Veracruz, Mexico. Such incidents disrupted the natural gas supply
to companies in Mexico. As a consequence, several companies including us and some of our clients
and suppliers suffered a temporary shut-down in operations. The possibility of having similar
incidents in the future could adversely affect our business and operations.
Our financial statements may not give you the same information as financial statements prepared
under United States accounting principles.
Mexican companies listed on the Bolsa Mexicana de Valores, which we refer to as the “Mexican
Stock Exchange,” including us, must prepare their financial statements in accordance with Mexican
FRS. Mexican FRS differs in certain significant respects from the U.S. GAAP as it relates to our
consolidated financial statements, including among others the treatment of minority interests,
workers’ profit sharing; accounting for the effects of deferred income taxes and consolidation of
subsidiaries. For these and other reasons, the presentation of financial statements and reported
earnings prepared in accordance with Mexican FRS may differ materially from the presentation of
financial statements and reported earnings prepared in accordance with U.S. GAAP. See note 24 to
our audited consolidated financial statements included elsewhere in this annual report for a
description of the principal differences between Mexican FRS and U.S. GAAP.
11
Item 5. Operating and Financial Review and Prospects
You should read this discussion in conjunction with, and this discussion is qualified in its
entirety by reference to, our consolidated financial statements and notes thereto and other
financial information included elsewhere in this annual report. Our consolidated financial
statements are prepared in accordance with Mexican FRS, which differs in certain significant
respects from U.S. GAAP. Note 24 to our consolidated financial statements for the year ended
December 31, 2007 provides a description of the principal differences between Mexican FRS and U.S.
GAAP as they relate to us. This section contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including without limitation those set forth in “Item 3.
Key Information—Risk Factors” and the other matters set forth in this annual report. See
“Forward-Looking Statements.”
OPERATING RESULTS
Factors Affecting Our Results of Operations
Our statement of operations is affected by, among other factors, (i) the level of demand for
our products in the countries in which we operate, (ii) our costs of production, which principally
consist of costs of raw materials, labor, energy and depreciation, (iii) the relationship between
the peso and the U.S. dollar, (iv) financing costs, which are incurred in both pesos and U.S.
dollars and (v) increased competition in our domestic market and abroad. See “Item 3. Key
Information—Risk Factors—Risk Factors Relating to Us—Difficult market conditions in the automotive
industry may affect our operating margins and results of operations,” “Item 3. Key Information—Risk
Factors—Risk Factors Relating to Us—We have customers that are significant to us and the loss of
all or a portion of their business would have an adverse effect on us,” “Item 3. Key
Information—Risk Factors—Risk Factors Relating to Us—Downturns in the economies in which we operate
may negatively affect the demand for our products and our results of operations,” “Item 3. Key
Information—Risk Factors—Risk Factors Relating to Us—Changes in the relative value of the peso to
the U.S. dollar and the Euro may have an adverse effect on us,” “Item 3. Key Information— Risk
Factors—Risk Factors Relating to Us—Inflation fluctuations may have an adverse effect on our total
comprehensive financing result,” “Item 3. Key Information— Risk Factors—Risk Factors Relating to
Us—Foreign exchange rate fluctuations may have an adverse effect on our total comprehensive
financing result,” “Item 3. Key Information—Risk Factors—Risk Factors Relating to Us—We may be
adversely affected by increases in interest rates,” and “Item 3. Key Information—Risk Factors—Risk
Factors Relating to Us—Substitution trends in the glass container industry may continue to
adversely affect our business.”
Trend Information
The Mexican glass container market has shown an upward trend during the past years. The
continued popularity of glass as a packaging option given its high quality image, its endless
possibilities of innovation and its environmental friendly aspects when compared to other container
products has helped this positive trend. In fact, some products that years ago migrated to other
types of packaging are returning to glass due to consumer preferences. Looking forward, one of the
main growth drivers in the Mexican glass container market is expected to be the migration from
returnable to non-returnable glass containers in the beer segment. Regarding the United States
market, the Glass Containers business unit has focused its strategy in value-added niche markets
where it has been able to capture the demand growth and estimates it will continue to show the same
trend in the future. This particular business unit is not expected to be affected by the economic
recession, as history has proved that there is no correlation between glass containers consumption
and GDP growth.
12
The long term fundamentals of the different markets where the Flat Glass business unit
participates are also strong. The Mexican flat glass construction market has experienced growth in
recent years and it is expected to grow in the future due to: strong demand, the current housing
deficit and the positive interest rate conditions prevailing in Mexico. The automotive OEM business
has experienced increasing pressures in different geographic markets. We are heavily dependent on
the big three US car manufactures which are currently experiencing difficult times. High gasoline
prices are also affecting sales of the OEM business, specially the ones related to Sport Utility
Vehicles (“SUV’s”), which represent an important percentage of
our auto glass volume. The Flat Glass business unit continues to diversify its customer base
to Japanese Manufacturers and to attract new automotive platform contracts. Despite the automotive
industry’s pressures, our automotive business has benefited from the growth and the strong
fundamentals of the Mexican AGR market. The Spanish residential construction market is experiencing
a slowdown. Vitro Cristalglass has been able to partially offset this situation through its
geographic diversification and the access to other European markets. One example of the steps taken
by Vitro Cristalglass to achieve a broader geographic diversification is the acquisition of Vitro
Cristalglass France, which is now engaged in the production and distribution of value-added glass
products to the French residential and commercial construction market. Longer term, the Spanish
construction market is expected to recover its growth momentum. Despite the positive results in
2007, Vitro America, our flat glass subsidiary in the United States, is facing a challenging
environment derived from the economic recession and the sub-prime mortgage crisis in the United
States. The real estate and construction market in the U.S. is now being seriously affected by the
effects of the sub-prime mortgage market, which is also affecting the economy overall. Credit
induced housing has played a very large role in the economy’s expansion that has lifted other
sectors of the economy and is in reverse now. Increased foreclosures could generate increased
inventory on the housing market which could affect our residential and commercial construction
sales, which as of today is still not clear when it will recover. See “Item 3. Key Information—Risk
Factors—Risk Factors Relating to Us—Downturns in the economies in which we operate may negatively
affect the demand for our products and our results of operations” and “Item 3. Key Information—
Risk Factors—Risk Factors Relating to Economies in Which We Participate—Economic developments in
Mexico and the United States affect our business.”
Substantially all of our export sales and most of our domestic sales in Mexico are denominated
in or affected by the US dollar, and accordingly, the following discussion of the trends of our
business units is based upon a US dollar presentation.
Our Glass Containers business unit performed extremely well in 2007, with a record year in
terms of sales, despite constraints on our production from interruptions in the supply of natural
gas during July and September 2007. Domestic sales have been driven by increased volumes coupled
with a better product mix at most of our business lines. Higher sales in the food and wine & liquor
lines compensated for marginal lower sales in the remaining business lines. Export sales continued
to benefit from an increase in volumes in food and wine & liquor as well as a better product mix at
cosmetics, fragrances and toiletries (“CFT”), soft drinks and wine & liquor business lines.
Our Flat Glass Business unit also performed very well, with increased sales across all our
business lines, other than sales from the construction market in the United States. In the
automotive business line higher volumes to the AGR market more than offset a reduction in volumes
to the OEMs.
The increase in the price of certain of our raw materials, in particular natural gas,
continues to negatively affect our cost of goods sold. The average NYMEX natural gas price during
2007 was $7.12 per MMBTU and even though it decreased 2% compared to 2006, it has increased 120%
compared with 2003.
Our cost of goods sold is sensitive to the price of natural gas. In recent years, every dollar
fluctuation per MMBTU has had an annual impact of approximately $20 million on our cost of goods
sold based on our average historical consumption of approximately 1.7 million MMBTUs per month. The
NYMEX closing price of natural gas as of June 23, 2008 was $13.20 per MMBTU. We have not been able
to raise the prices of our products to fully reflect the increases in our operating costs and
therefore our results of operations could be adversely affected. We define our strategy and
objectives in the ordinary course of business and to fulfill such objectives we limit our exposure
to increases in natural gas prices by entering into DFIs suggested by our counterparties and
jointly structured with them. This strategy is designed to meet our objectives with the risk that a
decrease in natural gas prices could have an adverse effect on the fair value of the derivative
instruments, resulting in losses that would be reflected within comprehensive financing result in
the income statement. A material decline in natural gas prices would have the beneficial impact of
substantially reducing our cost of goods sold. However, the benefits to our cost of sales would be
realized over a period of time, whereas the effect for the DFIs is recorded immediately in our
financial result by means of the mark to market valuations. Additionally, we often structure some
of our DFIs in order to obtain better conditions, such as a reduction in or complete elimination of
fees. As result, if natural gas prices decrease we could be exposed to higher losses than the
benefits we would obtain from decreases in our cost of goods sold.
13
See “Item 3. Key Information— Risk Factors—Risk Factors Relating to Us— We have experienced
rising operating costs in our businesses.”
Economic Developments in Mexico and the United States Affect our Business
A substantial portion of our operations are in Mexico and a substantial majority of our
consolidated net sales are made in Mexico and the United States. Therefore, economic conditions in
Mexico and the United States have a significant effect on our business, results of operations and
financial position.
2007 was a year of moderate global economic growth. The economies of Mexico and the United
States, our two biggest markets, recorded actual GDP growth in 2007 of 3.3% and 2.2%, respectively,
compared with growth of 4.7% and 3.3%, respectively, in 2006. Mexico’s economic growth rate was
mainly driven by the increase in oil prices. Analysts, however, continue to view the pace of growth
as weak, as economic uncertainties are anticipated due to, among other factors, the economic
deceleration in the United States. Over the past few years, Mexico’s rate of inflation has remained
low, amounting to 4.1% in 2006 and 3.8% in 2007.
The majority of our manufacturing facilities are located in Mexico. For each of the years
ended December 31, 2005, 2006 and 2007, 41%, 43%, and 44%, respectively, of our consolidated net
sales resulted from sales to parties located within Mexico.
While helping the country to maintain low levels of inflation and a manageable deficit, the
Mexican government’s continued fiscal and monetary policy does not provide the flexibility
necessary to support Mexico’s economic improvement. As a result, new investment and growth in
aggregate purchasing power have been marginal. Several factors could affect the growth of Mexico’s
economy and its industrial sector. These factors include (i) the extent of the U.S. economic
recovery and the participation of Mexico’s industrial sector in that recovery and (ii) the Mexican
government’s approval and implementation of fiscal and other structural reforms such as the
evolution of energy prices, particularly natural gas. In spite of these political and economic
dynamics, we will continue to focus on the factors within our control and position ourselves to
take full advantage of new market opportunities.
Inflation and Foreign Currency Exchange Rate Fluctuations
The following table sets forth, for the periods presented, certain information relating to
inflation and foreign currency exchange rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Nominal peso devaluation (appreciation) relative to the U.S. dollar
(1)
|
|
|
(4.6
|
%)
|
|
|
1.7
|
%
|
|
|
0.5
|
%
|
|
Mexican inflation (based on changes in INPC)
(1)
|
|
|
3.3
|
%
|
|
|
4.1
|
%
|
|
|
3.8
|
%
|
|
U.S. inflation (based on changes in Consumer Price Index)
(2)
|
|
|
3.5
|
%
|
|
|
2.5
|
%
|
|
|
4.1
|
%
|
|
Inflation differential (Mexican vs. U.S.)
(1)(2)(3)
|
|
|
(0.2
|
%)
|
|
|
1.6
|
%
|
|
|
(0.3
|
%)
|
|
Real peso devaluation (appreciation) relative to the U.S. dollar
(4)
|
|
|
(4.5
|
%)
|
|
|
0.1
|
%
|
|
|
0.8
|
%
|
|
Free Exchange Rate as of year end
(1)
|
|
Ps.
|
10.6344
|
|
|
Ps.
|
10.8116
|
|
|
Ps.
|
10.8662
|
|
|
Mexican GDP growth rate
(5)
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|
|
3.0
|
%
|
|
|
4.7
|
%
|
|
|
3.3
|
%
|
|
Exchange rate of euro per pesos as of year end
(6)
|
|
Ps.
|
12.5932
|
|
|
Ps.
|
14.2680
|
|
|
Ps.
|
15.9526
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|
|
|
|
|
|
(1)
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|
Source: Banco de México.
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|
|
(2)
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|
Source: U.S. Bureau of Labor Statistics.
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|
|
(3)
|
|
Compounded.
|
|
|
|
(4)
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|
Peso devaluation (appreciation) in real terms = -((Nominal peso devaluation +1) / (Inflation
differential + 1))-1.
|
|
|
|
(5)
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|
Source:
Instituto Nacional de Estadística, Geografía e Informática.
|
|
|
|
(6)
|
|
Source: Federal Reserve Bank of New York—Noon Buying Rates as to euro-to-dollar exchange rate
and Banco de México as to dollar-to-peso exchange rate.
|
Effects of Inflation and Foreign Currency Exchange Rate Fluctuations on Operating Margins
Changes in the relative value of the peso to the U.S. dollar have an effect on our results of
operations. In general, as described more fully in the following paragraphs, a real devaluation of
the peso will likely result in an increase in our operating margins and a real appreciation of the
peso will likely result in a decrease in our operating margins, in each case, when measured in
pesos. This is because the aggregate
amount of our consolidated net sales denominated in or affected by U.S. dollars exceeds the
aggregate amount of our cost of goods sold and our selling, general and administrative expenses
denominated in or affected by U.S. dollars.
14
A substantial portion of the sales generated by our Mexican and U.S. subsidiaries are either
denominated in or affected by the value of the U.S. dollar. The prices of a significant number of
the products we sell in Mexico, in particular those of flat glass for automotive uses and capital
goods are linked to the U.S. dollar. In addition, substantially all of our export sales are
invoiced in U.S. dollars and subsequently translated into pesos using the exchange rate in effect
at the time of the transaction. The translated U.S. dollar sales of our Mexican subsidiaries are
then restated into constant pesos using INPC, as of the date of the most recent balance sheet
included in those financial statements. As a result, when the peso devalues in real terms against
the U.S. dollar, as was the case in 2003, 2006 and 2007, the same level of U.S. dollar sales as in
a prior period will result in higher constant peso revenues in the more recent period. Conversely,
when the peso appreciates in real terms against the U.S. dollar, as was the case in 2004 and 2005,
the same level of U.S. dollar sales as in a prior period will result in lower constant peso
revenues in the more recent period. Moreover, because a material portion of our cost of goods sold,
including labor costs, and selling, general and administrative expenses are invoiced in pesos and
are not directly affected by the relative value of the peso to the U.S. dollar, the real
appreciation or devaluation of the peso relative to the U.S. dollar has a significant effect on our
operating margins, at least in the short term.
Further, a strong peso relative to the U.S. dollar makes the Mexican market more attractive
for importers and competitors that might not otherwise sell in the Mexican market. A strong peso
relative to the U.S. dollar also makes those of our products whose prices are denominated in or are
affected by the value of the U.S. dollar less competitive or profitable. When the peso appreciates
in real terms, with respect to such products, we must either increase our prices in U.S. dollars,
which make our products less price-competitive, or bear reduced operating margins when measured in
pesos. Given the competitive nature of the industries in which we operate, in the past we have
chosen to reduce our operating margins for such products in response to appreciation of the peso
relative to the U.S. dollar. For the year ended December 31, 2005, the appreciation of the peso in
real terms had an adverse effect on our operating margins and, while the peso did not appreciate in
the years ended December 31, 2006 and 2007, it may appreciate again in the future, potentially
resulting in an adverse effect on our operating margins. Sales of products manufactured, processed
or sold by us outside Mexico (principally by Vitro America, Vitro Packaging, Comegua, and Vitro
Cristalglass), as well as such subsidiaries’ expenses, are restated during a financial reporting
period by adjusting such amount for the inflation observed in the country in which the subsidiary
operates and then translated into pesos at the exchange rate in effect at the end of the period.
Since such subsidiaries’ revenues and expenses are generally both earned and incurred in the same
currency, the devaluation or appreciation of the peso has a much more limited effect on the
operating margins of such subsidiaries. However, profits, as reported in real peso terms, are
substantially impacted by the devaluation or appreciation of the peso relative to the appropriate
currency.
We define our strategy and objectives in the ordinary course of business and to fulfill such
objectives we limit our exposure to increases in foreign currency exchange rates by entering into
DFIs suggested by our counterparties and jointly structured with them. This strategy is designed to
meet our objectives with the risk that a decrease in foreign currency exchange rates could have an
adverse effect on the fair value of the derivative instruments, resulting in losses that would be
reflected within comprehensive financing result in the income statement.
Effect of Inflation and Foreign Currency Exchange Rate Fluctuations on Total Comprehensive
Financing Result
Our total comprehensive financing result includes (i) net interest expense, (ii) the net
effect of inflation on our monetary assets and liabilities, (iii) the net effect of changes in
nominal foreign currency exchange rates on monetary assets and liabilities denominated in foreign
currencies and (iv) since 2005, due to the implementation of Bulletin C-10, “Derivative Financial
Instruments and Hedging Activities,” gains or losses related to hedging transactions. Net interest
expense is calculated as the nominal amount of interest expense incurred by us with respect to our
short- and long-term debt and off-balance sheet financings, minus the nominal amount of interest
income generated by us with respect to our monetary assets.
15
Inflation affects our total comprehensive financing result. During periods of inflation, the
principal amount of our monetary debt will generally be reduced in real terms by the rate of
inflation. The amount of
such reduction will result in a gain from monetary position. This gain is offset by the
reduction in real terms in the value of the monetary assets we held during such period.
Historically, our monetary liabilities have exceeded our monetary assets and, thus, we have tended
to experience monetary gains during periods of inflation. Declining levels of inflation in recent
years have resulted in lower monetary gains.
Our total comprehensive financing result is also impacted by changes in the nominal value of
the peso relative to the U.S. dollar. Foreign currency exchange gains or losses included in total
financing cost result primarily from the impact of nominal changes in the U.S. dollar-peso exchange
rate on our and our Mexican subsidiaries’ U.S. dollar-denominated monetary liabilities (such as
dollar-denominated debt and accounts payable arising from imports of raw materials and equipment)
and assets (such as dollar-denominated cash and cash equivalents and accounts receivable from
exports). Because our U.S. dollar-denominated liabilities have historically been significantly in
excess of our dollar-denominated monetary assets, the devaluation or appreciation of the peso
resulted in exchange losses and gains, respectively. Accordingly, in 2006 and 2007, the nominal
devaluation of the peso relative to the U.S. dollar resulted in foreign currency exchange losses.
The nominal appreciation of the peso relative to the U.S. dollar resulted in a foreign currency
exchange gain in 2005.
Effects of Limitations on Long-term Debt Agreements
Certain of our long-term debt agreements contain limitations including the restriction of
payments to repurchase shares, limitation on dividends, limitation on liens and certain financial
covenants that if we do not meet at a consolidated level, our ability to incur additional debt is
restricted. As of December 31, 2007 such restrictions did not represent an event of default on the
credit facilities nor did it allow the lenders to accelerate the maturity of the debt under such
credit facilities.
As of December 31, 2007, we are restricted from incurring additional debt, except for certain
permitted debt including, among others, US$ 100 million of debt for working capital needs, capital
expenditures and interest payments, US$25 million for capital expenditures secured by liens and an
additional US$25 million for any other purpose. The financing agreements do not restrict our
ability to refinance debt.
Additionally, under our current indentures governing our Senior Notes, if an event of default
results in any indebtedness (as defined in the indentures) having a principal amount of US$25
million or more in the aggregate being due and payable prior to its stated maturity or failure to
make a principal payment when due and such defaulted payment is not made, waived or extended within
the applicable grace period, the noteholders have the right to accelerate the Senior Notes.
Effects of increases in interest rates.
Interest rate risk exists primarily with respect to our floating-rate peso and
dollar-denominated debt, which generally bear interest based on the Mexican equilibrium interbank
interest rate, which we refer to as the “TIIE,” or the London interbank offered rate, which we
refer to as “LIBOR”. If the TIIE or LIBOR rates increase significantly, our ability to service our
debt will be adversely affected.
As of December 31, 2007, our floating-rate peso and dollar-denominated debt amounted to Ps.
366 million and $34 million. As of March 31, 2008, we entered into swap arrangements under which
all interest payments, until 2012, on $500 million principal amount of our outstanding debt were
swapped from a fixed dollar rate to a variable peso rate. We define our strategy and objectives in
the ordinary course of business and to fulfill such objectives we limit our exposure to increases
in interest rates by entering into DFIs suggested by our counterparties and jointly structured with
them. This strategy is designed to meet our objectives with the risk that a decrease in interest
rates could have an adverse effect on the fair value of the derivative instruments, resulting in
losses that would be reflected within comprehensive financing result in the income statement.
We cannot assure you that these instruments will continue to be favorable to us or if other
instruments will be available at favorable terms to us, if at all, to fully hedge our exposure. See
“Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
16
Results of Operations
On June 16, 2006, we completed the sale of our 51% equity ownership interest in Vitrocrisa to
Libbey, the owner of the remaining 49% equity interest. Vitrocrisa, which was previously presented
as one of our reportable segments is presented as discontinued operation as its disposition
represents the end of a significant activity of the Company. Accordingly, all financial and
operating information relating to Vitrocrisa in this annual report are presented as a discontinued
operation.
The following table sets forth, for the periods presented, selected items of our consolidated
statement of operations calculated as a percentage of our consolidated net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of goods sold
|
|
|
72.3
|
|
|
|
72.6
|
|
|
|
70.6
|
|
|
Gross profit
|
|
|
27.7
|
|
|
|
27.4
|
|
|
|
29.4
|
|
|
General, administrative and selling expenses
|
|
|
20.8
|
|
|
|
19.8
|
|
|
|
19.9
|
|
|
Operating income
|
|
|
6.9
|
|
|
|
7.6
|
|
|
|
9.5
|
|
|
Total comprehensive financing result
|
|
|
5.6
|
|
|
|
8.2
|
|
|
|
5.8
|
|
|
Net income
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
0.5
|
|
The following table sets forth, for the periods presented, the consolidated net sales, export
sales and operating income (before corporate and other eliminations) of each of our business units,
as well as the contribution to our consolidated results of operations, in percentage terms, of the
consolidated net sales, export sales and operating income (after corporate and other eliminations,
and reflecting export sales in U.S. dollars) of each of our business units. The following table
does not include the results of discontinued operations. Peso amounts set forth in the following
table have been restated in millions of constant pesos as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
|
|
(Ps. millions, except for percentages)
|
|
|
($ millions)
(1)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glass Containers
|
|
Ps.
|
12,488
|
|
|
|
47
|
%
|
|
Ps.
|
14,068
|
|
|
|
51
|
%
|
|
Ps.
|
14,676
|
|
|
|
51
|
%
|
|
$
|
1,351
|
|
|
Flat Glass
|
|
|
13,704
|
|
|
|
52
|
%
|
|
|
13,462
|
|
|
|
48
|
%
|
|
|
13,605
|
|
|
|
48
|
%
|
|
|
1,252
|
|
|
Corporate and other eliminations
|
|
|
375
|
|
|
|
1
|
%
|
|
|
346
|
|
|
|
1
|
%
|
|
|
310
|
|
|
|
1
|
%
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
Ps.
|
26,567
|
|
|
|
100
|
%
|
|
Ps.
|
27,876
|
|
|
|
100
|
%
|
|
Ps.
|
28,591
|
|
|
|
100
|
%
|
|
$
|
2,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Ps. millions, except for percentages)
|
|
|
($ millions)
(1)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
Ps.
|
10,919
|
|
|
|
41
|
%
|
|
Ps.
|
11,875
|
|
|
|
43
|
%
|
|
Ps.
|
12,707
|
|
|
|
44
|
%
|
|
$
|
1,169
|
|
|
Exports
|
|
|
6,987
|
|
|
|
26
|
%
|
|
|
6,384
|
|
|
|
23
|
%
|
|
|
6,674
|
|
|
|
23
|
%
|
|
|
614
|
|
|
Foreign Subsidiaries
|
|
|
8,662
|
|
|
|
33
|
%
|
|
|
9,617
|
|
|
|
34
|
%
|
|
|
9,210
|
|
|
|
32
|
%
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ps.
|
26,567
|
|
|
|
100
|
%
|
|
Ps.
|
27,876
|
|
|
|
100
|
%
|
|
Ps.
|
28,591
|
|
|
|
100
|
%
|
|
$
|
2,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions
(2)
, except for percentages)
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
916
|
|
|
|
41
|
%
|
|
$
|
1,028
|
|
|
|
43
|
%
|
|
$
|
1,145
|
|
|
|
45
|
%
|
|
|
|
|
|
Exports
|
|
|
588
|
|
|
|
27
|
%
|
|
|
556
|
|
|
|
23
|
%
|
|
|
601
|
|
|
|
23
|
%
|
|
|
|
|
|
Foreign Subsidiaries
|
|
|
708
|
|
|
|
32
|
%
|
|
|
817
|
|
|
|
34
|
%
|
|
|
814
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,212
|
|
|
|
100
|
%
|
|
$
|
2,401
|
|
|
|
100
|
%
|
|
$
|
2,560
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions
(2)
, except for percentages)
|
|
|
|
|
|
|
Export sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glass Containers
|
|
$
|
290
|
|
|
|
49
|
%
|
|
$
|
344
|
|
|
|
62
|
%
|
|
$
|
364
|
|
|
|
61
|
%
|
|
|
|
|
|
Flat Glass
|
|
|
298
|
|
|
|
51
|
%
|
|
|
212
|
|
|
|
38
|
%
|
|
|
237
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated export sales
|
|
$
|
588
|
|
|
|
100
|
%
|
|
$
|
556
|
|
|
|
100
|
%
|
|
$
|
601
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Ps. millions, except for percentages)
|
|
|
($ millions)
(1)
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glass Containers
|
|
Ps.
|
1,327
|
|
|
|
72
|
%
|
|
Ps.
|
1,853
|
|
|
|
87
|
%
|
|
Ps.
|
2,054
|
|
|
|
76
|
%
|
|
$
|
189
|
|
|
Flat Glass
|
|
|
514
|
|
|
|
28
|
%
|
|
|
418
|
|
|
|
20
|
%
|
|
|
782
|
|
|
|
29
|
%
|
|
|
72
|
|
|
Corporate and other eliminations
|
|
|
(2
|
)
|
|
|
0
|
%
|
|
|
(154
|
)
|
|
|
(7
|
)%
|
|
|
(132
|
)
|
|
|
(5
|
)%
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
Ps.
|
1,839
|
|
|
|
100
|
%
|
|
Ps.
|
2,117
|
|
|
|
100
|
%
|
|
Ps.
|
2,704
|
|
|
|
100
|
%
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These amounts have been translated into U.S. dollars, solely for the convenience of
the reader, at the rate of 10.8662 pesos per one U.S. dollar, the Free Exchange Rate on
December 31, 2007.
|
|
|
|
(2)
|
|
Dollar figures reported herein are in nominal dollars resulting from dividing each
month’s nominal pesos by that month’s ending exchange rate published by Banco de México.
|
17
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Sales
Our consolidated net sales increased 2.6% to Ps. 28,591 million ($2,631 million) for the year
ended December 31, 2007 from Ps. 27,876 million ($2,565 million) for the year ended December 31,
2006. During the year ended December 31, 2007, domestic, foreign subsidiaries’, and export sales
grew 1.1%, 3.0% and 4.5%, respectively, year-over-year.
Domestic and foreign subsidiary sales increased as a result of improved sales volumes at the
Glass Containers and Flat Glass business units. Export sales increased to Ps. 6,674 ($614 million),
from Ps. 6,384 ($588 million) mainly due to higher float glass business volumes at the Flat Glass
business unit and to higher volumes in the food and wine & liquor business lines at the Glass
Containers business unit. Our export sales represented 23.3% of our consolidated net sales for the
year ended December 31, 2007.
Glass Containers Business Unit
Net sales of our Glass Containers business unit increased 4.7% to Ps. 14,676 million
($1,351 million) for the year ended December 31, 2007 from Ps. 14,068 million ($1,295 million) for
the year ended December 31, 2006. The main drivers of this sales increase were strong volumes in
the food and wine & liquor business lines, coupled with an improved overall product mix, in the
domestic market. This increase in sales was achieved despite the constraints on production from
interruptions in the supply of natural gas during July and September 2007.
Export sales grew 2.7% year-over-year due to higher volumes at the food and wine & liquor
business lines, reflecting continued strong demand, coupled with a better product mix at the CFT,
soft drinks and wine & liquor business lines.
Flat Glass Business Unit
Net sales of our Flat Glass business unit were Ps. 13,605 million ($1,252 million) for the
year ended December 31, 2007, an increase of 1.1% when compared to Ps. 13,462 million
($1,239 million) for the year ended December 31, 2006. A decrease in domestic sales of 0.7%
year-over-year was mainly driven by lower float glass volumes, which was partially offset by higher
automotive sales due to a better product mix coupled with higher volumes.
Export sales increased 7.4% year-over-year mainly due to higher float glass volumes, in line
with the company’s strategy of temporarily exporting the additional capacity gained by the purchase
of AFG’s 50% stake in Vidrio y Cristal del Noroeste (previously Vitro AFG, the float glass
manufacturing facility located in Mexicali, Baja California, México). In addition, AGR related
sales increased 33% due to higher volumes, which offset a decrease in the OEM market. The available
capacity that resulted from the reduction in the OEM export sales was used to supply the AGR
market.
Sales from foreign subsidiaries increased 4.5% year-over-year to $677 million from $648
million. Sales at Vitro Cristalglass rose 33%, driven by the stronger demand of more value added
products (improved product mix) from the construction market, the appreciation of the euro, and to
the new furnace in the La Rozada facility that started operating during the first quarter of 2007.
In addition, sales at Vitro Colombia rose 33% due to a better product mix and higher volumes linked
to the strong demand from the Venezuelan and Ecuadorian markets. Sales at Vitro America were
adversely affected by the anticipated slowdown in demand from the U.S. residential construction
market.
Operating Income
Our consolidated operating income increased 14.9% to Ps. 2,704 million ($249 million) for the
year ended December 31, 2007 from Ps. 2,117 million ($195 million) for the year ended December 31,
2006, mainly due to increased production volumes that contributed to better fixed cost absorption,
which paired with higher productivity and operating efficiencies and lower depreciation due to the
increase of the estimated remaining useful lives of certain fixed assets.
18
Glass Containers Business Unit
Operating income of our Glass Containers business unit increased 10.8% to Ps. 2,054 million
($189 million) for the year ended December 31, 2007 from Ps. 1,853 million ($171 million) for the
year ended December 31, 2006. This increase was driven by higher sales, improved production
efficiencies which optimized fixed costs absorption, better product mix and lower depreciation,
which more than offset the temporary constraints on production at certain glass containers
facilities in Mexico due to the interruption in natural gas supply caused by incidents that
occurred at certain PEMEX gas pipelines.
Flat Glass Business Unit
Operating income of our Flat Glass business unit was Ps. 782 million ($72 million) for the
year ended December 31, 2007, an increase of 87.1% when compared to Ps. 418 million ($38 million)
for the year ended December 31, 2006. This increase was due to a better product mix, improved
production efficiencies and enhanced fixed-cost absorption as well as the fact that 2006 included
significant expenses related to furnace repair and the temporary shut-down of one of our furnaces.
Total Comprehensive Financing Result
Our total comprehensive financing result decreased 27.1% from Ps. 2,276 million ($210 million)
for the year ended December 31, 2006 to Ps. 1,660 million ($153 million) for the year ended
December 31, 2007. This decrease was primarily due to a non-cash foreign-exchange loss of
Ps. 94 million ($9 million) during the year ended December 31, 2007 compared to a non-cash
foreign-exchange loss of Ps. 224 million ($21 million) in the year ended December 31, 2006,
resulting from a lower depreciation of the Mexican peso during the year ended December 31, 2007,
and more favorable values in our derivative instrument transactions of Ps. 201 million ($19
million) for the year ended December 31, 2007 compared to Ps. 337 million ($31 million) for the
year ended December 31, 2006, and a decrease of 7.6% in interest expense to Ps. 1,694 million ($156
million) for the year ended December 31, 2007 from Ps. 1,834 million ($169 million) for the year
ended December 31, 2006. Derivative instruments losses for the year ended December 31, 2007, were
comprised mainly by losses in interest rate DFIs of approximately Ps. 243 million ($22 million),
mainly due to increases in the TIIE, partially offset by gains in natural gas DFIs of approximately
Ps. 8 million ($1 million), mainly due to increases in natural gas prices during some months of
2007, and by gains in foreign exchange rate DFIs of approximately Ps. 32 million ($3 million),
mainly due to increases in foreign exchange rate.
Other Expenses (Income), Net
Other expenses (income), net, changed by Ps. 1,098 million ($101 million) to a loss of
Ps. 869 million ($80 million) for the year ended December 31, 2007 from a gain of Ps. 229 million
($21 million) for the year ended December 31, 2006, mainly due to (i) a gain from the sale of
long-lived assets of Ps. 795 million ($73million) in 2006 compared to a loss of Ps. 47 million ($4
million) in 2007; (ii) a gain from the sale of subsidiaries of Ps. 68 million ($6 million) in 2006
compared to a loss of Ps. 11 million ($1 million) in 2007; and (iii) fees and costs of Ps. 488
incurred for the extinguishment of debt associated with our debt restructuring completed during
2007.
Income and Asset Taxes
Income tax and tax on assets for the year ended December 31, 2007 represented an expense of
Ps. 44 million ($4 million) compared with an expense of Ps. 228 million ($21 million) for the year
ended December 31, 2006. The difference was derived mainly from the cancellation of a valuation
allowance on a deferred tax asset of Ps. 206 million ($19 million) in 2007, as management believes
that it is highly probable that such amount will be recoverable.
Net Income
For the year ended December 31, 2007, we generated consolidated net income of Ps. 131 million
($12 million) compared to a net income of Ps. 291 million ($27 million) for the year ended December
31, 2006. This decrease was mainly due to a gain on sale of discontinued operations of Ps. 480
million ($44
million) in 2006, which compensated for the net loss from continuing operations of Ps. 158
million ($15 million) in the same year, resulting in a net income of Ps. 291 million ($27 million)
in 2006. The net income from continuing operations for the year ended December 31, 2007 was Ps. 131
million ($12 million) compared to a net loss from continuing operations of Ps. 158 million ($15
million) for the year ended December 31, 2006. This resulted primarily from higher sales, an
increase in operating income and a lower total comprehensive financing result which allowed us to
offset higher other expenses of Ps. 869 million ($80 million).
19
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net Sales
Our consolidated net sales increased 5.0% to Ps. 27,876 million ($2,565 million) for the year
ended December 31, 2006 from Ps. 26,567 million ($2,445 million) for the year ended December 31,
2005. During the year ended December 31, 2006, domestic and foreign subsidiaries’ sales grew 8.7%
and 11.1%, respectively year-over-year, as a result of strong sales volumes at the Flat Glass and
Glass Containers business units.
For the year ended December 31, 2006, our consolidated export sales were $556 million
(Ps. 6,384 million), a decrease of 5.4% when compared to $588 million (Ps. 6,987 million) for the
year ended December 31, 2005. The decrease in exports is mainly due to lower AGR and
construction-related sales, as we plan to temporarily exit this export market. Our export sales
represented 23.1% of our consolidated net sales for the year ended December 31, 2006.
Glass Containers Business Unit
Net sales of our Glass Containers business unit increased 12.6% to Ps. 14,068 million
($1,295 million) for the year ended December 31, 2006 from Ps. 12,488 million ($1,149 million) for
the year ended December 31, 2005. Strong volumes across all business lines in the domestic market
continued to be the main driver behind the 7.9% increase year-over-year. In particular, sales
volume of beverage containers including beer, wine, liquor and CFT were the largest contributors to
the increase.
Export sales grew 18.3% year-over-year due to a strong rise in sales volumes at the CFT
business line as a result of increased demand in the South American and European markets and larger
volumes coupled with an improved price mix at the wine & liquor business line.
Flat Glass Business Unit
Net sales of our Flat Glass business unit were Ps. 13,462 million ($1,239 million) for the
year ended December 31, 2006, a decrease of 1.8% when compared to Ps. 13,704 million
($1,261 million) for the year ended December 31, 2005, due primarily to a decrease in export sales.
This decrease was partially offset by an increase in domestic sales of 14.4% year-over-year, mainly
as a result of higher automotive and construction-related sales. In addition, construction-related
sales volume increased 12% year-over-year.
Export sales decreased 30.3% year-over-year due to lower AGR and construction-related sales,
as we plan to temporarily exit this lower margin export market and focus our efforts on domestic
sales. The reduction in AGR export sales was driven by a decrease in volume as capacity was used to
supply the OEM market, although this effect was partially offset by an improved product mix.
Construction-related export sales decreased as we continued to focus on the Mexican market.
Automotive sales decreased 2.1% year-over-year, driven by lower sales volume in the AGR market.
This effect was partially offset by the success of current OEM platforms.
Sales from foreign subsidiaries continued an upward trend, increasing 9.8% year-over-year to
$648 million from $590 million. Sales at Vitro America rose 2.8% as a result of increased
construction-related volumes. Sales at Vitro Colombia rose 1.2% while Vitro Cristalglass’ sales
rose 8.3% driven by incremental large-scale contracts coupled with an improved product mix.
Operating Income
Our consolidated operating income increased 15.1% to Ps. 2,117 million ($195 million) for the
year ended December 31, 2006 from Ps. 1,839 million ($169 million) for the year ended December 31,
2005, mainly due to increased sales and production efficiencies in our Glass Containers business
unit.
Glass Containers Business Unit
Operating income of our Glass Containers business unit increased 39.5% to Ps. 1,853 million
($171 million) for the year ended December 31, 2006 from Ps. 1,327 million ($122 million) for the
year ended December 31, 2005. Growth in operating income was driven by higher sales volume, a
better product mix due to unseasonably high demand for glass containers and improved production
efficiencies which optimized fixed cost absorption. These factors more than offset higher
maintenance costs associated with the utilization of all our furnaces to meet this demand, as well
as higher energy costs. Additionally, all furnaces were ignited in the first quarter of 2006,
compared to the second quarter of 2005. This had a positive effect on our operating income.
20
Flat Glass Business Unit
Operating income of our Flat Glass business unit was Ps. 418 million ($38 million) for the
year ended December 31, 2006, a decrease of 18.7% when compared to Ps. 514 million ($47 million)
for the year ended December 31, 2005. This decrease was due to the temporary shutdown of the
furnace located in Mexico City. Higher volumes in domestic construction and value-added automotive
OEM products helped offset the decrease. Vitro America and Vitro Cristalglass also continued to
generate strong operating income, with increases 36.3% and 53.2%, respectively.
Total Comprehensive Financing Result
Our total comprehensive financing result increased 52% from Ps. 1,500 million ($138 million)
for the year ended December 31, 2005 to Ps. 2,276 million ($210 million) for the year ended
December 31, 2006. This increase was primarily due to a non-cash foreign-exchange loss of
Ps. 224 million ($21 million) during the year ended December 31, 2006 compared to a non-cash
foreign-exchange gain of Ps. 417 million ($38 million) in the year ended December 31, 2005,
resulting from a depreciation of the peso by 1.7% during the year ended December 31, 2006, compared
with a 4.6% appreciation in the year ended December 31, 2005. Additionally, an increase in other
financial expenses driven mainly by the negative effect of derivative transactions, which increased
from a charge of Ps. 17 million ($2 million) for the year ended December 31, 2005 to Ps. 337
million ($31 million) for the year ended December 31, 2006, mainly due to losses in natural gas
derivatives of Ps. 344 million ($30 million), which more than offset a 9.4% reduction in interest
expense.
Other (Income) Expenses, Net
Other expenses, net decreased Ps. 723 million ($67 million) to a gain of Ps. 229 million
($21 million) for the year ended December 31, 2006 from a loss of Ps. 494 million ($46 million) for
the year ended December 31, 2005, mainly due to (i) the gain from sale of long-lived assets of Ps.
795 million ($73 million); (ii) the gain from sale of other subsidiaries of Ps. (68) million ($(6)
million) (see “Item 4. Information on the Company—Business—Strategic Sale of Non-Core Businesses
and Assets.”), compared to a loss of Ps. 137 million ($13 million) in 2005; and (iii) restructuring
charges of Ps. 61 million ($6 million) in 2006 compared to Ps. 332 million ($31 million) in 2005.
In 2005, we recorded a gain of Ps. (458) million ($42 million) resulting from the designation of
Vitro as the sole beneficiary of the Vitro Club assets held in trust. See note 16 of our
consolidated financial statements.
Income Tax and Tax on Assets
Income tax, tax on assets and workers’ profit sharing for the year ended December 31, 2006
represented an expense of Ps. 228 million ($21 million) compared with a benefit of
Ps. (519) million ($(48) million) for the year ended December 31, 2005. The difference was derived
mainly from the recognition of a deferred tax benefit of Ps. 923 million ($85 million) in 2005
resulting from the recognition of the tax basis of the intangible assets of certain foreign
subsidiaries subject to repatriation, which was partially offset by the tax effects of a higher
foreign-exchange loss in 2006. Additionally, during the second quarter of 2006, a tax loss
carryforward was generated by the sale of Vitrocrisa’s shares, which resulted in a deferred tax
benefit.
Net Income
For the year ended December 31, 2006, we generated consolidated net income of Ps. 291 million
($27 million) compared to a net income of Ps. 243 million ($22 million) for the year ended December
31, 2005. This resulted primarily from a gain on sale of Ps. 480 million ($44 million) in
connection with the sale of our stake in Vitrocrisa in June 2006, other income of Ps. 863 million
($79 million) related to a gain from the sale of subsidiaries and long-lived assets. The effect of
these transactions was partially offset by an increase in financing costs due to higher non-cash
foreign-exchange losses and by the negative effect of derivative transactions, in addition to an
expense of Ps. 283 million ($26 million) related to income tax, tax
on assets and workers’ profit sharing for the year ended December 31, 2006 compared to a
benefit of Ps. 468 million ($43 million) for the year ended December 31, 2005.
21
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk
Our business activities require that we hold or issue financial instruments which expose us to
market fluctuations of natural gas prices, interest rates and foreign currency exchange rates. To
minimize our exposure to these risks, we utilize financial derivative instruments.
Our policy is to use derivative financial instruments to mitigate our exposure to liquidity
and market risks related to our production and financial operations, caused mainly by our natural
gas needs, as well as by future commitments made in foreign currencies. The DFIs that we use to
mitigate the aforementioned risks are Swaps, Options and Forwards, both simple and structured, the
latter in order to obtain better conditions, such as a reduction in or complete elimination of
fees.
From an economic point of view, DFIs are entered into for hedging purposes, however, for
accounting purposes our DFIs have not been designated as hedges because they do not meet all the
accounting requirements established by both Mexican Financial Reporting Standards and accounting
principles generally accepted in the United States of America, and therefore have been classified
as trading instruments. DFIs employed by us are operated in the Over the Counter market with
international financial institutions. The main characteristics of the transactions refer to the
obligation to buy or sell a certain underlying asset given certain criteria such as cap rate,
trigger level, spread, and strike price, among others.
Our policy for Financial Derivatives Instrument Operations (the “Policy”) sets guidelines for
the analysis, negotiation, authorization, contracting, operating, monitoring and recording of DFIs,
in order to analyze the risk exposure to financial markets, commodities and fluctuations in the
economic and financial variables.
The Policy defines that the strategy to be implemented in order to hedge our financial risks,
must take into consideration the following factors:
|
|
•
|
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Market risks to which we are exposed
|
|
|
•
|
|
Time frames for the strategy
|
|
|
•
|
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Circumstances in which we must change our hedging strategy
|
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•
|
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Operating budgets and projections
|
Analysis of future impacts of identified risks on derivative financial instruments
In order to analize and evaluate future impacts of our DFIs, we completed a sensitivity
analysis which was based on the annual historical volatility of the identified risks using the
Black-Scholes model.
In this sensitivity analysis, for purposes of our natural gas DFIs, we used 19% the historical
volatility of the Natural Gas Future NGK9 from January 1, 2007 to December 31, 2007, as this
contract was the last natural gas DFI contract entered into by us in 2007. For our foreign exchange
DFIs we used 7% for exchange rate volatility. The fair value impact on our DFI portfolio at
December 31, 2007 under an adverse scenario would have resulted in an additional loss of
approximately $36.5 million. For the calendar years ending December 31, 2005, 2006 and 2007, the
actual losses we incurred on our derivative agreements were Ps. 17 million ($2 million), Ps. 337
million ($31 million), and Ps. 201 million ($19 million) respectively.
22
Debt Subject to Market Risk
The table below sets forth information, as of December 31, 2007, regarding our debt
obligations with maturities originally extending for more than one year and that are sensitive to
changes in interest rates or foreign currency exchange rates. For these debt obligations, the table
presents scheduled principal payments according to their respective maturity dates. The fair value
of long-term fixed-rate debt is based on (i) if there is an observable market, the quoted market
prices for the debt instrument (for example, the 2012 and 2017 Senior Notes) or (ii) if there is
not an observable market, the present value of future cash flows, discounted back using the yield
curve that applies to the most recent issuance of a comparable
instrument. The financial data set forth in the following table has been restated in millions
of constant pesos as of December 31, 2007.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Fair
|
|
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Expected Maturity Date
|
|
2008
|
|
|
2009
|
|
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2010
|
|
|
2011
|
|
|
2012
|
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Thereafter
|
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|
Total
|
|
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Value
|
|
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(million, except for percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Fixed-Rate Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Dollar-denominated
(1)
|
|
Ps.
|
332
|
|
|
Ps.
|
7
|
|
|
Ps.
|
7
|
|
|
Ps.
|
8
|
|
|
Ps.
|
3,231
|
|
|
Ps.
|
9,981
|
|
|
Ps.
|
13,566
|
|
|
Ps.
|
12,944
|
|
|
Weighted-average coupon
|
|
|
10.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating-Rate Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated
(1)
|
|
Ps.
|
249
|
|
|
Ps.
|
117
|
|
|
Ps.
|
63
|
|
|
Ps.
|
64
|
|
|
Ps.
|
64
|
|
|
Ps.
|
235
|
|
|
Ps.
|
792
|
|
|
Ps.
|
792
|
|
|
Weighted-average
interest rate
|
|
LIBOR plus 1.66%
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
Euro-denominated
(2)
|
|
Ps.
|
230
|
|
|
Ps.
|
11
|
|
|
Ps.
|
10
|
|
|
Ps.
|
9
|
|
|
Ps.
|
6
|
|
|
Ps.
|
11
|
|
|
Ps.
|
278
|
|
|
Ps.
|
278
|
|
|
Weighted-average
interest rate
|
|
Euribor plus 1.02%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Peso-denominated
|
|
Ps.
|
131
|
|
|
Ps.
|
150
|
|
|
Ps.
|
|
|
|
Ps.
|
|
|
|
Ps.
|
|
|
|
Ps.
|
|
|
|
Ps.
|
282
|
|
|
Ps.
|
282
|
|
|
Weighted-average
interest rate
|
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CETES plus 3.25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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(1)
|
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The principal amount of our dollar-denominated debt was translated to pesos at
Ps.10.8662 per U.S. dollar, the Free Exchange Rate as of December 31, 2007.
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(2)
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The principal amount of our euro-denominated debt was translated at Ps. 15.9526 per
euro, the exchange rate as of December 31, 2007.
|
23
Interest Rate Risk
In
order to try to limit our exposure to increases in interest rates, we
entered into interest rate swap agreements to hedge
future interest payments.
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Notional
|
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Company
|
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Company
|
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|
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Amount
|
|
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pays interest
|
|
|
receives interest
|
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Fair Value
|
|
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Derivative financial instruments
|
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(million)
|
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rate (in pesos)
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|
rate (in US$)
|
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Period
|
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Asset
|
|
|
Interest rate options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency swaps
|
|
US$
|
150
|
|
|
TIIE + 1.08%
|
|
|
8.63
|
%
|
|
February 2007 to February 2012
|
|
Ps.
|
23
|
|
|
Cross currency swaps
|
|
US$
|
350
|
|
|
TIIE + 1.62%
|
|
|
9.13
|
%
|
|
February 2007 to February 2012
|
|
|
58
|
|
|
Cross currency swaps
|
|
US$
|
350
|
|
|
TIIE + 1.60%
|
|
|
9.13
|
%
|
|
February 2007 to February 2012
|
|
|
61
|
|
|
Cross currency swaps
|
|
US$
|
150
|
|
|
TIIE + 1.06%
|
|
|
8.63
|
%
|
|
February 2007 to February 2012
|
|
|
24
|
|
|
Interest rate swaps
|
|
Ps.
|
3,294
|
|
|
|
8.10
|
%
|
|
TIIE (in pesos)
|
|
|
February 2007 to February 2012
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest rate options
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ps.
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The derivative asset related to the Company’s interest rate options includes payments made
by the Company of Ps. 349 million, which resulted in a net loss of Ps. 155 million, and is
presented in total comprehensive financing result.
|
As of March 31, 2008, we have entered into swap arrangements under which all interest
payments, until 2012, on $500 million principal amount of our outstanding debt were swapped from a
fixed dollar rate to a variable peso rate and interest payments on another $500 million principal
amount of our outstanding debt were swapped from a fixed dollar rate to a fixed peso rate. In the
ordinary course of business, we also enter into currency swap and option agreements to hedge our
exposure to foreign currency exchange rate variations.
Foreign Currency Exchange Rate Risk
In
order to try to limit our exposure to increases in foreign currency
exchange rates, we entered into currency swap and option agreements to
hedge our exposure to increases in foreign currency exchange rates. The table below sets forth
information, as of December 31, 2007, regarding our currency swaps and options used to hedge our
exposure to U.S. dollar exchange rate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
Fair Value
|
|
|
Derivative financial instruments
|
|
(million)
|
|
|
Period
|
|
Asset
|
|
|
Foreign exchange options
|
|
|
|
|
|
|
|
|
|
|
|
Exotic instruments
|
|
US$
|
266
|
|
|
January to April 2008
|
|
Ps.
|
2
|
|
Natural Gas Price Risk
We enter into different derivative agreements with several counterparties to protect ourselves
against the increase in natural gas prices. NYMEX natural gas prices have increased from an average
price of $3.22 during 2003 to an average price of $7.12 during 2007, representing a cumulative
increase of 120%. The closing price of natural gas on the New York Mercantile Exchange (“NYMEX”) as
of June 23, 2008 was $13.20 per MMBTU.
The Company’s actual natural gas consumption is approximately 20 million MMBTUs per year.
In order to try to limit our exposure to increases in natural gas prices, we entered into
hedges with several financial and other institutions. As of December 31, 2007, we had hedges on the
price of natural gas for approximately 20% of our expected consumption needs in Mexico. As of
December 31, 2007, the fair market value of these hedges was a liability of Ps. 550 million.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Fair Value
|
|
|
Derivative financial
|
|
Amount
|
|
|
|
|
|
|
Asset
|
|
|
instruments
|
|
(MMBTUs)
|
|
|
Period
|
|
Contract Terms
|
|
(Liability)
|
|
|
Natural gas contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capped swap
(2)
|
|
|
8,040,000
|
|
|
January to December 2008
|
|
at $7.78 (Long Put at 7.03
Short Call at 8.20)
|
|
Ps.
|
(556
|
)
|
|
Swaps
|
|
|
1,640,000
|
|
|
January to December 2008
|
|
at 7.28
|
|
|
6
|
|
|
Options
|
|
|
4,800,000
|
|
|
January to December 2008
|
|
at 6.25
|
|
|
10
|
|
|
Exotic
|
|
|
3,600,000
|
|
|
January to December 2008
|
|
Short Call 10.50 Long Call
8.50 / Short Put 6.89 Long
Call 6.89 / Short Put 8.50
|
|
|
|
|
|
Exotic
|
|
|
1,800,000
|
|
|
January to December 2008
|
|
8.65 [Knock Out at 5.50]
|
|
|
(10
|
)
|
|
Exotic
|
|
|
1,200,000
|
|
|
January to December 2008
|
|
7.07 [Knock Out at 10.50]
|
|
|
|
|
|
Exotic
|
|
|
960,000
|
|
|
January to December 2008
|
|
7.75 [Cap at 9.50 Trig 6.26]
|
|
|
|
|
|
Exotic
|
|
|
840,000
|
|
|
January to December 2008
|
|
7.75 [Cap at 9.50 Trig 6.10]
|
|
|
|
|
|
Total natural gas contracts
|
|
|
|
|
|
|
|
|
|
Ps.
|
(550
|
)
|
|
|
|
|
|
(2)
|
|
In December 2007, the Company entered into a natural gas capped swap and executed an
option to receive a prepayment from the counterparty for Ps. 534 million, which will be
repaid throughout 2008. The net loss from the transaction was Ps. 22 million, which is
recorded in total comprehensive financing result. In January 2008, the Company entered
into a contrary position to that of the natural gas capped swap it acquired in 2007,
offsetting the market risks from such instrument.
|
25
SIGNATURES
Vitro, S.A.B. de C.V. and Viméxico, S.A. de C.V., hereby certify that they meet all of the
requirements for filing on Form 20-F/A and that they has duly caused and authorized each of the
undersigned to sign this annual report on Form 20-F/A on their behalf.
Date: June 19, 2009
|
|
|
|
|
|
|
|
VITRO, S.A.B. DE C.V.,
|
|
|
|
By:
|
/s/ Hugo Alejandro Lara García
|
|
|
|
|
Name:
|
Hugo Alejandro Lara García
|
|
|
|
|
Title:
|
Chief Executive Officer
|
|
|
|
|
|
|
|
By:
|
/s/ Claudio Luis Del Valle Cabello
|
|
|
|
|
Name:
|
Claudio Luis Del Valle Cabello
|
|
|
|
|
Title:
|
Chief Financial and Administrative Officer
|
|
|
|
VIMÉXICO, S.A. DE C.V.,
|
|
|
|
By:
|
/s/ Claudio Luis Del Valle Cabello
|
|
|
|
|
Name:
|
Claudio Luis Del Valle Cabello
|
|
|
|
|
Title:
|
Chief Financial and Administrative Officer
|
|
|
|
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
12.1
|
|
|
Certification
of the Chief Executive Officer of Vitro, S.A.B. de C.V. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
12.2
|
|
|
Certification
of the Chief Financial and Administrative Officer of Vitro,
S.A.B. de C.V. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
13.1
|
|
|
Certification
of the Chief Executive officer and Chief Financial and Administrative
Officer of Vitro, S.A.B. de C.V. pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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